Case Detail

HCA014689/1996

1996, No. A14689

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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BETWEEN
	ORIENMET MINERALS COMPANY LIMITED	Plaintiff

	AND

	WINNER DESIRE LIMITED	Defendant

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Coram: Hon Mr Justice Cheung in Chambers

Date of hearing: 12 March 1998

Date of delivery of judgment: 12 March 1998

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J U D G M E N T

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1. This is an application by the Plaintiff for summary judgment against the Defendant.

The facts

2. Very briefly, the facts are these. The Plaintiff and Defendant are two Hong Kong incorporated companies, although, according to the Plaintiff, the Defendant was and still is the business arm of a Chinese company in the People's Republic of China ("PRC") known as the Wuzhou Foreign Economics Relations and Trading Company, Guangxi. The Plaintiff and the Defendant entered into two agreements in July 1996 in which the Defendant agreed to transport 800 metric tons of aluminum ingot ("the goods") to the PRC for the Plaintiff. The Defendant agreed to handle the documentation and paying the proceeds of sale to the Plaintiff after selling the goods with the consent of the Plaintiff. After taking possession of the goods, the Defendant sold the goods without the consent of the Plaintiff and refused to pay the proceeds of sale to the Plaintiff.

Defendant's case

3. The Defendant's case is that the Defendant did not enter into any agreement with the Plaintiff. They were entered into by one Mr Chung Hui Kin who was a director of the Defendant. Mr Chung had disappeared since November 1996 and the Defendant could not locate him. The Defendant denied that Mr Chung had the authority to enter into the agreements; he was never authorized by any resolution of the Board of Directors of the Defendant to enter into the agreements. Mr Chung had misappropriated the proceeds of sale.

4. Although the lack of authority of Mr Chung was originally relied upon by the Defendant as the defence, it is no longer relied by Mr Tsang, Counsel for the Defendant. In my view, this concession is properly made. Mr Chung was not merely the director of the Defendant, but also its Deputy General Manager. He was the person in charge of the daily management of the Defendant and its business operation in Hong Kong. Prior to the two agreements, the Plaintiff had entered into numerous transactions with the Defendant. The contracts for these transactions were all signed by Mr Chung for the Defendant. The contracts were disclosed in the Plaintiff's affidavit and the Defendant did not disown any of these contracts. The defence of the absence of authority of Mr Chung is clearly an after thought and is not a credible defence.

Violation of PRC law

5. The real defence raised in this matter is that the terms of the agreements are in violation of the PRC law. The Defendant accepts that the governing law of the agreements is Hong Kong law. Reliance was made by Mr Tsang on the case of Regazzoni v. K.C. Sethia(1944) Ltd [1958] AC 301 (House of Lords) in which the head note reads :

"... the contract was unenforceable since an English court would not enforce a contract or award damages for its breach if its performance would involve doing an act in a foreign and friendly state which violates the law of that state. The principle is based on public policy and international comity. It does not follow from the fact that today the court would not enforce a revenue or penal law at the suit of a foreign state that today it will enforce a contract which requires the doing of an act in a foreign country which violates such law, but, whether or not an exception must still be made in regard to the breach of a revenue law in deference to old authority, the present case could not fall within any such exception."

6. The Defendant contends that the agreements are in serious violation of article 39 of the Regulations on Foreign Exchange Control ("the Regulations") of the PRC which provides that :

"Anyone who has committed any of the following acts of illegal procurement of foreign exchange shall be given a warning by the foreign exchange control authority and the foreign currency shall be seized and compulsorily exchanged, and he shall pay a fine equal to 30% or more but not more than 3 times of the amount of the illegally procured foreign exchange. If the case constitutes a crime, criminal liability shall be imposed in accordance with the law :-

Section (1) Make payment for goods imported or make similar payments in Reminbi or in kind in violation of State regulations when payment should be made in foreign exchange;
Section (2) Pay in Reminbi for other person's expenses in the country and paid back by that other person in foreign exchange."

The PRC legal expert of the Defendant stated that :

"According to the said two contracts, the goods money for the imported aluminum ingots are to be collected in Reminbi; and not paid in foreign exchange according to normal procedure. It is clearly an act of illegal procurement of foreign exchange which is prohibited by section (1) of Article 39. It is serious illegal conduct.

Furthermore, it is stipulated in the said two contracts that the collected goods money in Reminbi shall be privately converted into foreign currency and remitted out of China. It is a clear violation of the requirement of administration and verification of payment made in foreign exchange in respect of import laid down in Article 11. It is also an act of illegal procurement of foreign exchange which is prohibited by Section (2) of Article 39. It is also serious illegal conduct."

No evidence of application of the Regulations

7. The starting point is on what basis is the Regulations applicable to the agreements in question? Just when one prays in aid of a Hong Kong legislation such as the Sales of Good Ordinance or the Conveyancing and Properties Ordinance, one has to show why the statutory provisions are applicable, the Defendant's expert must show that the Regulations applies to the agreements. This is not done. The Defendant's expert simply proceeded on the basis that the Regulations applies.

8. On the other hand, the Plaintiff's Chinese law expert stated that the Regulations is Chinese law, and before it can be applied, it is necessary to ascertain which of the three contract laws in PRC applies to the agreements. The three laws are:

1) Economic Contract Law
2) Technology Contract Law
3) Economic Law Involving Foreign Elements (i.e. Foreign Economic Contract Law)

The Plaintiff's expert said that none of the three contract laws applies because the first two laws apply to contracts between Chinese entities while the third applies to "contracts concluded between enterprises or other economic organizations of the PRC and foreign enterprises, other economic organizations or individuals. (Article 2). In other words, in order to make the foreign economic law apply, one of the contracting party must be "foreign" while the other Chinese. In the present case, both parties are "foreign" legal persons and neither party is an "enterprise" or "organization" of the PRC." There is no response from the Defendant's expert to this view.

9. It is not appropriate in an O.14 application to comment, as if one is dealing with a Hong Kong legislation, on whether, if the Regulations applies to the agreements, Article 39 of the Regulations is infringed. However, the prerequisite for the Defendant obtaining leave to defend must be that there is credible evidence showing that the Regulations is the governing regulation and that the agreements belonged to the category of contracts in which payment should be made in foreign currency and not in Reminbi as prohibited by Article 39. There is no such evidence.

Other argument

10. Mr Tsang further relied on the speech of Viscount Simonds in Regazzoni at page 323 in which he said that "the common intention of the parties was to violate the law of India and it is no consequence that the documents did not disclose their intention." Mr Tsang relied on the contractual terms of the agreements, the previous transactions in which they showed that the Defendant had never acted as an agent for the Plaintiff and one occasion in which Mr Chung remitted money directly to one Ms Lu of the Plaintiff. He submitted that these are suspicious circumstances that one ought to find that the common intention of the parties was to violate the law of PRC. I really cannot see how such inference can be drawn from the matters he had relied upon.

Conclusion

11. The conclusion is that the Plaintiff is entitled to summary judgment as no credible defence has been shown. Damages are to be assessed by the Master. The Plaintiff is to have the costs of the application and of the action.

	(P. Cheung)
	Judge of the Court of First Instance,High Court

Representation:

Mr Horace Wong, inst'd by M/s Chan & Chiu for the Plaintiff

Mr David Tsang, inst'd by M/s Choy & Co, for the Defendant

HCA014689A/1996

1996, No. A14689

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

BETWEEN
	ORIENMET MINERALS COMPANY LIMITED	Plaintiff
	AND
	WINNER DESIRE LIMITED	Defendant

Coram: The Hon Mr Justice Findlay in Chambers

Date of hearing: 2 April 1997

Date of handing down of Judgment: 7 April 1997

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JUDGMENT

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Background

1. In July 1996, the parties entered into two agreements written in Chinese under which the defendant agreed to transport 800 metric tons of aluminium ingots to the People's Republic of China, to handle the necessary documents and to pay to the plaintiff the sale proceeds.

2. The agreements recorded that the defendant was to be the plaintiff's agent "in importing" the ingots, that the defendant would be responsible for processing the documents for importing the goods into China, and for organising shipment, transportation, loading and unloading the goods after receiving the bills of lading from the plaintiff in Hong Kong. The defendant was also responsible for obtaining the sale proceeds after selling the goods. The defendant was to remit the sale proceeds "in Reminbi". The plaintiff was to pay the defendant amounts in Hong Kong dollars for handling the goods. The sale price of the goods in China was to be confirmed by the plaintiff.

3. The agreements also contained a clause that, in translation, reads -

"This agreement shall have legal effects after being signed by [both parties]. If [the parties] has any dispute and cannot reach any agreement, the relevant arbitration shall be in accordance with Hong Kong Law."

4. The plaintiff alleges that the defendant has sold the goods in China, and has failed to account to the plaintiff for the proceeds.

5. Broadly, the defendant's case is that Mr Chung Hiu Kin, a director of the defendant, entered into the agreements. Mr Chung, it is said, was not authorised by the defendant to enter into the agreements. Mr Chung has now cannot be found. So, the defendant alleges that there were no agreements between the plaintiff and the defendant.

6. The plaintiff's solicitor says that, after acknowledging service of the writ, the defendant's solicitors wrote to the plaintiff's solicitors asking for a 14day extension for filing the defence. The plaintiff agreed to this provided it was recorded in a consent summons. The defendant's solicitors said that they would prepare a consent summons. They did so and faxed a copy to the plaintiff's solicitors. On the same day, the plaintiff issued a summons under Order 14 seeking judgment on the issue of liability, with the assessment of damages to be adjourned. In spite of this, the defendant's solicitors said that the defendant had a right to file a defence and "shall do so accordingly". Instead, however, the defendant filed a summons seeking a stay of the action "pursuant to s. 34C of the Arbitration Ordinance, Cap. 341 and Article 8 of the UNCITRAL Model. Law on International Commercial Arbitration" the arbitration agreement being "not a domestic arbitration agreement within the meaning of the Arbitration Ordinance, Cap. 341".

Is There an Arbitration Agreement?

7. The first issue to be resolved is whether or not the agreements contain a valid arbitration agreement.

8. I repeat the clause in the agreements relating to arbitration for the sake of convenience -

"This agreement shall have legal effects after being signed by [both parties]. If [the parties] has any dispute and cannot reach any agreement, the relevant arbitration shall be in accordance with Hong Kong Law."

9. There are two possible interpretations of this clause -

It provides that, if the parties agree to submit their dispute to arbitration, Hong Kong law shall govern that arbitration.
It provides that the parties shall refer any dispute to arbitration, which shall be conducted according to Hong Kong law.

10. I believe that the most natural construction of the clause is that it was the intention of the parties that any dispute that could not be resolved by agreement would be referred to arbitration conducted according to Hong Kong law. I cannot accept that the parties referred to arbitration merely for the purpose of fixing the applicable law in the event that they agreed to submit their dispute to that process of dispute resolution. I find that the parties have entered into a binding agreement to submit their disputes to arbitration.

International or Domestic?

11. The next issue to be decided is whether the arbitration agreement is international or domestic.

12. Section 2 of the Arbitration Ordinance, Chapter 341, provides that "International arbitration agreement" means an arbitration agreement pursuant to which an arbitration is, or would if commenced be, international within the meaning of article 1 (3) of the UNCITRAL Model Law, and "Domestic arbitration agreement" means an arbitration agreement that is not an international arbitration agreement.

13. Article 1(3) of the UNCITRAL Model Law provides -

"(3) An arbitration is international if:

(a)	the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or
(b)	one of the following places is situated outside the State in which the parties have their places of business;

	(i)	the place of arbitration if determined in, or pursuant to, the arbitration agreement;
	(ii)	any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

(c)

the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country."

14. In the case before me, there can be no doubt that "a substantial part of the obligations of the commercial relationship" was to be performed outside Hong Kong. The defendant's main obligation - to sell the goods in China and receive the sale proceeds there - were to be performed outside Hong Kong. One cannot say that these obligations were insubstantial; they were therefore substantial.

15. It follows, in my view, that the arbitration agreement between the parties was an international one.

Is the Dispute Arbitrable?

16. Mr Wong argues that is not permissible for the defendant to argue that agreement was never in existence, but, at the same time, that the agreement provides for any dispute, including a dispute as to whether or not the agreement was ever in existence, must be referred to arbitration. On the face of it, this argument has great merit. One might think that for our defendant to succeed in such an argument must be equivalent to the feat of pulling oneself up by one's own boot straps.

17. But the Model Law provides -

	"Article 16. Competence of an arbitral tribunal to rule on its jurisdiction.
	(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause."

18. So, this being an arbitration agreement to which the Model Law applies, Article 16 provides that the tribunal has precisely the power that Mr Wong says it does not have. And this is what Kaplan, J. decided in Fung Sang Trading Ltd. V Kai Sun Sea Products & Food Co Ltd [1991] 2 HKC 526.

19. Mr Wong argues, however that Kaplan, J. did not take into account another provision of the Model Law -

"Article 1. (5) This law shall not affect any other law of this State by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those of this law."

20. I do not accept that that this provision sets to naught the very specific provision of Article 16 (1). I do not accept that, in making the Model Law part of our law, the legislature provided that a tribunal may rule on the existence of the arbitration agreement, but, at the same time, provided that it may not do so because the law in existence immediately prior to the enactment of the Model Law may have said that an arbitrator may not rule of the existence of the agreement in which the arbitration agreement is contained. That would make nonsense of the legislation.

21. Mr Wong says that, although Kaplan, J. referred to the case of Heyman v Darwins [1942] AC 356, he did not accept it as authority for the proposition that "If the dispute is whether the contract which contains the [arbitration] clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission." (per Viscount Simon, L.C. at 366). Kaplan, J. did not refer to this pronouncement, I am sure, because it was not relevant. The Lord Chancellor was speaking with great good sense, but he was not considering the effect of Article 16 of the Model Law. Other English cases on this point must be approached with caution because England has not adopted the Model Law as part of its law.

22. Accordingly, I hold that, under these international arbitration agreements, the dispute as to whether or not the parties ever entered into the agreements is arbitrable.

Should a Stay be Granted?

23. On my findings, it seems to me that I have no discretion. Article 8 of the Model Law says that I "shall" refer the parties to arbitration.

Result

24. It seems to me that I must, not without some unhappiness, grant a stay and refer the parties to arbitration. I do so.

The Order 14 Summons

25. This summons must, on the basis of my conclusion of the stay summons, be dismissed.

Costs

26. There does not seem to me to be any obvious reason why costs should not follow the event on both summonses. Accordingly, I make orders nisi that the plaintiff pay the defendant's costs on those summonses.

	JK FINDLAY
	Judge of the High Court

Representation:

Mr Horace YL Wong, instructed by Messrs Chan & Chiu, for the plaintiff.

Mr Benjamin Chain, instructed by Messrs Oliver CM Chan & Co, for the defendant.

ORIENMET MINERALS CO LTD v. WINNER DESIRE LTD

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