HKCFI 1840
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1560 OF 2018
||TRUEARNS COMPANY LIMITED
||WEALTHY FOUNTAIN HOLDINGS INC
Before: Deputy High Court Judge MK Liu in Chambers
Date of Hearing: 19 July 2019
Date of Decision: 19 July 2019
D E C I S I O N
1. On 6 July 2018, the Plaintiff commenced this action against the Defendant for RMB387,010,874. On 17 December 2018, the Plaintiff obtained a default judgment against the defendant (“the Judgment”). The application now before me is the Defendant’s application by its summons dated 2 April 2019 (“the Summons”) for an order to set aside the Judgment, to stay this action, and the dispute between the parties herein be referred to arbitration.
2. I would first briefly set out the factual background.
3. By a shareholding and shareholder’s loan transfer agreement (股權和股東貸款轉讓協議) dated 6 January 2015 (“the Transfer Agreement”), the Plaintiff agreed to sell, and John Dewey Group Limited (“Dewey”) agreed to purchase, the Plaintiff’s entire shareholding in GCREF Investment III Limited (“the Shareholding” and “GRCEF”) and a shareholder’s loan in the sum of the USD equivalent of RMB 574,793,648 (“the Loan”), for the total consideration of RMB 1,127,046,368. GRCEF held, and still holds, 99% of the issued share capital of 徐州城置有限公司 (“the Project Company”), which in turn owns a property development project in Xuzhou, Mainland China (“the Project”).
4. By a letter of surety (履約保函) (“the Letter of Surety”) dated 5 January 2015 addressed to the Plaintiff, the Defendant has undertaken an unconditional and irrevocable payment obligation towards the Plaintiff regarding a total sum of RMB 637,046,680.
5. By a counter-guarantee (反擔保函) (“Counter-Guarantee”) dated 6 January 2015 addressed to the Defendant, Dewey, the Project Company, and Mr Kong Dehui (孔德輝) (“Kong”) (the ultimate beneficial owner of Dewey, and also the General Manager and person-in-charge of the Project both before and after the sale of the Shareholding and Loan), have undertaken that if the Defendant paid part or all of the secured sum pursuant to the Letter of Surety, the three counter-guarantors (namely Dewey, the Project Company and Kong) had to unconditionally repay the Defendant the sums.
6. Subsequently, the Plaintiff and Dewey entered into an amended transfer agreement (股權和股東貸款轉讓協議之修訂協議) dated 7 April 2015 (“the Amended Transfer Agreement”).
7. On or about 16 April 2015, the Plaintiff transferred the Shareholding and assigned the Loan to Dewey.
8. On 27 July 2015, the Plaintiff and Dewey entered into a supplemental agreement (“the Supplemental Agreement”) to amend and supplement certain terms in the Amended Transfer Agreement.
9. It is the Plaintiff’s case that although the Plaintiff had fulfilled all the conditions set out in the Amended Transfer Agreement, Dewey failed (and still fails) to pay part of the total purchase price owed in the sum of RMB 420,707,754. In light of Dewey’s failure to pay despite the Plaintiff’s demand, the Plaintiff through its solicitors wrote to the Defendant on or about 13 March 2018 to demand the Defendant to pay to the Plaintiff the amount of RMB 387,010,874 under the Letter of Surety.
10. There is no dispute that the Judgment is a regular judgment. It is trite that in order to set aside a regular judgement, the defendant has to show a real prospect of success in his defence.
11. The Defendant contends, inter alia, that there is an arbitration clause in the Letter of Surety and the dispute between the parties ought to be referred to arbitration. For this reason, the Judgment should be set aside, this action should be stayed and the matter should be referred to arbitration.
12. The parties are in agreement that the stay application should be determined first. If the court is of the view that the stay application would succeed or is likely to succeed, the court would not consider the merits of the defence at all.
13. When faced with a stay application made under section 20 of the Arbitration Ordinance (“the Ordinance”), the court must refer the dispute to arbitration unless one or more of the following is demonstrated:
(1) There is no arbitration agreement at all;
(2) The arbitration agreement is null and void, inoperative or incapable of being performed;
(3) There is in fact no dispute or difference to be referred to arbitration; or
(4) The relevant dispute is not one that is covered by the arbitration agreement.
14. In considering whether there should be a stay in favour of arbitration, the proper test is whether there is a prima facie case that the parties are bound by an arbitration clause. The onus is on the applicant to demonstrate this. Unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed for arbitration.
THE STAY APPLICATION
15. Section 19 of the Ordinance has given effect to Article 7 of the UNCITRAL Model Law. Article 7(1)(6) provides:
“The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.”
16. Accordingly, there is an “arbitration agreement in writing” in a contract if the following 3 conditions are satisfied:
(1) There is a reference in the contract to a document;
(2) That document contains an arbitration clause; and
(3) The reference is such as to make that clause part of the contract.
17. There is no dispute that the Transfer Agreement is referred to in the Letter of Surety, and there is an arbitration clause in the Transfer Agreement, ie Clause 13.2. The difference between the parties is whether the reference to the Transfer Agreement in the Letter of Surety has the effect of making the arbitration clause part of the Letter of Surety. This is a question concerning interpretation of the Letter of Surety.
18. The principles on contractual interpretation are trite and not in dispute:
(1) The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document.
(3) Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. Textualism and Contextualism are not conflicting paradigms. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement.
(4) The more unreasonable the result the more unlikely it is that the parties could have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. On the other hand, the Court must also be alive to the possibility that one side may have agreed to something which with the benefit of hindsight may not have served his interest.
19. Counsel for the parties have made thorough submissions and I am most grateful for the assistance provided by them. With respect, I am of the view that the arguments advance by each side have strength and weakness.
20. Mr David Chen, counsel for the defendant, has put forward the following points:
(1) All the contractual agreements in this case concern the same acquisition, namely, the sale and purchase of the Shareholding and the Loan.
(2) Although there were two contractual relationships which were entered into, one between the Plaintiff and Dewey as seller and purchaser under the Transfer Agreement and the other between the Plaintiff and the Defendant under the Letter of Surety, they were entered into in the context of a...