A and Others v. D

HCMP 1014/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1014 OF 2016

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REASONS FOR DECISION

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Introduction

1.The Plaintiffs in these proceedings applied to set aside the decisions of an arbitrator made in an arbitration between the Plaintiffs and the Defendant (“Arbitration”), on the ground of serious irregularity under section 4 of Schedule 2 to the Arbitration Ordinance, Cap 609 (“Ordinance”), and for the Defendant’s counterclaim in the Arbitration to be struck out.  The application was made by Originating Summons issued on 22 April 2016, pursuant to O 73 r 5 RHC and section 4 of Schedule 2. 

2.After hearing the parties, I dismissed the application, with costs to the Defendant on an indemnity basis.  The following are my reasons.

Background facts

3.The Plaintiffs and the Defendant were the equity partners of the Firm, pursuant to the terms set out in a letter dated 11 May 2007 (“Agreement”).  It is not disputed that the Defendant gave notice of his intention to retire from the Firm with effect from 15 November 2009.  By an assignment dated 16 November 2009 (“Assignment”), the Defendant assigned back to the 1^st Plaintiff his equity in the partnership.

4.Disputes arose between the partners as to amounts alleged to be due from the Defendant, and as to the Defendant’s entitlement to drawings and profit share under the Agreement as a result of his retirement.  Pursuant to clause 13 of the Agreement, the parties submitted their dispute to the Arbitration, by a Notice of Arbitration dated 30 May 2011.  An arbitrator was appointed (“Arbitrator”), and the parties expressly agreed that the Ordinance applied to the Arbitration. 

5.Pleadings were directed to be filed in the Arbitration.  According to the Statement of Claim, the Plaintiffs sought (inter alia) payment of loans of $700,000 and reimbursement of profits tax of $526,083.60 from the Defendant.  By his Defence and Counterclaim, the Defendant sought from the Plaintiffs a sum of $804,961.78, as outstanding commissions and basic drawings due under the Agreement, and an account of profit costs received after his retirement.

6.The issues for determination in the Arbitration were agreed, and these included the legal effect of the Assignment.  With the agreement of the parties, the Arbitrator ruled on this as a preliminary issue (“Preliminary Issue”).  By his Order for Direction No 6 (“Order 6”), the Arbitrator directed the parties to file written submissions on the Preliminary Issue, and in particular, to clarify whether the Defendant “is entitled to any payment under Clause 5 (including the profit costs received beyond the Relevant Period (the “Further Profit Costs”)) and/or other clauses of the Agreement beyond the Relevant Period”.  “Relevant Period” was defined in Order 6 to be 1 May 2007 to 16 November 2009.

7.On 13 November 2015, the Arbitrator ruled on the Preliminary Issue (“Ruling”).  At paragraph 11 of the Ruling, he stated:

“(a) The Respondent was an equity partner of the Firm during the Relevant Period ie between 1 May 2007 and 15 November 2009.

(b) As an equity partner of the Firm the Respondent owned 3% of the equity of the Firm (“Tony’s Equity”) and would have been entitled to 3% of the profits made by the Firm during the Relevant Period under Clause 9.1 and 9.2 of the Agreement.

(c) During the Relevant Period when the Respondent was an equity partner of the Firm, he was entitled to Drawings as that set out under Clause 5 of the Agreement. It is worth noting that according to the wordings of Clause 5 it is clear that the rights to make drawings are only available to equity partners of the Firm.

(d) By a notice dated 15 May 2009 the Respondent notified the Claimants of his intention to retire from the partnership with effect from 15 November 2009 pursuant to Clause 10.1 of the Agreement.

(e) Accordingly, the Respondent ceased to be an equity partner with effect from 15 November 2009 pursuant to Clause 10.1 of the Agreement.

(f) By an Assignment dated 16 November 2009 the Respondent assigned back to the 1^st Claimant “Tony’s Equity”. This was apparently done pursuant to Clause 10.3 of the Agreement given that the retirement of the Respondent occurred on or before 30 April 2010. It seems clear that the cessation of the Respondent’s equity partner’s status took effect on 15 November 2009 upon the cessation of 6 months following the written notice of retirement from the Respondent pursuant to Clause 10.1 of the Agreement. Tony’s equity was transferred back to the 1^st Claimant pursuant to Clause 10.3 of the Agreement on 16 November 2009.

(g) By reason of the above, the Respondent ceased to have any entitlement to payments on Drawings under Clause 5 or for profits distribution under Clause 9.1 and 9.2 of the Agreement as the Respondent ceased to be an equity partner with effect on 15 November 2009. It is clear from both clauses that the rights to make drawings and to share profits are only applicable to equity partners of the Firm.

(h) Following on the above, the Respondent would have no entitlement to “Further Profit Costs” beyond the Relevant Period.”

8.The Arbitrator stated his decision in paragraph 12 of the Ruling, as follows:

“Accordingly it is the Tribunal’s decision that the legal effect of the Assignment, reading alongside the relevant terms of the Agreement and the notice of retirement served by the Respondent on 15 May 2009 is that the Respondent had ceased to be an equity partner of the Firm with effect on 15 November 2009 and that the Respondent ceased to have any rights under the terms of the Agreement which rights were applicable to equity partners of the Firm only. This would include rights to make Drawings under Clause 5 as well as rights to share profits under Clause 9 of the Agreement.”

9.The Plaintiffs do not take issue with the Ruling.

10.After the Ruling, the Plaintiffs applied to the Arbitrator to strike out the Counterclaim in the Arbitration.  The application to strike out was dismissed by the Arbitrator.  His decision on the striking out application was dated 23 March 2016 (“Decision”).  By an Order for Directions No 8 made on 21 April 2016 (“Order 8”), the Arbitrator ordered that the costs of the striking out application should be borne by the Plaintiffs and be paid to the Defendant.

11.By their Originating Summons issued in these proceedings on 22 April 2016 (“OS”), the Plaintiffs sought the setting aside of the Decision and Order 8, on the ground of serious irregularity under section 4 of Schedule 2.

12.By a summons issued on 29 June 2016, the Defendant sought a declaration that the Court has no jurisdiction in respect of the subject matter of these proceedings or the relief or remedies sought by the Plaintiffs, and for the action to be dismissed.

Jurisdiction and whether Schedule 2 applies

13.The parties accepted before the tribunal that the Ordinance applies to the Arbitration.

14.The Ordinance adopts a unitary regime of arbitration, making no further distinction between domestic and international arbitrations.  The provisions of Schedule 2 of the Ordinance apply only if the parties opt for its application.  This is a salient feature and the key purpose of the Ordinance, which came into effect on 1 June 2011.

15.Section 99 of the Ordinance permits an arbitration agreement made between the parties to provide expressly that the provisions of Schedule 2 are to apply. 

16.It is indisputable that the Agreement between the Plaintiffs and the Defendant make no express provision for any of the provisions of Schedule 2 to apply. 

17.Section 100 of the Ordinance provides that all the provisions in Schedule 2 apply to an arbitration agreement entered into before the commencement of the Ordinance “which has provided that arbitration under the agreement is a domestic arbitration”.

18.Again, it cannot be disputed that although clause 13 of the Agreement provides for any dispute or question arising between the partners about the partnership or its accounts or transactions or arising out of or in connection with the partnership deed to be referred to arbitration according to the provisions of the Arbitration Ordinance, the Agreement makes no provision that such arbitration would be a domestic arbitration. 

19.On behalf of the Plaintiffs, it was argued that any arbitration under the Agreement would have been a domestic arbitration, since all the partners were Hong Kong parties with a place of business in Hong Kong. 

20.Under the repealed Arbitration Ordinance, Cap 341, any arbitration between the partners of the Firm might have been considered a domestic arbitration.  However, the parties in this case agreed with the Arbitrator that the Arbitration was to be governed by the Ordinance, and not the repealed Cap 341.  Under the Ordinance, any arbitration held in Hong Kong will be governed by the provisions of the Ordinance and by the Model Law as applied by the Ordinance, without any further distinction and consideration of whether the arbitration is a domestic, or an international, arbitration.

21.Counsel for the Plaintiffs made the distinction between the use, in section 100, of an arbitration agreement “which has provided”, and the use in section 102, of an arbitration agreement which “has provided expressly”.  It was suggested that the absence of the requirement in section 100 for there to be “express” provision means that Schedule 2 will automatically apply under section 100, so long as the arbitration agreement would have met the test for a “domestic arbitration agreement” under the repealed Cap 341. 

22.If the intention behind the transitional provisions contained in Part 11, and in particular section 100 of the Ordinance, is that Schedule 2 is to apply to domestic arbitrations, or domestic arbitration agreements within the meaning of the repealed Cap 341, section 100 could simply have provided for Schedule 2 to apply to “domestic arbitrations”, or to “domestic arbitration agreements”.  As presently drafted, section 100 (a) and (b) refer, not only to an arbitration agreement, but also to provision having been made in the agreement, that the arbitration is a domestic one. 

23.Nor can it be said that an arbitration agreement will by implication provide for domestic arbitration, or be intended by the parties to be a domestic arbitration agreement, simply because the parties are Hong Kong residents, and have a place of business in Hong Kong.  Under the repealed Cap 341, the parties to a domestic arbitration agreement can still opt out of the domestic arbitration regime by agreeing that their arbitration agreement is to be treated as an international arbitration agreement, or that their dispute is to be arbitrated as an international arbitration (section 2L of the repealed Cap 341). 

24.Since the Agreement made between the Plaintiffs and the Defendant in this case makes no provision at all for Schedule 2 to apply, there is no basis for the Plaintiffs to apply to this Court to set aside the Decision and Order 8 on the ground of serious irregularity under section 4 of Schedule 2.  Under section 3 (2) of the Ordinance, the court should interfere in the arbitration of the dispute only as expressly provided for in the Ordinance.

25.On behalf of the Plaintiffs, Counsel sought to argue that the Court should set aside the Decision and Order 8 under section 81 of the Ordinance, and Article 34 (2) (a) (iv) and (2) (b) (ii) of the Model Law.

26.Under O 73 r 5 (4) RHC, in relation to an application to set aside an arbitral award under section 81 of the Ordinance, the originating summons must state the grounds of the application, and if the application is founded on evidence by affidavit, a copy of every affidavit intended to be used must be served with the originating summons.  In KB v S HCCT13/2015, 15 September 2015 and Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] 3 HKC 415, the arbitration judge made it clear that it is an abuse of process if an applicant fails to state in the originating summons the grounds of its application under section 81, or 84 of the Ordinance. 

27.Since the OS only specified that the application was made under section 4 of Schedule 2, on the only stated ground of serious irregularity, and did not state any ground to set aside the Decision and Order 8 under section 81 of the Ordinance, it would be an abuse of process to permit the Plaintiffs to argue the application as if it was made under section 81.  For that reason, I refused to let the Plaintiffs proceed in that manner.

The serious irregularity alleged

28.Even if I was wrong, in ruling that section 4 of Schedule 2 does not apply to the Arbitration, the Plaintiffs’ application has no merit.

29.The basis of the Plaintiffs’ application to set aside the Decision and Order 8 is that the Arbitrator was revisiting and/or reinterpreting his earlier Ruling on the Preliminary Issue when he made the Decision and Order 8.  As such, it is alleged that the Arbitrator had purported to exercise a power which he did not have, and to conduct the arbitral proceedings outside the ambit of the procedures agreed by the parties. 

30.On a plain reading of the Ruling, it is clear that neither the Decision nor Order 8 was a reversal or reinterpretation in any way of the Ruling.  The Decision and Order 8 follow from, and are logical consequences of the Arbitrator’s findings in the Ruling. 

31.The Arbitrator found in the Ruling that the cessation of the Defendant’s status as an equity partner took effect on 15 November 2009.  The Arbitrator consequently found that the Defendant ceased to have entitlement to payments on drawings and profit distribution, when he ceased to be an equity partner with effect on 15 November 2009.  The Ruling was therefore that the Defendant would have no further entitlement to “Further Profit Costs” beyond the Relevant Period of 1 May 2007 to 16 November 2009. 

32.The Ruling was explained in paragraph 12, when the Arbitrator made it clear that considering the legal effect of the Assignment, the terms of the Agreement and the notice of retirement served on 15 May 2009, the Defendant had ceased to be an equity partner of the firm with effect on 15 November 2009, and ceased to have any rights under the terms of the Agreement, which rights include the rights to make drawings under Clause 5, and the right to share profits under Clause 9 of the Agreement.  The basis of the Ruling was that the Defendant’s rights as an equity partner ceased, with effect on and from 15 November 2009. 

33.The Defendant’s Counterclaim is for payment of the “Withheld Amount” of $804,961.78 (“Withheld Amount”), particularized in paragraph 39 of the Counterclaim.  On the face of paragraph 39, the Withheld Amount comprises commissions and basic drawings on the basis of bills settled in the preceding month.  According to the particulars of the commissions comprising the Withheld Amount, the Withheld Amount relates to commissions and drawings due from April 2009 to November 2009, before the Relevant Period.

34.There was accordingly no basis for the Plaintiffs to argue that the Ruling had decided the question of the Defendant’s entitlement to the Withheld Amount, and that the Defendant’s entitlement to the Withheld Amount had ceased on the findings made by the Arbitrator in the Ruling. As the Arbitrator explained in the Decision:

“My Ruling only says that the Respondent is no longer an equity partner of the Claimants’ firm with effect from 15 November 2009 and thus ceased to have any rights to share the drawings under the Agreement as from 15 November 2009. It should not affect nor deny the Respondent’s rights to the drawings under the Agreement before that date. Accordingly, my Ruling would not affect the Respondent’s counterclaim as per paragraph 39 of the (Defence and Counterclaim). Under paragraph 39 of the Defence and Counterclaim the Respondent claims that he is entitled to certain payments under clause 5 of the Partnership Agreement which he is entitled to during the period of April to November 2009. Clause 5 of the Partnership Agreement provides that an equity partner may draw out monies from the partnership bank account on 28^th and 15^th of each calendar month representing basic drawings and additional drawings as defined under that clause. Hence, if the Respondent is able to prove those claims he would have been so entitled on the 15^th and 28^th of each calendar month prior to his retirement from the partnership ie 15 November 2009. Because of this reason there is no basis for me to strike out the Respondent’s entire counterclaim.”

35.I see no basis whatsoever to find that the Arbitrator had attempted or purported to vary, or reinterpret, his Ruling.  There is no contradiction between the Ruling and the Decision.  The Decision, and Order 8 which follows from the Decision, are consistent with and follows from the Ruling.  There is no irregularity at all, either in the arbitral procedure or in the Arbitrator’s exercise of his powers, as the Plaintiffs sought to argue.

Conclusion

36.For the above reasons, the application to set aside the Decision and Order 8 was totally without merit, and was dismissed, with costs on an indemnity basis.  I agree that the Court has no jurisdiction to deal with the OS and the application made by the Plaintiffs to set aside the Decision and Order 8, and an order in terms of the Defendant’s summons is made, with costs to the Defendant on an indemnity basis. 

Mr Liu Man Kin and Ms Eleanor Yeung, instructed by Lily Fenn & Partners, for the 1^st to 3^rd Plaintiffs

Ms Ann Lui, instructed by Tony Au & Partners, for the defendant