The recent case of VK Holdings (HK) Ltd v Panasonic Eco Solutions (Hong Kong) Company Ltd demonstrates the importance of carefully drafting arbitration clauses to ensure they reflect the parties’ intentions about what disputes are to be covered. In this case, the court held that an arbitrator had correctly ruled that he had jurisdiction over the dispute and dismissed VK’s application under s.34 of the Arbitration Ordinance to set aside his interim award.
VK and Panasonic entered into an Agreement for the sale and purchase of electronic products, “Products” being defined as those specified in an Exhibit.
Panasonic alleged that some electronic parts supplied were defective and referred its claims to the HKIAC for arbitration, pursuant to the arbitration clause in the Agreement, providing for arbitration of “any and all disputes, controversies or differences arising out of or in connection with the Agreement”. VK contended that the dispute was outside the Agreement’s scope, since the electronic parts (Parts) were not Products, as defined in the Exhibit, but the sole arbitrator appointed made a preliminary ruling that he did have jurisdiction over the dispute.
The court dismissed VK’s application to set aside the arbitrator’s interim award, holding as follows:-
Scope of the arbitration clause
- The arbitrator’s jurisdiction turned on whether the parties’ dispute could fall within the arbitration clause, notwithstanding that “Products” had not been extended or amended in writing to include the Parts (as the Agreement required).
- An arbitrator’s jurisdiction was derived from the parties’ agreement. The court’s task was to consider the dispute, elicit from the arbitration agreement the parties’ intentions concerning the arbitrator’s jurisdiction and decide whether they intended the dispute to be resolved by the arbitrator.
- Each arbitration clause must be construed in the context of the contract as a whole and the meaning of a particular formula may be broader or narrower, depending on the nature of transaction, circumstances in which the arbitration clause came into existence and other provisions of the contract. There was a prima facie assumption that parties intended that all disputes relating to a particular transaction should be resolved by the same tribunal and that by agreeing to arbitrate, had chosen arbitration as the appropriate tribunal.
- The construction of a document is an attempt to discover what a reasonable person would have understood the parties to mean, having regard not merely to the individual words used, but the agreement as a whole, factual and legal background against which it was concluded, and practical objects it was intended to achieve.
- In most commercial contracts, the fundamental terms concerned the obligation to be performed, period for performance and price, which were usually stipulated with some particularity. However, it was not unusual to find elements of fluidity in a contract, particularly construction contracts, which enable variation of work and recalculation of contract price.
- The Agreement here contained an element of fluidity. It made it clear that terms and conditions “shall be applied to an individual purchase contract of the Products” “made from time to time” during the Agreement term. The parties clearly intended separate individual purchase contracts or transactions made from time to time during the term, which was a continuous one. The Agreement specified the Products as those in the Exhibit, but envisaged variations by way of additions to or deletions from the definition of “Products”.
- The structure provided under the Agreement for the placing and acceptance of orders and prices to be by mutual confirmation, with possible price review, all contemplated changes to and variations of the Agreement by mutual consent.
- The Agreement recitals referred to the parties’ intention to buy and sell “parts in electronic products”. The items supplied during the Agreement term and in their course of dealings were all electronic parts. The Parts performed substantially the same, if not identical, functions as the Products. VK had not pointed to any real difference in the parties’ trading to justify any distinction which had to be made between the Parts and the Products.
- The arbitration clause referred to “any and all” “disputes, controversies or differences” “arising out of or in connection with” the Agreement. These phrases conferred the widest possible jurisdiction and wide meaning. Of course, they were to be construed by reference to the subject matter of the contract , but a dispute “arising out of” the contract has been held to cover every dispute except a dispute as to whether there was ever a contract at all.
- Words of broad import, such as “in connection with this contract”, were to be given their natural meaning in their context and were capable of meaning any dispute other than one which was “entirely unrelated to the transaction covered by the contract”.
- The overriding objective in construction was to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. The test was not what either VK or Panasonic subjectively intended the Agreement to mean.
- Given the very broad terms used in the arbitration clause and that the nature and function of the Products and Parts were substantially similar, if not identical, there was a sufficiently close connection between the dispute and Agreement, to bring it within the arbitration clause. The relationship between the parties and their transactions for the supply of the Parts were so closely linked and related to their relationship and transactions for the supply of the Products, that judged objectively, it could not reasonably be said that they could not have intended, at the time the Agreement was made that any disputes relating to VK’s supply of the Parts would not be included in the Agreement. It could be reasonably assumed that Panasonic and VK could not have intended and agreed either to have a separate tribunal resolve their dispute relating to the Parts, or to have a different manner of resolving any dispute relating to the supply of the Parts, than as provided for in the arbitration clause. It certainly could not be said that the dispute was entirely unrelated to the Agreement or to the transaction of the purchase and supply of Parts under the Agreement.
The court agreed with the arbitrator’s ruling that he had jurisdiction over the dispute and to rule on whether the Parts fell within the definition of “Products” under the Agreement, whether the terms and conditions of the Agreement extended to VK’s supply of the Parts, and whether VK was in breach of the Agreement. Accordingly VK’s application to set aside the Interim Award was dismissed.
Although each arbitration clause will be construed in the context of the agreement as a whole and its meaning may be broader or narrower depending on the nature of the transaction, circumstances in which it came into existence and the other contractual provisions, there is a prima facie assumption that parties to a contract intended that all disputes relating to a particular transaction should be resolved by the same tribunal. Further, phrases like “any and all” “disputes, controversies or differences” “arising out of or in connection with” the agreement have been held by the courts to confer the widest possible jurisdiction and meaning.