The importance of the use of languages in determining the intended coverage of arbitration clause

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Introduction

It is not uncommon that parties to a commercial agreement include an arbitration clause to govern the way in which dispute is settled. In Giorgio Armani SpA v Elan Clothes Co Ltd [2019] HKCFI 530, in deciding an application by the plaintiff seeking the continuation of an anti-suit injunction against the defendant from taking any further step in the proceedings in the PRC, the Hong Kong court sets out its approach to the construction of arbitration clauses as to what kind of matter is intended by the parties to be determined by arbitration.

Background

The plaintiff, Giorgio Armani SpA (“Armani SpA”), is head of the Armani Group which manufactures and supplies luxury fashion products including clothing which bear trademarks belonging to Armani SpA. Armani SpA and the Arimani Group are controlled by Mr. Giorgio Armani (“GA”), a well-known figure in the world of fashion. The defendant, Elan, is a wholly owned subsidiary of Dashang Company Ltd, a PRC company listed on the Shanghai Stock Exchange.

In December 2014, Armani SpA and Elan entered into a Master Agreement (the “MA”) under which Elan was appointed as an authorised retailer with a right to open and operate single brand stores distinguished by a sign bearing one of the Armani marks in order to sell certain clothing products and accessories in the PRC. Under the MA, the single brand points of sale from which Elan is authorised to sell the specified Armani branded products have to be approved by Armani SpA. The distribution and sale of Armani branded products through single-branded stores was the only business of Elan.

Arbitration clause of the MA

Clause 13 of the MA has the following provisions regarding arbitration:

  • Clause 13.1 provides that any dispute, controversy or claim deriving from, arising out and/or regarding the MA, including any dispute regarding the validity, interpretation, construction, performance, breach and termination thereof, shall be settled by arbitration.
  • Clause 13.2 provides that nothing in clause 13 shall be construed as preventing any party to the MA from seeking conservatory or other interim relief and remedies, in relation to which the arbitration committee is not competent pursuant to mandatory provisions of law, in any court of competent jurisdiction.
  • Clause 13.3 provides that the formation, validity, interpretation, and implementation of the MA are to be governed by the laws, administrative regulations and other rules of HKSAR.

The dispute

In February 2017, GA announced without warning to the media in Italy that certain Armani brands were to be changed in a re-branding exercise, and as a result Armani SpA announced a reorganisation of its brands. Elan alleged that this change has caused Elan to suffer significant losses including (i) the loss of sales of Armani products; (ii) the loss of profits Elan would have expected to make; and (iii) the loss arising from the closure or compulsory refurbishment of the stores. Armani SpA contends that under the MA it was recognised as having complete control over the Armani brands and was entitled to carry out the re-branding exercise. Elan stopped paying royalties and advertising contributions that Armani SpA contended were due under the MA, but which Elan claimed were not due.

In June 2018, the parties having failed to settle their differences, Armani SpA served a notice of termination of the MA, and commenced arbitration proceedings in Hong Kong pursuant to Clause 13.1 of the MA seeking a declaration that it had validly terminated the MA, and claiming for damages and injunctive relief. In July 2018, Elan served its Response to Notice of Arbitration in which it denied that Armani SpA had validly terminated the MA and reserved any right to raise counterclaim(s) against Armani SpA for breach and/or repudiation of the MA. In the same month, the HKIAC confirmed the appointment of the presiding arbitrator and the convening of the tribunal.

Notwithstanding Clause 13.1 of the MA, in August 2018 Elan commenced proceedings in the Higher People’s Court of Shandong (the “Shandong Proceedings”) against Armani SpA, GA, Armani PRC and Armani HK (the “Shandong Defendants”) for the preservation of the assets of the Shandong Defendants up to a limit of RMB600 million. In other words, the Shandong Defendants included parties that were not the signing parties to the MA.

In October 2018, Armani SpA applied ex parte for and was granted by the Hong Kong court an interim injunction restraining Elan from taking any further step in the Shandong proceedings (the “Injunction”).

Legal principles

The legal principles applied by the Hong Kong court when deciding whether or not to grant an anti-suit injunction are founded on the principles that an anti-suit injunction is directed only to the defendant and is in respect of the conduct of the defendant, and does not call into question the jurisdiction of the foreign court. Foreign proceedings in breach of an arbitration agreement or exclusive jurisdiction clause are a breach of contract which ordinarily will be restrained by the grant of an injunction restraining the party in breach from conducting such proceedings unless there are strong reasons to the contrary shown.

The modern approach to the construction of arbitration clauses is to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause, namely, to have disputes that may arise out of the agreement containing the arbitration clause to be decided by a chosen tribunal. Construction of the clause must therefore be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have only some issues arising out of, or in connection with, the agreement containing the arbitration clause determined by arbitration, one needs to find very clear language before deciding that they must have had such an intention. The construction of an arbitration clause should therefore start with the presumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered to be decided by the same tribunal unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

The plaintiff’s case

Armani SpA submitted that the Shandong Proceedings against all of the Shandong Defendants, not just Armani SpA, fall within Clause 13.1. In support of this submission reliance is placed on the opening words of the MA:

 

“This agreement (the ‘Master Agreement’) is dated December 18th, 2014 and is by and between:

Giorgio Armani S.p.A., … (hereinafter referred to as ‘Armani’ together with its branch offices and Affiliates)

Each of Armani and Company is referred to as a ‘Party’ and together the ‘Parties’.”

 

It is common ground that GA, Armani PRC and Armani HK are “Affiliates” within the definition. Armani SpA also drew attention to the numerous occasions when “Affiliates” are referred to in the operative clauses of the MA. Accordingly, Armani SpA argued that GA, Armani PRC and Armani HK were contracting parties to the MA through the agency of Armani SpA, and that Armani SpA had authority, expressed or implied to enter into the MA on behalf of the Affiliates, whose rights and obligations are set out therein. Armani SpA also contended that it was to be presumed that Armani SpA and Elan, controlled as they are by rational commercial businessmen, intended that claims against Affiliates deriving from, arising out of and/or regarding the MA brought by Elan, were to be decided by arbitration, even if the Affiliates in question were not contracting parties to the MA, and there was nothing in the language of Clause 13.1 that rebutted this presumption.

The defendant’s case

Elan submitted that the only contracting parties to the MA are the parties who signed the agreement and who are referred to in the MA as the “Parties”, namely “Armani” (i.e. Armani SpA) and “Company” (i.e. Elan). In support of this submission, Elan made reference to various clauses in the MA where a distinction is made between “Armani” on the one hand and “Affiliate(s)” and “Authorised Distributor” on the other. Elan submitted that the claim in tort brought by Elan against all the defendants in the Shandong Proceedings was not covered by Clause 13.1 because: (i) the tort claim has no connection with and is not based on any breach of the MA; and/or (ii) the arbitral tribunal will be entitled to apply the Hong Kong conflicts of laws rules in deciding what is the law applicable to the tort and, under those conflicts rules, the double actionability rule would apply, with the consequence that the tort claim would not be actionable in the HKIAC arbitration; and (iii) Clause 13.1 is neither apt nor intended to cover claims that a Hong Kong court would not have jurisdiction to entertain.

Elan further argued that even if the claim in tort against Armani SpA in the Shandong Proceedings was covered by Clause 13.1, there were good reasons why that clause should not be enforced in respect of that claim since the Shandong Proceedings would continue against Armani PRC, Armani HK and GA, giving rise to the real possibility of inconsistent verdicts being reached in the HKIAC arbitration and the Shandong Proceedings.

The court’s decision

The Hong Kong court ruled that there is a strongly arguable case that Armani PRC, Armani HK and GA are parties to the MA considering:

  1. The words “is by and between” in the opening sentence of the MA are a strong pointer that “Armani” and (together with) its Affiliates and “Company” and its Affiliates (together with) are each separate parties to the MA, “Armani” and “Company” respectively signifying Armani SpA and Elan and “Affiliates” separately signifying persons and entities that satisfy the definition of Affiliates in the MA.
  2. This pointer is not diminished by the words “Each of Armani and Company is referred to as a ‘Party’ and together the ‘Parties’.” because these words are not premised on “Armani” and “Company” being the sole parties to the agreement. Instead, these words, particularly “the Parties”, are intended to provide a convenient short hand to be used when it is Armani and/or Company, as distinct from the other parties (viz Affiliates and branch offices) which are to be the subject or the beneficiary of a particular obligation contained in the MA.
  3. It follows that there is a very good argument that any dispute, controversy or claim deriving from, arising out of and/or regarding the MA is covered by the clause where one of the parties is an Affiliate of Armani SpA.

In addition, the Hong Kong court ruled that there is a strong argument that the tort claim in the Shandong Proceedings falls within Clause 13.1, given: (i) the breadth of the wording of Clause 13.1; (ii) the implicit contention that the acts complained of in the Shandong Proceedings are wrongful, at least in part, because the re-branding was not permitted under the MA that constituted Elan the “legal” retailer of Armani brands in question; and (iii) the fact that the pleaded damage complained of in the Shandong Proceedings results in part from Elan’s purchase of products and establishment of outlets as required by the MA.

Even if the Affiliates are not parties to the MA, there is a good argument that Clause 13.1 covers Elan’s claims in the Shandong Proceedings not only against Armani SpA, but also GA, Armani PRC and Armani HK. After all, if those managing Armani SpA and Elan wanted “disputes, claims or controversies deriving from, arising out of and/or regarding the MA” to be decided by arbitration where Armani SpA and Elan were parties to the dispute or claim, then surely, as rational businessmen, they would have wanted such “disputes, claims or controversies” where the claimant or disputant was an Affiliate also to be decided by arbitration.

Based on the above, the Hong Kong court concluded that it is just and convenient to order the continuation of the Injunction.

Conclusion

This case illustrated the importance of the use of language in a commercial agreement in determining what kind of matter is intended by the parties to be covered by the arbitration clause. In addition, the language used would also affect who are the parties that are covered by the arbitration clause.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019