THORN SECURITY (HONG KONG) LTD v. CHEUNG KEE FUNG CHEUNG CONSTRUCTION CO LTD

CACV 211/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 211 OF 2003

(ON APPEAL FROM DCCJ NO. 7482 OF 2002)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1. This is an appeal from (1) the order dated 30 April 2003 of HH Judge C B Chan granting the defendant a stay of the proceedings commenced by the plaintiff and (2) the order dated 16 June 2003 refusing the plaintiff's application for leave to appeal. At the conclusion of the hearing, the appeals were allowed. Written reasons were to be handed down later which we now do.

Background

2. The defendant who was the main contractor entered into a subcontract with the plaintiff who was the nominated subcontractor for the latter to carry out certain fire services and water pump installations for a project known as Tung Chung Area 30 Phase 3 ("the project"). Clause NS10(4) of the Special Conditions of the subcontract provided for the accrual of interest on any amount due but not paid to the plaintiff within 28 days after certification by the surveyor. The plaintiff claimed default interest accruing between October 1999 and October 2001 from the defendant. A dispute arose between the parties over the question whether such default interest was due and owing to the plaintiff.

3. The subcontract contained provisions for the resolution of disputes or differences of any kind between the plaintiff and the defendant. In issue is whether, on the true construction of those provisions, there was an arbitration agreement between the parties.

4. It is common ground that on 16 April 2002 the plaintiff wrote to the Hong Kong Housing Authority which was the contract manager of the project. In pertinent part the letter read:

"F.S. Installation for Tung Chung Area 30 Ph. 3
Sub-Contract to Contract No. 87 of 1997
Notice of Dispute

Pursuant to Special Condition NS11 of the Sub-Contract, we hereby write to inform you that a dispute has arisen between Messrs. Cheung Kee Fung Cheung (CKFC) the Main Contractor and us, the nominated sub-contractor, in respect of the above-mentioned works.

Under Special Condition NS10, CKFC defaulted to pay us the certified sum under Surveyor Certificates no. 13, 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28 & 29 within the prescribed time as identified in Appendix A - Interest Calculation Table, under which we had claimed for interest payments of HK$111,750.79 as a result of the default caused by CKFC.

Despite our repeated reminder to CKFC, we have not received any positive feedback from CKFC. Copies of relevant correspondence and documents are listed below and attached for easy reference.

...

In this connection, we would kindly request you to make a decision under Special Condition NS11(3) on each of following issues:-

1) Whether CKFC is obliged to pay the interest as a result of this default?

2) If your decision to item (1) above is affirmative, then is CKFC in default of interest payment to us? And what amounts should be paid to us?

3) If your decision to item (1) above is negative, then you based on what grounds in reaching the decision?

..."

The attachments included Appendix A which was the Interest Calculation Table which showed exactly how the interest claimed had been computed. This table was amended at a later date so that the final figure claimed became HK$112,610.70 but nothing turns on that.

5. By letter dated 7 June 2002, the contract manager wrote to the plaintiff in these terms:

"Construction of Tung Chung Area 30 Phase 3
Contract No. 87 of 1997

Re: Notice of Dispute

I refer to your Notice of Dispute which dated 16 April 2002 and our joint meeting with your representative at this office on 6 June 2002.

The dispute is in relation to several outstanding payments arising from the interest claims due to main contractor's late payment to your parties (from Surveyor's Certificate No. 13, 14 and 16 to 29).

Based on your submitted sub-contract payment record, it is noted that the main contractor had not followed the payment conditions as stipulated in Clause NS10(1). Under Clause NS 10(4), in the event of failure of the main contractor to make payment to sub-contractor, the sub-contractor is entitled to have interests at one percentage below the debt rate upon any overdue payment from the day next following the date on which the payment should have been made. In this regard, you are entitled to claim interest monies from the main contractor with detailed breakdown indicating in the payment record."

This letter was copied to the defendant.

6. Whilst it was common ground that there was a Notice of Dispute, Miss Cruden argued that the letter of 7 June 2002 from the contract manager was not a "decision" within subclause (3) and that the defendant should not be deprived of the opportunity of having this point decided by arbitration. Suffice it to say that although expressed infelicitously, when read together with the Notice of Dispute and the Table showing how the default interest was computed, it is quite plain that the letter was a "decision" within subclause (3).

7. On 11 June 2002, the plaintiff wrote to the defendant and after referring to the contract manager's letter of 7 June, demanded payment of interest monies due based on the calculations attached to the Notice of Dispute. The defendant did not respond to this demand and on 3 December 2002, the plaintiff commenced an action in the District Court (District Court Civil Action No. 7482 of 2002) to recover the default interest. On 24 December 2002, the plaintiff took out a summons for summary judgment. Some three weeks later, on 17 January 2003, the defendant applied for a stay of proceedings. It is common ground that the defendant maintained total silence and did nothing after receipt of the plaintiff's demand which was issued following the contract manager's letter of 7 June 2002 until it took out the summons for a stay.

8. The judge granted a stay of the District Court proceedings on 30 April 2003 and ordered costs against the plaintiff in any event. On 16 June 2003, the judge refused the plaintiff's application for leave to appeal to the Court of Appeal. The plaintiff obtained leave on 29 July 2003 by way of an ex parte application to this Court. The defendant took out a summons to rescind the grant of leave to appeal but by a consent order dated 17 December 2003, the defendant withdrew its application with costs reserved for argument at the hearing of the substantive appeal.

Dispute resolution framework

9. As this appeal turned on the true construction of the provisions of Clause NS11 of the Special Condition ("Special Condition 11"), it is necessary to set that out in full:

"NS11	Clause 29 of the Conditions of Sub-contract is substituted by the following :-	Settlement
		of Disputes

(1) If any dispute or difference of any kind whatsoever arises between the Contractor and the Sub-contractor in connection with or arising out of the Sub-contract or the carrying out of the Sub-contract Works including any dispute as to any decision, opinion, instruction, order, direction or certificate of the Contract Manager or certificate or valuation by the Surveyor whether during the progress of the Sub-contract Works or after their completion and whether before or after the determination, abandonment or breach of the Sub-contract, it shall be settled in accordance with the following provisions.

(2) For the purpose of this Clause a dispute shall be deemed to arise when one party serves on the Contract Manager a notice in writing (hereinafter called the Notice of Dispute) defining the dispute and requesting a decision by the Contract Manager under this Conditions of Contract. Provided that no Notice of Dispute may be served unless the party wishing to do so has first taken steps or invoked procedures if any are available elsewhere in the Sub-contract in connection with the subject matter of such dispute and the other party or the Contract Manager or the Surveyor as the case may be has :-

(a) taken such steps as may be required or

(b) been allowed a reasonable time to take any such steps.

(3) Within 60 days of receiving a Notice of Dispute, the Contract Manager shall either give, in writing, his decision on the dispute or state, in writing, his inability to make a decision on the dispute.

(4) Unless the Sub-contract has already been determined or abandoned the Sub-contractor shall in every case continue to proceed with the Sub-contract Works with all due diligence and the Contractor and the Sub-contractor shall both give effect forthwith to every such decision of the Contract Manager. Such decisions shall be final and binding upon the Contractor and the Sub-contractor unless and until as hereinafter provided either :-

(a) the parties agree otherwise, or

(b) the decision of the Contract Manager is revised by an arbitrator and an award made and published.

(5) In relation to any Notice of Dispute given under sub-clause (2) of this Clause either party may within 28 days of the Contract Manager's decision or his notice of inability to make a decision, provided no Notice to Refer to Arbitration under sub-clause (6) of this Clause has been served, serve on the other party a Mediation Request Notice, requesting that the Dispute be referred to mediation in accordance with and subject to the Hong Kong Government Mediation Rules issued as Appendix 1 to Works Branch Technical Circular 11/91 dated 27 May 1991. The other party shall, within 28 days of receipt of a Mediation Request Notice, reply in writing either agreeing to or rejecting mediation.

(6) The Contractor or Sub-contractor, by serving a written Notice to Refer to Arbitration within the time limits set out in (a) or (b) of this sub-clause, may require the dispute to be referred to arbitration in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory modification thereof for the time being in force and any reference shall be deemed to be a submission to arbitration within the meaning of such Ordinance.

(a)	Within 28 days of receipt of the Contract Manager's decision or his notice of inability to make a decision in respect to a Notice of Dispute.
(b)	Within 28 days of either a rejection to mediate or the failure of the other party to reply to a Mediation Request Notice within the prescribed time limit or the failure of mediation requested in accordance with sub-clause (5) of this Clause. Failure of mediation shall be taken to be the earliest of 90 days after the production of a mediator's report under Rule 15 of the Hong Kong Government Mediation Rules or immediately upon abandonment of the mediation by the mediator or immediately upon both parties agreeing in writing that mediation has failed."

This appeal

10. At the heart of this appeal is whether Special Condition 11 was an arbitration agreement. Did the provisions require disputes or differences to be resolved by arbitration or did it merely confer an option on the parties to arbitrate? The judge ruled that the clause was an arbitration agreement and it is this ruling that was challenged.

11. Subclause (1) of Special Condition 11 mandates that all disputes or differences "be settled in accordance with the following provisions". There was no reference to arbitration or to the settlement of disputes or differences by arbitration. One therefore has to read the remaining provisions to see what steps had to be taken for the resolution of disputes.

12. The first step to be taken to initiate the process is the service of a Notice of Dispute (which must be in writing) by either party to the contract manager. Under subclause (2), this Notice defines the dispute and requests a decision by the contract manager who, under subclause (3) is required, within 60 days of receiving a Notice of Dispute, to give his written decision on the dispute or state, in writing, his inability to make such a decision. This first part is thus self-contained, with its own time-frame.

13. Subclause (4) enjoins the parties to "give effect forthwith" to every decision of the contract manager rendered under subclause (3) and provides that "such decisions shall be final and binding" on the parties unless and until "as hereinafter provided" which was the happening of one of two events, namely, either the parties agree otherwise, or, the decision of the contract manager is revised by an arbitrator and an award made and published. The two events contemplated by subclause (4) form the subject matter of subclauses (5) and (6). Subclause (5) which deals with mediation is not relevant for present purposes.

14. The procedure for invoking subclause (6) is by service of a written Notice to Refer to Arbitration. The first matter to note is the wording used, viz. that the contractor or subcontractor "may require the dispute to be referred to arbitration". It is not expressed in mandatory terms: rather, it is framed as an option. Moreover, there is a time limit stipulated for invoking this procedure: under paragraph (a), that has to be done within 28 days of receipt of the contract manager's decision or his notice of inability to make a decision in respect to a Notice of Dispute.

15. In my view, subclauses (4) and (6) read together provide the second part of the framework devised by the parties for the resolution of disputes and differences between them. The decision made by the contract manager under the first part i.e. subclauses (2) and (3) is "final and binding" upon the parties unless and until the procedure contained in subclause (6) is invoked in accordance with its terms, namely, within the time limit stipulated.

16. It was argued that assuming the letter of 7 June were a decision for the purposes of subclause (3) of Special Condition 11 and in the event of the defendant refusing to pay the amount found due, on a proper construction of Special Condition 11, the plaintiff must go to arbitration and obtain an arbitral award before any question of enforcement could arise. Miss Cruden submitted that the effect of subclause (6) is that the parties must refer to arbitration and that the provision in subclause (4) that the decision of the contract manager is "final and binding" is subject to there being an arbitral award made under subclause (6) so that nothing is enforceable without such an award. That, to my mind, is not the plain meaning of Special Condition 11 when read a whole. I cannot agree that whenever the word "arbitration" is mentioned in any provision, it necessarily has to be interpreted as meaning an arbitration agreement. There is no bar that I can see to parties agreeing to an option to arbitrate which is exercisable only within certain time limits without necessarily creating an arbitration agreement. In such a situation, the option must be exercised in accordance with its terms.

17. In my view, the argument that nothing is final and binding absent an arbitral award frustrates the clear purpose of the provisions contained in Special Condition 11. The dispute resolution mechanism agreed to by the parties provides an efficient means for achieving finality. The parties agreed to be bound by the decisions of the contract manager which are to be final and binding unless the option to arbitrate is invoked within the time limits stated. That is a commercial arrangement that is readily comprehensible to render finality to disputes and at the same time maintaining some flexibility by giving either party an option to elect to arbitrate if it were dissatisfied with the decision of the contract manager. But in such a case, the conditions for exercising the option must be strictly complied with.

18. As it is my view that there was no arbitration agreement, the authorities relating to the effect of a time bar in the context of arbitrations are beside the point and need not be addressed.

Hon Hartmann J:

19. I agree fully and have nothing to add.