GRANDEUR ELECTRICAL CO LTD v. CHEUNG KEE FUNG CHEUNG CONSTRUCTION CO LTD

CACV 100/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 100 OF 2006

(ON APPEAL FROM DCCJ NO. 6782 OF 2004)

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J U D G M E N T

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Hon Yuen JA:

1.  The background facts have been set out in detail in the judgment of Barma J which I gratefully adopt. 

2.  Section 6(1) of the Arbitration Ordinance Cap. 341 provides:

'... article 8 of the UNCITRAL Model Law (Arbitration agreement and substantive claim before court) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement'. 

3.  The said article 8(1) provides:

'A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed'.

(Emphasis added).

4.  As to what is an 'arbitration agreement' referred to in article 8(1), article 7(1) of the UNCITRAL Model Law defines it as:

'an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.  An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement'.

(Emphasis added).

5.  In the same way that an arbitration agreement may be in the form of an arbitration clause in a contract, it may also be in the form of parts of a clause in a contract – in this case, the sub-clauses in NS11.

6.  NS 11 contains an arbitration agreement in sub-clauses (1), (4) and (6) ("the arbitration sub-clauses"), which provide that if either party wishes to challenge the Contract Manager's decision, or if he is unable to decide and either party wishes to pursue the disputed claim, then either party may refer the dispute to arbitration within 28 days thereafter.  Since sub-clause (1) provides that disputes 'shall be settled' in accordance with the following provisions, in my view that is the only route for either party to advance a dispute.  (And even if the time limit has expired, where a party seeks to pursue the dispute, the arbitration agreement is still operative: China Merchants Heavy Industry Co Ltd v JGC Corp [2001] 3 HKC 580 at 585; if litigation has commenced, the court would then stay the proceedings for the party to apply to an arbitrator for an extension of time to refer the matter to arbitration: Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, para. 47).  

7.  However where the Contract Manager has made a decision and neither party wishes to challenge it, as in Thorn Security (Hong Kong) Ltd v Cheung Kee Fung Cheung Construction Co Ltd [2005] 1 HKC 252, the arbitration sub-clauses are not engaged.  In that case, the defendant did not suggest that it wished to refer any dispute to the arbitrator.  It argued that the courts should refer the matter to arbitration solely for enforcement of the Contract Manager's decision.  The defendant had chosen to let the 28-day time limit pass after the Contract Manager's decision without referring it to arbitration, and more importantly, when the plaintiff sued in the courts for enforcement of the Contract Manager's decision, the defendant did not even then argue that it was seeking a stay from the courts because there was a dispute for which it would seek an extension of time from an arbitrator for him to resolve it.

8. In those circumstances, there was no 'dispute' engaging the arbitration sub-clauses or rendering the arbitration agreement 'operative' at the time the defendant asked the courts for a stay.

9. In my view, when the Court of Appeal (Le Pichon JA and Hartmann J) asked the question in Thorn whether there was an arbitration agreement and answered it in the negative, that question and answer must be understood in the light of those circumstances.  Although the parties were applying NS11, they had not ventured into the realm of the arbitration sub-clauses, which comprise the arbitration agreement.  The defendant did not assert that there was any dispute which it needed an arbitrator to resolve.

10. It is therefore understandable why the Court of Appeal held that a stay was not required – because those parts of NS11 at which the parties remained did not contain an arbitration agreement.  In my respectful view, I do not think the Court of Appeal intended to identify the nature of the entire NS11 clause, or to go any further than the facts in that case.  Insofar as some of the language used in the judgment went wider than necessary, that would have been obiter.  In particular, the reference to the parties having an 'option' should be understood.  Once there is a decision of the Contract Manager (or he has stated his inability to decide), a party wishing to challenge the decision (or wishing to pursue the matter) does not have an 'option' whether (a) to proceed to litigation or (b) to refer the dispute to an arbitrator.  The 'option' is only between (1) accepting the Contract Manager's decision as final and binding - which is what the Defendant in Thorn was found to have done - (or if the Contract Manager has stated his inability to decide, not pursuing the matter further), and (2) referring the dispute to an arbitrator. 

11.  In the present case, once the Contract Manager had stated his inability to decide the matter, the Plaintiff's options were (1) not pursuing the disputed claim and (2) pursuing it by referring it to an arbitrator.  It did not refer the dispute to an arbitrator but sought to resolve it through the courts.  In my view, that is not an available 'option' by reason of the mandatory provision in sub-clause (1) in NS11.  If the Plaintiff wishes to proceed, it would be up to the arbitrator whether to grant it an extension of time to pursue the dispute.

12.  I would therefore allow the appeal, dismiss the summons seeking to lift the stay of proceedings under s.6(1) of the Arbitration Ordinance and make an order nisi that the appellant should have its costs here and below.

Hon Barma J:

13.  This was an appeal against the order of Her Honour Judge H.C. Wong in the District Court dated 21 December 2005, by which she lifted a stay of proceedings between the Plaintiff (Respondent) and Defendant (Appellant) that had been made pursuant to an order dated 26 July 2005.  The Defendant contends that the stay should have remained in place, as the dispute which the Plaintiff seeks to litigate in these proceedings is the subject of an arbitration clause pursuant to which it had to be resolved by arbitration and not by proceedings in the courts.  The Plaintiff, however, contends that there was no requirement to go to arbitration, and that it had a choice whether to go to arbitration or to proceed in the courts.  Which party is right depends on the proper construction of Clause NS 11 of the agreement between them.

14.  The background can be briefly stated.  The Defendant was the main contractor for certain construction works being carried out by the Hong Kong Housing Authority in Tung Chung.  It entered into a sub-contract with the Plaintiff in respect of electrical works for the project on 4 March 1999.  The Plaintiff claims that the Defendant was in breach of Clause NS 10 of the sub-contract by failing to pay a total sum of HK$994,000 which the Plaintiff claims was due to it under two invoices respectively dated 15 March 2001 and 31 March 2004.

15.  Clause NS 11 of the sub-contract dealt with the manner in which disputes between the parties should be resolved.  So far as material, it is in the following terms:-

"(1) If any dispute or difference of any kind whatsoever arises between the [Defendant] and the [Plaintiff] 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 ..."

(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 [Plaintiff] shall in every case continue to proceed with the Sub-contract Works with all due diligence and the [Defendant] and the [Plaintiff] shall both give effect forthwith to every such decision of the Contract Manager.  Such decisions shall be final and binding upon the [Defendant] and the [Plaintiff[ 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.

....

(6) The [Defendant] or [Plaintiff], by serving a written Notice to Refer to Arbitration within the time limits set out in (a) ... 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) ...."

16.  Clauses NS 11(5) and 11(6)(b) referred to a mediation procedure which is not relevant in the context of the present proceedings.

17.  On 26 June 2004, the Plaintiff served a Notice of Dispute in relation to Defendant's failure to pay the two invoices.  As required by Clause NS 11(2) it was sent to the Contract Manager.  However, the Contract Manager did not give his decision on the dispute, or indicate his inability to make a decision on it, within the 60 days provided for under Clause NS 11(3).  He eventually notified the parties on 24 May 2005 that he was unable to reach a decision on the dispute.

18.  In the meantime, the Plaintiff commenced these proceedings against the Defendant in the District Court by a writ issued on 28 December 2004.  However, on 19 January 2005, the Defendant's solicitors wrote to the Plaintiff's solicitors asking for a stay of the District Court action, and a consent summons applying for a stay was filed by the Plaintiff on 26 January 2005.  For reasons which are not entirely clear, however, no formal order was actually made by the District Court until 26 July 2005.

19.  Some two months after the Contract Manager notified the parties of his inability to reach a decision on their dispute, the Plaintiff's solicitors wrote to the Defendant's solicitors on 22 July 2005, saying that they no longer agreed to a stay of the District Court action, and requested the Defendant to file a defence to the proceedings.  As the parties were unable to agree on the course to be followed, the Plaintiff applied to lift the stay on 7 September 2005, and the learned judge below acceded to the application on 21 December 2005.

20.  The learned judge below considered that she was bound, by the decision of this court in Thorn Security (Hong Kong) Ltd v Cheung Kee Fung Cheung Construction Co. Ltd [2005] 1 HKC 252, to hold that Clause NS 11 did not amount to an arbitration agreement which required the parties to resolve any disputes arising between them by arbitration (so as to entitle the Defendant to a stay to arbitration pursuant to section 6 of the Arbitration Ordinance (Cap. 341) and Article 8(1) of the UNCITRAL Model Law), but merely conferred on the parties an option as to whether to seek to resolve such disputes by arbitration leaving them free, if they chose not to exercise that option, to have such disputes resolved  by litigation in the courts.  She held that the Plaintiff having chosen, as it was entitled to, to litigate in the courts, there was no basis on which it should be forced to go to arbitration instead.  Before us, Mr Aiken S.C., appearing for the Plaintiff, also contended that we were bound by the Thorn Security case to so hold.

21.  With respect to the learned judge and to Mr Aiken, I do not agree.  In my view, Clause NS 11 does contain an arbitration agreement which requires the parties to submit any dispute between them to arbitration, and does not give either party a choice that would entitle it to have such disputes litigated in the courts.  Further, I do not think that the Thorn Security case binds us to hold otherwise.

22.  The relevant statutory provisions are section 6(1) of the Arbitration Ordinance, and Articles 7(1) and 8(1) of the UNCITRAL Model Law, which are set out in the judgment of Yuen JA.

23.  Where an agreement on its proper construction gives rise to a choice between arbitration and litigation in the courts, it will not (because of the choice) be an agreement to submit the relevant dispute to arbitration, so as to amount to an arbitration clause within the meaning of Article 7(1) of the Model Law.  The question is whether or not Clause NS 11 gives rise to such a choice.

24.  In construing Clause NS 11, it is necessary to have regard to the whole of its provisions.  In doing so, I think it is important not to lose sight of the terms of sub-clause (1), which provides that "any dispute or difference of any kind arising between [the parties] ... shall be settled in accordance with the following provisions [of Clause NS 11]" (our emphasis).  That is, to my mind, clearly a stipulation that the provisions of Clause NS 11 are to constitute the only route for either party to advance a dispute which has arisen between them, as the use of the word "shall" makes it clear that neither party has any choice as to the means for advancing and settling their disputes beyond what is provided for.

25.  Clause NS 11 then goes on to stipulate a multi-stage procedure that is to be adopted in relation to how disputes are to be taken forward and settled.  The starting point is for either party to serve a Notice of Dispute on the Contract Manager (Clause NS 11(2)).  The Contract Manager is then required to give his decision, or notify the parties of his inability to reach a decision, within 60 days (Clause NS 11(3)).  Where a decision is given, it shall be final and binding unless (relevantly for present purposes) it is revised by an arbitrator (Clause 11(4)).  Either party may require a dispute to be referred to arbitration by serving the appropriate Notice to Refer to Arbitration within 28 days of the Contract Manager's decision, or notification of his inability to make a decision in respect of it (Clause NS 11(6)).

26.  These provisions, in my view, set out an exhaustive set of procedures for the resolution of the parties' disputes.  Nowhere in them is it suggested that the option of court proceedings is one which is available to the parties.  I do not see that such an option is provided for, and would echo the comments of Ma J (as he then was) in Tommy CP Sze and Co. v Li & Fung (Trading) Ltd [2003] 1 HKC 418, at paragraphs 33 and 34 of his judgment, that in the light of the emphasis given to party autonomy in relation to dispute resolution by arbitration, a clause in a contract providing for disputes to be settled by arbitration should not readily be construed as giving a choice between arbitration and litigation unless that is specifically and clearly spelt out.  It is true that arbitration is not mandated at every stage of the dispute resolution procedure envisaged under Clause NS 11, but that does not make any difference.  Provided that the stage in the dispute resolution procedure at which arbitration is called for has been reached, the clause must be read as containing an arbitration agreement which mandates the use of arbitration as the only means of further advancing the dispute.

27.  In the present case, the Contract Manager having indicated that he was unable to make a decision, the only way for the Plaintiff to take its dispute forward was to serve a Notice to Refer to Arbitration under Clause NS 11(6).  This was not done within the time stated.  Notwithstanding the expiry of the stated time limit, the arbitration agreement remains operative, as it remains possible for the Plaintiff to proceed to arbitration, and to apply to the arbitrator for an extension of time within which to refer the matter to arbitration (see China Merchants Heavy Industry Co. Ltd v JGC Corp. [2001] 3 HKC 580, at pp.585-586 and the Tommy CP Sze case at paras. 42 to 47 of the judgment).

28.  In the Thorn Security case, the same Clause NS 11 came up for consideration by this court.  However, the context in which it arose for consideration was very different from the case now before us.  In Thorn Security, the Contract Manager had made a decision, which neither party contended should be challenged.  Some months after the decision was given, the plaintiff brought proceedings in the courts to enforce it, and obtain payment of the sums found to be due under it.  The defendant (who is the same Defendant as in these proceedings) did not refer the matter to arbitration within the 28 day period provided for by Clause NS 11(6), and more importantly, even when the plaintiff sued it in the courts to enforce the contract manager's decision, even then the defendant did not argue that it wished to obtain a stay from the courts because there remained a dispute which it wished to refer to arbitration, seeking an extension of time to do so if necessary.  Rather, the defendant's argument was that notwithstanding that it did not contend that there was any dispute to go to arbitration, the effect of Clause NS 11 was to require the plaintiff to go to arbitration simply to get an award on the contract manager's decision before it could be enforced in the courts.  That submission was clearly at odds with the provisions of Clause NS 11(4) which provided that unless revised by an arbitrator, the contract manager's decision should be final and binding.  It is therefore scarcely surprising that the Court of Appeal gave short shrift to the argument.

29.  However, the learned judge found, and Mr Aiken submits, that we are bound by the decision of this court in Thorn Security to hold, contrary to my view, that Clause NS 11 is not an arbitration clause.  With respect to both of them, I do not think that it does, and would suggest that the submission proceeds on a misunderstanding of the nature of the option open to the parties which was referred to by the court in the Thorn Security case.

30.  The relevant parts of the judgment of Le Pichon JA in Thorn Security are paras. 16 and 17, which are in the following terms:-

"16. It was argued that assuming the letter of 7 June were a decision for the purposes of sub-cl (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 sub-cl (6) is that the parties must refer to arbitration and that the provision in sub-cl (4) that the decision of the contract manager is 'final and binding' is subject to there being an arbitral award made under sub-cl (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 as 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 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."

31.  In my view, when the Court of Appeal in Thorn Securities asked itself whether there was an arbitration agreement and answered the question in the negative, this must be understood in the light of the circumstances of that case - namely, that the contract manager having made a decision, neither party was contending that it was wrong, or that there was a dispute which required to be taken further.  Thus, although the parties were operating under Clause NS 11, they had not reached the stage of the stipulated procedure which involved the arbitration agreement contained within it, as the defendant was not asserting that there was any dispute which it needed an arbitrator to resolve.  It is therefore understandable why the Court of Appeal held that there was no applicable arbitration agreement and that a stay to arbitration was not required in that case – because the parts of Clause NS 11 engaged on the facts of the Thorn Security case did not contain an arbitration agreement.  I do not think that the Court of Appeal intended to provide a view as to the nature of the whole of Clause NS 11 which went beyond what was required by the facts of the case before them.

32.  Moreover, I think it important to correctly understand the reference in Le Pichon JA's judgment to the parties having an "option to arbitrate".  In my view, it is clear from the context that the "option" that Le Pichon JA was referring to was not an option to choose between arbitration and litigation, but an option as to whether or not to take the matter further - in other words, an option between (a) accepting the decision of the contract manager as final and binding (or accepting his failure to make a decision) and not pursuing the matter further and (b) not accepting that decision (or failure to make one) and referring it to an arbitrator.  So understood, there is nothing in Thorn Security which requires us to conclude that Clause NS 11, in its application to the situation now before us, does not amount to an arbitration agreement.

33.  The only slight qualification that I would venture to suggest in respect of the judgment in the Thorn Security case is in relation to the suggestion that the option to arbitrate had to be exercised strictly in accordance with the time limits provided for in Clause NS 11.  As to this, I am of the view that a failure to act within such time limits is not necessarily fatal, given the possibility of an application to an arbitrator for an extension of time, as I have mentioned in paragraph 27 above.  I would note that neither the Tommy CP Sze case nor the relevant provisions of the Arbitration Ordinance which provide for the arbitrator's power to extend time limits was cited to the Court of Appeal in Thorn Security, no doubt because the question of a need to extend time did not arise, since the defendant there was not seeking to refer any dispute to arbitration out of time.

34.  Thus, in this case, the Contract Manager having stated his inability to decide the matter, the only choices available to the Plaintiff were (a) to accept that state of affairs, and not pursue the disputed claim or (b) to pursue the dispute by referring it to an arbitrator.  The Plaintiff clearly wishes to pursue the dispute, but has done so not by referring it to arbitration, but by reactivating the District Court action by applying for and obtaining a removal of the stay which had earlier been ordered by consent.  In my view, this was not a course that was open to the Plaintiff, for the reasons which I have given, and it follows that the proceedings in the District Court action should be stayed pursuant to section 6(1) of the Arbitration Ordinance, leaving it to the Plaintiff to refer the matter to arbitration, after which it will be for the arbitrator to decide whether or not the extension of time required by the Plaintiff should be granted.

35.  I would therefore allow the appeal, and vary the order of the learned judge below, substituting in place of the order which she made an order that the Plaintiff's application by the summons dated 7 September 2005 be dismissed.  So far as costs are concerned, I would make an order nisi that the Defendant is to have its costs here and below, to be taxed on the party and party basis if not agreed.