XCHRX OCEAN MORE ENTERPRISES LIMITED v. COMMERCIAL UNION ASSURANCE COMPANY LIMITED

1997, No. Con 12

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

_______________

_______________

JUDGMENT

_______________

The Background

1. The plaintiff entered into a building contract with a contractor (the contractor). The defendant and the contractor entered into a "contract bond" under which they were "held and firmly bound unto" the plaintiff in the sum of $2 million. It was a condition of the bond that "on default by the Contractor the [defendant] shall satisfy and discharge the damages sustained by the [plaintiff] thereby up to the amount" of $2 million.

2. On 12 February 1997, the plaintiff issued a writ of summons against the defendant claiming that, as a result of the contractor's default, it had suffered damages under two heads -

the cost of completing the construction, being $1.65 million; and

liquidated damages for delay in completion, being $2.63 million, and that, under the contract bond, the defendant was obliged to pay $2 million.

3. In its defence, the defendant says, amongst other things, that, under the contract between the plaintiff and the contractor, any dispute or difference was to be referred to arbitration, and the plaintiff has given notice of the disputes to be so referred. The defendant says no award has been made under the arbitration, and, pending resolution of the arbitration, the plaintiff cannot establish that the contractor was in breach or that the plaintiff has suffered any damages as a result. The defendant alleges that, therefore, the plaintiff's claim is premature, and denies that any obligation under the bond has arisen. In the arbitration, the contractor is making a counterclaim against the plaintiff.

4. The defendant issued a summons on 5 May 1997 seeking an order that, pending the outcome of the arbitration, this action be stayed. The basis of this application is solely the existence of the arbitration between the plaintiff and the contractor. This is the summons before me.

How Does the Arbitration Affect the Litigation?

5. The arbitration is an irrelevance to the litigation in this court.

6. There is no arbitration agreement between the plaintiff and the defendant, nor is there any agreement between them that they are in any way bound by the outcome of the arbitration between the plaintiff and the contractor. If there were such an agreement under which both parties were bound, this application would be well founded. Clearly, in those circumstances, it would be quite wrong to allow litigation to proceed when the matter in issue would be decided by another tribunal. But the situation here is that, whatever the outcome of the arbitration - whether it is in favour of the plaintiff, or the contractor, or is evenly spit - both the plaintiff and the defendant are free to exercise their rights in this court.

7. In this action, the defendant pleads, in effect, that the plaintiff is bound by the outcome of the arbitration. I do not think this is the case. It seems to me that, if the arbitrator were to make an award against the plaintiff, for example, by reason of a mistake of fact in the arbitration about which the plaintiff can do nothing, finding that the plaintiff had suffered no damages, the plaintiff could still proceed in this litigation, and seek to establish that it had indeed suffered such damages. In other words, the bond obliges the defendant to pay damages suffered by the plaintiff, not what an arbitrator finds to be the damages suffered by the plaintiff.

8. Equally, the defendant is not bound by the outcome of the arbitration. If the arbitrator finds that the plaintiff has suffered damages, the defendant is still at liberty to seek to show that, in fact, the plaintiff did not suffer such damages. This much Mr Reyes concedes.

9. In Alfred McAlpine Construction Limited v Unex Corporation (1994) 70 BLR 26, Glidewell, L.J. found, in effect, that, on the construction of the guarantee there concerned, the maximum liability of the guarantor would be determined by the arbitration. This was because an express term of that guarantee provided that the liability of the guarantor would not be greater than the liability under the express terms of the main contract (which included the arbitration clause), and that liability was to be determined by arbitration. There is no such express term in the bond before me, and I doubt if one can be implied. Although, on the findings of Glidewell, L.J., the beneficiary under the guarantee was bound by the arbitration in that it could not recover more than the award to the contractor, the guarantor was not so bound. The court held that, in the absence of any acceptance by the guarantor that it would be bound by the award, it would not order a stay.

10. I would go further, and want such an acceptance by both parties to be so bound before I would find that a stay would be appropriate. It would not be reasonable to expect only one party to bind itself to the outcome of the arbitration.

11. Mr Clayton says that he accepts that there should be a stay in relation to the liquidated damages claim. He says that because this claim is based on the architect's certificate. The court may not have the power to open up such a certificate, but the arbitrator does. Mr Reyes responds by saying that it would not be right to stay proceedings in relation to only part of a claim. I agree with that submission. I can see no advantage to anyone in ordering a stay of the proceedings so far as they concern the liquidated damages claim, but allow the proceedings to continue on the claim on the cost of completion. This would be a procedural nonsense. What is to happen if the arbitrator finds that the liquidated damages claim is not made out, and the plaintiff does not accept this? I cannot see any basis on which the plaintiff could be prevented from pursuing this claim against the defendant. And the same applies to the defendant: If the arbitrator finds that the liquidated damages claim is established, why should the defendant accept this? The defendant is at liberty to seek to show in the litigation that, in fact, those damages are not claimable. We would then have lopsided litigation, with the issue as to liquidated damages lagging behind the other claim, or, possibly, having to be litigated afresh. The fact that the court and the arbitrator have different powers, and therefore may reach different results, demonstrates all the more that there are different issues in the arbitration and in the litigation. Both the plaintiff and the defendant are entitled to have their disputes between them resolved in this court according to the ordinary law, without regard to the special provisions of the arbitration agreement. It is only if they both waive those rights by agreeing to be bound by the outcome of the arbitration that one can say that the arbitration has any relevance to the litigation between the plaintiff and defendant. There is no need to emphasise that it would be a good thing if it were not necessary to have two sets of dispute resolution procedures over essential the same facts, but it is unnecessary only if the parties make it so.

The Result

12. Accordingly, it seems to me that, in spite of the concession made by Mr Clayton, I should not accede to an approach that would stay any part of the litigation. I appreciate, of course, that it is unusual not to fall in with a concession by counsel against his own case, but here I agree with Mr Reyes that it would not be helpful to either party to stay only part of the proceedings. It being my view that it would also not be productive to stay the whole proceedings, it follows that the application to stay should be refused. I dismiss the summons.

The Costs

13. The matter of costs has not been argued, but I do not see any argument against the usual order that costs follow the event. Accordingly, I make an order nisi that the defendant pay the plaintiff's costs in any event.