GOOD YEAR PROFESSIONAL SERVICE CO. v. PENTA-OCEAN CONSTRUCTION CO. LTD.

HCA2270/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2270 OF 2002

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D E C I S I O N

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1) This is an application by the defendant to stay proceedings pending arbitration pursuant to section 6(1) of the Arbitration Ordinance, Cap. 341.

2) The plaintiff was the defendant's sub-contractor pursuant to two contracts written in Chinese involving construction related projects. The defendant was the Hong Kong Housing Authority's main contractor. The plaintiff is claiming for unpaid invoices amounting to HK$1,165,800.

3) Both contracts contain the same arbitration clause, the certified translation of which is :

"Clause 5

'Project Dispute'

'During the period while works are being carried out, if there is any dispute between the parties regarding the subcontract, which cannot be resolved by negotiation, either party may notify the other party in writing requesting for resolution by arbitration. Further, an arbitrator agreeable to both parties shall be appointed in writing for arbitration. Both parties also agree that the decision of the arbitrator shall be final, conclusive and binding."

The issue

4) The plaintiff submits that a stay should be refused because Clause 5 should be interpreted as meaning that disputes should only be referred to arbitration if they are disputes which arose "during the period while works are being carried out".

5) Mr Danny Choi for the plaintiff submits that in this case the disputes only arose when the defendant refused to pay certain invoices which was after the completion of the works themselves under both contracts. He submits that the parties did not intend to refer disputes to arbitration if they arose after "works are being carried out". Put bluntly, he submits that Clause 5 ceases to have any effect once the works are completed, even in respect of defects which may come to light later.

The law

6) The fundamental principles of law are trite and not the subject of argument in this case.

7) Article 8(1) of the UNCITRAL Model Law applies here and provides that :

"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 statement on the subsistence of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."

This is a mandatory provision.

8) The issue in this case concerns the validity of the arbitration clause in its application to the particular facts. The question for this court to answer is : has the party applying for a stay demonstrated that a dispute exists which is the subject of the arbitration agreement between the parties? In other words that the arbitration clause is not "null and void, inoperative or incapable of being performed".

This court's task

9) Firstly, the court must ask : is there a dispute between the parties? I am satisfied that there is.

10) A "dispute" is defined in very wide terms. The defendants have refused to pay for specific works allegedly completed. They have given reasons for non-payment by affirmation evidence. A dispute clearly exists. It is not appropriate to delve any further into the merits.

11) Secondly, the court must ask : does Clause 5 cover this dispute? I am satisfied that it does. The clause should be construed as meaning that disputes which are referable to arbitration must be in relation to matters which occurred during the period when the works were being carried out. It is unrealistic to place emphasis on the position of commas in a certified translation in arguing the opposite. The rhetorical question is posed : why would the parties intend a guillotine on arbitration to descend at the moment of the completion of the works? Such a guillotine would be arbitrary and would result in disputes which came to light before completion going to arbitration but disputes which came to light after completion going to court. It would result in arbitrators deciding some disputes and courts deciding others, even though they were similar in nature, simply because they arose at different times. This cannot have been the intention of the parties.

The plaintiff's second ground

12) As an alternative submission, the plaintiff complains that there has been an allegation of fraud made against the plaintiff by the defendant and therefore he relies on section 26 of Cap. 341 as a ground for refusing a stay.

13) Section 26(2) states :

" Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute which so arises involves the question whether any such party has been guilty of fraud, the Court shall, so far as may be necessary to enable that question to be determined by the Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement."

14) Mr Robert Morgan's commentary on the Ordinance suggests that :

" To give the court jurisdiction under this subsection, a concrete and specific issue of fraud must be raised and the fraud relied on must be alleged against the party opposing the stay (ie the plaintiff in the legal proceedings): ...."

15) In fact, in the present case, the high water mark of the so-called allegation of fraud is a statement in a defendant's affirmation, by way of background, that one of the owners of the plaintiff company is now serving four years' imprisonment for bribery offences committed in connection with these contracts. An appeal has been lodged.

16) There is no allegation by the defendant that the construction works themselves involved any fraudulent conduct. No fraud is pleaded by the defendant and none is alleged by the defendant. The reason it is raised is solely confined to this particular person's credibility.

17) Thus, on this ground also, I am satisfied that it would not be appropriate to refuse a stay.

18) For all the above reasons, there will be an order in the terms of the summons.