HOUTAI INVESTMENT HOLDINGS LTD v. LEUNG YAT TUNG AND OTHERS

HCA 1725/2019

[2021] HKCFI 1504

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1725 OF 2019

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D E C I S I O N

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Background

1.  This is an application made by the Defendants to stay the proceedings instituted by the Plaintiff against them.  The 4^th Defendant (“CAE”) claims that the action should be stayed in favour of arbitration, on the basis of an arbitration agreement made between the Plaintiff and CAE and contained in a contract for works relating to the Tuen Mun - Chek Lap Kok Link - Northern Connection Sub-sea Tunnel Section project HY/2012/08 (“Project”).  The 1^st to 3^rd and 5^th to 8^th Defendants claim that if the stay is granted on CAE’s application, the Plaintiff’s action against them should likewise be stayed as a matter of the Court’s case management discretion, as the Plaintiff’s claims against them are contingent upon the Plaintiff’s success in its claims against CAE.

Nature of the claims made in these proceedings

2.  The Plaintiff’s claims in these proceedings are made as the owner of vessels which are said to have been leased to CAE under oral agreements made between the Plaintiff and CAE, during the period from 11 December 2013 to 29 September 2014.  The leases are claimed to be “monthly periodic oral leases”, at market rent, for the vessels (referred to as Batch 1 Vessels and Batch 2 Vessels) to be used exclusively “for the purpose of carrying out the Project”. The Plaintiff claims that CAE failed to pay the agreed market rent.  It further claims that in breach of the oral agreement, CAE employed a batch of the vessels leased, the Batch 2 Vessels, for work other than the Project, which constituted repudiation which was accepted by the Plaintiff.  On the Plaintiff’s pleaded case, CAE failed to return the Batch 2 Vessels to the Plaintiff upon demand, and instead delivered the vessels to the 6^th Defendant. The Plaintiff claims that the 6^th Defendant had collected rent in respect of the Batch 2 Vessels without the consent of the Plaintiff, and further, that the other Defendants as shareholders and/or directors of the 4^th and 6^th Defendants had managed, assisted, or induced such wrongful acts of conversion of the Plaintiff’s vessels.

3.  In the alternative, the Plaintiff claims that all the Defendants had wrongfully, and with intent to injure the Plaintiff by unlawful means, conspired to convert and/or wrongfully detained the Batch 2 Vessels, and had deprived the Plaintiff of the use and possession of its vessels.

4.  By way of relief, the Plaintiff claims the outstanding rent for the Batch 1 and Batch 2 Vessels from CAE, a declaration that the 6^th Defendant held the misappropriated rent on constructive trust for the Plaintiff, an account of profits, and damages from all Defendants.

5.  The claims made in the action are accordingly based on the alleged oral leases made with CAE, and in tort as against the other Defendants.

6.  CAE denies that there was any oral agreement for the lease of the Plaintiff’s vessels, as alleged by the plaintiff.  According to CAE, the Plaintiff’s claims in respect of the vessels arose out of the relationship between the Plaintiff and CAE, under their sub-subcontract for works to be carried out by CAE as the Plaintiff’s subcontractor on the Project, and that disputes in relation to such claims are governed by the dispute resolution clause contained in the relevant contract signed between the Plaintiff and CAE.

7.  It does not appear to be disputed between the parties, that by Contract No HY/2012/08 made between the Hong Kong Government as Employer and Dragages-Bouygues Joint Venture (“JV”) as Main Contractor on 26 July 2013 (“Main Contract”), the JV agreed to design and construct works on the Project.  JV then entered into Subcontract No SC 001 (“Subcontract”) with the Plaintiff, whereby the Plaintiff agreed as subcontractor to construct the Northern Landfall Reclamation and Seawall (“Subcontract Works”) which forms part of the works under the Main Contract.  Part of the Subcontract Works were then further subcontracted by the Plaintiff to CAE under Sub‑subcontract No TM-CLKL/SSC/0001 (“Sub-subcontract”) signed by the Plaintiff and CAE and dated 16 August 2013.  Under the Sub‑subcontract, CAE agreed to carry out the Marine Works for the Subcontract Works (“Sub-subcontract Works”).

8.  On CAE’s case, it had carried out the Sub-subcontract Works, but disputes have arisen in relation to what CAE claims to be outstanding payments due from the Plaintiff in respect of the works it had completed.  According to CAE, there is an outstanding sum of HK$13,284,787.23 payable in respect of additional works and services other than the reclamation and seawall works, which additional works had been instructed by the Plaintiff and carried out by CAE under the Sub‑subcontract but which remained unpaid.  There is a further outstanding sum of HK$44,814,702.55 in respect of additional works and services instructed by the Plaintiff and carried out by CAE for the Phase 2 Reclamation under the Sub-subcontract, which also remained unpaid.  CAE further claims that there is a dispute in respect of a payment agreed on the Statement of Final Accounts, and which is the subject matter of a Supplemental Agreement made between the Plaintiff and CAE on 30 December 2015 (“Supplemental Agreement”).  CAE claims that a balance of HK$14,199,340.83 remains outstanding under the Supplemental Agreement which is due and payable from the Plaintiff to it.

9.  CAE had on 6 December 2019 issued 3 Notices of Dispute to the Plaintiff in respect of the above disputes under the Sub-subcontract, which will be arbitrated in accordance with the Sub-subcontract. CAE claims that the vessels which are the subject matter of the Plaintiff’s claims in this action were provided for CAE’s use under the Sub-subcontract, all by agreement reached amongst JV, the Plaintiff and CAE.  On CAE’s case, the disputed claims made by the Plaintiff in these proceedings should likewise be referred to arbitration, as they fall within the scope of the arbitration clause in the Sub-subcontract.

10.  The issues in dispute in these proceedings are whether there was an oral agreement for lease of vessels between the Plaintiff and CAE, the terms of such agreement, whether CAE was in breach of such agreement, whether the other Defendants had conspired with, procured or assisted in the conversion and detention of the Plaintiff’s vessels, and the remedies available to the Plaintiff.

Applicable legal principles

11.  The legal principles applicable to the determination of an application for stay of proceedings under section 20 of the Arbitration Ordinance (“Ordinance”) are settled.  They are as summarized in Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, and in PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, and will not be repeated here.  The onus is on the applicant for stay to show that there is a prima facie or plainly arguable case that the parties are bound by an arbitration clause.  Unless the point is clear, the action should be stayed for the tribunal to decide whether it has jurisdiction over the dispute formulated and identified.

The arbitration agreement and its scope

12.  The Subcontract and the Sub-subcontract are both governed by the Articles of Agreement (“Articles”), clause 22 of which provides for resolution of disputes (“Clause 22”).  Clause 22.1 states:

“A dispute is deemed to arise when one party serves on the other a notice in writing (a ‘Notice of Dispute’) stating the nature of the dispute. The date of this Notice will be the effective date to determine the start of proceedings.”

Clause 22.2 goes on to state:

“If any dispute cannot be settled by agreement (or otherwise) then it will be referred to arbitration and the final decision of a single arbitrator (to be appointed as required by Item 34) in accordance with and subject to the provisions of the Arbitration Rules stated in item 35. Any reference of a dispute to arbitration will be deemed to be a submission to domestic arbitration under the Arbitration Ordinance or any statutory modification to that Ordinance for the time being force.”

13.  Clause 22.6 of the Articles states:

“If a dispute arises under the Subcontract and there is a related dispute under the Sub-subcontract, then provided an arbitrator has not been agreed to or appointed for the Sub-subcontract dispute the Subcontractor may, by notice in writing to the Sub‑subcontractor, require that any dispute under this Sub‑subcontract be referred to the same arbitrator. Providing that the same arbitrator (“the common arbitrator”) is willing to accept the reference, the Sub-subcontract dispute will be determined by the common arbitrator.”

14.  The main issue in dispute on the application for stay is whether the arbitration clause in the Articles covers the disputes between the Plaintiff and the Defendants in respect of the alleged oral leases, and the alleged conversion/detinue.

15.  First and foremost, the fact that the Plaintiff’s causes of action are tortious does not mean that its claims must fall outside the scope of the arbitration clause.  Option I of Article 7 of the Model Law, adopted by section 19 of the Ordinance, defines “arbitration agreement” 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 legal relationship, whether contractual or not.  The legal relationship may be based on tort, or trusteeship, and is not confined to a contractual one.

16.  On behalf of CAE, it was submitted that the disputes relating to the Plaintiff’s alleged leasing of vessels to CAE for carrying out the Project fall within the wide scope of Clause 22, as Clause 22.2 simply provides that if “any dispute” cannot be settled by agreement, then it will be referred to arbitration.

17.  On behalf of the Plaintiff, it was contended that Clause 22.2 should be construed to mean disputes “arising under” the Sub-subcontract.  Counsel relied on Clause 22.6 and Clause 22.5, which contain references to disputes which arise under the Sub-subcontract, and disputes which arise under the Subcontract, and Clause 22.6 provides that if a dispute arises under the Subcontract and there is a related dispute under the Sub‑subcontract, then the Subcontractor may require any dispute under the Sub-subcontract to be referred to the same arbitrator.  It was argued that if Clause 22.2 should have a wider scope than disputes “arising under” the Sub-subcontract, it would be illogical and unreasonable that only those which arise “under” the Sub-subcontract can be referred to the common arbitrator, but not disputes which fall within a wider scope, eg disputes “in relation to” the Sub-subcontract.

18.  The purpose of Clause 22.6 is to provide for the right of the Subcontractor to require a dispute arising “under” the Sub-subcontract to be determined by a common arbitrator, if there is a related dispute “under” the Subcontract.  It seeks to make distinction between disputes which may arise under the Sub-subcontract which are related to disputes under the Subcontract, and those disputes which are not related.  The test or consideration in this context is whether the disputes which have arisen are both under the Subcontract and under the Sub‑subcontract, and are related. Whether there may be a wider range of disputes which arise in connection with the Sub-subcontract is not relevant, for the purpose of deciding whether they should be referred to the common arbitrator.

19.  In any event, I do not agree that it would be useful to rely on decisions as to the meaning which the courts have attached to the use of “under”, “in connection with” or “in relation to” in arbitration agreements, and whether and how one is wider in scope than the other.   The scope of an arbitration clause is to be construed and interpreted in the context of the agreement made by the parties in each particular case, and the exercise of construction is one of ascertaining objectively the intention of the parties at the time when the agreement was made.  As Lord Hoffman illustrated in his judgment in Fili Shipping Co Ltd and others v Premium Nafta Products Ltd [2007] BUS LR 1719 (at 1724), it may be artificial and futile to draw distinction between linguistic nuances.

20.  The modern approach to the construction of arbitration agreements is the presumption in favour of arbitrability and the “one‑stop” adjudication approach (Fili Shipping Co Ltd and others v Premium Nafta Products Ltd [2007] BUS LR 1719), at least as a useful starting point.  In Fili Shipping, Lord Hoffman referred to the construction of an arbitration clause as “starting from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship in which they have entered or purported to enter to be decided by the same tribunal”.  There are of course reminders from the courts that the presumption may be rebutted and would not be applicable in particular cases, where the parties have entered into different interlinked agreements, relating to different aspects of an overall and often complex commercial transaction, and where there are differently expressed choices of jurisdiction and/or law in different agreements providing for different manner of resolution of disputes. The Fiona Trust presumption and principles are always subject to consideration of the presumed intention of the parties, and what is required in each case is a careful and commercially minded construction of the agreement in question.

21.  Where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement “at the centre of gravity of the dispute”, as referred to in Trust Risk Group SpA v Amtrust Europe Ltd [2017] 1 CLC 456, or at the “commercial centre of the transaction” in question, as referred to in paragraph 4.59 in Joseph on Jurisdiction And Arbitration Agreements And Their Enforcement, 6^th edition).

22.  It is true that disputes as to the existence of the oral agreement and liability for payment of the rental charges for the vessels should have the closest connection with the oral lease agreement itself.  However, the Plaintiff and CAE have a wider legal relationship, in respect of the Sub-subcontract Works, and such works and the parties’ rights and liabilities are governed by the Sub-Subcontract.  It is noted from the correspondence adduced in evidence that the Plaintiff had continuously invoiced CAE for the rental charges of the Batch 1 Vessels, and such invoices were issued under and by reference to the Sub‑subcontract.

23.  In any event, that there is no claim that under the alleged oral lease agreements, which were made after the Sub-subcontract, the Plaintiff had agreed with CAE on any manner of dispute resolution which is different to that provided and specified under the Sub-subcontract.

24.  The object of the Sub-subcontract is for CAE to carry out the Sub-subcontract Works, which are part of the works to be carried out in and for the Project, and of course, for CAE to be paid for the Sub‑subcontract Works at the rates agreed under the Sub-subcontract Works.

25.  The object of the alleged oral agreement, even on the Plaintiff’s pleaded case, is for the vessels to be leased by the Plaintiff as owner to CAE, for the stated purpose of carrying out the Project.

26.  Clause 22 does not qualify or define the “dispute” which is to be arbitrated.  Clause 22.2 only provides for “any dispute” which cannot be settled by agreement to be referred to arbitration. That is extremely wide, and under clause 22.1, a “dispute” is deemed to arise when a party serves a Notice of Dispute which states the nature of the dispute, and that commences the proceedings for the dispute.  As drafted, it is plainly arguable that Clause 22 is sufficiently broad to embrace all disputes which may arise between the Plaintiff and CAE in the course of these dealings under, or are related to the Sub-subcontract.

27.  The Supplemental Agreement which contains the parties’ agreement on the final account for the Phase 1 works under the Sub-subcontract contain the value of the Subcontract Works and variations carried out, with references made to deductions for “vessel rental”, although there is no evidence nor explanation from the parties as to whether these were the Batch 1/Batch 2 Vessels.  CAE’s claim is that the sum agreed under the Supplemental Agreement has not been paid in full, and the disputed amounts will be determined in the arbitration commenced.

28.  Counsel for the Plaintiff made the point that the Plaintiff’s case is that under the oral lease agreements, the vessels could only be used “for the purpose of carrying out the Project”, and not that they would be used for the Sub-subcontract Works.  On the evidence, CAE’s claims are that they had carried out works additional to the works specified under the Sub-subcontract.  Such works were for the Project.

29.  Under the Sub-subcontract, CAE was contractually responsible for providing all resources, plant and materials for incorporation in the contract works, as well as “Equipment” which is defined in the Sub-subcontract to mean “all equipment of every kind including plant and marine vessels required for execution of the Sub‑subcontract Works”.  The Plaintiff has the identical contractual obligation in respect of the Subcontract Works undertaken under the Subcontract, as the contracts are back-to-back.  The provision of vessels for execution of the relevant contract works would appear to be part of the performance of the respective duties of the Plaintiff and CAE under their contracts.

30.  From the Notices of Dispute and the supporting documents, it would appear that the claims made by CAE in the arbitration under the Sub-subcontract include deductions made and expenses incurred for the lease of vessels.

31.  It should be borne in mind however that it is not necessary for CAE to establish that the claims included in its Notices of Dispute for arbitration in accordance with Clause 22 are identical or related to the claims made by the Plaintiff in this action in respect of the alleged oral lease agreements, for there to be a stay. So long as it can be established that there is a prima facie case of the existence of an arbitration agreement between the Plaintiff and CAE, and that the claims made by the Plaintiff in this action fall within the scope of the arbitration agreement contained in the Sub-subcontract, the Court will grant the stay of the action for the dispute to be arbitrated. The claims of the Plaintiff may be the subject matter of a new arbitration to be commenced, or they may be included in an arbitration already commenced. It is then for the arbitral tribunal to decide on its jurisdiction and on the merits of the claim: whether or not there was an oral agreement for lease of vessels, whether all the vessels leased were included in the Sub-subcontract as “Equipment” brought onto the site (if relevant), whether the vessels were brought on to the site by CAE or by the Plaintiff, the terms agreed between the parties as to the manner of use of the vessels, etc, all of which go to the merits.

32.  On the evidence adduced at this preliminary stage, it appears that the oral lease agreements are not entirely different transactions between the Plaintiff and CAE, but are closely related to the performance of the Sub-subcontract.

33.  In all the circumstances, and having considered the factual matrix, the purpose of the Sub-subcontract, the connection between the lease of the vessels and the execution of the Sub-subcontract Works, it would not be reasonable for the parties as rational businessmen to have intended that disputes arising under the oral leases and those under the Sub-subcontract should be resolved in different fora.  The fact that the Plaintiff had throughout issued invoices for the rental charges of the vessels under and by reference to the Sub-subcontract is a reflection of the Plaintiff’s understanding and intention as to the scope of the arbitration agreement contained in the Sub-subcontract, and the close connection between the oral leases and the Sub-subcontract.

34.  I am satisfied there is a prima facie case of the existence of an arbitration agreement between the Plaintiff and CAE, as contained in Clause 22, which is sufficiently wide in scope to cover the claims made by the Plaintiff in these proceedings, the dispute on which claims arose out of and are connected with the parties’ relationship and dealings under the Sub-subcontract. There is no evidence or assertion that the arbitration agreement is null and void, inoperative or incapable of being performed.  Under section 20 of the Ordinance, the Court “shall” refer the Plaintiff and CAE to arbitration.

Stay sought by the remaining Defendants

35.  As for the other Defendants, I am satisfied on the evidence at this stage that the Plaintiff’s claims against them are dependent and contingent upon the existence of a binding lease agreement between the Plaintiff and CAE, and the terms of such agreement as to the use of the vessels.  Until such issues are determined, the liability of the 6^th Defendant and the directors of the 4^th and 6^th Defendants in relation to the use of the vessels cannot be determined.  On the evidence, CAE’s case is that the vessels or at least the Batch 1 Vessels had throughout been used for the Project.  Unless the Plaintiff can establish that CAE was in breach of the lease and had no right to employ the vessels in the way it did, the other Defendants cannot be held to be liable for assisting in the alleged conversion, detinue or any wrongdoing.

36.  I accept the submissions made on behalf of the 1^st to 3^rd, and 5^th to 8^th Defendants, that there is an overlap in the factual issues which require determination in this action and those which arise in the arbitration between the Plaintiff and the 4^th Defendant.  It would be a waste of costs and there is a risk of conflicting outcomes, if the action against the remaining Defendants is allowed to proceed when the action against CAE is stayed, and this would be contrary to the objectives of the CJR.

Disposition

37.  For all the above reasons, I grant the stay sought in both the summons issued by CAE, and the summons issued by the remaining Defendants.  Orders are made in terms of those summonses.

38.  The order nisi is that the Plaintiff should bear the costs of both summonses, on indemnity basis, including all the costs reserved.