XCHRX CLINTON ENGINEERING LTD. v. DONG-JUN (HOLDINGS) LTD.

1998, No. A3608

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Application

1. I have before me an application by the defendant for a stay of these proceedings pending the award under an arbitration under which the liability, if any, of the defendant's subsidiary under a building contract will be determined.

The Background

2. The defendant's subsidiary company is Guangzhou Dong-Jun Real Estate Interest Company Limited (the subsidiary). The subsidiary employed the plaintiff to do some mechanical and electrical work on a building in Guangzhou. The subsidiary also entered into another contract with the plaintiff in relation to some consultancy services. The plaintiff alleges that the subsidiary owes it $114.792 million under the building contract and $14,131,085 under the consultancy contract. In this action, the plaintiff is claiming these sums from the defendant on the basis of an undertaking to pay given by the defendant to the plaintiff.

3. The defendant says that the plaintiff rendered no services under the consultancy contract and nothing is due in this respect.

4. Under the building contract, the parties agreed to refer any disputes to arbitration. There is no such agreement in relation to disputes under the consultancy contract. The disputes under the building contract have been referred to arbitration.

5. The plaintiff relies on two letters in alleging the "guarantee" by the defendant. They are dated 6 May 1997 and 22 May 1997. They both refer to a letter written by the plaintiff to the subsidiary dated 29 April 1997. This letter of 29 April 1997 said -

"With reference to our auditor's request to confirm the balance due to us by your company in the sum of HK$151,307,899.00, we confirm that this is our assessment of the value of work-in-progress for Dong-Jun Plaza and the value does not represent any agreement nor commitment by your company as the sum for settlement."

6. On 6 May, 1997, the defendant wrote to the plaintiff saying -

"I refer to your letter dated 29 April 1997 in relation to the balance due from [the subsidiary] to your company under two original contracts to perform M&E works and to provide project management service to Dong-Jun Plaza. We advise you that the balance due from our [subsidiary] to your company as at 31 December 1996 was HK$151,307,699 representing an aggregate sum of work-in-progress and outstanding payable due to your company. We confirm that we will do our best endeavour to pay off the aforementioned balance at Hong Kong Dollar Prime Rate plus 2%."

7. On 16 May 1997, the plaintiff faxed a draft of another letter that it wanted the defendant to sign. This draft mentioned both contracts and concluded -

"The company hereby give you an irrevocable guarantee that we will honour all the obligation of [the subsidiary] under the above mentioned contracts if [the subsidiary] were unable to meet its commitments."

8. On 22 May 1997, the defendant wrote to the plaintiff saying -

"I refer to your letter dated 29 April 1997 in relation to the balance due from [the subsidiary] to your company under two original contracts dated 31 December 1993 to perform M&E works and a contract dated 20 May 1994 to provide project management service to Dong-Jun Plaza. We hereby confirm our agreement that we will assume and honour all the obligation of [the subsidiary] under the above mentioned contracts if [the subsidiary] were unable to meet its commitments."

The Defendant's Case for a Stay

9. The crucial argument in the defendant's case for a stay is the effect of the undertaking by the defendant. If it is the case that, assuming the undertaking to mean what it says, the defendant is bound to pay to the plaintiff what the arbitrator finds is due by the subsidiary to the plaintiff, and if the plaintiff can demand from the defendant no more than this, there is obviously a good case for a stay. If neither party, or only one party, is bound by the arbitrator's award, a stay would not be justified.

10. The undertaking, to paraphrase it, and to ignore the condition "if [the subsidiary] were unable to meet its commitment", which has no relevance for present purposes, is to pay to the plaintiff what the subsidiary is obliged to pay under the contracts

11. Mr Dennis Chang, SC, on behalf of the defendant, argues that the defendant's undertaking is to pay what the arbitral award finds that the subsidiary was liable to pay because this is the subsidiary's obligation under the building contract. And the plaintiff can obtain from the defendant no more than this. Until that award is published, it cannot be known what the subsidiary is obliged to pay, and, therefore, it cannot be known what the defendant is obliged to pay.

12. This is the argument advanced in Alfred McAlpine v Unex Corporation (1994) 70 BLR 26. In that case, the undertaking by Unex was that it would not be "under any greater liability to McApline than [the builder] would have been liable in contract pursuant to the express terms of the contract". Glidewell LJ found that this provision meant that "the maximum liability of Unex to McAlpine is the amount which, if there is a reference to arbitration, is determined by the arbitrator to be due by [the builder] to McAlpine." Although Evans LJ did not follow the same approach, and Waite LJ remained neutral, I find the reasoning and conclusion of Glidwell LJ attractive, and I adopt it.

13. In that case, Unex failed in its application for a stay because, although the maximum liability of Unex was limited to the amount of the arbitral award, it was not bound, and was not willing to be bound, to accept the arbitrator's award as the measure of its liability. Glidwell LJ and Evans LJ found that there would have been a very strong case for a stay if that were the case.

14. In the case before me, the terms of the defendant's undertaking, which was negotiated with, and agreed to, by the plaintiff, is such that both parties to this action will be bound by the arbitrator's award as far as the defendant's liability to the plaintiff is concerned. The defendant's obligation is to pay to the plaintiff what the arbitrator finds is due by the subsidiary, and the plaintiff cannot impose on the defendant any greater obligation than that.

15. It being so, on my finding, that the defendant's obligation is to pay what the arbitrator finds is due by the subsidiary to the plaintiff, no more and no less, the undesirability of not granting a stay can be demonstrated by considering what might happen if a stay is not granted. If this litigation proceeds before an award is made, it may be that this court will find that the subsidiary's liability to the plaintiff is, say, $5 million, and gives judgment for the plaintiff is this sum. A week later, the arbitrator's award may be published, and the liability of the subsidiary to the plaintiff is found to be $2 million. Clearly, this is a situation that is most undesirable. It would be equally undesirable if this court found that the amount due by the subsidiary was less than that found by the arbitrator.

16. So, it seems to me, that it would be right that the action be stayed so far as it concerns the claim of $114,792,000 under the building contract.

17. But, Mr Graham says, even if I were to come to this conclusion, it would not be right to stay the action in respect of the claim for $14,131,085 under the consultancy contract.

18. The problem with that approach is that, while the plaintiff says that the sum of $32,928,915 was paid to it under the consultancy contract, the defendant says that these payments were made in respect of the building contract. In deciding what amount is due by the subsidiary to the plaintiff under the building contract, this is one of the issues that the arbitrator must resolve. Whatever the arbitrator finds on this issue will influence what he awards as the liability of the subsidiary, and, consequently, what is the liability of the defendant under the building contract in this action. For example, if the arbitrator finds that the amount of $32,928,915 was paid to the plaintiff under the building contract, this will reduce the liability of the subsidiary in the arbitration and the defendant in this action under the building contract. If he finds otherwise, the same situation will prevail but in reverse. Whatever he finds, it seems to me that if this action is permitted to continue on the claim under the consultancy contract, there is a risk of this court coming to a different conclusion, with the attendant undesirable consequences.

19. To spell out a possible scenario, this court might find that the payments concerned were in respect of the consultancy contract and give judgment for the plaintiff in the sum presently claimed under this head, but the arbitrator might find that the money was paid under the building contract. The plaintiff would then have suffered an injustice. In the event that the arbitrator finds that the money was paid under the building contract, the plaintiff may well wish to amend its claim under this head to withdraw the credit given for these payments. On a balance of convenience, for these reasons, I think it better that the whole action be stayed until the arbitrator's award is known.

The Result

20. For these reasons, I order that this action be stayed until the publication of the arbitrator's award, or further order.

The Costs

21. This is not a permanent stay so there is no call to deal with the costs of the action. As to the costs of this application, there does not seem an obvious reason why costs should not follow the event. I make an order nisi that the plaintiff pay the costs of the application.

JK FINDLAY

Judge of the High Court
Court of First Instance