THE INCORPORATED OWNERS OF WING FAI BUILDING, SHUI WO STREET v. GOLDEN RISE (HK) PROJECT CO LTD

DCCJ 225/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 225 OF 2016

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D E C I S I O N

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The Application

1.  This is the defendant’s application to stay the action pursuant to section 20 of the Arbitration Ordinance, Cap 609, on the ground that there is an arbitration agreement binding on the parties requiring them to refer the present dispute to arbitration.

Factual Background

2.  The plaintiff is the Incorporated Owners of a building in Kwun Tong, which is described in the plaintiff’s evidence as “a small and old building” completed in 1965.  The defendant is a building contractor.  The plaintiff and the defendant entered into a contract in about November 2009 under which the defendant agreed to carry out various renovation works for the building, including waterproofing works to the roof and refurbishment of the external wall.

The Plaintiff’s Claim

3.  The plaintiff’s case is that shortly after the renovation works were completed by the defendant, there have been instances of water leakage throughout the building, especially during rainy seasons.  Notwithstanding certain remedial works undertaken by the defendant, the water leakage has continued.

4.  The plaintiff now alleges that the waterproofing works done by the defendant were defective and the defendant is thus liable for breach of contract and/or negligence.  The plaintiff claims damages against the defendant for the loss that it has suffered.

Procedural History

5.  The parties entered into protracted correspondence with regard to the alleged defective works, with no result.  The plaintiff eventually issued the writ in this action in January 2016.

6.  It is to be noted that during the pre‑writ correspondence, the plaintiff, through its solicitors, invited the defendant on at least two occasions to consider whether it would agree to resolve the dispute by arbitration.  See letters from the plaintiff’s solicitors to the defendant dated 19 September 2015 and 13 November 2015.  The defendant never replied to those letters.

7.  It was only when the defendant was seeking the plaintiff’s consent to an extension of time to file its defence in March this year that the defendant, through its solicitors, raised for the first time that the dispute ought to be referred to arbitration – see the defendant’s solicitors’ letter dated 24 March 2016. The deadline for the filing of the defence fell on 14 April 2016.  No defence has been filed.  In the meantime, the plaintiff did not agree that the court proceedings should be stayed for parties to proceed to arbitration.  The stay summons was then taken out by the defendant on 13 April 2016.

The Stay Application

8.  The basis of the defendant’s stay application is to be found in clause 4.1.36 of a document entitled “Project Contract”（「工程合約」）, which document formed part of the contract between the plaintiff and the defendant.

9.  Clause 4.1.36 has a heading entitled “Arbitration”（「仲裁」） and comprises 2 sub-clauses – (a) and (b).  Sub-clause (a) reads:

「無論在本合約執行期間、或在本合約完成、或被放棄之後，僱主與承建商（無論因違約或其他原因）就本合約或與其相關之任何事項發生爭執或分歧時，任何一方可以書面通知對方，而有關之爭執或分歧可轉呈由雙方同意委任之仲裁人，根據仲裁條例或當時有效之修訂條文之規定進行仲裁，無論裁決結果如何，對雙方均為決定性或具約束力。除非仲裁的問題關於僱主的指示是否得本合約授權、或關於證書的發出是否有不恰當的抑制、或除非僱主與承建商一致的書面同意，否則不能在本合約完成或以為完成之前、或承建商僱用終止或以為終止之前、或放棄本合約之前進行仲裁。雖然提交仲裁決定，承建商仍須遵從及繼續遵從任何與受仲裁問題有關的僱主指示或決定，直至仲裁人有裁決為止。根據仲裁人裁決而需負責的一方承擔全部仲裁費用。」 (emphasis added)

Sub‑clause (b) reads:

「雙方確認及同意仲裁只是解決爭執或分歧的途徑之一，在未經對方書面同意下，任何一方不得單方面展開仲裁程序。」

10.  For the purpose of the stay application, it is important to highlight the use of the word「可」in Chinese in sub‑clause (a) which precedes the reference to the referral of disputes to an arbitrator agreed to be appointed by both parties.

11.  In the parties’ skeleton submissions, Mr Jerry Chung, counsel for the defendant, has translated the Chinese word as “can”, whereas Mr K Y Kwok, solicitor representing the plaintiff, has translated it as “may”.

12.  In my view, the difference in the translation is not material given that both words, when interpreted literally and in isolation, are permissive in nature and both are to be distinguished from words such as “shall” which literally denote an obligatory meaning.  I shall adopt the interpretation of “may” below.

13.  The defendant’s position is that clause 4.1.36 is an “arbitration agreement” within the meaning of Article 7(1) of the UNCITRAL Model Law, which is given legal effect in Hong Kong by virtue of section 19(1) of the Arbitration Ordinance.  Applying section 20, which gives legal effect to Article 8 of the Model Law, the dispute ought to be referred to arbitration and hence the present proceedings ought to be stayed.  The defendant says clause 4.1.36 constitutes an arbitration agreement because it shows the clear intention of the parties to go to arbitration and their intention that relief should be obtained from arbitration and not from court litigation.

14.  At the hearing this morning, Mr Chung put forward a fall‑back position in that if the clause does give an option to the parties to elect arbitration, if one party does take up this option, then at that time it becomes mandatory for the other party to be bound by the choice of arbitration and the latter cannot insist on carrying on with litigation if one has already been commenced.

15.  Mr Chung drew support from the Privy Council decision in Anzen Ltd v Hermes One Ltd [2016] UKPC 1, a copy of the authority was only handed up to the court this morning. Mr Chung’s reliance on this case in support of his fall‑back position is not fully understood as the arbitration clause in that case is substantially different from our clause 4.1.36.  In any event, whether under his primary or fall‑back position, the defendant’s stance is that in the present case, arbitration has become mandatory given that the defendant has taken out the stay application, the only difference between the two positions is the exact time at which arbitration becomes mandatory.  But the difference seems to me to be rather immaterial in the present case.

16.  The plaintiff disagrees with the defendant’s position and contends that clause 4.1.36 does not have the effect of compelling or requiring the parties to arbitrate.  All it does is to give the parties a right or option to elect arbitration.  As such, it does not fall within the definition of “arbitration agreement” for the purpose of the Arbitration Ordinance and the plaintiff is entitled to proceed with the present court proceedings.

17.  In the present case, I consider that the issue of whether clause 4.1.36 is an “arbitration agreement” would be determinative of the summons in that if I agree with the defendant’s interpretation, the action ought to be stayed, but if I am with the plaintiff, then the stay ought to be refused.

Legal Principles

18.  The approach a court should adopt when faced with a stay application of this kind is set out by Ma J (as he then was) in Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418.  There are usually 4 questions that need to be answered – see §§19 to 23.  In the present case, only Question 1, namely whether there is an arbitration agreement, falls to be considered.

19.  As to how this question should be approached, Ma J gave the following guidance (at §18):

“By this is meant an agreement between the parties by which present or future disputes or differences between them are required to be resolved by the arbitral process.  The definition of “arbitration agreement” is contained in section 2 of the Ordinance, which in turn refers to Article 7 of the Model Law.  An agreement which does not compel parties to have disputes or differences resolved by arbitration is not an arbitration agreement for present purposes.  Where, for example, an option is given to the parties to go to arbitration if they so choose, but with litigation in the courts being an available option as well, this is not truly an arbitration agreement.  There must be its element of compulsion in the agreement between the parties that any disputes or differences must be arbitration.” (original emphasis)

20.  Ma J reiterated the relevant question at §37 as follows:

“In future, the relevant inquiry here should simply be: Is the clause in question one that requires disputes or differences to be resolved by arbitration?”

21.  In Grandeur Electrical Co Ltd v Cheung Kee Fung Cheung Construction Co Ltd [2006] 3 HKLRD 535, a decision of the Court of Appeal, Barma J (as he then was) said (at §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 [the arbitration provision in question in that case] gives rise to such a choice.”

22.  On NS 11, Yuen JA said (at §6) that the effect of the clause was to provide that arbitration “is the only route for either party to advance a dispute”, and therefore it was an arbitration agreement.

23.  In essence, in answering Question 1, the fundamental determining factor is whether the parties are compelled to have the dispute resolved by arbitration or whether they are given a choice.  In determining the “compulsion vs choice” question, I make the following 3 observations, based on the authorities cited by Mr Chung and Mr Kwok.

24.  First, the answer must be based on a proper construction of the relevant clause by applying the well‑established contractual principles.  The court’s task is to find out the objective intention of the parties, by considering the actual words used, interpreting those words in the context of the contract as a whole, and taking into account the circumstances surrounding the making of the contract and available to the parties.

25.  Secondly, where a permissive word such as “may” or “can” appears in an arbitration provision, there have been in the past cases deciding that the word should be interpreted in the permissive sense, thus bearing its literal meaning and giving a choice to the parties.  On the other hand, there are cases in which it has been held that the word “may” should really be construed as “shall”, thus compelling the parties to submit the dispute to arbitration.

26.  An example of the former group of cases is the obiter decision of Deputy High Court Judge Burrell in Hannice Industries Ltd v Elite Union (Hong Kong) Ltd HCA 1876/2011, 22 March 2012 – see §20.  The latter group includes the decision of Barnett J in Guangdong Agricultural Co Ltd v Conagra International (Far East) Ltd HCA 3032/1992, 24 September 1992 at §§7 and 9 and the decision of Kaplan J in China State Construction Engineering Corporation Guangdong Branch v Madiford Ltd HCA 6563/1991, 2 March 1992 and Tianjin Medicine & Health Products Import and Export Corporation v J A Moeller (Hong Kong) Ltd HCA 11228/1993, 27 January 1994.  (The latter two cases have been helpfully referred to me by Mr Kwok for the plaintiff, even though the decisions are on their face against the plaintiff.)

27.  Despite the apparent divergence in the court’s interpretation of the permissive word “may” or “can”, the approach taken by the court in the construction exercise is a consistent one.  These conclusions were reached by the courts taking into account the relevant “factual matrix” in each case, which obviously differs from case to case and hence the different conclusions reached.

28.  Deputy High Court Judge Burrell said in Hannice at §19:

“What is apparent from all these cases is that each clause must be read and considered in the context of the contract to which it relates.  Kaplan J was making this point when he said “At the end of the day, it seems to me clear that this is one if those cases where the word ‘may’ in effect means ‘shall’. ” ”

29.  In my view, these cases and the different conclusions reached simply reinforce the point that in construing any arbitration provision, the court’s task is to ascertain what the objective intention of the parties is, namely whether it is compulsion or choice.

30.  Thirdly, when construing an arbitration provision, Mr Chung submitted in his written submissions that the modern approach is that there is in general an assumption that it is the parties’ intention that all disputes should be referred to arbitration.

31.  Ma J said in Tommy CP Sze & Co as follows:

“...The emphasis these days is on party autonomy with minimal interference by the courts and where parties have expressly agreed to refer disputes or differences to be determined by arbitration, it is generally safe to assume that it is their intention to have such disputes or differences to be resolved only by arbitration...” (at §33(2)) (original emphasis)

“In my judgment, it is clear that clause 25(b) is an arbitration agreement. It makes little sense to construe the clause as somehow giving an option to the parties whether or not to have their disputes or differences resolved by arbitration. Nothing in the clause mentions an option as such. It is also difficult to see why parties would wish to have disputes or differences between them resolved both privately and publicly. It is surely one or the other. It does not readily make sense (in the absence of clear words dictating this result) that a party is able or is required to go to arbitration provided that he fulfils procedural requirements (such as commencing proceedings within a certain time) but if he does not or chooses not to, then he can freely litigate in the courts.” (at §34)

See also Barma J’s remarks in Grandeur Electrical Co Ltd at §26:

“... 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...”

32.  Therefore, it would seem to be the case that where the parties have agreed on specific provisions providing for a mechanism on how parties can go to arbitration, an assumption may arise to the effect that the parties do not intend to have a choice between litigation and arbitration when a dispute later arises, and that presumption can only be displaced by clear words providing otherwise.

Analysis

33.  Applying the above principles, I am of the clear view that clause 4.1.36 does not compel or require the plaintiff and the defendant to submit any dispute arising out of the contract to arbitration.  Each party, by the express provisions of the clause, is given a choice whether to arbitrate or not.  In coming to this view, I have taken into account the following matters.

34.  First, the two sub-clauses are to be read together.  While sub‑clause (a) does provide in some detail in what circumstances a party “may” refer a dispute to arbitration, as submitted by the plaintiff, sub‑clause (b) expressly provides that arbitration is one of the means to resolve disputes and, most importantly, arbitration cannot be commenced by one party without the written consent of the other.  The latter party may give its consent or it may withhold its consent. In other words, it has a choice and it cannot be compelled to submit to arbitration.

35.  Secondly, Mr Chung submitted that sub‑clause (b) should be disregarded as it must be read to have been overridden by sub‑clause (a), as the former is inconsistent with the part of the latter clause which provides that arbitration can only be commenced after a certain timeframe (“the Stipulated Time”).

36.  His argument on this is as follows.  While sub‑clause (a) states at the outset that parties may go for arbitration, it then imposes a restriction that arbitration should not be started until after the Stipulated Time.  That restriction is itself subject to some exceptions, one of which is where both parties consent.

37.  Mr Chung argued that the blanket consent requirement in sub‑clause (b) is inconsistent with the above restriction in that if consent is required in any event for any arbitration to commence, there is no need for the consent to be listed as an exception in sub‑clause (a) as the consent would clearly be already in place under sub‑clause (b).  Because of this inconsistency, sub‑clause (b) should be disregarded.

38.  I reject this submission.

39.  I see no inconsistency between the two clauses as argued.  At most, there is only an overlap.  I consider that the proper construction is as follows.  Under sub‑clause (b), all arbitration requests require consent of both parties.  But that consent is a generic one for all types of disputes, arising at whatever time. Where an arbitration request is made before the Stipulated Time and where no exception stated in sub‑clause (a) applies, the other party’s consent, specifically to the effect that the arbitration can take place before the Stipulated Time, need also be obtained.  Thus construed, there is no inconsistency between the two sub‑clauses.

40.  In any event, sub‑clause (b) would have general application to disputes which arise after the Stipulated Time.  And in that situation no inconsistency between the two sub-clauses can possibly arise.

41.  While a reasonably prudent draftsman might have taken care to provide for priority as between sub‑clauses in a situation of this sort by making use of standard legal language such as “without prejudice to” and “subject to” as between different clauses.  These phrases are not present in clause 4.1.36.  In such a case, the court should construe the sub‑clauses as a whole and interpret it so as to give effect to the intention of the parties, as can properly be ascertained. It should not and will not lightly strike down and thus disregard a clause simply because there is arguably some overlap to some extent with another clause.  This is particularly so given that sub‑clause (b), as submitted by Mr Kwok, has been expressed in the clearest and most unequivocal terms as providing for a consent to the parties.

42.  Thirdly, in his written submissions, Mr Chung argues that an option to litigate in court was not explicitly spelt out in the clause.  Accordingly, the parties should not be regarded as having an option to opt for court proceedings.  I do not accept this submission.  The proper factual context to be taken into account in this case is that there are generally available a number of dispute resolution mechanisms, which would include litigation, arbitration, mediation and informal negotiation.  The fact that litigation was not expressly referred to is neither here nor there.  One asks rhetorically, given that mediation and negotiation were also not explicitly referred to, are the parties now precluded from pursuing these means to resolve their disputes?  The answer is obviously “no”. The parties having acknowledged and agreed that arbitration is only one of the means available, the option of court litigation is, in my view, not ruled out simply because it was not expressly stated in the provision.

43.  Fourthly, I consider that the language is plain and clear enough to show that the parties have intended to have a right to choose arbitration or not.  There is simply no room for the assumption referred to in Tommy CP Sze & Co and Grandeur Electrical Co Ltd to arise.  But even if I am wrong on this and an assumption does arise in the present case that the parties had intended to have disputes to be resolved only by arbitration, that assumption is displaced by the clear words in sub‑clause (b), which has the effect of giving the parties a choice to either consent to or not consent to arbitration.

44.  In conclusion, the present case is one where the word “may” in clause 4.1.36(a) should simply mean “may”, ie, it should be construed to bear its literal meaning in the permissive sense, and that is so because of the clear express provisions in clause 4.1.36(b) to that effect.  It follows that since the parties are not compelled to pursue arbitration, clause 4.1.36 is not an arbitration agreement for the purposes of the Arbitration Ordinance.  The plaintiff ought to be allowed to continue with the present action.

Conclusion

45.  I therefore dismiss the defendant’s stay application.

46.  Pursuant to an earlier order made by the Registrar, the defendant should file its defence within 21 days from today.

(Submissions on costs)

47.  The costs should follow the event.  The defendant accepts that costs should be assessed on an indemnity basis.  I consider that this is an appropriate case to assess costs by way of summary assessment.  I therefore make the following orders on costs:

(1) The plaintiff do have costs of the stay application, including any costs reserved, on an indemnity basis.

(2) The plaintiff do lodge and serve its statement of costs by noon on 28 June 2016.

(3) The defendant do lodge and serve its list of objections (if any) by noon on 30 June 2016.

(4) The summary assessment will be conducted on the papers and the assessed costs shall be payable by the defendant within 14 days of the assessment.