SCHINDLER LIFTS (HONG KONG) LTD v. DICKSON CONSTRUCTION CO LTD

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HEADNOTE

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Arbitration - Arbitration Ordinance s.12(1) - application to court to appoint arbitrator where one party to arbitration agreement having refused to concur in appointment opposes the application - analogous to application for stay of proceedings - strong bias in favour of arbitration. Wharf Properties Limited and Another v. Eric Cumine Associates, Architects , Engineers and surveyors and 17 others (1984) HKLR 211 considered.

The defendant, a contractor, denied a claim by the plaintiff, its subcontractor, for money allegedly due in respect of losses sustained as a result of delay and disruption caused to the subcontract works by the failure of the defendant to carry out the contract works on time. The plaintiff served notice to concur in the appointment of an arbitrator, there being an arbitration clause in the subcontract. The defendant did not concur and the plaintiff applied to the Court for an arbitrator to be appointed. The application was opposed on the grounds that the arbitration clause did not cover the dispute but that, if it did, the principal issue was a point of law as to the construction of the Hong Kong Government standard form of subcontract, so that it was of interest to many and should be dealt with by way of an originating summons. The difficulties which a party to an arbitration would face when seeking to refer a preliminary point of law to the court or to appeal against an award made it undesirable to appoint an arbitrator.

Held: (appointing an arbitrator)

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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JUDGMENT

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1. This is an application by the plaintiff for the appointment of an arbitrator under section 12(1) of the Arbitration Ordinance Cap. 241 (the Ordinance).

2. The evidence before me consists of one affidavit, with exhibits, of Mr McCloskey, the plaintiff's contracts director, which was filed on the 18th April 1991; two affidavits, with exhibits, of Mr Cheng Hung-tat, contracts manager of the plaintiff, filed on the 9th May 1991 and 4th June 1991 respectively one affidavit with exhibits, of Mr Cheng Wai-chuen, a director of the defendant, filed on the 9th May 1991.

3. On the 21st October 1986, the defendant as contractor and the plaintiff as subcontractor entered into a "green form" subcontract in the Hong Kong Government Standard Form of Subcontract (1978 Edition). It was a fixed price subcontract for the supply and installation of lifts, escalators and dumbwaiters, with provision for the valuation of and payment for authorised variations. It is "back to back" with a standard form contract entered into between the Hong Kong Government as employer and the defendant as contractor.

4. The plaintiff has made a claim against the defendant for payment for loss and expense occasioned by delay and disruption of the subcontract works due to delay on the part of the defendant in carrying out the main contract works. It seeks the appointment of an arbitrator but the defendant has declined to concur in an appointment. Hence this application.

5. The subcontract contains an arbitration clause, clause 24(A), which reads :

"24(A) If any dispute or difference shall arise between the subcontractor and the contractor, whether during the progress of the subcontract works or after their completion and whether before or after the termination, abandonment or breach of the subcontract, as to the execution of the subcontract works or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith, then such dispute or difference shall be referred to the arbitration and final decision of a single arbitrator in accordance with and subject to the provisions of the Arbitration Ordinance or any authorized modification thereof for the time being in force and any such reference shall be deemed to be a submission to arbitration within the meaning of such Ordinance."

 

6. It is convenient here to mention clause 24 (C) of the subcontract because the plaintiff contends that it indicates that the intention of the parties was to select arbitration as a "one stop" method for the resolution of disputes between them. It is in the following terms:

"24(C) The award of the arbitrator shall be final and binding on both parties."

7. It is common ground that no written provision appears in the standard form of subcontract for the payment of compensation in respect of losses due to delay. The plaintiff contends that it is nevertheless entitled to claim such compensation on the basis of breach of an implied term and that it has other claims in relation to variations and acts of prevention.

8. The defendant's position is that the only part of the subcontract dealing with delay is clause 8(B) which a provides for extensions of time in certain circumstances, that no term such as the plaintiff contends for can be implied and indeed that it is a trade practice to treat the subcontract as not providing for compensation for delay.

9. These are issues to be determined by the tribunal which deals with the claim and I refrain from comment.

10. On the 2nd July 1990, the plaintiff submitted its claim to the defendant for extensions of time and for compensation in the sum of $599,699.90 for financial loss occasioned by delays and disruption due to -

11. The written claim, including appendices' runs to 128 pages and includes a 13 page legal opinion (not prepared for these proceedings) on the general question whether nominated subcontractors could recover time related loss and expense under the Hong Kong Government Standard Form Subcontract (1978 Edition). The plaintiff regarded that opinion as showing the legal basis for its claim. Mr Scott, who appeared for the plaintiff on this application, adopted the arguments in the opinion as his own.

12. The claim submitted on the 2nd July 1990 was followed by a period of silence from the defendant. A reminder sent on the 24th August 1990 elicited a reply on the 7th September that the defendant was considering the matter. On the 13th September, the plaintiff served a notice to concur in the appointment of a single arbitrator. The defendant replied on the 20th September saying that there was no dispute or difference and that it could not concur in the appointment of an arbitrator. In subsequent correspondence the defendant continued to say that it was considering the matter and that there was no dispute or difference. In November 1990, it requested further particulars and reiterated the requirement in letters dated 19th December and 28th December.

13. On the 5th January 1991,  the plaintiff wrote to the defendant dealing with points raised by the defendant in correspondence. The defendant then called for further particulars and the plaintiff gave a detailed reply on the 1st March 1991, at the same time serving another notice to concur in the appointment of an arbitrator. The defendant  replied on the 8th March saying "we see no point in the appointment of an arbitrator at this time before you can provide us with details of your case." On the 14th March, the defendant raised further queries on the claim and said "we deny any liability whatsoever for your loss and expense unless it was due to our fault. In any case, you are required to provide all necessary information to support your claim".

14. Finally, in a letter dated the l8th March 1991, the defendant said :

"Unless you can provide the details of information, we are not prepared to consider your claims and your threat on arbitration action will not be entertained."

15. One month later, the plaintiff issued the summons now before the court, seeking the appointment of an arbitrator.

16. Mr John Scott's submissions in support of the plaintiff's application were addressed to four questions, which I shall deal with in turn.

17. Mr Scott argued that it was not open to defendant to say that there is no dispute until the claim has been particularised to its own satisfaction. A dispute may arise even before a claimant has a fully constituted cause of action - Ramac Construction Co. Ltd. v. J.E. Lesser (Properties) Ltd. [1975]  2 Lloyds Rep 430.

18. According to Mr Scott, it is clear from the evidence before the court that there is a dispute both as to liability and as to quantum.

19. Mr Anthony Rogers, Q.C., who appeared for the defendant, addressed me throughout on the basis that there was a dispute on a point of law, i.e. the construction of the subcontract. He said nothing at all about issues of fact relating to the claim.

20. It is true that where there is complete silence on the part of a person in receipt of a claim, there is no dispute to be referred to arbitration and the claimant must prosecute his claim by action - Peter Leung Construction Co. Ltd. v. Tai Poon Co. Ltd., Civil Appeal No.45 of 1985 (unreported), but here the defendant has gone much further than simply ignoring the claim, it has, in effect, denied the claim.

21. I find that there is a dispute or difference between the parties.

22. According to the plaintiff, it concerns the defendant's obligation to pay monies to the plaintiff and the amount to be paid in respect of losses suffered by the plaintiff as a result of delay and disruption to the subcontract works caused by the defendant. Mr Scott submits that there are numerous issues of fact and law to be decided.

23. Mr Rogers has conducted his case on the basis that there is primarily an issue of law. He has refrained throughout from any mention of issues of fact but it is obvious that this is not a case where the facts are agreed, leaving only an issue as to liability to be decided. The defendant has made it abundantly clear in correspondence that even if, which it denies, it is open to the plaintiff as a matter of law to make the claim it has purported to make, the plaintiff will be put to proof on the issues both of liability and quantum.

24. It is clear from the evidence before me that the dispute will not be resolved simply by deciding one preliminary issue of law as to whether there is an implied term providing for compensation for loss due to delay.

25. First of all, Mr Scott observed that the clause is drawn so widely as to cover matters not only of contract but also e.g. of tort. He referred me to Ashville v. Elmer [1988] 2 Lloyds Rep. 73 as an illustration of the proper approach to construction. There the English Court of Appeal was considering the meaning of an arbitration clause. May L.J. said in his judgment at p.75 :

"In seeking to construe a clause in a contract, there is no scope for adopting either a liberal or narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that the clause is ambiguous, that it has two possible meanings. In those circumstances, the court has to prefer one above the other in accordance with settled principles. If one meaning is more in accord with what the court considers to be the underlying purpose and intent of the contract, or part of it, than the other, then the court will choose the former rather than latter."

26. Three years before that, in Antaios Compania S.A. v. Salen A.B. (H.L.(E.)) (1985) 1 A.C. 191 Lord Diplock said, at p.201:

"While deprecating the extension of the use of the expression 'purposive construction' from the interpretation of statutes to the interpretation of private contracts,.... I take this opportunity of restating that if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense."

27. In that he echoed the words of Maule J. who said in Cockburn and Another v. Alexander (1848) S.C. 18 L.J.C.P. 74; 13 Jur 13 :

"It is to be borne in mind that we are here dealing with a mercantile instrument, in the interpretation of which we must look at the substance of the matter, and are not restrained to such nicety of construction as is the case with regard to conveyances, pleadings and the like."

28. Mr Scott submitted that the dispute clearly falls within the words of the arbitration clause being a dispute "as to any matter or thing of whatsoever nature arising ... in connection therewith".

29. It was contended by Mr Rogers on behalf of the defendant that the dispute between the plaintiff and the defendant was as to whether there was an implied term in the subcontract that, in the event of delay, the defendant would be entitled to payment for any loss occasioned thereby. Such a dispute, he submitted, is not a dispute as to the execution of the subcontract works. "Execution of the subcontract works" is a qualifying phrase restricting the scope of matters to be referred to arbitration. The arbitration clause does not mention any dispute or difference in relation to the contract; nor does it mention a dispute as to the law. The question for the court, according to Mr Rogers, is whether the dispute or difference relates to the execution of the subcontract works or relates primarily to the interpretation of the contract. He submits that it is inconceivable that, at the time of entering into the subcontract, the parties would contemplate that an arbitrator would have to adjudicate upon the existence or non-existence of a term of the subcontract not spelt out in the contract document.

30. Mr Rogers pointed out that the Ramac case was concerned with an arbitration clause which referred to any dispute or difference "as to the construction of this contract or as to any matter arising thereunder or in connection therewith" whereas there is no mention of the subcontract in the clause presently under consideration.

31. I mention in passing the case of Lawson v. The Wallasey Local Board (1883) 11 QB 229. Because it appeared in the defendant's list of authorities, Mr Scott was at pains to show that it was distinguishable upon its facts and that there was considerable doubt as to whether it would be decided in the same way today. When Mr Rogers came to address me, however, he said that the actual decision in the case was irrelevant. He merely cited it to illustrate the principle that it is necessary to look at the arbitration clause to see whether a given dispute falls within it. Since that principle is not in doubt, I need say no more about the Lawson case.

32. Mr Scott's answer to these submissions was that the arbitration clause relates not only to disputes as to the execution of the subcontract works but also to "any matter or thing of whatsoever nature arising thereunder or in connection therewith". The claim, he said, for payment for losses due to delay to and disruption of the works was clearly a "matter or thing arising in connection therewith". It would astonish anyone claiming payment under the subcontract, for example, if he were told that the arbitration clause only related to such matters as the quality of the work and not to the obligation to pay for it. As to Mr Rogers' submission that the dispute was a pure and simple question of law, Mr Scott pointed out that the facts upon which the claim was based were also disputed. An arbitrator would have questions both of fact and of law to decide and Mr Rogers had not denied that. It was incorrect to suggest that questions of law were not for the arbitrator. In every arbitration one would expect the arbitrator to decide questions of law and then apply the law to the facts he found. Here there was not simply a question whether there was an implied term, the plaintiff was also relying on express terms, such as that relating to variations. The issues were much wider than the defendant was prepared to admit.

33. Having decided that there is a dispute or difference, I must now consider whether it falls within the terms of the arbitration clause. It could be said that there is some ambiguity as to whether the words "thereunder or in connection therewith" refer to the whole phrase "the execution of the subcontract works" or to "the subcontract works". Mr Rogers took the view that they refer to the whole phrase. Mr Scott did not disagree. I am content to proceed on the basis that Mr Rogers is right. On either view, my finding would be the same. I bear in mind the principles of construction to which I have referred and also the "officious bystander test" which Mr Scott has recommended. Lord Justice Balcombe said in the Ashville case (supra) : "As on any issue of construction, the issue is incapable of much elaboration. It is a matter of how the words strike the reader."

34. I hold that the dispute or difference which has arisen between the parties is a dispute or difference as to a matter or thing arising in connection with the execution of the subcontract works. It comes within the terms of the arbitration clause. In my view, to hold otherwise would be to "flout business common sense".

35. The fact that the subcontract as such is not mentioned in the arbitration clause does not mean that disputes as to construction of the subcontract are necessarily excluded. It would have been possible to draw the clause so as to exclude such disputes, had that been the intention.

36. Mr Scott submitted that the express intention of the parties to resort to arbitration should not be ignored or frustrated. Clause 24(C) providing that the award of an arbitrator shall be final and binding on the parties showed that the parties had chosen arbitration as a "one stop" method for the resolution of disputes. My attention was drawn to a passage at page 179 of the second edition of Mustill and Boyd on Commercial Arbitration and a footnote thereto. The passage refers to s.10 of the Arbitration Act 1979 but it is equally relevant to s.12 of the Ordinance. It reads :

"The power of the court under s.10 is discretionary. The court is not obliged to make an appointment, even if the conditions laid down by section 10 have been fulfilled. The court will, however, probably lean in favour of exercising its power, and an appointment would be withheld only if there were a strong balance of convenience in having the matter dealt with in the High Court rather than by arbitration, or if the court felt that the applicant had acted unreasonably in making the application."

37. The footnote (5) reads in part :

"It is submitted that the position is rather similar to that which exists upon an application to stay under s.4(1). If the parties have contracted to submit their disputes to arbitration, the court will in general tend to enforce the contract ..."

38. Inasmuch as the defendant in the present case is arguing for litigation rather than arbitration, the position is analogous to one where a plaintiff is resisting an application for a stay of proceedings. The factors to be considered on such an application were set out by Mantell J. in Wharf Properties Limited and Another v. Eric Cumine Associates, Architects, Engineers and Surveyors and 17 others [1984] HKLR 211. After reviewing the authorities, Mantell J. reached a conclusion which is correctly summed up in the headnote as follows :

"On an application of this type the court should consider all the circumstances of the case but consider them with a strong bias in favour of maintaining the bargain between the parties. The court must be vigilant to see that it does not drive either of the parties to a tribunal where it would not get substantial justice, but at the same time must not overlook the fact that at the time the parties agreed to arbitration they had in mind the overriding jurisdiction of the court."

39. With regard to the fact that the matters in dispute include questions of law, Mr Scott referred again to a passage in Mustill and Boyd at page 477 :

"The parties must have been taken to have foreseen, when they agreed to have their dispute resolved by arbitration, that the disputes might involve questions of law as well as fact; and a skilled arbitration tribunal might be just as successful in resolving a dispute involving both types of issue as a judge of the High Court."

40. In the present case, both parties are in agreement that, if an arbitrator is to be appointed, it should be John Francis Uff Q.C., Ph.D. BSC (Eng), FICE, C Eng, FCI Arb. Mr Scott submitted that Mr Uff is eminently qualified to deal with all questions, whether of law or fact, which might arise in the arbitration. I agree. There is no question of "driving one of the parties to a tribunal where it would not get substantial justice".

41. It was further pointed out that in a building contract case such as this, an arbitrator may have a wider power than the court to review and revise Architects' Certificates. See the remarks of Hunter J., as he then was, in John Lok and Partners Ltd. v. Wharf Properties Ltd. [1984] HKLR 305, commenting on the likely effect in Hong Kong of the decision in Northern Regional Health Authority v. Derek Crouch Construction [1984] 2 WLR 676. It remains to be seen whether the Hong Kong Court of Appeal will follow the Derek Crouch case, but that decision lends powerful support to the argument for arbitration, since it indicates that the powers of the High Court as opposed to arbitrators are severely restricted in respect of the review and revision of Architects' Certificates, which may be required in this case.

42. Mr Scott went on to point out that s.23(A) of the Ordinance makes provision, where there has been a reference to an arbitrator, for a preliminary point of law to be determined by this court. Such a procedure could be adopted in the unlikely event that Mr Uff and the court thought it necessary. If on the other hand, the plaintiff were to take out an originating summons to seek the construction by this court of the terms of the contract, as the defendant had suggested, the procedure would be cumbersome and time wasting whereas an arbitrator is master of his own procedure.

43. Finally, he pointed out that the claim was made by the plaintiff : there was no counterclaim. It was for the plaintiff to select the procedure for pursuing his claim in accordance with the bargain made between the parties.

44. Dealing with the matter of discretion, Mr Rogers observed that if an arbitrator is appointed and makes what the defendant believes to be an error of law, the defendant will be "hemmed in" by ss.23, 23(A) and 23(B) of the Ordinance and by clause 24(C) of the subcontract, so as perhaps to be prevented from seeking rectification by the court of that error. In order to illustrate the difficulty of obtaining leave to appeal, he cited the well known guidelines laid down in the Nema case : Pioneer Shipping v. BTP Tioxide Ltd. (1982) AC 724 which guidelines have been followed in Hong Kong.

45. Mr Rogers also cited the judgment of Kaplan J. in Unistress Building Construction Ltd. v.  Humphreys Estates, Construction List No. 4 of 1991 (unreported) as showing the difficulties faced by a party making application for determination of a preliminary point of law under s.23(A). That  judgment does indeed show that the difficulties posed by both section 23(A) and 23(B) can be formidable. They are intended to be. At page 13 of his judgment, referring to the legislative amendments to the law of arbitration in England and Hong Kong since 1979, Kaplan J said "These amendments showed a strong shift away from court interference towards party autonomy."

46. Mr Scott's answer to Mr Rogers' point was that the difficulties had been brought into existence as a result of a vital change in legislative philosophy as interpreted in the Nema. That philosophy was, according to Mr Scott, to preserve the autonomy of the arbitrator and to give finality to the arbitral award. If the parties who made an arbitration agreement find themselves in a position where they are unable to appeal, that is the natural consequence of their bargain. I agree. The right of a party to an arbitration to go to court has been restricted rather than abolished. The court can hardly be expected to take the modern legislative and judicial policy in favour of the finality of arbitration as a reason for declining to appoint an arbitrator, for fear that it might refuse on proper grounds after the appointment to decide a preliminary point of law or after the award refuse leave to appeal.

47. There was no reason, according to Mr Scott, to suppose that the arbitrator, a distinguished lawyer, would decide a point of law incorrectly. If his decision was likely to be of wide interest in Hong Kong, it would not necessarily be lost to view, since section 2E of the Ordinance permits it to be reported. I think, with respect, that Mr Scott was mistaken about that since section 2E relates to the reporting of proceedings in court.

48. It is greatly to be hoped that contractors in the construction industry and the professionals who serve it will before long see the wisdom of reporting the decisions of. arbitrators on points of law of general interest. It would be a simple matter to produce a report to the effect that a certain arbitrator had construed a clause in a standard form of contract in a certain way and to set out his reasons. Such a report, devoid of any mention of the particular facts of the case or the identities of the parties, could hardly be regarded as detracting from the principle of privacy, which is generally considered one of the advantages of arbitration over litigation. It would be of great value to everyone dealing with that standard form and in particular to any arbitrator who found himself called upon to decide the same point, even though he would not be bound by the decision. I have no doubt that room would be found for such reports in the professional journals, perhaps including that of the Chartered Institute of Arbitrators, which has a flourishing branch in Hong Kong. All  that is required is the consent of the parties.

49. For illustration of his thesis that where the principal issue is one of law, arbitration is not appropriate, Mr Rogers referred me to the section "Questions of Law involved" in the 20th edition of Russell on Arbitration, beginning at p.189. He also cited Hyams v. Docker (1969) 1 Lloyds Rep. 341. That was a case where an arbitrator had expressed himself to be unwilling to construe a contract.  Plowman J. granted a stay of proceedings on an undertaking by the defendant to take out an originating summons raising the issue of construction. Mr Rogers suggested that the present case was one for taking out a similar summons.

50. Mr Scott has, I think rightly, pointed out the dangers of referring to the 20th and latest edition of Russell which was published in 1982, not long after the Nema decision, and to old cases which reflect an outdated philosophy. It is nowadays perhaps more helpful to refer to the far more recent (1989) second edition of Mustill and Boyd and to note the important trends which have emerged since Russell was last published. I did not find Hyams v. Docker to be of assistance.

51. Having found that there is a dispute or difference between the parties and that it comes within the terms of the arbitration clause, I must now decide whether or not to make the order. A guiding principle, to which reference has already been made, is that if the parties have contracted to submit their dispute to arbitration, the court will in general tend to enforce the contract unless there is a very strong balance of convenience in having the matter dealt with in the High Court or the applicant has acted unreasonably in making the application. It is not suggested here that the plaintiff has acted unreasonably. There is a strong bias in favour of maintaining the bargain between the parties.

52. As to the balance of convenience, the question of delay and expense must be considered. The present restrictions on access to the courts by parties to arbitration agreements have their origins in the great and costly delays which occurred under the old system when the courts were more ready to interfere. The course proposed by the defendant would produce unnecessary expense and delay. For the reasons to which I have already adverted, resolution by the court of a preliminary issue of law will not dispose of the claim. It will increase costs and delay its resolution.

53. It is true that the construction of the standard form of subcontract would be of wide interest in the construction industry. The defendant complains that if the arbitrator gets it wrong, the opportunities for appeal are restricted and therefore that the issue or issues of law should be dealt with by a court and not by an arbitrator. The defendant, however, was well aware of the restrictions when it entered into a subcontract which included the arbitration agreement and the agreement that the award of the arbitrator shall be final and binding on both parties. I find that the defendant has failed to show a very strong balance of convenience in having the dispute dealt with in the High Court. The defendant should be held to its bargain.

54. It will still be open to the defendant, or, for that matter, to the plaintiff to try to make use of the machinery provided by s.23A, once the issues have been clearly defined for the purposes of the arbitration. If in due course either party desires to appeal on a point of law it can apply for leave to appeal and the application will be considered on its merits.

55. The parties having agreed that Dr John Francis Uff, Q.C. is a suitable person to act, I order that he be appointed to act as arbitrator under the arbitration agreement contained in the subcontract dated the 21st day of October 1986.

56. There will be an order nisi that the plaintiff's costs of and occasioned by this application be taxed if not agreed on a party and party basis and paid by the defendant in any event