AGGRESSIVE CONSTRUCTION CO LTD v. DATA-FORM ENGINEERING LTD

   HCA 2143/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

 ACTION NO. 2143 OF 2008

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REASONS FOR DECISION

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Introduction

1.  On 4 August 2009, I granted the Plaintiff’s application to have the Defendant’s counterclaim stayed in favour of arbitration pursuant to the arbitration agreements contained in two sub-contracts made between the parties with costs against the Defendant (“said Order”).  On 18 August 2009, the Defendant applied for leave to appeal against the said Order.  Following the service of a statutory demand for the costs of the Plaintiff’s application on the Defendant, the Defendant applied for a stay of execution of the said Order on 9 September 2009.  At the conclusion of the hearing of the two applications, I granted an interim stay of execution for two weeks which I then extended to 14 October 2009 pending the handing down of this Reasons for Decision.

APPLICATION FOR LEAVE TO APPEAL

2.  The Defendant is represented by a different counsel Mr Kwong in these two applications.  Mr Kwong advanced almost entirely new arguments to resist the Plaintiff’s application to stay for arbitration so much so that this application for leave to appeal amounts to a re-hearing of the Plaintiff’s application.  As appeal to the Court of Appeal shall be by way of re-hearing, Mr Chiu, counsel for the Plaintiff, does not object to have the Plaintiff’s application re-argued.  Had the new arguments been advanced at the original hearing, I would have to determine them on their merits in my decision made on 4 August 2009 (“Decision”).  Now that they are advanced as proposed grounds of appeal, my jurisdiction is to determine whether any of those proposed grounds of appeal have any reasonable prospect of success.  If they have, leave shall be granted and it would then be for the Court of Appeal to determine if indeed any those grounds of appeal do succeed.  The threshold which the Plaintiff has to prove becomes somewhat higher while that for the Defendant is somewhat lower.  This is utterly unsatisfactory.   

3.  Before turning to the proposed grounds of appeal, I shall first deal with an issue which arises as a result of the Civil Justice Reform (“CJR”) and a novel argument advanced by Mr Chiu on the approach of the court in an application to stay for arbitration. 

The test for granting leave to appeal

4.  Under the common law, the court will only refuse leave to appeal if the applicant has no realistic prospect of success on the appeal: see Smith v Cosworth Casting Processes Ltd [1997] 1 WLR 1538.  This test was adopted by Leong JA, as he then was, in Ma Bik Yung and Ko Chuen, HCMP 4303 of 1999, unreported, dated 8 September 1999.  Thus, the preference of the court is to grant leave to appeal unless the applicant has no arguable case.

5.  Mr Chiu submits that prior to CJR, if an applicant could show that there were mere possibilities of success, it would be enough to negate that he has no realistic prospect of success and leave to appeal would be granted.  He argues that under section 14AA(4) of the High Court Ordinance introduced under the CJR, the preference is reversed from granting to refusing leave to appeal.  He argues that there is now a positive burden on the applicant to establish a reasonable prospect of success.  However, Mr Kwong argues that the CJR does not result in any change in the substance of the test.  He quotes Hong Kong Housing Society and Wong Nai Chung,DCCJ 3620 of 2007 in which Deputy District Judge Khaw held that the CJR did not impose any change in substance for the test.

6.  The test as stated by Lord Woolf in Smith v Cosworth Casting Processes Ltd was as follows:

“The court will only refuse leave if satisfied that the applicant has no realistic prospect of succeeding on the appeal.  The test is not meant to be any different from that which is sometimes used, which is that the applicant has no arguable case.  Why however this court has decided to adopt the former phrase is because the use of the word “realistic” makes it clear that a fanciful prospect or an unrealistic argument is not sufficient.”

Section 14AA(4) of the High Court Ordinance provides:

“   (4)   Leave to appeal for the purpose of subsection (1) shall not be granted unless the Court hearing the application for leave is satisfied that –

(a)       the appeal has a reasonable prospect of success; or

(b)    there is some other reason in the interests of justice   why the appeal should be heard.”

7.  I think the phrases “realistic prospect of success”, “reasonable prospect of success” and “arguable case” all mean the same concept.  Thus, apart from the more mandatory language used in section 14AA(4), the test under section 14AA(4) is no different from that as stated by Lord Woolf, i.e. whether the applicant has a reasonable prospect of success. 

8.  As for the burden of proof, I think, it is all along on the applicant, whether under the common law before the CJR or under section 14AA(4) thereafter.  It does appear that under Lord Woolf’s test, the applicant starts off with a preference in favour of granting leave.  However, being the applicant, he must assume the burden of proof, if his application is challenged.  That burden would be discharged by showing an arguable case or as what Mr Chiu calls it, mere possibilities of success.  That would be enough to negate any objection that he has no realistic prospect of success.  As the test under section 14AA(4) is the same, it cannot be said that the section has imposed on the applicant a burden which is any more onerous.  Thus, in my view, while it appears that section 14AA(4) has reversed the preference in favour of granting leave to appeal and has adopted more mandatory language, it introduced no change in substance to the test or on the burden of proof.

Argument based on the decision in Pacific Crown Engineering Ltd and Hyundai Engineering & Construction Co. Ltd

9.  Next, I turn to consider Mr Chiu’s novel argument based on the decision in Pacific Crown Engineering Ltd and Hyundai Engineering & Construction Co. Ltd [2003] 3 HKLRD 440.  In that case, the parties disputed whether they had entered into an arbitration agreement.  Burrell J held that when there was a dispute as to whether there was an arbitration agreement or clause, the onus was on the defendant to prove there was a good prima facie or plainly arguable case predicated on cogent, and not dubious or fanciful, evidence that an arbitration clause or agreement existed.  If the defendant proved this, the court should refer the matter to the arbitrator for final determination on the matter.  Burrell J also quoted the dicta of Litton V-P, as he then was, in Star (Universal) Co. Ltd & Another v Private Co “Triple V” Inc [1995] 2 HKLR 62 that the judge could do no more than to form a prima facie view whether an arbitration agreement existed and if he were to go into the matter more deeply he would in effect be usurping the function of the arbitrator.

10.  Based on those authorities, Mr Chiu says that he was wrong to have argued the application to the depth he did at the last hearing.  He submits that it would have suffice for him to show a prima facie case that the arbitration agreements existed and the Plaintiff is entitled to have the Defendant’s counterclaim stayed.  It would then be for the arbitrator to determine whether the arbitration agreements existed.  He therefore argues that on this ground alone the appeal is simply unarguable as the Plaintiff has proved not only a prima facie case that the arbitration agreements existed but that on balance of probability the agreements did exist.

11.  With respect, counsel has misunderstood the decision in Pacific Crown Engineering Ltd.  In that case, the plaintiff contended the contract between the parties was evinced by a bundle of letters and a meeting and there was no arbitration agreement.  On the other hand, the defendant contended that the letters and meeting were merely negotiations and it had sent the plaintiff the full contract in the form of an amended standard form contract which included an arbitration clause.  On that basis, the defendant applied for a stay of legal proceedings commenced by the plaintiff.  Thus, the dispute between the parties was whether there was an arbitration agreement between the parties and nothing else.  Naturally, once a prima facie case of an arbitration agreement is established, the matter should be referred to the arbitrator and the defendant is entitled to have a stay of proceedings. 

12.  The present case goes beyond that.  The Plaintiff applied for stay in favour of arbitration pursuant to article 8(1) of UNCITRAL Model Law.  That article provides:

“(1)  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 first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

The Defendant has brought the counterclaim before this Court, which the Plaintiff said was the subject of an arbitration agreement and sought to have the counterclaim stayed.  The Defendant resisted the Plaintiff’s application on the ground that the arbitration agreements were null and void, inoperative or incapable of being performed.  The Court cannot simply upon finding a prima facie case of arbitration agreement refer the matter to arbitration and order a stay of the counterclaim as suggested by Mr Chiu without first finding that the arbitration agreements were null and void, inoperative or incapable of being performed.  Indeed there were many cases in which this issue was determined by the court, for example: Tai Hing Cotton Mill Limited and Glencore Grain Rotterdam BV and Sunrise Resources Limited,CACV 143 of 1995.  The Court cannot properly exercise its discretion without considering the grounds challenging the validity of the arbitration agreements advanced by the Defendant.

13.  I now turn to consider the Defendant’s proposed grounds of appeal.  I adopt the background facts of this case as set out in my Decision.

Ground (1) - the Plaintiff was in repudiatory breach of the arbitration agreements

14.  By this proposed ground of appeal, the Defendant alleges that I should have appreciated that clause 19(a) of the System Formwork Sub-Contract (“Clause 19(a)”) was terminated by reason of the Plaintiff’s repudiatory breach and the Defendant’s election to accept the same.  The Defendant was legally represented.  The Defendant’s stance was that the arbitration agreement contained in Clause 19(a) was null and void and, if not, the Plaintiff has waived the arbitration agreements by taking out the present action.  The Plaintiff’s repudiatory breach of the arbitration agreements and the Defendant’s acceptance of the breach were never argued before me.  The same was not disclosed in the Defendant’s affirmation filed in opposition to the Plaintiff’s application.  Of course, I could not have appreciated that the Defendant is now running this new argument.  Be that as it may, as an appeal is by way of a re-hearing, subject to no new evidence being adduced by the Defendant, I do not see any reason why I should not consider if this proposed ground of appeal has any reasonable prospect of success.

15.  It is trite law that an arbitration agreement is a contract and as such questions on repudiation and acceptance of a repudiatory breach fall to be decided in accordance with traditional principles of contract.  Accordingly, where a party to an arbitration agreement, by words or conduct, demonstrates an intention no longer to be bound by the agreement, the other party is entitled to consider himself discharged from performance of the agreement.  See: Bremer Vulkan Schiffbau UND Maschinenfabrik and South India Shipping Corporation Ltd [1981] AC 909, per Lord Diplock; Downing v Al Tameer Establishment & Another [2002] EWCA Civ 721 (English CA), per Potter LJ and Vitol SA v Norelf Ltd [1996] 3 All ER 193, per Lord Steyn.

16.  Clause 19(a) provides that the Defendant shall within 28 days of the Plaintiff’s determination request the Plaintiff to resolve the dispute by arbitration.  It is common ground that by its two letters dated 30 September 2008, the Defendant requested to refer the disputes to arbitration, but the disputes have not been so referred to arbitration and no arbitrator has been appointed.  Hence, Mr Kwong submits that it was the Plaintiff’s obligation to refer the disputes to arbitration and by its failure to do so, it is highly arguable that the Plaintiff had unequivocally evinced an intention no longer to be bound by the arbitration agreements.  He further argues that by commencing the counterclaim in the present proceedings, the Defendant has unequivocally accepted and communicated its acceptance of the Plaintiff’s repudiatory breach to the Plaintiff.  Hence, Mr Kwong submits that there were no operative arbitration agreements.  He relies particularly on Andre & Cie SA v Marine Transocean Ltd [1981] 2 All ER 993 and Downing v Al Tameer Establishment & Another.

17.  The case of Andre & Cie SA does not assist the Defendant.  That was a case involving a delay of eight years such that the court inferred that the parties had impliedly agreed to terminate the arbitration agreement and that the arbitration agreement had been frustrated by the mutual default of the parties.

18.  Mr Kwong relies heavily on Downing v Al Tameer Establishment & Another.  But that case is readily distinguishable from the present case.  In that case, the arbitration agreement did not exclude resort to the court if no arbitration proceedings were commenced and more importantly the defendant denied there was any arbitration agreement between the parties.  This second point is important as such denial was an unequivocal act of repudiation of the arbitration agreement.  None of these features in the present case.

19.  Mr Chiu submits that Mr Kwong’s argument must be premised on the fact that arbitration proceedings having been commenced otherwise Mr Kwong’s argument would involve a logical short circuit.  I agree because if this new argument is based on the fact that arbitration proceedings had never been commenced, the Defendant’s right to dispute the determination would have been time barred under Clause 19(a).  On the premise that the arbitration proceedings had been commenced, Mr Chiu submits that the Defendant was in breach of section 2GE(1) of the Arbitration Ordinance which imposes an implied obligation on the party having a claim under the arbitration agreement to prosecute the claim without delay and is not entitled to benefit from its own wrong.  Section 2GE(1) provides as follows:

“(1)  There is an implied term in every arbitration agreement that a party who has a claim under the agreement will prosecute the claim without delay if the claim relates to a dispute that is capable of settlement by arbitration.  This subsection is subject to any express term in the agreement to the contrary.”

I think whether the Defendant was in breach of implied term to prosecute the claim without delay is irrelevant.  The issue is whether it is arguable that the Plaintiff was in repudiatory breach of Clause 19(a).

20.  Clause 19(a) provides that if the Defendant disputes the determination, he shall request the Plaintiff to resolve the dispute by arbitration and that the matter would then be referred to one single arbitrator.  The clause is silent as to the procedures that are to follow.  Assuming for the purpose of this leave application that it is arguable that the duty was on the Plaintiff to refer the dispute to arbitration, the question is whether inaction for five months amounted to repudiation.  It is not known what happened during those five months.  There is no evidence of any reminder or further request for arbitration from the Defendant or any express refusal by the Plaintiff to refer the matter to arbitration.  In my view, even assuming that the Plaintiff was under an obligation to refer the disputes to arbitration, a period of inaction for five months without more is just too short to evince any intention on the part of the Plaintiff that it no longer considered itself to be bound by the arbitration agreements.  In this context, the fact that the Plaintiff commenced the present action in respect of the Statutory Claim is irrelevant.  But, even if the inaction is considered together with the commencement of this action, I do not think it makes any difference.  The repudiation argument is bound to fail.

Ground (2) - doctrine of abandonment

21.  Under this ground, the Defendant alleges that I should have appreciated the legal implication and effect of the doctrine of abandonment and that by reason of the conduct of the Plaintiff and the Defendant they had mutually abandoned the arbitration agreements and/or any rights to arbitrate.  Again, this is another new argument advanced by the Defendant. 

22.  The doctrine of abandonment is applicable to arbitration agreements.  The doctrine was succinctly stated by Lord Brandon in Paal Wilson & Co. v Blumenthal [1983] 1 All ER 34 at 47 as follows:

“The concept of the implied abandonment of a contract as a result of the conduct of the parties to it is well established in law: see Chitty on Contracts 23^rd edn 1968, vol 1, para 1231, and cases there cited.  Where A seeks to prove that he and B have abandoned a contract in this way, there are two ways in which A can put his case.  The first way is by showing that the conduct of each party, as evinced to the other party and acted on by him, leads necessarily to the inference of an implied agreement between them to abandon the contract.  The second method is by showing that the conduct of B, as evinced towards A, has been such as to lead A reasonably to believe that B has abandoned the contract even though it has not in fact been B’s intention to do so, and that A has significantly altered his position in reliance on that belief.  The first method involves actual abandonment by both A and B.  The second method involves the creation by B of a situation in which he is estopped from asserting, as against A, that he, B, has not abandoned the contract (see Pearl Mill Co. Ltd v Ivy Tannery Co. Ltd [1919] 1 KB 78).”

There are two limbs under this doctrine.  Under the first limb, the Defendant has to show that the conduct of the parties as evinced to and acted on by the other party necessarily leads to the inference of an implied agreement to abandon the arbitration agreements.  Under the second limb, the Defendant has to show that the conduct of the Plaintiff as evinced to the Defendant has been such as to lead the Defendant reasonably to believe that the Plaintiff has abandoned the arbitration agreements and that the Defendant has significantly altered its position in reliance on that belief.

23.  Mr Kwong’s argument under the first limb is basically a repetition of the repudiation argument.  He relies on the Plaintiff’s failure to refer the disputes to arbitration for five months and the commencement of the present action in relation to the Statutory Claim.  It can be argued that by commencing the present action after five months’ inaction the Plaintiff fortuitously led the Defendant to the belief that the Plaintiff had abandoned the arbitration agreements.  It can also be argued that by averring in the Defendant’s affirmation that the Plaintiff had thus waived its right to arbitration the Defendant was indeed led to such belief.  However, Mr Kwong is unable to point to any conduct of the Defendant which could have a similar effect on the Plaintiff.  It is true that the Defendant made a counterclaim in the present action.  But the Plaintiff refrained from filing a defence.  Thus that conduct did not evince to the Plaintiff any intention of abandonment on the part of the Defendant and the Plaintiff did not act on that conduct.  Furthermore, that conduct was a conduct which happened after the alleged abandonment and could not be relied upon as conduct which could necessarily lead to the inference of an implied contract of abandonment.  Thus, it cannot be argued that there was mutual conduct which necessarily leads to the inference of an implied agreement between the Plaintiff and the Defendant to abandon the arbitration agreements.  The argument based on the first limb must fail.

24.  On the second limb, though I have held that it is arguable that by commencing the present action after five months’ inaction the Plaintiff fortuitously led the Defendant to the belief that the Plaintiff had abandoned the arbitration agreements, there is no evidence that the Defendant has acted on and significantly altered its position in reliance on that belief.  It is argued that the Defendant wasted costs in filing the counterclaim and in resisting the Plaintiff’s application to stay for arbitration.  Such costs were minimal and would not have been incurred had the Defendant been properly advised.  It is suggested that the Defendant suffered delay.  Again, there is no evidence of what detriment was caused to the Defendant by inaction of five months.  In my opinion, it could not be argued that the Defendant has significantly altered its position in reliance on that belief.  The argument based on the second limb also fails. 

25.  This proposed ground of appeal is unarguable.

Ground (3) - waiver by estoppel

26.  Under this ground, the Defendant argues that I failed to appreciate that under the doctrine of waiver by estoppel, the Plaintiff is barred from insisting on enforcing its right to arbitrate.  Such arguments have been considered in paragraphs 29 to 32 of my Decision.  The Defendant raises three specific criticisms.

27.  Firstly, the Defendant alleges that the Plaintiff’s inaction for five months while it was under a legal duty to appoint arbitrator amounted to a representation that it would not insist on arbitration.  I have already said that five months is too short a period for any inference of waiver to be drawn.  What is more important was the Plaintiff’s commencement of the present action after a period of inaction.  That was dealt with in paragraph 32 of my Decision.  The period of inaction was not mentioned because of its insignificance in the circumstances. 

28.  Secondly, the Defendant alleges that I failed to appreciate that the Defendant did rely on the said representation in commencing the counterclaim.  Though not expressly mentioned in paragraphs 29 to 32 of my Decision, the discussion therein was premised on the Defendant acting on the representation.  This argument is frivolous.

29.  Thirdly, the Defendant alleges that I failed to appreciate that the Defendant suffered detriment as a result of the legal costs and delay incurred by commencing the counterclaim.  As I have held, such costs were minimal and would not have been incurred had the Defendant been properly advised.  The Defendant was also under an implied obligation to prosecute its claim without delay but had failed to do so during the five months.  It has also failed to show what detriment it suffered as a result of the delay.  Hence, I concluded in paragraph 32 of my Decision that the Defendant was unable to show it had somehow by reliance on the Plaintiff’s conduct altered its position to its detriment or why it would be unjust to allow the Plaintiff to go back on its promise.

30.  There is no suggestion that I erred on principle of law.  This ground of appeal is essentially one against my finding of fact, which the Court of Appeal would be unlikely to disturb.  But, most importantly, the waiver by estoppel point is a secondary argument.  The basis of my decision was that the Statutory Claim falls outside the scope of Clause 19(a) and hence the Plaintiff has not waived the arbitration agreements by commencing the present action.  Accordingly, this proposed ground of appeal has no reasonable prospect of success.

Ground (4) - waiver of right to arbitration

31.  By this ground, the Defendant alleges that I should have appreciated that the Plaintiff had waived its right to arbitration by commencing the present action and further that I erred in construction of Clause 19(a).  This is a matter of construction which I have dealt with in paragraphs 22 to 28 of my Decision.  On the basis of the construction which I found, I further found that the Statutory Claim fell outside the scope of Clause 19(a).  Mr Kwong only sought to re-argue on the construction but could offer no additional and convincing argument which I have not considered.  Accordingly, I consider this proposed ground of appeal has no reasonable prospect of success.

Ground (5) - whether arbitration proceedings have commenced

32.  By this ground, the Defendant alleges that I erred to hold that the parties were deemed to have commenced arbitration.  Mr Kwong argues that Clause 19(a) provides for a three-stage process for commencing arbitration.  These are a written determination by the Plaintiff on a dispute in relation to the two sub-contracts; the Defendant’s request to resolve the dispute by arbitration and the Plaintiff’s referring the disputes to a single arbitrator.  Mr Kwong specifically refers to the last sentence of Clause 19(a) which provides that any such referral by the Plaintiff shall be deemed to be an acceptance of arbitration within the meaning of the Arbitration Ordinance.  He argues that as the Plaintiff has never taken any steps to refer the dispute to arbitration, there is no basis to deem that arbitration has commenced under Clause 19(a) or section 31 of the Arbitration Ordinance.

33.  This is a matter of construction of the two letters dated 30 September 2008 and the last sentence of Clause 19(a).  Mr Kwong has offered no argument that I was wrong in my construction of the two letters.  But his argument that arbitration could not be deemed to have commenced by reason of Clause 19(a) is clearly wrong.  He clearly ignored section 31 of the Arbitration Ordinance which is a statutory deeming provision.  It is a statutory provision which operates in parallel with the last sentence of Clause 19(a).  As there is now no argument about the correctness of my construction of the Defendant’s two letters, it is not disputed that the Defendant had given notice to the Plaintiff to refer the disputes to arbitration.  The deeming provision under section 31 is therefore invoked.  Furthermore, nothing actually turned on whether arbitration proceedings have commenced in the present case.  This proposed ground of appeal has no reasonable prospect of success.

Ground (6) - risk of conflicting decision

34.  By this ground, the Defendant alleges that I failed to appreciate that by ordering a stay of the counterclaim, there is a real risk of conflicting decision due to multiplicity of proceedings.  The arguments raised by Mr Kwong have been canvassed in paragraphs 33 to 37 of my Decision.  His arguments only confirm that it was proper for me to have exercised my discretion to order a stay of the Defendant’s counterclaim.  Accordingly, I find that this proposed ground of appeal has no reasonable prospect of success.

Conclusion

35.  For the above reasons, the Defendant has failed to show its intended appeal has a reasonable prospect of success.  Its application for leave to appeal must be dismissed with costs.

Application for stay of execution pending appeal

36.  The Defendant’s primary concern for making this application is the Plaintiff’s assiduous attempts to enforce the costs order made on 4 August 2009.  The Plaintiff has served a statutory demand on the Defendant and indicated that it would start winding up proceedings against the Defendant if the costs were not paid.  Mr Kwong argues that if the Defendant was wound up, the Plaintiff can practically evade the counterclaim which involves about $10 million.  He quote the principles concerning stay of execution as stated by Ma J, as he then was, in Star Play Development Ltd and Bess Fashion Management Co. Ltd, HCA 4726 of 2001, unreported dated 28 May 2002.

37.  Mr Chiu takes issue with Mr Kwong on the basis that the application for stay of execution was made under Order 45 rule 11 of the Rules of the High Court and not the usual Order 59 rule 13 and hence Mr Kwong’s reliance on the legal principles in Star Play Development Ltd is misplaced.  I would not be unduly concerned whether the application was made under Order 45 or Order 59.  There is nothing to prevent an amendment of the application from being made.  However, having considered the proposed grounds of appeal and having refused application for leave to appeal on the basis that the Defendant failed to show that the appeal has a reasonable prospect of success, the principles in Star Play Development Ltd could be of no assistance to the Defendant.

38.  If the Defendant pays the assessed costs of $105,000, there is no way the Plaintiff could have it wound up.  If the Defendant is so impecunious as to be incapable of paying, even if a stay of execution pending appeal is granted, it will certainly face another insurmountable hurdle by the Plaintiff demanding security for costs of the appeal.  If the Defendant could pay the security for costs of the appeal, one wonders why it could not pay the assessed costs and whether its claim of impecuniosity was just an excuse to delay the fruit of the Plaintiff’s litigation.  If indeed, the Defendant has a meritorious counterclaim of that magnitude, its directors or shareholders, whether the Defendant is placed under liquidation or not, would somehow find means to pay the assessed costs and finance the counterclaim litigation.  I do not consider the Defendant’s alleged lack of means genuine or is it a ground for staying the execution of the costs order. 

39.  Accordingly, I dismiss the Defendant’s application for stay of execution.

Conclusion

40.  The Defendant’s applications for leave to appeal and for stay of execution are dismissed with costs, which I assess at $40,000.