XCHRX SHUN CHEONG ELECTRICAL ENGINEERING CO. LTD. v. CHEUNG KEE FUNG CHEUNG CONSTRCUTION CO. LTD.

1997, No. CA 79

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. The parties are in dispute in relation to a construction contract. The contract contains the common two-tier arbitration clause that requires a party to first submit its dispute to the architect and then take it to arbitration if it so desires.

2. On 29 October 1996, the plaintiff referred a number of disputes to the architect. On 27 January 1997, the architect decided some disputes, but decided that she could not resolve others. On 24 April 1997, the plaintiff wrote to the defendant. The document was headed "Notice of Arbitration", said that it required certain disputes be referred to arbitration, and ended by saying "We hereby give you notice that should you fail to agree with us upon the appointment of an arbitrator, we intend to proceed to request the Court or a judge thereof to appoint an arbitrator to determine the above disputes.". On 28 May 1997, the plaintiff wrote again to the defendant, referring to the notice of

arbitration dated 24 April 1997, and saying that "We now request that you concur in the appointment of an arbitrator for the arbitration of the disputes set out in the Notice of Arbitration". The plaintiff proposed as arbitrator one of three people.

3. On 2 June 1997, the defendant replied to both communications. The defendant complained that the notice did not set out all the disputes and proposed others that should be referred to arbitration. The defendant asked that the plaintiff waive the requirement that the defendant first refer the additional disputes to the architect. The defendant proposed one of three other people, including Mr Terry Cleary, "as arbitrator to determine and to resolve all disputes and/or differences between the parties".

4. The plaintiff responded on 10 June 1997. It said that the defendant should comply with the agreed procedure regarding the additional disputes. It also said that it agreed that Mr Cleary be appointed as arbitrator "to determine the disputes set out in our notice of arbitration". The plaintiff asked if Mr Cleary was aware of the matter so that it might approach him for directions.

5. On 16 June 1997, the defendant replied, saying, amongst other things, that the notice of arbitration was "defective and invalid" because the notice referred "matters which are different from that set out in your letter" to the architect.

6. On 23 June 1997, the plaintiff's solicitors wrote to Mr Cleary telling him that "agreement on your appointment as arbitrator has been reached between the parties".

7. Mr Cleary responded on 25 June 1997 by a letter in which he noted that the defendant disputed the validity of the notice of arbitration and he asked for a copy of the arbitration clause.

8. On 26 June 1997, Messrs James R Knowles (Hong Kong) Limited, now acting for the defendant, wrote to Mr Cleary enclosing a copy of the plaintiff's letter of 29 October 1996 and saying that it had "an important bearing to our client's letter dated 16 June 1997 by supporting our client's contentions set out therein." They also enclosed the letter of 16 June 1997 and a copy of the arbitration clause. Nothing was said challenging the validity of Mr Cleary's appointment.

9. On 7 July 1997, Mr Cleary wrote to both parties. He told them of his terms of remuneration. He noted that there was a dispute "as to the form and content of the notice of arbitration" He suggested that "these disputes on jurisdiction" be resolved.

10. The plaintiff's solicitors replied on 28 July 1997 suggesting that the arbitrator rule of the parties' written submissions as to jurisdiction.

11. James R Knowles wrote to the arbitrator on 31 July 1997. They said that they had examined the letter to the architect dated 29 October 1996 and the notice of arbitration, and were "of the firm opinion" that Mr Cleary had no jurisdiction. It is apparent that this "firm opinion" was based on the argument that the disputes referred to the architect were not the same disputes referred to arbitration. They also raise new matters rendering the notice of arbitration defective. Firstly, they say the notice "failed to require our client to appoint or concur in appointing an arbitrator. It only said what would happen if our client failed to agree with [the plaintiff] upon the appointment of an arbitrator. The distinction is clear and important". Secondly, they argued that the notice must "request that the other side concur in the nomination of a named arbitrator". Thirdly, names were proposed by the plaintiff only on 28 May 1997, which was outside the time limit for referring disputes to arbitration.

12. On 31 July 1997, Mr Cleary, not surprisingly, suggested that the parties seek declaratory relief from the courts.

13. The plaintiff took this up, and, on 15 August 1997, issued an originating summons in which it sought determination of the following questions -

1. Whether the notice was a valid notice of arbitration;

2. Whether, having regard to the exchanges between the parties and Mr Cleary, he was duly appointed as arbitrator in the reference commenced by the notice; and

3. Whether Mr Cleary, as arbitrator, had jurisdiction to determine the questions in the notice.

14. The plaintiff also sought an order that the defendant pay the costs on an indemnity basis.

15. On 17 October 1997, the plaintiff issued a notice saying that, if it were held that Mr Cleary had not been duly appointed, the plaintiff would seek, in the alternative, an order under the Arbitration Ordinance that he, or some other fit and proper person, be appointed.

16. On 31 October 1997, I made an order that the defendant do advise the plaintiff by letter within 14 days whether it had any objection to the terms of appointment of Mr Cleary. The defendant did not so advise.

17. In letters written after the issue of the originating summons, the defendant solicitors say there was no agreement to the appointment of Mr Cleary as arbitrator. This assertion is not enlarged upon.

18. The defendant filed no evidence in opposition to the orders sought.

19. When the matter came before me, Mr Alder told me that the defendant would agree to orders that would resolve the substantive application. This, he emphasised, would be "a matter of fresh agreement and is not a concession as to any of the prayers". Although Mr Alder says this, he also made it clear that his client still wished to argue before the arbitrator that the notice of arbitration itself was defective, and its perfection by the later letter of 28 May 1997 was out of time. The defendant also wished no order as to costs, or a limited order in respect of party and party costs. Mr Alder made it clear to me that the defendant did not concede that the plaintiff was entitled to any of the prayers sought.

20. The notice of arbitration is perfectly valid. The defendant's argument that the notice sought to refer to arbitration disputes that were different to those submitted to the architect is totally without merit. Mr Alder told me that he did not wish to argue this point. The point should never have been raised. It has no substance. The other arguments that the notice "failed to require our client to appoint or concur in appointing an arbitrator. It only said what would happen if our client failed to agree with [the plaintiff] upon the appointment of an arbitrator. The distinction is clear and important", and that the notice did not "request that the other side concur in the nomination of a named arbitrator" are equally without any substance. There could be nothing clearer from the last paragraph of the plaintiff's letter of 24 April 1997, where it said "We hereby give you notice that should you fail to agree with us upon the appointment of an arbitrator, we intend to proceed to request the Court or a judge thereof to appoint an arbitrator to determine the above disputes.", that the plaintiff was asking the defendant to agree to the appointment of an arbitrator.

21. The second prayer concerns the validity of the appointment of Mr Cleary. It is certainly so that the defendant proposed Mr Cleary "as arbitrator to determine and to resolve all disputes and/or differences between the parties", and that the plaintiff, by the letter of 10 June 1997, accepted that Mr Cleary be appointed as arbitrator "to determine the disputes set out in our notice of arbitration". So, at this point, there was no meeting of minds. But the defendant did not respond to this acceptance by the plaintiff by making the point that the parties were not in agreement as to what disputes Mr Cleary was to determine. It contented itself with maintaining that the notice of arbitration was defective. Indeed, the point about the absence of consensus was not made, and then without specification, until after the issue of the originating summons. In any event, the point is academic. The plaintiff has sought an alternative order that Mr Cleary be appointed under section 12 of the Ordinance. Clearly, Mr Cleary is a fit and proper person, and his terms have now been agreed. It is equally clear that the defendant had no right to insist upon futher disputes being referred to Mr Cleary without the defendant going though the agreed procedure to refer these to the architect in the first place. Accordingly, if the defendant had not persisted in its unarguable points about the validity of the notice of arbitration, there should have been no difficulty about the appointment of an arbitrator.

22. Regarding the third prayer concerning Mr Cleary's jurisdiction to determine the questions set out in the notice of arbitration, Mr Alder says this is "unnecessary and premature". I do not understand this. Mr Alder still argues that the notice of arbitration is invalid, and his client wishes to argue the point before the arbitrator. Clearly, then, it is necessary to make an order that ensures that Mr Cleary can get on with his job and determine the disputes contained in the notice without him being bothered, as I have been, with unmaintainable arguments concerning the validity of the notice.

23. Accordingly, I determine that the notice of arbitration is valid. I appoint Mr Cleary as arbitrator to determine the disputes set out in that notice on the terms agreed by the parties. I determine that Mr Cleary has jurisdiction to determine the disputes in the notice.

24. There remains the question of costs. Obviously, the defendant having failed in its opposition, the plaintiff is entitled to its costs. The plaintiff claims indemnity costs. I am firmly of the view that, if the defendant had not maintained the unarguable points about the validity of the notice, there should have been no other difficulties to proceeding with the arbitration. The defendant was obliged to co-operate in implementing the dispute resolution procedure that it had agreed. It did not do so. It raised points that had no validity at all and that should never have been argued. In my view, the defendant's conduct was unreasonable. The court should discourage parties from seeking to frustrate or delay agreed arbitration proceedings to settle their disputes by raising obviously unmeritorious points. The plaintiff is entitled to costs on an indemnity scale, to be taxed if not agreed, and I so order.