HO FAT SING t/a FAMOUS DESIGN ENGINEERING CO v. HOP TAI CONSTRUCTION CO LTD

  DCCJ 3600/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3600 OF 2007

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DECISION

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Background

1.  This is a rehearing, by way of appeal against the decision of Master Lai, of an application by the Defendant for a stay of proceedings for the dispute between the parties to be referred to arbitration.  With the Defendant's consent, I granted leave to the Plaintiff to appeal out of time against the Master's decision made on 4 September 2008. 

2.  The Plaintiff, Mr. Ho, and the Defendant Hop Tai Construction Company Ltd. ("Hop Tai") entered into a contract on 13 December 2005 to carry out works ("Subject Contract"). Hop Tai is a subcontractor of China Harbour Engineering Company Ltd., which is the Main Contractor employed under a contract with the Highways Department to carry out the same works ("Main Contract"). The Subcontract was made between the Main Contractor and Hop Tai for carrying out the works. 

3.  Mr. Ho commenced these proceedings in August 2007 for recovery of a sum of $581,049.40, claimed to be due for work done under the Subject Contract.  On 6 February 2008, Hop Tai applied for the proceedings to be stayed on the basis that the parties had agreed under the Subject Contract to refer disputes under the Subject Contract to arbitration.  Hop Tai relies on SCC 37 of the Special Conditions of Contract of the Main Contract, which is claimed to be incorporated in the Subject Contract between the parties. The Master granted the stay by order made on 4 September 2008.

The Issues

4.  The issues raised for determination at the appeal are :

(1)  Is SCC 37 incorporated into the Subject Contract?

(2)  Is SCC 37 an arbitration clause?

(3)  If SCC 37 has been incorporated into the Subject Contract, is it inoperative or incapable of being performed so far as there is any dispute between Mr. Ho and Hop Tai?

(4)  Is there any dispute between Mr. Ho and Hop Tai so as to trigger SCC 37?

Is SCC 37 incorporated into the Subject Contract?

5.  Counsel for Mr. Ho argues that the mere fact that the Subject Contract makes reference to the Main Contract, or to the Special Conditions of Contract of the Main Contract, does not automatically incorporate SCC 37, or any arbitration clause in the Main Contract. 

6.  It is not disputed between the parties that whether there has been incorporation by reference is a question of construction, namely, a task to ascertain the parties' intention when they entered into the contract by reference to the words used (Astel-Peiniger JV v. Argos Engineering & Heavy Industries Co Ltd. [1994] 3 HKC 328, at 339).

7.  I agree with Counsel for Hop Tai that on a proper construction of the Subject Contract and its terms, it is quite clear that Mr. Ho and Hop Tai had agreed to be bound by all the provisions of the Main Contract, including the Special Conditions of Contract of the Main Contract.

8.  The Subject Contract is in Chinese.  Under the reference to "Contract Rules (合約條例)", the Special Conditions of Contract of the Main Contract are expressly referred to.

9.  Not only that, but the Subject Contract expressly provides that the provisions and rules or regulations of the Subject Contract are based on the provisions of the Main Contract, and that in respect of each provision, the Main Contract prevails, save as expressly provided for in the Subject Contract.  In particular, Hop Tai and Mr. Ho confirm that all the benefits of the Employer under the Main Contract are vested in Hop Tai, and all the obligations of the Contractor under the Main Contract are vested in Mr. Ho, on a “ back to back" basis.

“本合約之合約條例及條款係根據原合約之條款制定，每一條條文均依據原合約為準（除本合約另有説明外）。甲方雙方確認原合約内一切業主的權益全歸於甲方，而原合約内一切承判人的義務全歸於乙方（ Back to Back basic）。”

10.  The Subject Contract does not make any express provision for the manner of resolution of disputes. 

11.  As Counsel for Hop Tai has pointed out, the Subject Contract not only refers to the Main Contract which contains SCC 37, but expressly refers and includes the Special Conditions of Contract themselves.  It does so under (E) of the Contract Rules, and it also refers to the Special Conditions of Contract as Appendix 8 in the "Contract Rules Index".

12.  I do not accept the argument advanced by Counsel for Mr. Ho that the references to the Main Contract are only for the purpose of preventing Mr. Ho from using unfamiliarity with the provisions of the Main Contract as an excuse in causing delay in the works or claiming additional payments.  Both Mr. Ho and Hop Tai acknowledge and agree under the Subject Contract that the Main Contract is the basis of the Subject Contract, and both parties agree and confirm that all the benefits of the Employer under the Main Contract are vested in Hop Tai, and all the obligations of the Main Contract are vested in Mr. Ho, on a "back-to-back" basis.

13.  In my judgment, there is no doubt that on a plain reading of the express provisions set out on page 1 of the Subject Contract, the natural and ordinary meaning to be given to the words used must be that the benefits of the Employer which are acknowledged to be vested in Hop Tai include the benefits of the agreed mechanism for settlement of disputes under SCC 37, and the obligations of the Main Contractor likewise acknowledged by Mr. Ho to be vested in him under the Main Contract include the obligation to adhere to the dispute settlement mechanism set out in SCC 37.  The words “benefits (權益)” and “obligations (義務)” are general and, objectively read, cannot be understood to be confined to the meaning Mr. Ho seeks to give them.

14.  Mr. Ho claims that he was not given a copy of the Special Conditions of Contract, which are in English which he does not understand and was not given the opportunity to read.  However, the Contract Rules Index to the Subject Contract set out Appendix 8 and refers to the General and Special Conditions of Contract, stated to be not enclosed.  This Index is in Chinese.  It expressly provides that documents not enclosed are available at the offices of Hop Tai for Mr. Ho to inspect and review, and that Mr. Ho should not use unfamiliarity with the Main Contract requirements to delay or claim additional payments, which will confer on Hop Tai the right to exercise the default provisions set out in clause 19 of the Subject Contract.

15.  I do not accept that any failure on the part of Mr. Ho to go to Hop Tai's office to review the Special Conditions of Contract, or to have these English conditions explained to him, can afford to him an excuse to protest against the incorporation of the Special Conditions of Contract, simply because he is not aware of the consequences of such incorporation or the meaning and effect of SCC 37.  This is particularly so when he was alerted in Chinese to the serious consequences of the likelihood of the default clause being triggered. 

16.  I am satisfied that, whether under Article 7 (2) of the Model Law or s.2AC (3) of the Arbitration Ordinance, the dispute settlement clause in SCC 37 has been incorporated to become part of the Subject Contract.

17.  Counsel for Mr. Ho raised the further point that as the Subcontract to which Hop Tai is a party contains a different arbitration clause to that set out in SCC 37, it could not have been the intention of Hop Tai to incorporate into the Subject Contract the Special Conditions of Contract to the Main Contract on a back to back basis, or to be bound by SCC 37.  I agree with Counsel for Hop Tai that this point does not assist Mr. Ho, since both the Main Contract and the Subcontract contain provisions whereby disputes are to be resolved, not by the Courts, but by way of arbitration ultimately.  In any event, the Subject Contract refers to the Main Contract as its basis, and not to the Subcontract.

Is SCC 37 an arbitration clause?

18.   SCC 37 set out a mechanism for disputes arising out of or in connection with the Main Contract or the carrying out of the works to be resolved, first by reference to the Engineer appointed under the Main Contract, and if the Engineer fails to give a decision for a period of 28 days after being requested to do so, or if the parties are dissatisfied with the decision of the Engineer, to refer the dispute to mediation or adjudication.  If the dispute cannot be resolved by mediation and/or adjudication, or if neither party wishes the dispute to be referred to mediation or adjudication, then SCC 37 provides for the dispute to be referred and finally settled by arbitration in accordance with and subject to the provisions of the Arbitration Ordinance.

19.    Counsel for Mr. Ho seeks to rely on the decision in Thorn Security (HK) Ltd. v. Cheung Kee Fung Cheung Construction Co. Ltd,CACV 211/2003 30 July 2004 to contend that SCC 37 is not an arbitration clause, and hence attempts to argue that s.6 of the Arbitration Ordinance and Article 7 of the UNCITRAL Model Law are not applicable for the Court to grant a stay of proceedings.  Counsel further argues that the parties to the Subject Contract has not reached a stage in the dispute resolution mechanism set out in SCC 37, at which arbitration is called for.

20.  As emphasized by the Court of Appeal in its later decision in Grandeur Electrical Company Ltd. v. Cheung Kee Fung Cheung Construction Company Ltd. CACV 100/2006 25 July 2006 , the decision in Thorn Security must be confined to its particular facts.

21.  I cannot see how SCC 37 can be interpreted to mean that Mr. Ho has a choice between arbitration and litigation in the courts.  It provides that if any dispute as is defined arises, it "shall be referred", first to the Engineer, and then to mediation or adjudication, and then to arbitration, all in defined circumstances.  SCC 37, in my view, sets out the only route for either party to the Subject Contract to resolve a dispute which has arisen between them.

22.  A dispute has clearly arisen between Mr. Ho and Hop Tai, as defined in SCC 37.  Mr. Ho claims that money is due and unpaid by Hop Tai in respect of the works he carried out under the Subject Contract.  Hop Tai is resisting these proceedings and has not made payment under the Work Orders despite the alleged completion of work.

23.  I agree with Counsel for Hop Tai that on the facts of this case, the parties have reached a stage which mandates the use of arbitration as the only remaining means of resolving the dispute.  By instituting these proceedings, Mr. Ho has elected not to refer the dispute arising under and in connection with the Subject Contract to the Engineer appointed under the Main Contract, nor to resolve the dispute by mediation and/or adjudication.  Under the express provisions of SCC 37(2), where neither party wishes the dispute to be referred to mediation or adjudication, such dispute "shall be referred to and finally settled by arbitration".

24.  I consider that the court has power either under Article 8 of the Model Law to stay these proceedings for arbitration, or under s.48 (5) of the District Court Ordinance to stay the proceedings for the parties to resolve the dispute in accordance with the mechanism set out in SCC 37.

If SCC 37 has been incorporated into the Subject Contract, is it inoperative or incapable of being performed so far as there is any dispute between Mr. Ho and Hop Tai?

25.  I cannot see how it can be argued that SCC 37 is inoperative or incapable of being performed in relation to the dispute between Mr. Ho and Hop Tai.  Counsel for Mr. Ho argues that the dispute cannot be referred to the Engineer appointed under the Main Contract, since Mr. Ho is not a party to the Main Contract.  The short answer to this is that if the Engineer fails, for a period of 28 days after being requested, to give a decision in relation to the dispute referred to him by Mr. Ho, either Mr. Ho or Hop Tai may request that the dispute be referred to mediation or adjudication.  If the dispute cannot be resolved by mediation and/or adjudication, or because of the refusal to mediate or adjudicate by either Mr. Ho or Hop Tai, or if neither party wishes the dispute to be referred to mediation or adjudication, then the dispute shall be referred and finally settled by arbitration, all in accordance with SCC 37.

Is there any dispute between Mr. Ho and Hop Tai so as to trigger SCC 37?

26.  "Dispute" is widely defined in SCC 37 (1).  It means any dispute or difference of any kind whatsoever between Hop Tai and Mr. Ho arising out of or in connection with the Subject Contract or the carrying out of the works under the Subject Contract.

27.  As set out in paragraph 22 above, a dispute has clearly arisen between Mr. Ho and Hop Tai under the Subject Contract, so as to trigger SCC 37 to apply.

Conclusion

28.    For the above reasons, I am satisfied that a stay of proceedings is justified, and will accordingly dismiss the appeal, with costs including certificate for Counsel.