XCHRX CHINA INSURANCE CO. LTD. v. CHINA LINK CONSTRUCTION CO. LTD.

1999, No. MP45

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 respondent was the sub-contractor to Far East Wagner Construction Limited (FEW) on a construction project. In 1996, a fire occurred on the site damaging the works. The applicant is the insurer of FEW and the respondent.

2. In March 1997, the respondent submitted a claim to the applicant in respect the cost of its remedial works. On 12 May 1997 and 21 July 1997, FEW told the applicant's adjuster that payment should not be made to the respondent because FEW had paid the respondent $3 million for the remedial works. The adjuster asked Mr Ernie Tsui, a director of the respondent, and Mr Edwin Yeung, its quantity surveyor, about this allegation. They denied that FEW had made any payment to the respondent.

3. There was a lull before the quantum of the respondent's claim was agreed in the sum of about $4.5 million in August 1998. The applicant then informed FEW of its intention to pay the respondent, which responded by repeating that it had paid the respondent for the remedial works. This was conveyed to the respondent's solicitors, who repeated that the respondent had not received any payment from FEW in respect of the remedial work.

4. At the applicant's request, FEW's solicitors then provided evidence that three payments of $1.5 million had been made to the respondent.

5. When confronted with this evidence, the respondent' solicitors said the payments were made under an agreement. The facts were these: On 9 October 1996, FEW agreed to pay to the respondent $9 million "In order to ease [the respondent's] difficulties and to assist [the respondent] in their cashflow.". On 5 November 1996, FEW agreed to pay $12 million to the respondent by payment of the sums of $1.5 million a week. It was said that the extra $3 million "are advance payment from [FEW] and to be refunded to FEW through the 'Fire' insurance claims to the extent of and not exceeding a total sum awarded from the insurance claim. For the sake of clarity, the first [$3 million] successful insurance claim from the 'Fire' incident will be reimbursed to FEW and if the successful claim is less than [$3 million], [the respondent] should make up for the balance and reimbursed to FEW."

6. The respondent has commenced arbitration proceedings in respect of its claim against the applicant, and FEW has commenced court proceedings against the applicant claiming, amongst other sums, the cost of the remedial works carried out by the respondent.

7. I now have before me an originating summons by the applicant by which it seeks an order that the issue of whether the respondent is guilty of fraud and the applicant discharged from liability to the respondent be determined by this court pursuant to section 26(2) of the Arbitration Ordinance (Cap. 341), that the arbitration agreement cease to have effect, and that the authority of the arbitrator be revoked.

8. I also have a summons by the respondent asking that these proceedings be stayed pursuant to section 6(2) of Chapter 341. I do not understand this summons or its purpose. Section 6(2) refers to matters within the jurisdiction of the Labour Tribunal. If the respondent means to refer to section 6(1), there is no need for the summons, and it makes no sense. If the applicant fails, the matter will remain with the arbitrator.

9. Section 26(2) of Chapter 341 provides that, where a dispute arises involving the question whether a party is guilty of fraud, the court shall, "so far as may be necessary to enable the question to be determined by the Court, have power to order that the [arbitration] agreement shall cease to have effect and the power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement.".

10. Before moving on to the respondent's main contention, I should say that, in the alternative, Miss Rattigan argued that there was not sufficient prima facie evidence of fraud. I think there is. On the face of it, the respondent received money from FEW as an "advance payment" of the insurance claim, and told the applicant that it had not received any money from FEW. The respondent did not say - Yes, we have received money from FEW, but this does not affect our claim against you. There was a blanket denial, which, it appears at this stage, was a false denial. That may well be found to be a fraud by the respondent on the applicant.

11. But Miss Rattigan's main argument is that this is not a proper case in which the respondent should be prevented from exercising its right to have the dispute resolved in the forum chosen by both parties.

12. I take it to be the law that, where the party applying under section 26(2) is the party alleging the fraud, it is not sufficient to rely only on the charge of fraud. That party must show that, taking all the circumstances into account, it is just and convenient that the matter should be taken out of arbitration. There must be a balancing exercise, and I take it also that a heavy weight in favour of the party opposing the stay is that the parties have agreed that their disputes should be referred to arbitration. I believe that a court should not lightly interfere with the wish of the parties as expressed in the arbitration agreement. This has been the general attitude of the courts in recent years.

13. Mr Chan recognises that he cannot rely solely on the charge of fraud. The applicant's reasons for asking for the order sought are given in the applicant's evidence as "this matter is not suitable for arbitration because of the respondent's fraud, and the fact that the respondent claim is also part of a claim by FEW against the applicant in a High Court action." Although there is no evidence of this, Mr Chan advances another reason: That it is important to the applicant that it be allowed to have publicity for the lesson that "If you cheat, we will not pay."

14. I reject the first reason. An arbitrator is perfectly capable of dealing with allegation of fraud, so it cannot be properly said the matter is not suitable for arbitration.

15. I also reject the reason advanced by Mr Chan himself. The authorities have recognised the special position of a party against whom an allegation of fraud is made in according him extra weight in an application of this nature because he may wish to publicly clear himself of the allegation made. But no one has yet suggested that the other side of the coin applies; that the party making the allegation should be entitled to air his allegations in a public court when he has agreed to a private arbitration of disputes. Indeed, this approach might encourage allegations of fraud and applications for a public trial as a weapon in terrorem against innocent parties.

16. In my view, the only circumstance that weighs in favour of trial is the undesirability of a multiplicity of actions, with possible conflicting findings of fact.

17. FEW is taking proceedings against the applicant. An issue in that action is whether or not FEW is entitled to recover in respect of money paid to the respondent in respect of the remedial work. One of the issues in the arbitration will be whether or not FEW paid money to the respondent for the same purpose. It seems to me that, in both sets of proceedings, there will be little difficulty in establishing the primary facts. I do not think that it can be seriously in dispute that FEW paid $4.5 million to the respondent under the agreement mentioned, and that $3 million of this was an "advance payment" in respect of the insurance claim. So I think it unlikely that there will be conflicting findings of fact. It may be, of course, that the court and the arbitrator may interpret these primary facts differently, but I think this is improbable too. But even if there is a real possibility of a difference, I do not think this is a sufficient reason to deprive the respondent of its chosen means of dispute resolution. The fact of the matter is that whether or not FEW paid the money to the respondent will not be, I anticipate, a major factual issue in either set of proceedings.

18. In the proceedings by the respondent, the major issue will be whether or not the respondent was guilty of fraud so that it is debarred from recovering. This will not be an issue in the proceedings by FEW. If I were to grant this application, the respondent would be obliged to commence court proceedings. There may be an application to consolidate the actions, and this might be granted. But it might not, because I would anticipate that FEW would say what I have said here; why should we be burdened with a joint trial in which the major issue - the alleged fraud - has nothing to do with us. If such a consolidation application were granted, the issues as between FEW and the applicant would be largely different from the major issue between the applicant and the respondent. I envisage that the trial would be, in the main, about whether or not the respondent committed fraud. I do not think that this course would result in any great saving of expense and trouble, or any at all, in contrast to two separate sets of proceedings. This course, I believe, might prejudice FEW.

19. In the result, I am not convinced that the circumstances in this case show that it is just and convenient that the respondent should be prevented from proceeding with the arbitration. Consequently, the applicant's summons is dismissed.

20. As for the respondent's summons, as I have said, I do not think it served any useful purpose. The matter has been decided purely on the applicant's summons, and the issue raised in the respondent's summons, even if the correct section had been quoted, could not have been thought to have been any different from that raised by the respondent. What sense does it make, I ask rhetorically, to apply for a stay of proceedings that are going to be finalised, one way or another, before any effective order could be made on the respondent's summons. The only effective stay would be an order preventing the applicant from proceeding with its application, and that would be sheer nonsense. If I were to grant the order asked for by the respondent, it would not bite because the proceedings sought to be stayed are already spent. Accordingly, the respondent's summons is also dismissed.

21. As to costs, it seems to me that the respondent has been substantially successful. Accordingly, I believe that the applicant should pay the respondent's costs of the applicant's application. The respondent should pay the costs of the respondent's own application, but I say that these costs should be only those solely referable to that application. For example, the costs of the hearing would have been incurred even if the respondent had issued no summons, so the applicant should pay the costs of this. I make an order nisi accordingly.