GOLDEN WAY ENGINEERING DEVELOPMENT LTD v. GWP ENGINEERING LTD

DCCJ 2595/2022

[2024] HKDC 32

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2595 OF 2022

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BETWEEN

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DECISION

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OVERVIEW

1.  By Summons (“the Summons”) dated and filed on 16 December 2022, the defendant (“D”) applies for, among others:

(1) An Order for stay of the present action (“the Action”) commenced by the plaintiff (“P”) in favour of arbitration pursuant to section 20 of the Arbitration Ordinance (“the Ordinance”) (Cap. 609).

(2) Further or alternatively:

(a) A Declaration that the Court has no jurisdiction over D in respect of the subject matter of the claim or the relief or remedy sought in the Action.

(b) An Order for setting aside of the Writ of Summons in the Action.

2.  In the substantive hearing, D has focused mainly on seeking relief (1), namely, an Order for stay of proceedings, contending that clause 25 (“Clause 25”) in the agreement sent by D to P on 3 September 2021 represents a valid and binding arbitration agreement which requires the parties to submit all their disputes, including the subject of P’s claim in the Action, to arbitration.

3.  P opposes, submitting that the document containing Clause 25 is merely an unsigned draft. P disputes that there is any agreement with D to arbitrate their disputes as alleged.

4.  In view of the parties’ dispute on the nature of the document sent by D to P on 3 September 2021, I will refer to it in neutral term below as the ‘Document’.

P’s CLAIM IN THE ACTION

5.  To begin with, P’s case can be summarized as follows.

6.  P was at all material times and is a company incorporated in Hong Kong carrying on mainly the businesses of design, supply and installation of various metal work and glass products.

7.  D was at all material times and is an engineering company incorporated in Hong Kong specializing in the supply of vitreous enamel panels, structural steel and other building materials.

8.  D engaged P to supply materials and to provide installation works (the “Works”) to a project (the “Project”) called ‘The Proposed Data Centre Development’ at No. 2-16 Lam Tin Street, Kwai Chung.

9.  From August to December 2021, P issued a total of 7 quotations to D for the Works. According to P, D accepted them by issuing:

(1) the Purchase Order on 11 August 2021 covering the works set out in the 1^st Quotation of P, thereby forming the first agreement (the “1^st Agreement”) between the parties;

(2) the Payment Certificate on 4 November 2021 (the “Payment Certificate”) covering, inter alia, the works set out in the 2^nd to 5^th Quotations of P, thereby forming the second agreement (the “2^nd Agreement”) between the parties; and

(3) the Purchase Order on 7 December 2021 covering the works set out in the 7^th Quotation of P, thereby forming the third agreement (the “3^rd Agreement”) between the parties.

10.  It is P’s case that the works covered by the 1^st to 3^rd Agreements were duly completed. However, D has failed and/or refused to settle the invoices issued by P for such works. P therefore commences the Action against D for recovery of an unpaid sum of $743,593.06^[1].

11.  D disputes the jurisdiction of the Court in the Action on the strength of Clause 25 requiring the parties to refer their disputes to arbitration, and has taken out the Summons for, inter alia, stay of proceedings in favour of arbitration.

APPLICABLE LEGAL PRINCIPLES

12.  Section 20(1) of the Ordinance gives effect to Article 8 of UNCITRAL Model Law:

“Article 8 Arbitration agreement and substantive claim before court

(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.

(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

13.  In Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Limited [2016] 1 HKLRD 582, it was explained by M Chan J as follows:

“11. The modern trend of the courts is to uphold arbitration agreements, to facilitate arbitrations, and (save in circumstances necessary to safeguard due process and as allowed under the international Conventions) not to intervene in an arbitration, which is the parties’ free choice as to the method of dispute resolution, and the substantive law and forum to govern and oversee the arbitration.

12. As a matter of public policy, Hong Kong as a party to the New York Convention has the duty to comply with its duties under Article II of the Convention: to recognize and enforce an arbitration agreement and to stay actions before the Court in breach of a valid and subsisting arbitration agreement. Under s 20 of the Arbitration Ordinance, a Court before which an action is brought in a matter which is the subject of an arbitration agreement ‘shall’ refer the parties to arbitration, unless the Court finds that the agreement is null and void, inoperative or incapable of being performed. The Court has the duty to stay an action in accordance with the arbitration agreement found to exist.”

14.  In approaching an application for stay under section 20(1) of the Ordinance, the court will ask 4 questions (see Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Others [2003] 1 HKC 418 at §§19-22 per Ma J (as he then was), cited in Chu Kong v Lau Wing Yan & Others [2019] 1 HKLRD 589 (CA) at §11 per Poon JA (as he then was)):

(1) Is the arbitration clause an arbitration agreement?

(2) Is the arbitration agreement null and void, inoperative or incapable of being performed?

(3) Is there in reality a dispute or difference between the parties?

(4) Is the dispute or difference between the parties within the ambit of the arbitration agreement?

15.  In Tommy CP Sze & Co v Li & Fung (Trading) Ltd (supra), it was set out as to how these questions should generally be dealt with by the court in a stay application. As observed, it is of course open to the court to deal with the questions in whatever order that seems efficient. One also has to recognize the obvious fact that not all these questions will be controversial in every case.

16.  In the present case, it is common ground that only Question (1) is engaged. For Question (2), in the event that it is held by the Court that there is a valid and binding agreement between the parties to arbitrate, P does not seem to be disputing that such agreement is otherwise “null and void, inoperative or incapable of being performed”^[2]. Neither have the parties indicated that Questions (3) and (4) are controversial.

17.  In determining whether there exists an arbitration agreement (and whether the arbitration agreement is null and void, inoperative or incapable of being performed), it was held in Tommy CP Sze & Co v Li & Fung (Trading) Ltd (supra) that:

“18. It is of course crucial in any application for a stay (whether under s 6 of the Ordinance or art 8 of the Model Law) that there exists an arbitration agreement. By this is meant an agreement between the parties by which present or future disputes or differences between them are required to be resolved by the arbitral process. The defendant of ‘arbitration agreement’ is contained in s 2 of the Ordinance, which in turn refers to Article 7 of the Model Law. An agreement which does not compel parties to have disputes or differences resolved by arbitration is not an arbitration agreement for present purposes. Where, for example, an option is given to the parties to go to arbitration if they so choose but with litigation in the courts being an available option as well, this is not truly an arbitration agreement. There must be its element of compulsion in the agreement between the parties that any disputes or differences must be arbitration.

…

29. In the present case, the court has therefore to determine whether or not the effect of the clause in question (clause 25(b)) is to allow a claimant to go to court to have the disputes with the other party resolved, should he not wish or is unable to go to arbitration for whatever reason. In other words, is it an option clause? If it is, then a stay is not granted because the claimant is not required to have the dispute or difference resolved by arbitration. If it is not, then the court will move on to the other Questions I have identified.

…

Question 2: Is the arbitration agreement null and void, inoperative or incapable of being performed?

38. This inquiry is of course derived from the wording of Article 8 of the Model Law. In essence, before any dispute or difference is referred to arbitration, the court must be sure that this is a viable option; in other words, that an arbitration can take place to resolve the relevant disputes or differences.

39. Where, for instance, the alleged agreement is void (say for public policy), frustrated or simply incapable of being performed, it cannot and will not be enforced. The words ‘null and void, inoperative or incapable of being performed’ have been the subject of many cases and text book discussion. I need only refer to the following: Mustill & Boyd: Commercial Arbitration at 464-465; Morgan: The Arbitration Ordinance of Hong Kong: A Commentary, at 436-439. They are words that have existed in various forms in arbitration legislation, both here and elsewhere (such as section 9(4) of the Arbitration Act 1996 in England) and in international covenants (such as article II(3) of the New York Convention).”

18.  The onus is on the defendant to demonstrate to the court that there is a good prima facie case, or a plainly arguable case, that a valid arbitration clause exists between the parties (see Private Company ‘Triple V’ Inc v Star (Universal) Co Ltd & Another [1995] 3 HKC 129 (CA) per Litton VP (as he then was) and Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd [2003] 3 HKC 659 at 662-663 per Burrell J).

19.  The court should first look at the evidence in support of the contention that there is a prima facie or a plainly arguable case that the parties are bound by an arbitration clause. The test has been satisfied if the evidence is cumulatively cogent and arguable, and not dubious or fanciful (see Pacific Crown Engineering Ltd (supra) at 663-664).

20.  In PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309 (CA), after referring to the above two cases, Tang VP held that the same approach should be adopted and observed:

“52. In relation to the submissions that the court should stay these proceedings to an arbitrator who can then determine whether or not he has jurisdiction, the judge said at para 43:

‘43. While I accept that is a possible course, it does not strike me as appropriate here. A decision by an arbitrator on his jurisdiction would still be open to challenge before this Court. The matter would simply return to me. Where (as here) a question of construction is involved and little (if any) extrinsic evidence is sought to be adduced in aid of construction, it would be conducive to saving time and cost to determine the question of jurisdiction now.

44. The writ was issued in December 2004. It is presently December 2005 and a Defence has yet to be filed. Given my views on clauses 4.3, 5, 11.2 and 11.3, it would be wrong to refrain from deciding the jurisdictional issue now. To remit the question to an arbitrator would only lead to unjustifiable delay and expense.’

53. Support for the judge can be found in Ahmad Al-Naimi v Islamic Press Agency Inc [2000] 1 Lloyd’s Law Rep 522, a decision of the English Court of Appeal.

54. At that time, in England, O 73, r 6(2) of the Rules of the Supreme Court provided that:

‘Where a question arises as to whether an arbitration agreement has been concluded or as to whether the dispute which is the subject matter of the proceedings falls within the terms of such agreement, the court may determine that question or give directions for its determination, in which case it may order the proceedings to be stayed pending the determination of that question.’

55. We do not have a similar provision in Hong Kong. But what Waller LJ said at page 524 is applicable here. He said:

‘…if it is clear on the evidence that a contract did or did not exist then the court should so decide for it cannot be right either to direct an issue pursuant to order 73, rule 6(2) or to leave the ‘dispute’ to be determined by an arbitral tribunal.’

56. The judge regarded the point as clear. He held that there was no agreement to arbitrate at all. There was not a prima facie or arguable case otherwise. If so, the judgment must be upheld.

57. So we turn to decide whether it is clear that there was no agreement to arbitrate billing disputes.”

DISCUSSION

21.  D submits that it has demonstrated, on the evidence, a cogent and arguable case that the parties are bound by Clause 25 to arbitrate. The clause reads as follows:

“Any dispute or difference arising between the Contractor [D] and the Sub-Contractor [P] in connection with this Sub-Contract either Party may request that it be referred to mediation in accordance with and subject to the Hong Kong International Arbitration Centre (“HKIAC”) Mediation Rules or any modification thereof for the time being in force. If either Party refuses such request for mediation or if mediation fails to resolve the dispute then, within 90 days of such refusal or failure or, should the Party instigating resolution of such dispute not wish to refer the matter to mediation such dispute shall be referred to the arbitration and final decision of a single arbitrator to be agreed upon by the Contractor and the Sub-Contractor or in default of agreement to an arbitrator appointed at the request of either the Contractor or the Sub-Contractor by the Secretary-General for the time being of the Hong Kong International Arbitration Centre in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory 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.”

22.  D further submits, in passing, that Clause 25 is not “null and void, inoperative or incapable of being performed” under section 20(1) of the Ordinance.

23.  In gist, P argues before me as follows:

(1) The Document has never been accepted by D and is an incomplete draft.

(2) The Document, even if capable of being a complete agreement, was superseded by subsequent agreements between the parties.

(3) The condition precedent of Clause 25 was not met.

24.  P’s case is that the parties entered into the 1^st to 3^rd Agreements – covering the 1^st, 2^nd to 5^th and 7^th Quotations – for P to perform the Works in the Project for D in exchange for payment. P provided the quotations for the carrying out of the Works to D in the manner as follows:

Quotations	Amount (HK$)
Quotation No. 1 dated 6 August 2021 (“1st Quotation”)	116,091
Quotation No. 2 dated 17 August 2021 (“2nd Quotation”)	512,496
Quotation No. 3 dated 23 August 2021 (“3rd Quotation”)	9,739,769
Quotation No. 4 dated 23 August 2021 (“4th Quotation”)	9,009,750
Quotation No. 5 dated 25 August 2021 (“5th Quotation”)	15,089
Quotation No. 6 dated 15 November 2021 (“6th Quotation”)	48,600
Quotation No. 7 dated 15 November 2021 (“7th Quotation”)	63,813.06

25.  On 3 September 2021, D sent the Works Order Summary (the “Works Order Summary”) covering the 1^st to 4^th Quotations with a total of sum of $19,378,106 and the Document to P by email.

26.  P stresses that the parties were at all material times still in the process of negotiation and this explains why the Document has remained unsigned. On P’s case, the parties have never intended to conclude the 1^st to 3^rd Agreements in the form of the Document.

27.  In support, P has cited §4-031 of Chitty on Contract (34^th Edition, Sweet & Maxwell)^[3] for the legal proposition that:

“An acceptance is a final and unqualified expression of assent, whether by words or conduct, to the terms of an offer. The objective test of agreement applies to an acceptance no less than to an offer. On this test, a mere acknowledgement of the receipt of an offer does not amount to an acceptance; nor is there acceptance if a person, to whom an offer to sell goods had been made, merely replies that it is his ‘intention to place an order’ or asks for an invoice…”

28.  Bearing in the mind the relevant legal principles discussed above, I am unable to accept P’s arguments for the following reasons.

29.  First of all, P’s current assertion that the Document is not a ‘complete’ agreement accepted by D is simply incredulous, taking into account P’s own reliance on it in securing a performance bond (“the Performance Bond”) dated 1 November 2021 from DBS Bank (Hong Kong) Limited (“DBS Bank”) for the sum of $500,000 (“the Bond Sum”) subject to the following terms and conditions:

(1) In the Performance Bond, reference was expressly made to a “contract/agreement dated 3^rd September 2021 (“Main Contract”)… between the Employer [D] and Golden Way Engineering Development Limited (“Contractor”) [P]” (see Recital (A)).

(2) Pursuant to that contract/agreement, “the Contractor agreed to carry out the sub-contractor work of supply and installation work for the Proposed Data Centre Development at No. 2-16 Lam Tin Street, Kwai Chung (collectively, “Works”) as more particularly described in the Main Contract”.

(3) At the request of P as the Contractor, DBS Bank as the Surety agreed to guarantee to D as the Employer the due performance by P of its obligations under the contract/‌agreement dated 3 September 2021 described as the Main Contract (see Recital (B)).

(4) DBS Bank guaranteed to D the due performance by P of its obligations under the Main Contract in the manner as provided for under clause 2 (see clause 1).

(5) In the event of P’s default of any of its obligations under the Main Contract and upon demand by D, DBS Bank shall satisfy and discharge any claims, actions, damages, losses, charges, costs or expenses sustained by D as a result of such default provided that the aggregate amount claimed by D shall not exceed the Bond Sum, i.e. $500,000 (see clause 2).

30.  P is not heard of disputing the authenticity of the Performance Bond.

31.  All that P seeks to rely on are firstly, it obtained the Performance Bond on D’s request, and on the condition that a deposit had to be provided by D in order for P to commence work; and secondly, only a scanned copy, but not the original, of the Performance Bond was sent to D by email as D had failed to make the deposit as agreed.

32.  I however fail to see the relevance of these matters. For the present purpose, what matter – and which are not in dispute or are indisputable – are as follows:

(1) P obtained the Performance Bond from DBS Bank, with the representation that there was a contract/‌agreement with D dated 3 September 2021.

(2) P accepts in affirmation that the reference in the Recitals of the Performance Bond to such contract/‌agreement was to “indicate the Plaintiff’s willingness to acknowledge the terms contained in the Unsigned Draft Agreement”.

(3) It might be the case that it was D who requested P to provide security, but as submitted by D, the application for the Performance Bond was made by P, and with P’s own representation, to DBS Bank.

(4) P’s representative signed on the Performance Bond to express assent and adherence.

(5) It might also be the case that P obtained the Performance Bond on the condition of D’s payment of deposit for future work, but that would not reduce the force of P’s own admission that there was a contract/‌agreement with D dated 3 September 2021.

33.  Second, the so-called 1^st to 3^rd Agreements are obviously riddled with numerous unexplained gaps and unanswered questions, which make P’s current account simply unbelievable.

34.  To begin with, for instance, notwithstanding that the 2^nd Agreement, which covers, among others, the 3^rd and 4^th Quotations, involves a total contract sum in excess of $18 million, P merely asserts in affirmation, in one single sentence, that D ‘confirmed’ the ‘acceptance’ of these quotations with the issue of the Payment Certificate on 4 November 2021, without explaining at all as to how such acceptance was rendered in the first place and then confirmed and also why such confirmation became necessary etc.

35.  In addition, the 1^st to 3^rd Agreements merely cover the 1^st, 2^nd to 5^th and 7^th Quotations. It remains unclear to the Court as to how the 6^th Quotation, which was equally issued by P to D but has at the moment been left out, fits in P’s own case.

36.  On the other hand, as submitted by D, the following matters would support that there is at least a good prima facie case, or a plainly arguable case, that the Document, which contains a valid arbitration clause under Clause 25, represents the agreement formed by the parties at the material times:

(1) By way of timing, when the 1^st to 4^th Quotations were sought, the parties were in continuous negotiation to conclude an agreement to govern their relationship.

(2) The 1^st to 5^th quotations were provided by P to D for consideration from 6 to 25 August 2021.

(3) By way of D’s email dated 3 September 2021 to P, attaching the Document together with the Works Order Summary, the 1^st to 4^th Quotations from P were accepted, thereby forming an agreement between them.

(4) The Works Order Summary and the Document are plainly related documents: the Works Order Summary refers to the Document, and both of them share the same Job Number and Sub-Contract Number (“GJ2104SS” and “SC-001”).

(5) Essentially, the Works Order Summary bears all the necessary information, e.g. quantities, unit rates and retention money, as would be provided by the ‘Schedule’ under clause 3 of the Document.

(6) By the time when P sent the email to D on 14 September 2021 (the “14.09.21 Email”), requesting for an update on the status of “the Contract”, the agreement between the parties had been formed as described above.

(7) As P sent the 14.09.21 Email in response to D’s email dated 3 September 2021, when P enquired about “the Contract” in the 14.09.21 Email, P meant the Document and the Works Order Summary attached to D’s email dated 3 September 2021.

(8) In further support, the Payment Certificate dated 4 November 2021 was issued by D pursuant to the agreement already formed between the parties. The ‘Original Sub-Contract Sum’ set out therein, i.e. $19,378,106.00, was the same as the amount stated in the Works Order Summary, whereas the ‘Total Sub-Contract Sum’, i.e. $19,393,195.00, took into account also the variation works covered by the 5^th Quotation, i.e. $15,089.

(9) P did indicate in the 14.09.21 Email that it would ‘consider’ updating the quotation, but it was also made clear by P that the updating was only applicable in the event that there was no binding agreement between the parties. This is to be contrasted with the situation where P had issued an ‘updated’ quotation, applying a set of revised rates to the works covered by the Works Order Summary.

37.  In these circumstances, as submitted by D, the fact that the Document was not signed would not preclude it from becoming a complete and binding agreement between the parties. In support, it was held in Reveille Independent LLC v Anotech International (UK) Limited (2016) 166 ConLR 79, [2016] EWCA Civ 443 as follows:

“40. There are a number of rules of English contract law which, in combination, bear on the resolution of this appeal. First, classical analysis finds the parties’ consent to a contract in the acceptance of an offer, and it is well accepted that acceptance can be by the conduct of the offeree so long as that conduct, as a matter of objective analysis, is intended to constitute acceptance: Brogden v Metropolitan Rly Co (1877) 2 App Cas 666. Secondly, as in Brogden, acceptance can be of an offer on the terms set out in a draft agreement drawn up between the parties but never signed. Thirdly, if a party has a right to sign a contract before being bound, it is open to it by clear and unequivocal words or conduct to waive the requirement and to conclude the contract without insisting on its signature: Oceanografia SA de CV v DSND Subsea AS, the Botnica [2006] EWHC 1360 (Comm), [2007] 1 All ER (Comm) 28 (at [94]), per Aikens J.

41. Fourthly, if signature is the prescribed mode of acceptance an offeror will be bound by the contract if it waives that requirement and acquiesces in a different mode of acceptance. In my view it follows that where signature as the prescribed mode of acceptance is intended for the benefit of the offeree, and the offeree accepts in some other way, that should be treated as effective unless it can be shown that the failure to sign has prejudiced the offeror: see Chitty on Contracts (32^nd edn, 2015) paras 2-066, 2-067; Oceanografia SA de CV v DSND Subsea AS, the Botnica [2007] 1 All ER (Comm) 28 (at [119]), per Christopher Clarke J. Fifthly, a draft agreement can have contractual force, although the parties do not comply with a requirement that to be binding it must be signed, if essentially all the terms have been agreed and their subsequent conduct indicates that this, albeit a court will not reach this conclusion lightly: RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, (2010) 129 ConLR 1, [2010] 1 WLR 753 (at [54]-[56]). Finally, the subsequent conduct of the parties is admissible to prove the existence of a contract, and its terms, although not as an aid to its interpretation: Chitty on Contracts (32^nd edn, 2015) para 13-129.”

38.  Third, I am unable to accept P’s argument that the Document, even if capable of being a complete agreement, was superseded by the subsequent agreements between the parties, as it has clearly disregarded the effect of clause 5 thereof, which expressly provides that “[v]ariations by way of addition, modification or omission to the Sub-Contract Works may be ordered in writing by the Contractor without vitiation of this Sub-Contract.”

39.  Lastly, I also reject P’s contention that the mechanism for arbitration has still not been engaged in the present case.

40.  P submits that pursuant to Clause 25, before arbitration is to be engaged, 2 conditions have to be satisfied, namely, firstly, either P or D refers the dispute between the parties to mediation; and secondly, the other party refuses to mediate.

41.  As rightly pointed out by D, P’s construction of Clause 25 that it is only when these 2 conditions are satisfied that the dispute could be referred to arbitration is problematic, as the wordings of the clause simply do not support it. The clause does not compel either party to attempt mediation before resorting to arbitration. On the other hand, it is made clear that if either party refuses the request for mediation or if mediation fails to resolve the dispute or should the party instigating resolution of the dispute not wish to refer the matter to mediation then such dispute shall be referred to arbitration.

CONCLUSION

42.  For all the reasons above, I make the following orders in favour of D as sought:

(1) An Order in terms of paragraph 1 of the Summons; and

(2) Costs should follow the event. There be a costs order nisi that P shall pay D the costs of this application to be taxed if not agreed on an indemnity basis, with certificate for counsel.