THE STANDARD CIVIL ENGINEERING CO. v. THE ATTORNEY GENERAL

M.P. No. 186/86

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. These proceedings were instituted under Section 28 of the Arbitration Ordinance for the purported enforcement of an arbitral award made on the 20th December 1985 and amended on the 9th January 1986.

2. This endeavour of the plaintiff was beset with procedural errors. The plaintiff's firm is a sole proprietorship, wholly owned by Mr. Woo Ping Ching. A sole proprietor may not sue in the name of his firm. The use of a firm name in litigation is reserved by 0. 81 r. 1 for partnerships. No point was taken on this irregularity. Under 0. 73 r. 10(1) of the Rules of Supreme Court, an application to enforce an award under Section 28 of the Arbitration Ordinance may be made ex parte, and an originating summons is to be issued on a direction of the court. In the instant case, the plaintiff caused to be commenced proceedings, without any direction, by an originating summons. If the plaintiff had obtained, in compliance of the Rules of Supreme Court, an ex parte order for enforcing the arbitral award, the Attorney as the defendant would have had 14 days after service of the order to apply to have it set aside. No real prejudice has been caused save that attention was unnecessarily diverted to fundamentals for an ex parte application, such as formal defects and validity. But again no objection was taken to this leap-frog maneuver. However, it is the third procedural error that has, in my view, proved fatal to the plaintiff's application.

3. That an arbitral award cannot be enforced in the usual manner against the Government was not in dispute. Indeed, it is provided by 0.77 r. 15(1) that "nothing in Orders 45 to 52 shall apply in respect of any order against the Croon". Orders 45 to 52 are grouped under the heading "Enforcement of Judgments and Orders". An arbitral award can only be satisfied in accordance with the provisions in Section 21 of the Crown Proceedings Ordinance whereby a successful party in an arbitration may apply, at any time 21 days after an award or at any time after taxation of costs, for the issuance of a certificate in the prescribed form. Payment shall then be made by the Director of Accounting Services.

4. Mr. Burdett, counsel for the defendant called in aid the decision in Grech v. Board of Trade⁽¹⁾, where an arbitral award against the Board of Trade was held to be, insofar as it was against the Crown, incapable of being enforced with leave under Section 12 of the Arbitration Act, 1889. Section 12 of the 1889 Act is identical with our Section 28 of the Arbitration Ordinance without the added provision for signing judgment in terms of the award.

5. Relying on Section 32 of the Arbitration Ordinance which applies Part II to any arbitration to which the Crown is a party, Mrs. Spruce argued that since Section 28 of the Ordinance for leave to enforce an arbitral award was within Part II, arbitral awards had thus been made specifically enforceable against the Crown under that Section. Like argument was advanced for the applicant Grech, hailing Section 23 of the Arbitration Act ,1889, as an express provision binding the Croon to Section 12 of the Act⁽²⁾ Section 23 of 1889 Act extended the whole Act to any arbitration to which the Sovereign was a party. Such argument as canvassed on behalf of Mr. Grech was peremptorily rejected by the Court of Appeal without calling upon the Solicitor General appearing for the Crown. There is clearly no substance in this submission. I need say no more.

6. It was further submitted by Mrs. Spruce that the application in Grech v. Board of Trade was refused merely because the designation, "Board of Trade" was obscure. That does not seem to be what was decided by Warrington, L.J. in the Grech case, where the nature of the arbitral award was approached in the alternative viz. simply as an award against the individual members of the Board of Trade personally, "that is to say, the Lords of the Committee for the time being of the Privy Council entrusted with the matters relating to trade and foreign plantations" or alternatively, as an award against the Crown. It was exclusively on the first of these alternatives that Warrington, L.J. came to the conclusion at p.p. 957 and 958 that the arbitral order was not without difficulty for leave to be granted. The learned Lord Justice explained :

"In my opinion, this is one of those cases in which the remedy is not so clear that the court ought to make such an order against the Board of Trade, regarding that title as a name or title including a number of individuals. To begin with, there are no statutory provisions, so far as I know, enabling those individuals to be sued by that name. They are not partners, the name is not a firm name, and I know of no provision which enables them as individuals to be so sued. But I only refer to that as showing that the case is not so clear a case that one ought to make an order on that alternative. " (The emphasis is mine).

7. At p. 958, Warrington, L.J. ruled quite independently on the second alternative concluding that as an award against the Crown, the court had 'ho power" to grant leave.

8. Dealing with both possibilities together, Scrutton, L.J. refused leave on the ground that neither stood out as the more probable alternative of the two. The learned Lord Justice observed :

"Now the court only makes an order when it is a clear case; if not clear, it leaves the party to the ordinary legal rights. It is not at all clear what the position is here. The award may make these members of the Board of Trade personally liable, or it may be that the only effect is, that there is a claim upon the Crown which cannot be enforced, which depends upon the clemency of the Crown, and in answer to which, the Crown may say, 'Yes, but we have a claim against you. ' Therefore, this is one of those cases where the court will not summarily interfere; they will leave the parties to their legal rights. "

9. In his separate treatment of the award as one against the individuals, Warrington, L.J. was unsure of its validity for he knew of no law "enabling those individuals to be sued". The matter was disposed of, in that alternative, on account of uncertain validity. Scrutton, L.J., however, preferred to deny leave by reason of the dubious nature of the award. To the learned Lord Justice, it was not quite apparent whether the award was a claim against the Crown or one against members of the Board of Trade personally. It was far from being clear what "the position" was. On whatever bases these rulings were made and whether the uncertainty lied in the validity of an alternative or in the nature of the award, I do not read the case of Grech as negating the underlying principle that an arbitral award cannot be enforced against the Crown under Section 12 of the 1889 Act or Section 28 of our Arbitration Ordinance.

10. Lastly, Mrs. Spruce contended that an order for enforcement under Section 28 of the Arbitration Ordinance would be required in an application for a certificate under Section 21 of the Crown Proceedings Ordinance. Section 21(1) of the Crown Proceedings Ordinance contains an express reference to arbitration, and an order for which a Section 21 certificate may be obtained has been defined in Section 2(2) of the same Ordinance as including an award. It is reasonably clear that an arbitral award without more is sufficient to found an application for a certificate under Section 21(1) of the Crown Proceedings Ordinance.

11. This same line of argument was also ventilated before the English Court of Appeal in Grech v. Board of Trade, which was rejected by Warrington, L.J. at p. 958 in these terms :

12. Whilst a decree or judgment upon a petition was envisaged by the Petitions of Right Act, 1860 and our Section 21(1) of Crown Proceedings Ordinance speaks of a certificate, the ratio decidendi suffers from no ambiguity that no other order under a different statute than an arbitral award was necessary to support an application under the Petitions of Right Act, 1860 or is necessary for the Crown Proceedings Ordinance here in Hong Kong.

13. In my judgment, this court has no jurisdiction to entertain and no power to grant the application of the plaintiff.

14. Even if I had power to entertain and grant the plaintiff application, I would not be prepared to exercise my discretion in the plaintiff's favour. An arbitral award such as this would, in my view, suffice for the purposes of Section 21(1) of the Crown Proceedings Ordinance. An order granting leave to enforce and enter judgment in terms of the award would thus serve no real practical purpose. Judicial orders are not to be sought or obtained in vain.

15. Finally, in the light of the decision in Grech v. Board of Trade, there are matters in the plaintiff's case under Section 28 of the Arbitration Ordinance, which cannot be said to be insubstantial or completely free from doubt. If I had not been so fully assisted, on these highly arguable issues alone, I would have been content to leave the Contractor to enforce his award by action.

16. I cannot part from this aspect without drawing attention to the views of Professor Glanville Williams expressed, as he then was a reader in English Law in London University, in his "Crown Proceedings" in 1948, p. 154 :

"But an award is not enforceable against the Crown under the summary procedure of Section 12 of the Arbitration Act. "

17. It is not really necessary for me to consider the rest of the wide-ranging submissions. In his succinct argument, Mr. Burdett virtually abandoned the inter partes summons of the Attorney for leave to set off and counterclaim. A great deal of time was wasted on many peripheral matters. I do not propose to deal with each of them in any great detail, but I must make a passing reference to the groundless accusations levelled at the conduct of the Government department concerned and the professional persons involved if only for recording my disapproval.

18. I pass then to the facts for setting the scene in which this present dispute arose : Modifications were desired for the Freight Building at Kai Tak Airport. Government through the then Architectural Office of the Public Works Department signed a Building Contract No. 151/78 dated the 19th April 1978 with the firm of Mr. Woo. I will call them Government and the Contractor. Works commenced on the 8th May 1978 and were completed on the 7th January 1980. Building Contract No. 151/78 was in the usual form. It contained in the General Conditions a Clause 115 for arbitration and a Clause 106 for Government's entitlement upon forfeiture. I should also refer to Clause 105(2)(b). Clause 105(2)(b) and Clause 106 read as follows :

19. Disputes on the execution of works under Building Contract No. 151/78 had arisen and there upon Government and the Contractor submitted to arbitration on the 27th September 1983. There was no Government re-entry under Building Contract No. 151/78, and the usual Clauses 105 and 106 of the General Conditions had no application. Award was made by the arbitrator on the 20th December 1985 and it was amended on the 9th January 1986 from $486,494.18 to $483,830.38 as the sum found due to the Contractor by Government.

20. For the Hung Hom Indoor Stadium Annex Building, Government signed another Building Contract No. 251/82 with the Contractor on the 26th April 1982. Works commenced on the 15th May 1982. Commencement date was extended to the 3rd July 1983. This Building Contract No. 251/82 comprised two phases in construction. Government re-entered on the 9th November 1983. The Court was informed that Phase I was completed thereafter by another contractor on the 17th April 1984 and Phase II on the 21st May 1984. Government claims a delay of 34 days for Phase II and 340 days in respect to Phase I. Much was sought to be made capital of in the computation of time from the extended date of commencement, the 3rd July 1983, to the date of completion on the 17th April 1984 for Phase I. These two dates give a period of only 288 days instead of the claimed period of 340 days. No explanation was offered by Government, but nothing crucial turned on this criticism for the purposes of the Contractor's application pursuent to Section 28 of the Arbitration Ordinance.

21. Under Building Contract No. 251/82, by his Interim Payment 17B dated 31st December 1983, the Contractor claimed a sum of $1,931,025.70 from Government. Pursuant to Interim Certificate No. 16 dated the 3rd October 1983, Government paid $100,470.00 which the Contractor had challenged as an under-assessment. Government claimed that "almost no work had been carried out, nor materials delivered during the period from the last Interim Certificate No. 16 issued on 3rd September (sic) 1983 and the date of re-entry". Government therefore did not accept the submissions of the Contractor in his Interim Payment 17B to the tune of $1,931,025.70. Government's attitude was strongly criticised, at times beyond what could be legitimately put.

22. Before re-entry, the Contractor served on Government a notice dated the 6th October 1983 requesting for an appointment of an arbitrator in respect to disputes prior to the 21st June 1983. A day before re-entry, on the 8th of November 1983, Government agreed to the appointment of a single arbitrator. Whilst the said notice of the Contractor dated the 6th October 1983 was inferentially confined to events previous to the 21st June 1983, I was informed by counsel for the Contractor that the arbitration was in relation to matters in Interim Certificate No. 16. Arbitration on the disputed items in Interim Certificate No. 16 has not been concluded. As a matter of fact, no further step has, since the appointment of the arbitrator under Building Contract No. 251/82, been taken.

23. IOn the 11th October 1985, the Chief Architect concerned issued 2 certificates under Building Contract No. 251/82. One certificate was entitled "Certificate of Cost of Completion", and it was certified that in monetary terms Government would be $3,238,600 out of pocket before completing Building Contract No. 251/82 after re-entry. The sum so claimed included, inter alia, payment to another contractor for completion, the department's overheads for supervision and administration and liquidated damages for delay. The other certificate is entitled "Statement of Amount of Excess Due to Government from the Contractor after Forfeiture" which certified an excess of $1,753,525 as due to Government by the Contractor as the result of re-entry. On the same day, the 11th October, 1985, a Government Demand Note of even date was served on the Contractor. After deducting sums due to the Contractor under Building Contract No. 151/78 and another Building Contract No. 811/79 to the extent of $225,095.23, the net claim of Government against the Contractor finally came to :- $1,753,325 - $225,095.23 = $1,528,429.77. On the 21st December, 1985, through Mr. Crocker of the Legal Department, Government sought to deduct or se-t off its claim after re-entry under Building Contract No. 251/82 against the arbitral award in favour of the Contractor under Building Contract No. 151/78. What is worthy of note is that the Crown's claim subsequent to re-entry under Building Contract No. 251/82 accrued long after the commencement of the arbitration under the earlier Building Contract No. 151/78 and that Section 106(2) of Building Contract No. 251/82 was formally invoked one day after the arbitral award.

24. The Contractor complained that Government's calculations were open to question, that Government wrongfully ignored his claim of $1,931,025.70 in Interim Payment 17B (inclusive of any disputed under-assessment in Interim Certificate No. 16), that Government's computation of delay was erroneous and that Chief Architect/7, signatory to the said "Certificate of Cost of Completion" and "Statement of Amount of Excess Due to Government from the Contractor after Forfeiture" had not been established to be the proper certifier. It was suggested, in particular, that the Chief Architect must have irretrievably delegated all of his power to the Project Architect. The Contractor also felt aggrieved that Government had failed, since re-entry, to certify the value of some further works done, materials and plant on the site as required by Clause 105(2)(b). It was therefore contended that without taking into account these items under Clause 105(2)(b), the two said certificates of Government purportedly issued under Clause 106 could not be valid or accurate. Bona fide of Government and the Chief Architect was also boldly assailed without justification. If there had been any substance in these allegations, provided that they were proper matters to be introduced, they should have been resolved elsewhere but not under Section 28 of the Arbitration Ordinance on an Originating Summons, "a summary form of procedure intended to dispense with the full formalities of a trial"⁽³⁾.

25. In the course of these proceedings, the parties were invited to consider a global submission of all their disputes to this Court, but the suggestion was not favourably received. If objections and allegations properly raised in an application under 28 of the Arbitration Ordinance cannot be disposed of without a trial, an arbitral award should not be enforced in a summary way. The question which immediately leaps to mind is : Are the matters sought to be canvassed proper matters to be introduced?

26. For Building Contract No. 251/82, Government's version is that the amount, if any, to be certified as value of further works, materials and plant on site was negligible. Mr. Lo in para. 10 of his affirmation filed herein on the 7th March 1986 further explained that "the continued application of liquidated and ascertained damages would, in any event, have resulted in a credit being due to Government. ". Government has particularized and quantified its claim in the two said certificates. Under Clause 106(2), such quantified claim is to be "deemed a debt due by the Contractor to Government". The clause does not stipulate that only undisputed sums could be deducted from monies due or to become due by the Contractor under another contract with Government. A similar analysis may be found in Gilbert-Ash (Northern) Ltd. v. Modern Engineering (Bristol) Ltd.⁽⁴⁾ Further, an application under Section 28 of the Arbitration Ordinance is decidedly summary in nature. Triable issues that lie at the heart of the application cannot be properly determined on affidavits.

27. Government re-entered under Building Contract No. 251/82 on the 9th November 1983. The amount due by the Contractor under this contract was certified on the 11th October 1985, and or the same day a demand note was sent. On the 21st December 1985, Government sought to deduct the balance of the certified amount from debt found due to the Contractor in the arbitral award under an earlier Building Contract No. 151/78. It is highly debatable that the certified amount under Building Contract No. 251/82 had in fact accrued from the date of Crown re-entry on the 9th November 1983. The arbitrator began to sit as from the 14th October 1985, but the arbitration proceedings under that earlier Building Contract No. 151/78 commenced as from the date of the Arbitration Agreement, the 27th September 1983. All possible dates of accrual of the certified claim of Government under Building Contract No. 251/82 were subsequent to the commencement of the arbitration proceedings.  The said certified amount could not have operated as a set-off in those proceedings before the arbitrator. See Richards v. James⁽⁵⁾. Put as a set-off or counterclaim, this certified amount under the later building Contract No. 251/82 has many more difficulties to face. First, Government itself objected to the arbitrator considering any deduction arising from the Contractor's liability to Government under the later Building Contract No. 251/82 on the ground that the same fell outside the Arbitrator's terms of reference. Government is not now to be allowed to maintain that the question of such deduction should have been dealt with by the Arbitrator. Secondly, the terms of reference did not seem to be wide enough to embrace this question of deduction arising under a totally different contract. Thirdly, the arbitrator though presented with a different clause for consideration, declined to have regard to any power of deduction under another Contract. Paragraph 7 of the arbitral award appears to be controversial, but given a fair and benevolent reading, in my judgment the arbitrator can be seen to have decided not to adjudicate on "deduction". The arbitrator's decision is and has been accepted as final. Fourthly, Section 28 of the Arbitration Ordinance is a summary procedure for execution. Set off and counterclaim are themselves matters for trial not for a summary application for leave to enforce an arbitral award. They may be relevant in an application for a stay, but no stay has, at this stage, been sought. Mr. Burdett was almost prepared to concede that the Attorney's summons for leave to set-off and/or counterclaim was misconceived. Relief in Government's inter partes summons was no longer pursued.

28. I turn next to Mr. Burdett's contention that the debt found due in the arbitral award under Building Contract No. 151/78 had been wholly satisfied by Government's exercise of the power to deduct under Building Contract No. 251/82. Counsel for the Attorney leaned heavily on the close association in terms of the identical personalities and provisions in these two contracts. I can see the force of counsel's argument, and if the debt in the arbitral award has been satisfied by Government invoking Clause 106(2) under the later contract, there is no indebtedness left to support the Contractor's application. 

29. Mrs. Spruce referred to p. 371 of Russell on Arbitration, 20th ed. for the proposition that an arbitral award will invariably be enforced as a judgment unless it suffers from some formal defect or there is a real ground for doubting its validity.

30. Counsel for the Contractor also attacked Clause 106(2) as a penalty. Counsel sought to derive support from a clause under consideration in Gilbert-Ash v. Modern Engineering, ante. where the clause in question comprised four sentences. The third sentence read :

"If the sub-contractor fails to comply with any of the conditions of this sub-contract, the contractor reserves the right to suspend or withhold payment' of any monies due or becoming due to the sub-contractor".

The fourth sentence read:

"The contractor also reserves the right to deduct from any payment certified as due to the su-b contractor and/or otherwise to recover the amount of any bona fide contra accounts and/or other claims which he, the contractor, may have against the sub-contractor in connection with these or any other contract."⁽⁶⁾

31. It was only this third sentence which was held to be a penalty. At p. 698 C/E, Lord Reed had this to say :

"This prevision (i.e. the third sentence) purports to entitle the contractor to 'suspend or withhold payment of any monies due'. There is no reference to the amount of the contractor's claim in respect of breaches of contract and no requirement that before withholding payment he need even estimate the amount of his claim. Read literally this provision would entitle the contractor to withhold sums far in excess of any fair estimate of the value of his claims. That would simply be to impose a penalty for refusing to admit his claims..... So, as it Stands, this provision is unenforceable."

At p. 703 G, Lord Morris commented :

"If this (the third sentence) was a valid provision, any failure, however unimportant, would enable the contractor to withhold present or future payments. Such a heavily penalizing provision ought not to be accorded any validity. "

At p. 711 D, viscount Dilhorne said :

"Literally read the third sentence of clause 14 enables the contractor to suspend or withhold payment of any monies due or becoming due to the sub-contractor, however large, if the sub-contractor is guilty of any breach, however minor, of the sub-contract. Read literally this sentence provides for the imposition of a penalty which may be wholly disproportionate to the damage suffered by the contractor. "

32. At p. 723 G/H, Lord Salmon came to the same conclusion on the third sentence :

"According to the natural meaning of its language, it would enable the contractors to suspend or withhold payment of very large sums of money due by them to the sub-contractors in the event of the sub-contractors committing some minor breach of contract causing only trivial damage in no way comparable to the amount own to the sub-contractors. This paragraph is, therefore, unenforceable since it provides for the exaction of a penalty. "

33. But the fourth sentence in the clause there under consideration was not even challenged as being unenforceable. The speeches given in Their Lordships' House were merely on a point of construction. At p. 698 F/G, Lord Reed observed :

"So I turn to the fourth sentence. I do not see how it can be limited to sums which had either been found to be due or agreed. It refers to bona fide contra accounts. The words 'bona fide' would be quite unnecessary and, indeed, meaningless, if the scope of this provision were limited to sums adjudged or agreed to be due. They must imply a claim which the contractor believes to be genuine but which may still be in dispute. "

34. At p.p. 704 C-E, 711 E/F, 715 D-E and 724 A/B-C, the other learned Law Lords delivered themselves of concurring opinions.

35. The fourth sentence is not different, in principle , from our Clause 106(2). In my view, Clause 106 is not a penalty but is a provision legally enforceable.

36. Proper construction of Clause 106(2) should not have been attempted in these summary proceedings. This matter was pressed upon me at great length, and I feel constrained to hold that the power of deduction was enforceable against the Contractor and had been duly exercised. The debt in the arbitral award has prima facie been shown to have been wholly satisfied. But whether or not the alleged quantum in Government's claim is sustainable, that must be an issue yet to be determined. It is quite impossible to decide here what, if any, unsatisfied claim the Contractor has in his arbitral award for supporting his present application under Section 28 of the Arbitration Ordinance. All these matters are inextricably tied to the subsistence or continued subsistence of the debt found due by the arbitrator. No court will come to the aid of a person with a wholly satisfied award.

37. In my view, if the Court could grant and should consider granting leave against the Crown under Section 28 of the Arbitration Ordinance, for all these reasons, I would exercise my discretion adverse to the Contractor and consequently refuse his application.

38. In conclusion, both as a matter of jurisdiction and on merits, I would not accede to the Originating Summons of the Contractor.

39. It remains for me to say that the plaintiff's application must be dismissed. I so dismissed it at the conclusion of counsel's submissions with an intimation that reasons were to be given in writing, which I now do.

40. The Attorney's inter partes summons was inappropriate and abandoned. I have also ordered its dismissal.

41. I would, as indicated, provisionally award costs against the Contractor on his Originating Summons but make no order as to costs in the Attorney's inter partes summons. At the request of Mrs. Spruce, all costs were reserved until the handing down of my written judgment.

(1) [1923] 92 L.J.K.B. 956

(2) Page 957 ibid.

(3) Commercial Arbitration, Mustill & Boyd, p. 370

(4) [1974] A.C. 689 at p. 704 C to E ,per Lord Morris of Borth-y-Gest

(5) [1848] 2 Ex. 471

(6) Ante. p.p. 697 H - 698 A