MASS TRANSIT RAILWAY CORPORATION v. HOPEWELL CONSTRUCTION CO. LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an application pursuant to S. 6 of the Arbitration Ordinance, Cap. 341 for the stay of parts of a statement of claim in litigation in favour of arbitration.

2. The plaintiff, the Mass Transit Railway Corporation, ("MTRC") was granted approximately 45 acres of land at Kowloon Bay for the purpose of constructing its principal railway depot. The railway depot roof covers an area of approximately 25 acres. On that roof, there has been a development comprising 41 blocks of flats and a commercial centre. The whole development on the railway depot roof is known as the Telford Gardens Development.

3. A contract for the construction of the 41 blocks of flats was made between MTRC and Telford Development Limited on 10th September 1976. Telford Development Limited in its turn contracted with the defendant, Hopewell Construction Co. Limited ("Hopeweel") for the construction of 20 of the 41 blocks of flats.

4. After commencing work on those 20 blocks of flats for Telford Development Limited, Hopewell won other construction contracts on the Telford Garden Development. These other contracts were made directly between MTRC and Hopewell. There were 4 such contracts. Two of those contracts were to construct the columns supporting the transfer plates on which the residential blocks in phases I and II of the residential development stood. That pair of contracts bore the numbers "702(1)" and "702(2)". The third of those contracts, namely "701(1)", was for the construction of walkways for access to the residential blocks in phase I of the residential development. Fourthly, there was contract number 703 which related principally to the construction of the commercial area but also included the construction of transfer plate columns and transfer plates for phase III of the residential development. The four contracts I have just described have, for the purpose of the present proceedings, been compendiously referred to as "the 700 series of contracts".

5. The four contracts in the 700 series were made on various dates between 20th February 1978 and 23rd October 1978. For the purpose of the proceedings before me, the date of acceptance of tender was treated as the date of the making of each of those four contracts. For the sake of completeness, I will just mention that the date of the acceptance of the tender in 702(1) was 20th February, 701(1) was 18th May, 703 was 6th October and 702(2) was 23rd October.

6. Each of the four contracts in the 700 series was on the Standard Form of Building Contract for use in Hong Kong, Private Edition with Quantities, Second Edition 1976, issued under the sanction of the Hong Kong Institute of Architects and the Royal Institution of Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong.

7. In each of the four contracts in the 700 series, a departure was made from the usual arbitration provision which is clause 35 of the Standard Form. The following was substituted:-

8. Not each of the four contracts in the 700 series had the same Architect. The Architect for contracts 701(1) and 703 was Messrs Palmer & Turner wheras the Architect for contracts 702(1) and 702(2) was Messrs Hsin Yieh & Associates.

9. Because of loading restrictions on the roof at the Kowloon Bay Railway Depot, Hopewell negotiated with MTRC for the provision of an off-site work and storage area to assist Hopewell carry out the construction of the 20 blocks of flats for Telford Development Limited. The opening gambit in those negotiations between MTRC and Hopewell was Hopewell's letter to MTRC dated 8th September 1977. Correspondence and discussion continued between Hopewell and MTRC, the upshot being that in or about 1978 MTRC procured a piece of land on the west of Wai Yip Street for Hopewell to use as a storage and works area for the 20 blocks of flats. That area comprised 6,139 square metres, and is "Area 2" on the plan forming part of exhibit SWGE-4(i) to the affidavit of Mr Elliott, filed 24th September 1986. MTRC has to pay Government $65 per square metre per annum for open areas and $130 per square metre per annum for covered areas, and wishes to pass those costs on to Hopewell for the time Hopewell used this land as a storage and work area. The actual amount being claimed by MTRC from Hopewell in respect of "Area 2" is $1,278,160. That covers the period from 1st May 1978 to 31st December 1980.

10. Despite demands from MTRC, Hopewell has refused to pay that sum of $1,278,160. Hopewell's defence in respect of that sum is that Hopewell was merely acting as the agent of Telofrd Development Limited while negotiating with MTRC for storage and working areas in respect of constructing the 20 blocks of flats, so that on ordinary principles of the law of agency, MTRC should look to Telford Development Limited for payment. Further, Hopewell contends that this figure of $1,278,160 was included in a general settlement reached between MTRC and Telford Development Limited in 1982, with the result that MTRC's claim can be defeated by a plea of accord and satisfaction. Also, Hopewell disputes the actual amount claimed, as it makes no admission in respect of the size of the area it occupied, nor the duration of its occupation.

11. Paragraphs 1 - 10 of the statment of claim accompanying the writ in the present action relate to that sum of $1,278,160 which I have just described in respect of work and storage areas for the construction of the 20 blocks of flats.

12. After Hopewell began negotiating with MTRC for the provision of off-site storage and working areas in respect of the 20 blocks of flats, the topic of the provision of off-site work and storage areas for the 700 series of contracts became a subject matter of discussion and correspondence between Hopewell and MTRC. MTRC procured work and storage areas for Hopewell for the purpose of carrying out the construction required by the 700 series of contracts. The areas thus procured by MTRC are those shown as "Areas 1, 3, 4 and 5" on the plan, exhibit SWGE- 4(i), I have already referred to. The rent payable by MTRC to Government was again $65 per square metre per annum for open areas and $130 per square metre per annum for covered areas. Hopewell moved into occupation of those areas I have just described in late 1978 or early 1979. The total which MTRC claims to have paid to Government in respect of "Areas 1, 3, 4 and 5" for the period between 1st January 1979 and 31st December 1980 is $1,203,378, and MTRC wants to pass that cost on to Hopewell Hopewell denies all liability in respect of such rent, contending it was MTRC's obligation under the 700 series of contracts to provide off-site working and storage areas.

13. Paragraphs 11 - 14 of the statment of claim relate to that figure of $1,203,378 which MTRC is claiming as rental for the "Areas 1, 3, 4 and 5" just described.

14. It is in respect of the claim embraced by paragraphs 11 - 14 of the statement of claim that Hopewell now seeks a stay in favour of arbitration.

15. Neither of the two Architects involved in the four contracts making up the 700 series has had this dispute relating to rent referred to him for a decision in writing under the arbitration clause.

16. The arbitration clause in the 700 series of contracts is, I am satisfied, indistinguishable in its material particulars from clause 66 of the Fifth Edition of the Institution of Civil Engineers Standard Form of Contract in the United Kingdom. I have been convinced by the reasoning in pages 266 - 271 of Mr Duncan Wallace's Commentary on the Fifth Edition of the Institution of Civil Engineers Conditions of Contract that an arbitration clause like the one in the 700 series of contracts will not operate as a bar to litigation where no reference to the Architect has taken place. Thus, Hopewell's application for a stay in respect of paragraphs 11 - 14 of the statement of claim fails in limine.

17. Yet another liminal reason exists why Hopewell's application for a stay should fail. The dispute falls outside the ambit of the arbitration clauses under the 700 series unless it can be said to be "in connection with or arising out of the Contract or the carrying out of the Works". The onus is on Hopewell to show that the dispute is within the arbitration clause: See Mustill & Boyd's Commercial Arbitration, page 416. Whether any dispute arises "in connection with or arising out of the Contract or the carrying out the Works" is a matter of impression. Here, I am looking at four separate contracts which make up the 700 series. When I consider, say, contract No. 701(1), am I satisfied that the dispute about this $1,203,378 for rent for storage and work areas arises in connection with or out of that contract or the carrying out of the works comprised in that contract? I think the answer is clearly, "No". The same question asked in respect of the other three contracts in the 700 series also brings the answer, "No".  The answer might have been different if there had been just the one comprehensive contract instead of four separate ones. I am satisfied that the arrangements relating to rent for storage and work areas are not sufficiently closely connected with any of the four contracts in the 700 series to bring the arbitration clause into play.

18. The summons is silent as to which of the four contracts in the 700 series should be arbitrated as the result of the dispute. When I questioned counsel for Hopewell on this aspect, he submitted that all four of the contracts should be arbitrated. My conclusion, however, is that none of them should be arbitrated because the dispute does not relate to any one of the four in particular. On the view I take, the dispute is on a matter separate from the four contracts in the 700 series. Another way of looking at the matter is to say that the dispute does not "affect" the four contracts in the 700 series. As to this, see Mustill & Boyd, page 420 and Heyman v. Darwins, Limited ⁽¹⁾.

19. That the 700 series comprises four contracts rather than one will also be seen to have significance in the context of multiplicity of proceedings and the exercise of the court's discretion, which is the topic I deal with next.

20. How then would the court have exercised its discretionary powers, had Hopewell not failed on the two liminal points dealt with above? Once the court is satisfied that there is a dispute in respect of matters agreed to be referred to arbitration, the court will order a stay unless there is sufficient reason why the dispute should not be referred to arbitration. In this context, the onus is on a plaintiff to show cause why the parties should not be held to their bargain to arbitrate.

21. For the purpose of considering how the court would have exercised its discretionary powers in the present instance, it is necessary to bring in some further facts. By a letter dated 1st May 1978, Hopewell requested MTRC to acquire a work and storage area of 80,000 square feet to the west of Wai Yip Street and undertook to pay $3 per square foot per annum for that area. Subsequent correspondence from Hopewell (namely, a letter dated 10th March 1981 and a further letter dated 14th April 1986) confirmed that the 80,000 square feet in respect of which Hopewell agreed to be liable for rent at the rate of $3 per square foot per annum comprised the areas shown as Areas 1, 2 and 3 on the plan (Exh. SWGE-4(i)), already referred to. Area 2 was the storage and work area for the 20 blocks of flats Hopewell was constructing for Telford Development Limited, whereas Areas 1 and 3 are included in the storage and work area for the 700 series of contracts. Hence, Hopewell's admission of liability for rent to MTRC in respect of 80,000 square feet at $3 per square foot straddles the work and storage areas for the construction of the 20 blocks of flats as well as the work and storage areas for the 700 series of contracts.

22. Paragraphs 15 - 17 of the statement of claim relate to Hopewell's undertaking in its letter of 1st May 1978 to be liable to MTRC for the rent in respect of the 80,000 square feet just referred to. In the proceedings before me, the claim covered by paragraphs 15 - 17 of the statement of claim was referred to as "the alternative claim". Whereas paragraphs 1 - 10 of the statement of claim relate exclusively to the storage and work area for the construction of the 20 blocks of flats and paragraphs 11 - 14 relate exclusively to the work and storage areas in respect of the 700 series of contracts, paragraphs 15 - 17 of the statement of claim, by contrast, are of a mixed nature, referring to both the construction of the 20 blocks of flats and the 700 series of contracts.

23. Because of the alternative claim comprised in paragraphs 15 - 17 of the statement of claim, the spectre of multiplicity of claims and inconsistent verdicts arises.

24. If Hopewell are right, and there has to be arbitration on clauses 11 - 14 of the statement of claim as well as litigation in respect of paragraphs 1 - 10 and 15 - 17 of the statement of claim, then, besides the proceedings in the High Court, there will also then need to be referral to two separate Architects for their decisions in writing under the arbitration clauses and references to as many as four arbitrators if a separate arbitrator is appointed for each of the four contracts in the 700 series.

25. Can it seriously be suggested that as part of their bargain, the parties ever contemplated that a dispute over a work and storage area should be referred to two Architects, followed by four arbitrators? At the point of contracting, no businessman in his right mind would tolerate such an absurd state of affairs. If it is said that the sanctity of contract requires such a result, I can only say that the sanctity of common sense dictates otherwise. Since the parties entered into the 700 series of contracts, there has, of course, been the enactment of S. 6B of the Arbitration Ordinance, empowering the court in suitable situations to order the consolidation of arbitrations, but rather than wait and see whether the number of arbitrations gets reduced by consolidation, I think a more sensible course is to act robustly now by keeping the number of proceedings at one by refusing a stay of the litigation.

26. If arbitrations had already commenced under the 700 series of contracts, the court might have felt obliged to allow the arbitrations and the litigation to continue concurrently. Concurrent arbitrations and litigation were the situation facing the Court of Appeal in England in Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. ⁽²⁾. Faced with a fait accompli, the court there allowed both sets of proceedings to continue and relied on issue estoppel to avoid conflicting decisions. However, in the case presently before me, I am in the position where I can avoid the same issues arising in two different sets of proceedings by the simple expedient of refusing a stay of the litigation.

27. If I were to allow litigation and arbitration or arbitrations in the situation now before me, there could then be the unseemly spectacle of a race between the litigation and arbitration to get seized of the issues first, so as to confront the slower tribunal with issue estoppel. Rather than create a legal mare's nest, I prefer the neater and more sensible solution of simply leaving all the issues to the court for determination.

28. Two other minor matters call for comment. One of those matters is the difficulty MTRC might have with some of its witnesses if both litigation and arbitration were permitted. Those difficulties are described in paragraph 20 of Mr Duncan's affidavit, sworn 10th October 1986. Although there might be some inconvenience to MTRC's witnesses, I have not been satisfied on the strength of the material in Mr Duncan's affidavit that this is a factor which would dispose me to exercise my discretion against arbitration. The other point is whether Hopewell is ready, willing and able to arbitrate. To remove any doubt on this, I would have allowed Hopewell to file an affidavit confirming its willingness, readiness and ability. No doubt, such an affidavit would readily be forthcoming, and I do not think MTRC, on this ground, has any realistic prospect of defeating any entitlement on the part of Hopewell to arbitrate. However, both of the points decided in Hopewell's favour in this paragraph are of academic interest only in view of my overall finding against Hopewell on the summons.

29. There is one other minor matter. That is the admissibility of the enlarged photographs of the work and storage area, exhibited to Mr Greenwood's affidavit made on 16th October 1986. I regard those photographs as relevant and admissible. Although Counsel for Hopewell objected to those photographs initially, he did not persevere with his objections. I think he was right not to persevere with his objections, because there is no rational basis on which those photographs could be excluded from the court's consideration.

30. In view of the foregoing, Hopewell's application for a stay stands dismissed.

(1)    [1942] A.C. 356, 360 and 366
(2)    [1984] 2 W.L.R. 676