CARRIER HONG KONG LTD v. DICKSON CONSTRUCTION CO LTD

HCCT11/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.11 OF 2005

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J U D G M E N T

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1. This is an application by Carrier H.K. Ltd (“Carrier”) who is the respondent in an arbitration, for a declaration under RHC Order 73 rule 3(2).  The claimant in arbitration, Dickson Construction Company Ltd (“Dickson”) has instituted proceedings against Carrier under the Arbitration Ordinance, Cap. 341.  Carrier has challenged the fact that there is any arbitration agreement which binds the parties.  Consequently the parties agreed to submit to an arbitrator, Ms Teresa Cheng SC, a preliminary question namely whether the parties were bound by a contract which contained an arbitration agreement.  On 7 January 2005 the arbitrator published a partial final award in which she found that a binding contract did exist, that it contained an arbitration agreement in writing and therefore, that she had jurisdiction to hear the dispute between the parties.

2. Carrier now seeks a declaration from this court that the arbitrator’s declaration that she had jurisdiction was wrong.

3. By RHC Order 73 rule 3(2) this court may re-hear the arguments.  It can receive evidence which was not before the arbitrator.  It is a hearing de novo in which the court can confirm or reverse the arbitrator’s finding.  Before the arbitrator the onus was on Dickson to establish that an arbitration agreement which bound the parties existed.  The same onus applies in this hearing.  Both sides have filed further evidence since the publication of the partial final award.  The further evidence relates to one sub-issue only.  One of the issues before the arbitrator was the nature and extent of the works actually carried out by Carrier when they were on-site between October 2002 and March 2003.  Carrier’s case was that it was of a limited and preparatory nature.  Dickson’s case was that it was more than preparatory.  The further evidence is on this subject.  It adds little to the key questions to be answered.

4. Carrier have been represented by Mr Peter Graham both before the arbitrator and in this application.  Mr Rimsky Yuen SC leading Mr Victor Dawes, neither of whom appeared below, have appeared on behalf of Dickson.

BACKGROUND

5. As this is, in effect, an appeal by way of a re-hearing it is necessary to set out exactly what the arbitrator’s decision and findings were.  However, in order properly to understand them, a brief outline of the background will help to put them in context.

6. Dickson, in early 2002 were putting together a tender to the Architectural Services Department (“ASD”) who was the employer in a forthcoming project.  The deadline for the tenders was 3 May 2002.  Dickson had invited Carrier to be it’s nominated HVAC sub-contractor (Carrier bearing on the ASD approved specialist sub-contractors list).  In its tender to ASD Dickson was required to name its chosen sub-contractor and to disclose the agreed sub-contract price.  There can be no doubt that prior to 3 May 2002 Carrier knew that they were being nominated by Dickson, knew that a price of $33 million had been entered in the tender, knew the scope of the works to be carried out, knew that Dickson was hoping to be appointed as main contractors by ASD and knew that, if successful, that would be a “back and back” contract with ASD.

ARBITRATOR’S FINDINGS AND DECISION

7. It is common ground that not everything was agreed in early May 2002.  Some matters were outstanding.  One in particular was referred to by Carrier by its letter of 2 May 2002.  That was the right to vary the price depending on the variations in foreign exchange rates affecting the purchase of equipment.  A second matter, which emerged later, was the price, if any, of variation orders.

8. Nonetheless, the arbitrator found that the essential terms had been agreed.  She found that Carrier had intended to be bound and not only did they know that $33 millions was the price that had been submitted to ASD but also that Carrier had agreed that price.  It was one of those familiar situations in the Hong Kong construction industry where a sub-contractor had to make a decision whether it wanted the job or not.  If it did, it was well known to an experienced sub-contractor such as Carrier that its proposed contract with Dickson would be a “Standard Form Domestic Sub-contract” using the “blue form” which necessarily incorporated a written arbitration agreement in clause 18.

9. In addition to finding these matters outlined in the “background” above, the arbitrator, in support of her finding that Carrier knew that $33 million was the agreed price on 2 May 2002 made a specific finding that on 2 May 2002 in the course of telephone conversations Mr Hung of Carrier offered to do the work for $33 million and Mr Chin of Dickson accepted the offer.  Mr Chu of Dickson corroborated this evidence.  All the evidence before the arbitrator was by affirmations and documentation.  Both parties were invited to call witnesses before the arbitrator.  Neither accepted the invitation.  The re-hearing before this court has been on the same basis.

CARRIER’S COMPLAINTS

10. Carrier’s primary submission is that the arbitrator was wrong to conclude that Dickson had satisfied the onus upon it to demonstrate that a binding contract containing a written arbitration agreement had come into existence which thereby founded the jurisdiction upon which the disputes between the parties could be resolved by arbitration.

11. The main issues, which they submit should have caused her to reach a different decision are as follows :

(1)	Important terms in the contract were not agreed in the early May exchanges by correspondence and telephone.  Those terms remained unresolved.  One issue in particular, namely the value of variation orders, was still a matter of dispute when Carrier stopped work in early April 2003.
(2)	Carrier’s letters of 2 and 4 May offering to do the work for, firstly $35 million, then $33 million, are headed “subject to contract” and contain conditions under which the offers were made.
(3)	Negotiations about the terms of the contract continued after 4 May 2002 thus indicating that no complete agreement had been reached.  For example, the contract price was reduced to $32,920,000 in December 2002 and also Dickson’s “letter of acceptance” dated 2 January 2003 sets out a number of provisions which had not previously been discussed.
(4)	Little or no weight should be attached to the fact that Carrier commenced work as sub-contractors in October 2002 and continued to do so until it left the site at the end of May 2003.  This is because the work was only preparatory in nature and is not, in any event, evidence of a binding agreement.
(5)	Additionally, Carrier complain that the arbitrator should not have made findings of fact based on conflicting affirmation evidence.
(6)	Finally, it is submitted that if Carrier is bound by a written arbitration agreement there is uncertainty about which arbitration agreement binds them.  They pose the questions—is it Clause 18.2 of the Standard Form contract which Dickson says formed the basis of their agreement in May 2002?  Or, is it the arbitration agreement in the main contract later agreed between Dickson and ASD?  The argument in support of the latter being that once Dickson was appointed by ASD the contracts were back to back therefore the arbitration agreement which applies to Dickson must also apply to Carrier.
The argument concludes that if there is lack of certainty as to the terms of the arbitration agreement there can be no agreement.

APPLICABLE LEGAL PRINCIPLES

(a)   For an arbitration agreement to bind the parties it must be clear that both parties so intended and the agreement must be in writing

12. This principle is spelt out in Aughton Ltd v. M.F. Kent Services (1991) 57 BLR where it was stated that :

“…  It provides good reason for requiring that an alleged intention of the parties to exclude the ordinary right of access to the court by an arbitration agreement, which may well include special terms of limitation, be clearly demonstrated from the terms of the contract.

I also recognize the importance of the point that clear words should be required before a party is to be deprived, by an agreement imputed to him, of his ordinary right of access to the court in exchange for a right to arbitrate.

The object, or the effect, of that statutory requirement must be to emphasise, and seek to ensure, that one is not to be deprived of his right to have a dispute decided by a court of law, unless he had consciously and deliberately agreed that is should be so.  Thus, if one party to a dispute under a contract wishes to litigate it in a court of law, it would be no answer for the other party to prove, by the clearest evidence, or even an admission, that there had been an oral agreement to arbitrate, which had not been reduced into writing or specifically evidenced by writing.”

13. It is also a requirement by section 2 AC of the Arbitration Ordinance Cap. 341.

(b)   An agreement to carry out works may be complete and binding in spite of the fact that a number of details have yet and be agreed or finalized.  This is particularly so in the construction industry.  A binding agreement may, in any given case depending on its own facts, be inferred from a consensus on the basic, albeit essential, terms

14. The 29^th edition of Chitty on Contracts refers to this issue in the following way :

“In all these cases, the Courts took the view that the parties intended to be bound at once in spite of the fact that further significant terms were to be agreed later, and that even their failure to reach such agreement would not invalidate the contractunless, without such agreement it was unworkable or too uncertain to be enforced.

….

Thus an agreement is not incomplete merely because it calls for some further agreement between the parties.  Even the parties’ later failure to agree on the matters left outstanding will vitiate the contract only if it makes it ‘unworkable or void for uncertainty’.”

15. The point is also made in Matsui Babock Energy Ltd v. John Brown Engineering Ltd (1996) 51 Con LR 129 :

“It is sometimes said that the parties must agree on the essential terms and that it is only matters of detail which can be left over.  This may be misleading, since the word “essential” in that context is ambiguous.  If by “essential” one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract.  If by “essential” one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous.  If by “essential” one means a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue.  It is for the parties to decide whether they wish to be bound and, if so, by what terms, whether important or unimportant.  It is the parties who are, in the memorable phrase coined by the Judge, “the masters of their contractual fate”.  Of course the more important the term is the less likely it is that the parties will have left it for future decision.  But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later.  It happens every day when parties enter into so-called “heads of agreement”.”

16. In a more recent decision, Ward LJ (in ACT Construction Ltd v. E Clarks & Sons (2002) BWCA 11) went further still and stated that even a failure to finalize the price and scope of works was not necessarily fatal to a finding of an agreement :

“…  In focusing on the essential ingredients for ‘a building contract of some complexity’ the judge may have lost sight of the fact that even if there is no entire contract, and especially even if there is no ‘formal’ contract, there may still be an agreement to carry out work, the entire scope of which was not yet agreed, even if a price has not been agreed.  Provided there is an instruction to do work and an acceptance of that instruction, then there is a contract and the law will imply into it an obligation to pay a reasonable sum for that work.  That is what happened here.”

(c)   The consequence of Carrier’s letters of 2 and 4 May 2002 being headed “subject to contract”

17. The meaning of the phrase is not as strict as contended for by Carrier.  Carrier relies on a conveyancing case for its meaning (Mui Foon v. Land Development Corporation, HCMP6219/1998).  I find it more helpful to apply Hudson’s Building Engineering Contracts 11^th edition :

“The background in construction contracts is very different (to conveyancing).  Not only is the tendered documentation usually expressly designed to obtain a tender offer capable of immediate binding acceptance, but it is the very same documentation which frequently also expressly contemplates a later formal contract.”

THE FACTS

18. Having set out some of the important legal principles I turn to an outline of the facts.  Many of the facts were not in dispute.  On a consideration of all the evidence, both on affirmation and in the documents, particularly the correspondence, I am satisfied of the following facts, which form the basis of my decision :

(a)	Between 2 and 4 May the parties negotiated the price from $35 million down to $33 million.
(b)	Mr Hung of Carrier agreed this price initially on the telephone.
(c)	The price and Carrier’s name, to Carrier’s knowledge was entered in the tender documents to ASD.
(d)	Carrier’s agreement to be bound was subject to (or conditional upon) ASD accepting Dickson’s tender, which it did in August 2002.
(e)	Letters from Carrier after 4 May cease to be headed “subject to contract”.
(f)	At the time of Carrier’s tender to Dickson they had chosen not to include their Bills of Quantities.  Therefore rates for variations had not been finalized or even discussed.
(g)	Carrier were informed that the tender had been successful in October 2002 and commenced work almost immediately.
(h)	Carrier worked on site for about 6 months.  Their first written indication that they did not consider themselves bound by contract was 31 March 2003.  They formally wrote to Dicksons to this effect on 9 April 2003 and withdrew from the site on 28 May 2003.
(i)	On 4 December 2002 the price of the contract was reduced by a further 0.24% to $32,920,000.
(j)	Dickson sent its “Letter of Acceptance” to Carrier on 2 January 2003.  Some terms, particularly the rate for variations, continue to be discussed thereafter in correspondence.

THE DECISION

19. In my judgment, the application of legal principles to the facts, summarized (not comprehensively) above results in Carrier’s application being dismissed.  The essential reasons being as follows :

(1)	In all the circumstances it was proper for the arbitrator and it is equally proper for this court to prefer Dickson’s evidence relating to Carrier’s agreement to the price of $33 million by telephone, regardless of the fact that there was no oral evidence on this particular matter.  All the surrounding evidence supports such a finding.  Carrier’s letter of 4 May confirmed the price, Carrier knew an agreed price had to be included in Dickson’s tender to ASD and Dickson produced corroborative evidence support.  It is a safe and obvious finding to make.
(2)	The terms which Carrier had agreed in early May 2002 were sufficient to bind them in contract to Dickson.  The agreement incorporated the blue form which contained the written arbitration clause at 18.2.  The terms which were yet to be agreed were non-essential for the purpose of a binding agreement.  The high water mark of Carrier’s complaints in this regard concerns the absence of consensus on the valuation of variations.  This cannot be relied on by Carrier as an escape route from being bound.  The absence of BQ from their offer in May 2002 was of their choosing.  In their letter of 2 May 2003 they indicated that the BQ would be forwarded in due course.  Moreover, the fact that ASD subsequently zero rated variations does not necessarily mean that Carrier would be paid nothing for them.  Carrier would have the opportunity of arguing subsequently that the valuation of variations should be governed by the mechanism set out in the standard form contract which was to govern the relationship between themselves and Dickson or to rely on an implied term.  In short, the absence of agreement on this particular term and on other less significant terms, does not dilute in any way the binding nature of agreement on essential issues and therefore the existence of a contract.
(3)	There is little or no merit in Carrier’s submissions in relation to their “subject to contract” argument.  The words appears on the two letters of 2 and 4 May and then disappear.  In a construction contract such as this they cannot provide Carrier with an escape route from their agreement and obligations at any time in the future.  The reality is that the “contract” which it was “subject to” was ASD’s acceptance of Dickson’s tender.  In May everything was conditional on Dickson being offered the job as main contractor.  Between May and August (when Dickson were awarded the contract) Carrier remained the nominated sub-contractor.  Once appointed they were obliged to carry out the sub-contract works accordingly.
(4)	The fact that Carrier carried out works under the sub-contract for 6 months from October 2002 and did not finally leave the site until the end of May 2003 is strongly indicative of the fact that they regarded themselves as being a party to the agreement and held themselves out as such.  Mr Graham is right when he said that the commencement of work does not necessarily prove a contract.  However, the length of time and circumstances in which the work is done can add weight to the proposition that a contract is in place.  In this case, for example, Carrier produced regular progress reports in its own name as the HVAC sub-contractor.
(5)	The fact that the price of the contract was slightly reduced to $32,920,000 in December 2002 cannot be construed as evidence of continuing negotiations prior to reaching a binding agreement as contended for by Mr Graham.  The amount of the reduction was very small.  It was little more than as exercise in “good will” by Carrier to make a further token reduction 2 months after work had commenced.  Had Carrier said no, there was little Dickson could have done about it.  In any event, tinkering with the price during the contract is not uncommon in construction cases.
(6)	Carrier’s complaint that there is confusion as to which arbitration agreement applies to the sub-contract is, in my judgment, without foundation.  The fact that after Dickson was awarded the contract by ASD the relationship between employer, main contractor and sub-contractor became a “back to back” relationship does not alter the fact that the arbitration agreement between Carrier and Dickson remains the one which was necessarily incorporated by means of the blue form in May 2002.  Namely clause 18.2 of the Standard Form.  The arbitration agreement has a separate existence of its own.

20. In summary, I agree with the conclusions reached by the arbitrator.  I have come to the same conclusions for the same reasons.  Carrier’s application under Order 73 rule 3(2) is dismissed with a costs order nisi in Dickson’s favour.