SUNGLOW SUPPLIES & ENGINEERING LTD v. SHING HING CONSTRUCTION COMPANY LTD

DCCJ1005/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1005 OF 2013

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DECISION

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1.  This is an appeal against an order made by a master.

THE APPLICATION

2.  By a summons dated 27 May 2013, the defendant applies, inter alia, for an order that all further proceedings in this action be stayed pursuant to section 20 of the Arbitration Ordinance (“the Summons”).

3.  On 18 November 2013, Master Timon Shum dismissed the Summons after hearing submissions from both sides.

4.  This is the appeal brought by the defendant against the decision made by the master on that day.

BACKGROUND

5.  The defendant is the main contractor for the restoration work of a heritage building situated at 12, Belcher’s Street where the former Western Fire Station used to locate.  It is now an old people’s home run by the Po Leung Kok.  The work involved, inter alia, the restoration of the external wall and the wooden windows (“the Project”).

6.  The plaintiff is one of the two sub-contractors engaged by the defendant for the Project.  The other sub-contractor is one Cheung Kee Woodworks Co Ltd (“Cheung Kee”).  It is not disputed that the plaintiff did the restoration work for the external wall and Cheung Kee did the restoration work for the wooden windows in the Project.

7.  On 30 September 2010, the defendant submitted a tender to the Architectural Services Department (“ASD”) for the Project. 

8.  On 20 October 2010, the architect in charge of the Project at the ASD verbally requested the defendant to contact Mr Sunny Chow (“Chow”) of the plaintiff asking them to provide method statement and material details relating to the Project.

9.  On 1 November 2010, the plaintiff submitted a quotation dated 29 October 2010 (“the 1^st Quotation”) and a method statement for the work.  Part A of the 1^st Quotation refers to the restoration of the external wall, inter alia, the provision of labour and materials for cleaning and protection of general façade with rising damp (“the Aida Item”). Part B of the 1^st Quotation refers to provision of materials for the “Remmers” wooden protection system for timber windows and louvres (“the Aidol Item”).  (Note: The Aida Item is a type of material used for fixing the external wall and the Aidol Item is a type of material used for fixing the wooden windows in the Project).

10.  On or about 18 November 2010, Chow of the plaintiff suggested to Mr Yuen Hung Wai (“Yuen”) of the defendant that Cheung Kee should be appointed to do the wooden window work.  At that time, the defendant did not know that Cheung Kee was also owned by Chow.  The defendant only found out about this later.

11.  On 18 November 2010, Cheung Kee provided a quotation for work to be done on the wooden windows and louvres in the Project (“the Cheung Kee Quotation”), including the removal of the old windows and louvres and supplying and installing of new wooden windows and louvres.  However, it specifically excluded the “supply of painting / coating / cleaning material”, ie the Aidol Item, which are the materials used for restoring the wooden windows, under this quotation.     

12.  On 16 December 2010, the plaintiff provided a revised quotation for, inter alia, the Aida Item (“the Revised Quotation”). Under this quotation, it has been specifically provided that the Hong Kong Construction Association Ltd’s (“HKCA”) standard form of domestic sub-contract should be adopted.

13.  On 28 December 2010, the defendant provided 2 separate quotations for the Aida Item and Aidol Item respectively.

14.  For the Aida Item, it was by way of a further revised quotation from the Revised Quotation where the defendant was to provide labour and materials for, inter alia, “cleaning and protection of General Façade with Rising Damp” by applying the “Aida” injection cream filling system on the external wall (“the Aida Quotation”).  Under the Terms and Conditions of the Aida Quotation, it has been specifically provided that “The Hong Kong Construction Association Ltd Standard Form of Domestic Sub-contract (2008 Edition issued) (sic.) to be adopted”.             

15.  For the Aidol Item, a new and separate quotation was submitted by the plaintiff to the defendant on the same day (“the Aidol Quotation”).  Under this quotation, it was for the provision of the Aidol materials only.  The terms of payment were quite different from the Aida Quotation.  No reference was made under the Terms and Conditions that the HKCA’s standard form of domestic sub-contract should be adopted, although both the Aida and Aidol Quotations contained the term that “all material and workmanship to be compiled with main contract requirement and satisfactory of the Architect, ASD and SHC.”   

16.  On 29 December 2010, Cheung Kee and the defendant entered into a written sub-contract for the wooden work of the Project by adopting the HKCA’s standard form of domestic sub-contract. The Cheung Kee Quotation has specifically been mentioned in the Third Schedule of the sub-contract and the entire quotation has been incorporated and included as part of the sub-contract between Cheung Kee and the defendant.

17.  On 14 January 2011, the plaintiff revised the Aida Quotation without taking out the reference to the “Standard Form of Domestic Sub-

18.  On 26 January 2011, the defendant and the plaintiff entered into a written sub-contract by adopting the HKCA’s standard form of domestic sub-contract for the “Restoration of External Walls and Building (A&A) Works” in the Project (“the Sub-Contract”).  Under the Second Schedule of the Sub-Contract, “Sub-Contract Works” has been described as “(R)estoration of external walls and the walls of the stairs outside Main Building which include brick, granite and cement sand surface etc except applying painting to the inner side of parapet.”  The revised Aida Quotation dated 14 January 2011 has been specifically included and referred to in the Second and Third Schedules of the Sub-Contract.       

19.  Clause 18 of the Sub-Contract stipulates the following arbitration clause:-

“18.1 If any dispute or different arises between the Sub-Contractor and the Contractor (together termed “the Parties” and either one termed “the Party”) in connection with this Sub-Contract…

18.2 If either Party refuses such request for mediation or adjudication or if mediation or adjudication fails to resolve the dispute or different…such dispute or difference shall subject to the provisions of this Clause, be referred to the arbitration and final decision of a single arbitrator in accordance with and subject to the provisions of Part II of the Arbitration Ordinance…”. [emphasis added]

20.  On 27 January 2011, the defendant by way of a cover letter signed and accepted the plaintiff’s Aidol Quotation dated 28 December 2010 referred to in §15 above.  As said, this quotation does not contain a reference to the HKCA’s standard form of domestic sub-contract and hence no referral to arbitration could be found on the face of the document. 

21.  On 22 March 2011, the defendant accepted a re-revised quotation on the Aida Item which does not affect the substance of the Sub-Contract entered into by the parties on 26 January 2011. 

22.  On 19 December 2011, an unsigned “specimen” certificate of warranty was provided by the plaintiff to the Chief Property Services Manager of the ASD for the Project covering 12 different products, including the Aida and Aidol Items.  It is not clear whether this certificate of warranty had in fact been signed and delivered to either the defendant or the ASD then or subsequently.

23.  When the plaintiff commenced the present proceedings by issuing the Writ of Summons, together with the Statement of Claim, on 26 March 2013, the Aida Item was originally included in the claim. However, the plaintiff later conceded that the Aida Quotation should be stayed in favour of arbitration in accordance with clause 18.1 of the Sub-Contract.  Hence, a Notice of Withdrawal was filed by the plaintiff for the Aida Item on 16 May 2013.

24.  However, the plaintiff argues that the Aidol Quotation is a “stand-alone” contract and thus does not fall within the ambit of the Sub-Contract.

25.  The defendant, on the other hand, argues that the Aidol Quotation is not a “stand-alone” contract and in any event, the defendant says that the Aidol Quotation cannot be said to be entirely unrelated to the Sub-Contract and thus the Sub-Contract is wide enough to cover the Aidol Quotation.

LEGAL PRINCIPLES INVOLVED

26.  Section 20 of the Arbitration Ordinance, Cap 609 provides for a mandatory stay of proceedings in favour of arbitration where the action is the subject of an arbitration agreement, unless the court finds that the agreement is null and void, inoperative or incapable of being performed.

27.  HH Judge Mimmie Chan (as she then was) in Fai Tak Engineering Co Ltd v Sui Chong Construction Engineering Co Ltd, DCCJ 305/2009, (unreported; 22 June 2009), succinctly summarized the relevant principles as follows:-

“11. The legal principles applicable to determination of the Summons are not seriously in dispute. In considering an application to stay proceedings in favor of arbitration, the proper test is whether there is a prima facie case that the parties were bound by an arbitration clause. The onus is on the applicant for stay to demonstrate this. Unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed for arbitration (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309; Private Company “Triple V” Inc v Star (Universal ) Co Ltd & Another [1995] 3 HKC 129). When there is a dispute as to whether there was an arbitration agreement or clause, the onus on the applicant has been explained to mean that the applicant has to prove that there is a good prima facie or plainly arguable case, predicated on cogent, and not dubious or fanciful, evidence that an arbitration clause or agreement existed (Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd [2003] 3 HKC 659).

12. In Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, Ma J (as he then was) set out the approach of the Court in dealing with an application for stay.  There are four questions which a court must generally deal with: (i) Is there an arbitration agreement between the parties? (ii) Is the clause in question capable of being performed? (iii) Is there in reality a dispute or difference between the parties? (iv) Is the dispute or difference between the parties within the ambit of the arbitration agreement?”

28.  In determining whether a dispute between the parties fall within the ambit of the arbitration agreement, ie Question (iv) above, Ma J (as he then was) in Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Ors [2003] 1 HKC 418 at pp 434-435 made the following observations:-

“Question 4: Is the dispute or difference between the parties within the ambit of the arbitration agreement?

53. The existence of disputes or differences between the parties is not by itself enough to activate the operation of an arbitration agreement. It is necessary further to demonstrate that such disputes or differences are matters which are intended by the arbitration agreement to be referred to arbitration. In other words, the relevant dispute or difference must come within the ambit of the arbitration agreement.

54. This part of the inquiry requires the court to construe the arbitration agreement in order to identify exactly what matters are required to be referred to arbitration.

55. The arbitration agreement in the present case is by no means an unusual one in this regard. The matters to be referred to arbitration are ‘All disputes [between the plaintiff and the defendants]…as to the performance of the [placement memoranda]…or as to any matter or thing arising out of the [placement memoranda]…or in any way connected therewith…’ These are very wide words in my view.

56. The summary of the plaintiff’s claims demonstrates in my view that they clearly fall within the ambit of the arbitration agreement in the present case…

57. Words like ‘in connection with’ or ‘connected therewith’ are wide in nature and will cover all disputes other than those entirely unrelated to the transaction covered by the contract in question: see Mustill & Boyd: Commercial Arbitration at p 119. These words are wide enough to cover claims in constructive trust as long as they are related to the transaction covered by the arbitration agreement”.

DISCUSSION

29.  Mr Kenneth Lam, counsel for the plaintiff, has in his submission conceded Questions 1 to 3 as set out in Tommy CP Sze & Co case, supra.   Therefore, the only remaining question for the court to decide is on Question 4, namely, is the dispute or difference between the parties within the ambit of the arbitration agreement?

30.  Mr Lam cited Ma J (as he then was) in Tommy CP Sze & Co, supra where at §59 on pp 435 – 436 the judge said the following regarding Question 4:-

“In deciding whether or not a dispute or difference comes within the ambit of an arbitration agreement (and therefore whether it should be referred to arbitration), the court adopts the following approach:

(1) As stated above, it must first construe the arbitration agreement itself.

(2) Next, it must analyse the nature of the dispute or difference by reference to the claim which is made.  The nature of the claim will enable the court to decide the question whether or not the dispute or difference is one that is covered by the arbitration agreement.  For example, where the arbitration agreement stipulates that all disputes or differences in connection with a contract should be referred to arbitration, the court will look at the claim that is made to see whether or not it is covered by these words…”

31.  Mr Lam submits that a classic example where a stay should be (and was in fact) refused can be found in the case of Link Wide International Investment (Hong Kong) Ltd v Devi Trading Company Ltd DCCJ 3509 of 2010 (Acting Chief District Judge ST Poon (as he then was); 17 December 2010), where the plaintiff entered into a written contract, called “the sales contract”, with the defendant, which had an arbitration clause, but then sued the defendant on a separate “stand-alone” contract, called “the compensation agreement”, which did not have any arbitration clause, without relying on the sales contract.  The judge held, on the facts of that case, the claim was not caught by the arbitration clause in the sales contract and there should thus be no stay of proceedings (see §§ 8-9 of Judgment).

32.  Hence, Mr Lam submits that the Aidol Quotation dated 28 December 2010, which was subsequently agreed and accepted by the defendant on 27 January 2011, was a “stand-alone” contract and therefore was not subject to the Sub-Contract and thus the referral to arbitration.

33.  Ms Elsie Yiu, counsel for the defendant, on the other hand, submits that the Aidol Quotation was not a “stand-alone” contract by reference to (1) mention was made to the “main contract” in the quotation itself when it stated that “all material and workmanship to be compiled with main contract requirement”; and (2) certificate of warranty was issued by the plaintiff covering both the Aida and Aidol Items.

Was the Aidol Quotation a “stand-alone” contract?

34.  There is no dispute that the Aidol Quotation in question started life under the 1^st Quotation when the plaintiff provided a quotation for both the Aida Item and the Aidol Item.  Under the 1^st Quotation, the parties intended that the HKCA’s standard form of domestic sub-contract to be adopted.  It was only due to Chow’s suggestion (and the subsequent agreement by Yuen of the defendant) that the wooden works were undertaken by another contractor, ie Cheung Kee, that resulted in two separate contracts for the wooden window works, one for the supply of the new windows and louvres and the other one for the Aidol Item.

35.  In the Cheung Kee Quotation, which was for the supply, delivery and installation of the new timber windows and louvres (together with their accessories) and the restoration and repair of the existing timber windows (together with their accessories), ie for labour and materials, no mention was made regarding the adoption of the HKCA’s standard form of domestic sub-contract.  However, by the time when the contract was signed on 29 December 2010, the Cheung Kee Quotation was incorporated as part of a HKCA’s standard form of domestic sub-contract and hence subject to the referral of arbitration.

36.  Similarly, for the Aida Quotation, not only it has specifically been mentioned in the quotation that the HKCA’s standard from of domestic sub-contract to be adopted, by the time when the Sub-Contract was signed on 26 January 2011, the Aida Quotation was specifically incorporated as part of the agreement.

37.  However, for the Aidol Quotation, it took a very different path.    

38.  Not only the term to adopt the standard form of domestic sub-contract was taken out from the original quotation, the Aidol Quotation has never formed part of the Sub-Contract entered between the plaintiff and the defendant on 26 January 2011.  In fact, a valid contract for the supply of the Aidol Item was only concluded between the plaintiff and the defendant the day after the parties signed the Sub-Contract for the Aida Item, ie on 27 January 2011.  That was when the defendant accepted and signed on the Aidol Quotation dated 28 December 2010 and paid the 30% deposit by cheque. 

39.  In my view, it was not due to mere coincidence or “purely circumstantial” as the defendant’s counsel would submit that the clause to adopt the HKCA’s standard form domestic sub-contract was omitted from the Aidol Quotation.  In my judgment, it is clear that the parties had intended that, for the purchase of the Aidol Item, which was for the supply of materials only with no provision of labour involved (with total contract sum at slightly less than HK$200,000), the HKCA’s standard form of domestic sub-contract, hence the arbitration clause, should not apply.  For the Aida Item, which involved the supply of both the labour and materials (with total contract sum at almost HK$1.2 million), the parties intended that they would be abided by the HKCA’s standard form of domestic sub-contract, hence the specific mention of it in the Aida Quotation and the subsequent signing of the Sub-Contract itself. Similarly, for the Cheung Kee Quotation, which was for the supply of both labour and materials (in the form of new timber windows and louvres) in the total contract sum of around HK$700,000, the parties agreed to subject themselves to arbitration by adopting the HKCA’s standard form of domestic sub-contract.        

40.  While it is true that both the Aidol Quotation and the Aida Quotation have made reference to the main contract and certificate of warranty, in my view, it does not mean that they are necessary subject to the HKCA’s standard form of domestic sub-contract also.  First, it is ultimately a question of interpretation of the parties’ intention at the time of entering of the contract.  In my view, if the parties wished to subject the Aidol Item to the Sub-Contract, there were plenty of opportunities for them to do so.  The fact that they did not do so, despite of those opportunities, was in my view a good indication that they had not intended to subject this particular contract to arbitration.  I have not heard from Ms Yiu or the defendant that it was due to an inadvertence on the part of the defendant that this term was left out in the Aidol Quotation.  Second, I remind myself that we are dealing with a case where both sides are specialist and experienced contractors who are dealing at arm’s length and knew exactly what they were doing.  Given the fact that the Aidol Quotation was for the supply of the materials for fixing the wooden windows only and for a much smaller sum than the other two contracts, perhaps it is understandable why the parties did not want to subject this particular contract to the Sub-contract and arbitration proceedings.  Third, as conceded by the defendant, although the main contract included the Aida Item and the Aidol Item, there was no mediation and/or adjudication provision contained in the main contract.  As for the certificate of warranty, I understand that they were provided for all the 12 different items of products supplied by the plaintiff to the defendant for the Project. The warranty was given to the ASD.  The mere referral of it in the Aidol Quotation does not in my view mean that the parties have agreed to subject themselves to the arbitration agreement found in the Sub-Contract in relation to the Aida Item.             

41.  As stated by HH Judge Mimmie Chan (as she then was) in Fai Tak Engineering Co Ltd, supra, a contract must be interpreted objectively and the court, in attempting to reach a conclusion as to the presumed intention of the parties, will generally consider what would have been the intention of reasonable persons in the position of the actual parties to the contract.

42.  Looking at the matter objectively, I am of the view that the parties’ intention for the Aidol Item was clear: at the time when they entered the contract for the Aidol Item on 27 January 2011, they did not intend the Aidol Item to be subjected to the arbitration agreement.  Otherwise, one would expect that not only there would be specific mention of it in the quotation itself, but also the Aidol Quotation would have formed part of the Sub-Contract signed between the plaintiff and the defendant just the day before as well.   

43.  In the aforestated premises, it is obvious to me that the Aidol Quotation was a “stand-alone” contract, not intended to be covered by the arbitration agreement contained in the Sub-Contract that governed the Aida Item only.    

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

44.  Ms Yiu further submits that even if the Aidol Quotation is a “stand-alone” contract (which the defendant denies), it does not mean that it will not fall within the ambit of the Sub-Contract as it is not entirely unrelated to the Sub-Contract.

45.  On this limb of her argument, Ms Yiu submits that there are cogent authorities demonstrate that arbitration clause which includes the phrase “in connection with” is sufficient to catch disputes arising under another contract related to the contract containing the arbitration clause.

46.  She cited the case of Getwick Engineers Limited v Pilecon Engineering Limited, HCA 558/2002, unreported (Ma J (as he then was); 28 August 2002) in support of her argument.  In that case, Ma J (as he then was) held at p9 of the Judgment that:- “(W)here the words “in connection with” are used, while every contract must of course be construed in accordance with its ordinary and natural meaning (and arbitration agreements are no exception), it seems to me that they are wide in nature.  They would in general cover all disputes other than one entirely unrelated to the transaction covered by the contract in question: see Mustill & Boyd: Commercial Arbitration 2^nd Edition, at 119.” 

47.  In that case, the plaintiff was a sub-contractor who claimed various alleged outstanding sums owed to them under a sub-contract.  The said sub-contract included an arbitration clause.  However, the plaintiff’s claim also included additional work carried out by the plaintiff pursuant to the defendant’s request which were not covered by the relevant sub-contract.   The learned judge held that all claims (including the ones that were not covered under the sub-contract) to be resolved by arbitration and a stay for the entire action was granted (save and except for a sum of claim covered by the dishonoured cheque claim).

48.  She also relies on Mustill J’s (as he then was) dicta in A&B v C&D Lloyd’s Rep 1 [1982] 166 at p172 where it was held, inter alia, that, “Even if there were a third agreement [which by itself does not contain the arbitration clause], I consider that a claim relating to a breach of it would, in the particular circumstances of this case, be connected with both the previous [arbitration agreements]”.

49.  I have no problem in accepting the principles laid down in the cases cited by Ms Yiu at all.  With respect, however, we are dealing with a very different factual scenario in our case here and therefore the 2 cases can be easily distinguished.  In A&B v C&D, supra, there was an issue between the plaintiffs and C as to the basis on which the work was performed.  The plaintiffs say that there was a new and separate agreement under which C were to supply advice and services which lay outside the scope of their obligations under the 2 existing contracts.  C maintain that the work was carried out pursuant to the second agreement (see p168). 

50.  On the particular facts of that case, Mustill J (as he then was) was not convinced that there was ever a new and separate (ie third) agreement.  In his view, the parts of the second agreement relating to the voluntary services were wide enough to cover the advice and inspection which C in fact supplied.  There was no sign in the documents of any distinct contract to cover these particulars services nor, so far as the learned judge could see, any particular reason why the parties should have troubled to make one (see p172).  Further, it was, based on the “particular circumstances” of the case that the learned judge considered a claim relating to a breach of it would be connected with both the previous agreements. 

51.  In our case, as I have mentioned above, there was a separate and distinct contract which governed the Aidol Item.  It was not governed by the same terms as the Aida Item which is subject to the Sub-Contract and the arbitration clause.  Thus, unlike in A&B v C&D, supra, we do have a new and separate contract for the Aidol Item which was not referred to in the Sub-Contract governing the Aida Item nor was anything mentioned about the HKCA’s standard form of domestic sub-contract in the contract itself.  

52.  The case of Getwick can be distinguished also.  In that case, Ma J (as he then was) found that the money owed for the “variation works” or “additional works not covered by the Sub-contract” was within the ambit of the arbitration agreement and therefore a stay was granted.  It is important to bear in mind that the learned judge, when setting out the various steps involved in deciding whether a matter should be stayed under section 6 of the Arbitration Ordinance (and Article 8 of the UNCITRAL Model Law), stated firstly that “the court first construes the relevant arbitration agreement to see just what matters are intended to be referred to arbitration” before coming to the passage cited by Ms Yiu in §46 above (see §23(1) on p8 of the Judgment). 

53.  In our case, we are not dealing with variation works or additional works derived from the Sub-Contract itself.  We are dealing with a new and separate contract not intended to be covered by the arbitration agreement.  I have already mentioned that the Sub-Contract did not include the Aidol Item.  In fact, if one were to look at the Sub-Contract itself, the term “Sub-Contract” was defined as “this document together with other documents as are specified in the Second Schedule hereto” (Clause 1.1 (h)) [emphasis added].  As said, the Second Schedule does not refer to the Aidol Quotation dated 28 December 2010.  As for the “Sub-Contract Works”, this has been defined as “the Works described in the Sub-Contract and as are specified in the Second Schedule hereto.” (Clause 1.1 (i)) [emphasis added].  Again, under the Second Schedule, the Sub-Contract Works does not refer to the supply of any wooden window or louvres, least about the supply of the Aidol Item for the fixing of the wooden windows.  Thus, in my judgment, it is clear that the parties only intended that all matters “in connection with” the Aida Item should be referred to arbitration and not otherwise.

54.  In the aforesaid premises, I find it difficult to stretch the meaning of “in connection with” contained in the Sub-Contract to cover the dispute between the plaintiff and the defendant in respect of the Aidol Item and make it falls within the ambit of the arbitration agreement.  

CONCLUSION

55.  In conclusion, for the aforesaid reasons, I am of the view that   the master was right in dismissing the Summons at the hearing on 18 November 2013.  I shall uphold the master’s decision and dismiss the defendant’s notice of appeal dated 29 November 2013 accordingly.

56.  Costs should follow the event.  There will be an order nisi that the defendant should pay the costs of the plaintiff of this application, with certificate for counsel, such costs to be taxed if not agreed.  The costs should be paid forthwith since a significant stage of the proceedings has been reached.  The order nisi will become absolute unless the parties apply to vary the same within 14 days.                            

57.  It remains for me to thank counsel on both sides for their very helpful assistance.