KENON ENGINEERING LTD v. NIPPON KOKAN KOJI KABUSHIKI KAISHA

HCA3492/2002, HCA3973/2002
& HCCT21/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3492 OF 2002

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(HEARD TOGETHER)

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J U D G M E N T

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1. There are three applications before the court. In HCA No.3492 of 2002, Kenon Engineering Ltd ("Kenon") is the plaintiff and Nippon Kokan Koji Kabusihiki Kaisha, also known as Nippon Kokan Koji Corporation ("NK3") the defendant. NK3 applies that further proceedings be stayed in favour of arbitration or alternative dispute resolution. In HCA No.3973 of 2002, NK3, which is the plaintiff, applies for Kenon's counterclaim to be likewise stayed. In HCCT No.21 of 2003, Kenon applies for a declaration that a clause in the contract, on which NK3 relies as an arbitration clause, is not an arbitration clause, and that there is no valid arbitration agreement between the parties obliging Kenon to refer the matters in dispute in the other two actions to arbitration.

2. NK3 was the specialist sub-contractor for the engineering and erection of the structural steel packages for the North East Tower in the northern site at the Hong Kong Station development. It is not necessary to go into the details of the sub-contractual chain, but Kenon was the erection sub-contractor to NK3. The disputes relate to the contract between them ("the Sub-Contract"), dated 6 March 2001. It was a re-measurement contract with the contract price calculated on unit rates fixed for the duration of the Sub-Contract. Payment was to be made by way of monthly application, and subject to a 7.5% retention.

3. Clause 21.1 of the Sub-Contract is in the following terms :

"Mediation

All disputes, controversies or differences which may arise between the Erection Contractor and Sub-Contractor out of or in relation to or in connection with the Sub-Contract or breach thereof shall finally be settled by the Mediation Procedure under the laws of Hong Kong - SAR of PRC. The award rendered by the mediation procedure shall be final and binding on both the Erection Contractor and Sub-Contractor."

4. The works progressed and there is a dispute between the parties as to precisely what happened, but in any event on 19 July 2001 they entered into a Supplemental Agreement ("the 1st Supplemental Agreement"). There were three schedules attached to it. Under the first schedule were listed items which NK3 had agreed to purchase from Kenon and then make those items available to Kenon for use in the work. This effectively amounted to NK3 purchasing materials on behalf of Kenon and deducting the price for those materials from the monies that would otherwise be due to Kenon. The second schedule was a list of equipment that was on the site and for which NK3 agreed to pay to Kenon approximately HK$3.5 million (effectively as an advance payment). NK3 were then to take a charge or mortgage over that equipment. The third schedule listed certain leases and tenancy agreements that Kenon had entered into and NK3 agreed to pay the rental payments under those leases on behalf of Kenon provided that the sums ranked as a debt owed by Kenon to NK3.

5. Clause E of the 1st Supplemental Agreement provided that :

"save as provided for in this agreement the terms and conditions of the Sub-Contract will remain in full force and effect."

6. On 16 November 2001, the parties entered into a second Supplemental Agreement ("the 2nd Supplemental Agreement") which effectively terminated the relationship between them. The relevant part of this agreement, for the purposes of these applications, is Clause 5 which provides :

"5. NK3 and Kenon shall settle the final account of [the Sub-Contract] until 21 February 2002 in accordance with the procedures described below...

....

5.5 Any dispute shall be settled by mediation in accordance with the Mediation Procedure of the Laws of Hong Kong Special Administrative Region."

7. The parties attempted but failed to settle their disputes arising from the Sub-Contract. On 13 August 2002, Kenon, through solicitors, proposed mediation under Clause 5.5 above. Two potential mediators were named, Mr Jean Peter Ho and Mr Ivan Y.C. Cheung. Then on 16 August, Kenon demanded payment of various sums under the 1st Supplemental Agreement and threatened legal proceedings if payment was not made by 28 August 2002. NK3 replied, through solicitors, denying liability and intimating a counterclaim in respect of, inter alia, wages ordered by the Labour Tribunal to be paid to Kenon's workers, and accepting Mr Ho as mediator. However, the parties could not agree on the terms of mediation. There was a dispute about the extent of the matters to be mediated, and as to the time limit to be allowed for the mediation to be completed before the parties, if they could not agree, were able to take other action.

8. On 12 September 2002, Kenon issued a Writ in HCA No.3492 of 2002 which claimed various sums from NK3 under the 2nd Supplemental Agreement. Then on 18 September, NK3 issued to Kenon a Notice of Reference of Disputes ("the Notice") relying on Clause 21.1 of the Sub-Contract in respect of disputes comprising :

(i) whether completion of Kenon's works under the Sub-Contract had been delayed;

(ii) whether NK3 have had to and did carry out work and/or incur costs within the scope of the Sub-Contract work which NK3 would not have to carry out and/or incur but for Kenon's acts and/or omissions or default of Kenon's obligation out of the Sub-Contract and/or Kenon's request for NK3 to do so;

(iii) whether NK3 is entitled to be reimbursed for sums advanced to Kenon under the Sub-Contract which NK3 would not have had to advance but for Kenon's default under the Sub-Contract and/or requests to do so; and

(iv) whether Kenon was in default of various other obligations under the Sub-Contract such as to cause NK3 to suffer loss and damage.

9. The Notice proposed Mr John Scott, QC, SC as arbitrator.

10. On 25 September 2002, Kenon through solicitors replied to the Notice saying that it did not accept that the Notice was valid, disagreeing the appointment of Mr Scott and informing NK3 that Kenon were about to commence the legal proceedings. It did not directly address the question as to whether or not arbitration was the correct forum for resolution of the dispute.

11. The Notice was referred to the Hong Kong International Arbitration Centre ("HKIAC") which on 24 December 2002 appointed Mr Scott to act as arbitrator.

12. In the meantime, on 21 October 2002, NK3 issued the Writ in HCA No.3973 of 2002. The Statement of Claim is dated 15 November 2002 and is a claim for monies allegedly due and owing as a result of payments made by NK3 for and on behalf of Kenon as a result of orders of the Labour Tribunal under section 43 of the Employment Ordinance (Cap. 57). Kenon's Defence and Counterclaim sets up its version of the final account under the Sub-Contract as a set-off and counterclaim to the claim for reimbursement of wages. As against the claim for wages of HK$6,051,877 made by NK3, Kenon counterclaims for HK$16,217,115.88.

13. Pursuant to his appointment as arbitrator by HKIAC, Mr Scott proceeded with the arbitration. Kenon indicated to him that they objected to his jurisdiction and, as a result, on 12 March 2003, he made directions as to the filing of submissions and evidence concerning the validity of the arbitration agreement so that he could rule on the issue pursuant to Article 16(3) of the UNCITRAL Model Law.

14. On 22 March 2003, Kenon commenced HCCT No.21 of 2003 in its unamended form seeking declarations in relation to the arbitration. There was some correspondence between the parties and the arbitrator as to the similarity of the relief sought and Kenon amended its Summons on 17 April 2003. Mr Scott then on 13 May 2003 stayed the arbitration proceedings generally pending the hearing of Kenon's amended summons.

15. So far as these applications are concerned, the position of NK3, in brief, is this. Clause 21.1 of the Sub-Contract can only be an arbitration agreement. It is not superseded by Clause 5.5 of the 2nd Supplemental Agreement. Therefore under the Arbitration Ordinance, Cap.341, Article 8 of the UNCITRAL Model Law applies and the two actions should be stayed to arbitration. Further, by section 13, and Article 16 of the Model Law, the arbitrator has power to determine his own jurisdiction, subject to reference back to the court under Article 16(3). If the court finds that there is at least a prima facie case that Clause 21.1 is an arbitration agreement, the matters should be stayed to arbitration so that the arbitrator can exercise that jurisdiction.

16. Kenon's position, in brief, is this. Clause 5(5) of the 2nd Supplemental Agreement supersedes the dispute resolution mechanism provided for in Clause 21.1 of the Sub-Contract. In any event, Clause 21.1 is a mediation agreement and not an arbitration agreement. The HKIAC has no power to appoint arbitrators except where parties have made an arbitration agreement. Kenon should not be required to submit to the purported jurisdiction of the arbitrator simply because he was appointed, because his appointment was invalid. While the arbitrator has power to determine his own jurisdiction, the jurisdiction of the court should not yield to that power. It is unjust to force the parties to arbitration before an arbitrator who does not have jurisdiction.

17. The relevant articles of the Model Law are :

"Article 8: Arbitration agreement and substantive claim before court

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

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

"Article 16: Competence of arbitral tribunal to rule on its jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.

(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award."

18. The primary issue to be resolved is whether Clause 21.1 is an arbitration clause. If it is, the question whether it is superseded by Clause 5.5 will arise. However Mr Manzoni says that all NK3 need is to show that is prima facie an arbitration clause. If so it the question must go to the arbitrator. The court can only refuse that, if it finds for purposes of Article 8 that the clause is null and void, inoperative or incapable of being performed. Reference of the jurisdiction question to the arbitrator will not deprive Kenon of its right; if the arbitrator rules as a preliminary issue that he has jurisdiction, the matter may still be brought back before the court for a ruling.

19. In support of this various cases are referred to, particularly Fung Sang Trading Ltd v. Kai Sun Sea Products and Food Co. Ltd [1992] 1 HKLR 40; Nanhai West Shipping Co. v. Hong Kong United Dockyards Ltd [1996] 2 HKC 639 and Private Company 'Triple V' Inc. v. Star (Universal) Co. Ltd [1995] 3 HKC 129. In all these cases the court took the approach that where there is prima facie evidence of an arbitration agreement the decision on jurisdiction should be left to the arbitrator.

20. Mr Leong, SC argues that these cases do not assist because in every case there was some kind of arbitration agreement and the jurisdiction question related either to its ambit or whether it could be separated from the main contract. Here the question is whether there is a valid arbitration clause and the court has jurisdiction to decide it.

21. He relies in particular on opinions given in Mustill & Boyd, Commercial Arbitration (2nd Edition) and in The Arbitration Ordinance of Hong Kong - A Commentary by Robert Morgan that the arbitrator's ruling on his jurisdiction is neither exclusive nor final but only provisionally binding, and on dicta by Bokhary J, (as he then was) in Aboitiz Jebsen Bulk Transport Corp. v. Kit Shipping Agency Ltd [1990] HKC 390, and by Steyn J (as he then was) in Harbour Assurance Co. (UK) Ltd v. Kansa General International Insurance Co. Ltd (1992) 1 Lloyd's Rep. 81 that the issue as to whether the arbitration agreement exists is a matter for the court.

22. Mr Manzoni says that these authorities (except Morgan) are out of date. The English authorities came before the Arbitration Act 1996 which follows, though it does not adopt the Model Law. Aboitiz was decided before the application of the Model Law in Hong Kong. This may be so, but I have not been referred to, or found any authority for the proposition that the jurisdiction of the arbitrator to rule on his own jurisdiction and particularly on the question of the existence of an arbitration agreement is exclusive. I do not see how it can be exclusive, given the fact that it is provisional and subject to review by the court.

23. There is support for this in the comment of Kaplan J in Fung Sang Trading Ltd which is relied on as disapproving the decision of Bokhary J in Aboitiz. At page 54, Kaplan J said:

"In that case the learned judge in considering whether or not to grant a stay stated that the question whether or not there had been a submission to arbitration, is not to be decided by the arbitrator but by the court. If by that the learned judge meant that the arbitrator could never ever rule on the question of jurisdiction, I must respectfully but profoundly disagree. If he meant, however, that an arbitrator could never make a binding ruling as to his jurisdiction because the matter could always be considered by the court I respectfully agree."

24. In the present case arbitral proceedings were commenced. Under Article 8(2) they could have been continued and an award made. This would necessarily have required Mr Scott to rule on his own jurisdiction, particularly on Kenon's objection that there is no arbitration agreement. If he had decided as a preliminary question that there was no arbitration agreement, that would have been an end of the matter. But if he had decided that there was an arbitration agreement, and he therefore had jurisdiction, that would have been subject to review by the court under Article 16(3). But Mr Scott stayed the arbitration pending a decision on Kenon's Originating Summons which in its amended form seeks a declaration precisely as to whether or not there is an arbitration agreement. If I were to refer that question of whether or not there is an arbitration agreement to Mr Scott, on the basis that there is prima facie evidence that there is one, I cannot see that there would be any practical advantage to either side. If he were to decide that there was no agreement the time and costs of these summonses would have been wasted. If he were to decide that there was an agreement, Kenon could bring the matter back before the court. They would be going round in circles.

25. It also seems to me that in the circumstances of this case, where the arbitrator has stayed the arbitration pending the court's decision, that decision could not be said to usurp the jurisdiction of the arbitrator.

26. In any event, it seems to me that the court must have jurisdiction to decide for the purposes of Article 8 whether or not there is an arbitration agreement before it goes on to decide whether such agreement is null and void, inoperative or incapable of being performed.

27. I am satisfied that I have jurisdiction to decide this question finally and I consider that it would be impracticable for me to refer it back to the arbitrator to decide it provisionally.

28. I turn to the question itself. Is Clause 21.1 an arbitration clause? Mr Manzoni relies heavily on the fact that it provides for an award rendered by the mediation procedure to be final and binding on the parties. He argues that the reference to "Mediation Procedure" is meaningless because there is no one generally recognized mediation procedure. The clear intent is that all disputes should be determined outside of the courts so the reference to mediation is intended to be a reference to arbitration. In particular he relies on David Wilson Homes v. Survey Services Ltd [2001] 1 BLR 267 where it was held that a reference of a dispute to a Queen's counsel was an arbitration clause, notwithstanding that it made no reference to arbitration. Any procedure in which a judicial inquiry was to be undertaken so as to arrive at a final and binding result was in effect an arbitration.

29. Mr Leong, SC points to the fact that the clause specifically refers to mediation. Mediation may be facilitative or evaluative and in the latter the mediator may express a view or make a recommendation. The parties are free to bind themselves to accept such recommendation.

30. It seems to me that the clause is ambiguous. It purports to bind the parties to accept an award, which suggests that arbitration is intended. At the same time it specifically refers to mediation procedure. It seems to me to express alternative intentions without choosing between them. The court must do the best it can to resolve the ambiguity. It may have resort to such extrinsic evidence as is admissible to construe any contract. In the last resort the clause may be declared void for uncertainty. See Lewison, The Interpretation of Contracts, 2nd Edn, 1997 at 7.03.

31. I have already ruled inadmissible the evidence of the parties' previous negotiations so these must be disregarded. In the circumstances there is little in the way of extrinsic evidence to go on. However the "matrix of fact" may be considered. Part of that matrix is the fact that both parties are experienced building contractors. They know what mediation is; they very nearly managed to get this matter to mediation by Mr Ho. It is a fact that a reference to arbitration which originally appeared in Clause 5.5 was crossed out and the words "mediation procedure" substituted. I think I can take account of that, not as part of inadmissible evidence of their negotiations, but as evidence that they know at least that arbitration and mediation are different procedures. I think it must be inferred from this and their experience in the trade that they know what arbitration is also.

32. What must be decided is what they must be taken to have agreed. This is not a case, like David Wilson Homes, the parties simply do not refer to arbitration. They do refer quite specifically to mediation. Nor is it like Cott U.K. Ltd v. F.E. Barber Ltd [1997] 3 All ER 540, where a clause headed "Arbitration Clause" was held not to be an arbitration clause, and that the heading could not prevail over the express wording of the clause. Here the express wording specifically refers to "Mediation Procedure". I do not see that it follows, because they agreed to be bound by a final award, that they must have agreed to arbitrate, when they made that specific reference, knowing what mediation was and what arbitration was. What "mediation procedure" they meant is not clear; or at what point the mediator's recommendation was to be taken as an award. But I do not see how they can be taken to have meant to be bound to arbitration. If the clause means anything - and that in itself is questionable -- it must be taken as meaning that that was the one thing to which they did not agree.

33. I conclude therefore that Clause 21.1 is not an arbitration clause, and that there is no valid arbitration agreement between the parties obliging Kenon to refer the matters in dispute in the other two actions to arbitration.

34. It follows that the question of whether Clause 21.1 is superseded by Clause 5.5 need not be considered. The remaining question is whether the court, in the exercise of inherent discretion, should stay proceedings so that the parties can follow their agreement. I do not see how this can be done, even if I have power to do it, because it is not clear what that agreement is. It is not an arbitration agreement, so there cannot be a stay to arbitration. If it is a mediation agreement, it is not clear what "mediation procedure" is referred to. There is in any event no point in staying the proceedings to mediation because the parties can choose not to mediate at any time.

35. It follows that there will be an order in terms of Kenon's Originating Summons in HCCT No.21 of 2003 with costs, to be taxed if not agreed. NK3's two summonses are dismissed with costs, to be taxed if not agreed.