XCHRX EVER RISE ENGINEERING LTD. v. DAH CHONG HONG (ENGINEERING) LTD.

HCCT 63/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.63 OF 2000

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D E C I S I O N

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1. This is a defence summons to stay proceedings pending arbitration. There is also before the court a plaintiff's Order 14 summons. The plaintiff was the defendant's sub-contractor engaged to supply and instal MVAC services in the Bank of China Currency Operation Centre. The plaintiff's claim is for $2,680,828.91 being the outstanding balance of monies due to them, $24,287,110.03 having already been paid out of an agreed final account sum of $26,967,938.94.

2. The defendant says :

(i) the outstanding balance is disputed;

(ii) there was no agreed final account; and

(iii) the matter should be referred to arbitration pursuant to clause 4(b) of the contract between the parties.

The plaintiff submits:

(i) there is no dispute;

(ii) the parties are bound by the settlement agreement contained in a letter of 21 February 2000; and

(iii) in any event, the arbitration clause does not cover this dispute, even if a dispute exists.

Is there a dispute?

3. Given the very wide definition given to the word "dispute" in stay applications, I have come to the conclusion that a dispute does exist.

4. Both counsel, Mr A. Bell for the defendant and Ms T. Cheng, SC, for the plaintiff, have referred the court to the contractual background of the case which preceded a letter written by the defendant to the plaintiff on 21 February 2000, in the following terms :

"Further to our letter ref.:DPD722/99 dated 30/11/99. This is confirm that the final account are as followings and no further claim for the captioned project will be impose to our office.

Item	Description	HK$
1	Original Contract Sum	23,900,000.00
2	V.O. Works	3,067,938.94
	Final Amount	26,967,938.94
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You are also reminded that the captioned finial account is based on Ngo Kee's fax transmission ref.; NK/COC.SC-IP/FA/F1472 and letter ref.: NK950/SC-IP/FA/4665. Any revision of the payment received from Ngo Kee. The captioned final account will be adjust accordingly and no objection by your company."

It was signed by both parties.

5. Ms Cheng points out that this was the conclusion of commercial negotiations between the parties and it amounts to an admission by the defendant that this sum is due. The final paragraph does not affect the situation because there has been no revision of payment received from the main contractor.

6. The defendant's primary submission is that this letter takes no account of deductions in the contract price due to contra charges as provided for by clause 1(b) of the contract. Clause 1(b) states :

"Unless otherwise expressly provided and agreed to the contrary in this Agreement, supply and provide at the Contractor's own costs and expenses all the plants, machinery, apparatus, instruments, tools, equipments, haulage, power, tackle, materials, things and labour and the transportation thereof necessary to carry out, execute and complete the said works Provided Always That it is expressly hereby agreed that apart from and in additional to such materials and things expressly provided in this Agreement to be supplied by the Company, the Company shall be entitled (but not under any duty so to do) at its sole and absolute discretion if it deems fit so to do from time to time by notice in writing notifying the Contractor that all or any part of the materials and things required for the carrying out of the said works as specified in the notice will be supplied by the Company to the Contractor and the Company shall be entitled to supply to the Contractor and the Contractor shall accept such materials and things for the carrying out of the said works and in such event, the Company shall be entitled to deduct from the contract price payable by the Company to the Contractor as provided in Clause 2(a) hereinafter the value of such materials and things so supplied calculated at the purchase price paid by the Company for such materials and things; ..."

7. According to the defendant, they made purchase orders which have not yet been accounted for. The quantum of such contra charges has yet to be calculated. Whatever it is, they were not accounted for nor referred to in the letter of 21 February 2000 nor were they included in the negotiations which preceded it.

8. Ms Cheng, with some force, submits that such potential reductions in the sum due to them from the defendant have been taken into account. At this stage in the litigation, it can be said she appears to have a strong case. However, I am not able to say that there is no dispute. I think it would be wrong to construe the letter of 21 February 2000 as an unequivocal admission which acts as a bar to the right to arbitrate. The only additional item specifically referred to in the letter is variation works. It does not waive the defendant's right to set-off.

Is this dispute covered by the arbitration clause?

9. The plaintiff makes two points :

i) The letter of 21 February 2000 constitutes a self contained settlement agreement between the parties. This agreement contains no arbitration clause at all, so nothing can be referred to arbitration.

ii) If the applicable contract is the MVAC contract which does contain an arbitration clause, then that clause, when properly construed, does not permit this dispute to be arbitrated.

(i) Separate agreement?

10. As to the submission that the 21 February letter amounts to a self contained and entirely separate contract, I do not think it accords with either the reality of the situation or the facts. I do not think it can be said that the parties intended to enter into a different and separate contract when negotiating a final price for the contract works. It is evidence of an admission and no more. It is not pleaded as a separate agreement giving rise to separate contractual obligations, rather it is pleaded as evidence of an admission that works to the value of $26,967,938.94 were carried out by the plaintiff.

(ii) Arbitration clause does not cover this dispute?

11. To deal with this issue, I set out the whole of the relevant clause (clause 4) :

"(a) The Company shall have full power from time to time to direct the Contractor to alter, amend, omit, add to, or otherwise vary any of the said works, and the Contractor shall carry out such variations; and be bound by the same conditions (the expression of 'the said works' in this agreement shall include all variation and/or additional works to be carried out by the Contractor under this agreement). If the said variations and/or additional works result in an increase or decrease in the contract price, the difference in price shall be adjusted with reference to and on the basis of the Schedule of unit rates annexed hereto and to be agreed between the Company and the Contractor and failing which the difference shall be submitted to arbitration as provided hereinafter Provided Always That irrespective of any failure of the parties to agree on the increase or decrease in the contract price, the Contractor shall forthwith continue to carry out the said works as varied and/or any additional works without delay and to complete the same on or before the completion date or within such time as the Company may reasonably extend.

(b) If there is any dispute in respect of the increase or decrease in the contract price occasioned by the variation thereof, it shall be referred to the arbitration of a person to be agreed upon, or failing such agreement, to some person appointed on the application of either of the parties hereto by the Chairman for the time being of in accordance with and subject to the provisions of the Arbitration Ordinance and with reference to on the basis of the Schedule of unit rates annexed hereto. Provided Always, it is expressly agreed that the carrying out of the said works as varied shall continue pending the arbitration."

12. Each counsel has invited the court to put a different meaning on the words underlined. Mr Bell submits they mean that any dispute about variations of the contract price shall be referred to arbitration. Ms Cheng submits that only disputes concerning increases or decreases in the contract price occasioned by variations to the contract are referable. Accordingly, increases or decreases in the contract price due to a dispute over contra-charges would not be covered.

13. Clause 4 only has these two sub-clauses, (a) and (b). It is logical to consider them together in order to determine their true meaning and effect. Clause 4(a) provides specifically for amendments to the contract price as a result of variations to the contract works. If there is no agreement on the difference in price, it shall be submitted to arbitration as provided by clause 4(b). Clause 4(b) then says that if there is a dispute (i.e. a failure to agree about matters referred to in clause 4(a)), it shall be referred to arbitration. The words "the increase or decrease in the contract price occasioned by the variation thereof" (my emphasis) mean only such increases or decreases which have resulted from variations to the contract works are covered. Had it been intended to cover all alterations to the contract price, however caused, it would plainly have used words such as "any dispute in respect of an increase or decrease in the contract price" and no more. The addition of the words "occasioned by the variation thereof" are not merely repetitive words, as submitted by Mr Bell, but are restrictive words which are intended to narrow the scope of what may be arbitrated to matters arising under clause 4(a).

14. The question now arises, even if a dispute over contra charges is not covered by clause 4(b), is there any other dispute between the parties which is covered. Mr Bell submits that the issue of clause 1(b) deductions is not the only area of dispute. The reality is, in my judgment, that any other dispute, if any, is too vague to be worthy of consideration in this context. In short, I find there to be no adequate evidence of a dispute which is covered by clause 4(b). Accordingly, I refuse the application for a stay solely on the ground that the dispute which does exist is not a clause 4(b) dispute.

Order 14

15. The result of my ruling thus far is that HCCT 63/2000 continues. I must therefore consider the plaintiff's Order 14 application.

16. It must be recognized at the outset that the test to establish "a dispute" for a stay application and the test to establish a triable issue in Order 14 proceedings is different. The test is more difficult for the defendant in the Order 14 proceedings. Nonetheless, the court's observations already made in the context of the "dispute" argument are still relevant. In my judgment, the issues raised by the defendant are more than "mere moonshine". I have found that it is arguable that the letter of 21 February 2000 is not a final, binding, unequivocal statement of what is due. It is arguable that it is a statement of the final calculation of what the original contract price was plus the agreed value of the variations carried out, and no more.

17. Having said that, the letter of 21 February will present a substantial obstacle for the defence. I have also considered with care the contents of the two opposing affirmations. Whilst the court should avoid a trial on the affirmations, it is nonetheless appropriate to consider their overall contents when deciding the relative strengths of each party's case, if it is thought that it may be a proper case for conditional leave being granted.

18. In my judgment, this is such a case. The fact that the defence case depends on their contention that contra charges were simply ignored when settlement negotiations were under way put the defence in the "shadowy" category, as per Lord Denning in Van Lynn Developments v. Pelias Construction Co [1968] 3 AER 824.

19. For these reasons, I grant leave to defend conditional upon the full amount of the claim being paid into court within 14 days. In the event of the payment not being made in time, the plaintiff may immediately enter judgment.

20. On the stay application, I make an order for costs against the defendant. On the Order 14 summons, costs will be in the cause if the payment in is made in time, if not, the costs will be to the plaintiff.