SANG HING MECHANICAL & ELECTRICAL ENGINEERING LTD v. ARNHOLD & CO LTD

HCA 3891/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3891 OF 2003

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Dates of Hearing: 20 May 2004

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J U D G M E N T

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1.  The Plaintiff claims unpaid retention monies (in the amount of $681,650.55) said to be due under an agreement (“the sub-contract”) whereby the Defendant as main contractor sub-contracted air-conditioning works to the Plaintiff as sub-contractor.  There are 2 versions of the sub-contract.  One dated 20 April 1999 on its first page is in the Defendant’s possession, the other undated on its first page but dated 3 May 1999 on its last page is in the Plaintiff’s possession.  For the purposes of this application, dates apart, there is no material difference between the terms of the 2 versions.

2.  The Defendant applies to stay the Plaintiff’s claim pursuant to Arbitration Ordinance (Cap. 341) (“AO”) s. 6(1).  The Defendant relies on cl. 15.2 of the sub-contract which provides:-

“Any dispute or difference arising out of or in connection with the Local Purchase Order shall be referred to and determined by an arbitration at Hong Kong International Arbitration Centre and in accordance with its Domestic Arbitration Rules, unless the Company [the Defendant] and Sub-contractor [the Plaintiff] agree otherwise.”

3.  The question arises as to what is meant by the expression “the Local Purchase Order” in cl. 15.2.  Mr Dawes (appearing for the Defendant) says that the words must refer to the sub-contract.  Ms Lam (appearing for the Plaintiff) contends that the words are either devoid of any meaning which makes sense or, at any rate, cannot be equated with the sub-contract.

4.  The words “Local Purchase Order” appear in cl. 1 of the sub-contract.  Clause 1 is entitled “Definition” and simply defines “LPO” as “Local Purchase Order”.  I note in passing that cl. 1 also provides:-

“Singular and plural: Words importing singular also include plural and vice versa where the context requires or intends.”

5.  The words “Local Purchase Order” further appear in cls. 13 and 14 of the sub-contract.  Those clauses provide as follows:-

“13.0    Revocation, Termination and Frustration

 13.1    The Local Purchase Order shall be deemed revoked and discharged in the event that there is any substantial change of design on the requirements or performance of the equipment required by the Checking Parties or the equipment is rejected or not acceptable to the Checking Parties.  Both the Company and Sub-contractor shall be deemed being discharge from the Local Purchase Order in this regard, unless both parties mutually agree otherwise.

13.2    The Local Purchase Order shall be deemed revoked and discharged in the event that the duty/type of the equipment is revised due to design changes and the Company found that the revised price for the equipment is unreasonably high in comparison with the price form interpolation.

13.3    In the event of any revocation or discharge of the Local Purchase Order under Clause or 13.2 or 13.3 the Sub-contractor shall not be entitled to be compensated or have remedy for any consequential damages or loss of profit arising from the revocation by frustration or discharge of the Local Purchase Order or the like.

13.4    In the event that there is any substantiated or anticipated delay to the project progress as directly or indirectly caused by the Sub-contractor’s acts and/or omissions, the Company shall exercise his discretionary rights to terminate the Local Purchase Order.  The Sub-contractor shall not be entitled to claim any remedy for consequential damages of loss or profit arising from the termination of the Local Purchase Order in this regard or the like.

14.0    Treatment of Ambiguities or Discrepancies

14.1    The Local Purchase Order, the Company issued correspondence and the Employer’s requirements shall be seen together and regarded as a complete document and taken as mutually explanatory of one another.  Notwithstanding the Local Purchase Order takes a high order of precedence generally, in case of any ambiguity and/or discrepancies among themselves, the most stringent terms and/or requirements shall prevail, unless otherwise interpreted by the Company.”

6.  As Ms Lam points out, a “purchase order” ordinarily means “a document authorising a seller to deliver goods with payment to be made later”.  See, for example, Black’s Law Dictionary (7th ed.), p. 1248.

7.  The sub-contract relates (among other things) to the provision, design, supply, installation, delivery, inspection and fixing of air-conditioning equipment.  By cl. 4 the Plaintiff agreed to “ensure that the process, installation, construction, materials, performance and workmanship of the equipment are acceptable to [the Defendant]”.  Clause 5 provided for adjustment in the price of equipment to reflect changes in the quantity and capacity actually employed.  Such adjustment was to be based on rates quoted by the Plaintiff.  Where no unit rates were applicable, appropriate rates were to be mutually agreed by the parties.  If the Defendant disapproved of a particular piece of equipment, the Plaintiff was obliged to re-select and re-submit another unit of the relevant equipment without any cost implication to the Defendant.  By cl. 9 delivery of equipment was to be “within 2 months ETA HK”.  The Plaintiff was to adjust and monitor delivery time to comply with the works programme.

8.  I reject the argument that the words “Local Purchase Order” are devoid of any sensible meaning and should be ignored.  It is a tenet of the construction of contracts that as much as reasonably possible a Court should strive to give effect to words used by the parties to an agreement and should not ignore them except as a last resort.

9.  There appear to be only 3 possible meanings to the words “Local Purchase Order” given the context of the sub-contract.

10.  First, the words could refer to one or more purchase orders to be placed by the Defendant with the Plaintiff for equipment.  That reading does not seem tenable.  There is no evidence that it was ever contemplated that purchase orders were to be placed with the Plaintiff by the Defendant.  For what it is worth, none in fact ever seems to have been placed by the Defendant with the Plaintiff according to Ms Lam.

11.  Second, the words “Local Purchase Order” might refer to individual purchase orders entered into by the Plaintiff on its own behalf or on behalf of the Defendant with third parties for the supply of equipment for use in the project.  But that reading is even more problematic.  Clauses 13 and 14 would not make sense on this construction of “Local Purchase Order”.  For example, cl. 13.1 refers to the Plaintiff and Defendant being deemed to be discharged from the Local Purchase Order.  Since the Local Purchase Order in this second sense which I have described would not be between the Plaintiff and the Defendant, but between one or either or both of them on the one hand and a third party supplier on the other, how can cl. 13.1 purport to discharge the Plaintiff and Defendant from a purchase order so understood?  Cl. 13.4 would equally be mysterious in its operation.  What is meant by the Defendant’s “discretionary right” to terminate a Local Purchase Order if the same refers to an order for delivery of goods placed with a third party?  As for cl. 14.1, it would be curious if Local Purchase Orders in the second sense with third party outsiders, should be accorded a “higher order of precedence generally” in defining the contractual relationship between the Plaintiff and the Defendant.  Cl. 14.1 makes better sense if the expression “Local Purchase Order” is equated with the sub-contract.

12.  Third, the words “Local Purchase Order” might refer to the sub-contract itself.  That reading appears to me to be the only one that makes sense of cls. 13 and 14.  Indeed, it appears by process of elimination that the expression “Local Purchase Order” can only refer to the sub-contract.

13.  Ms Lam submits that in their ordinary definition the words “purchase order” cannot be used to describe the sub-contract.  I disagree.  The sub-contract includes the supply, delivery and installation of certain equipment (albeit apparently not split air-conditioning units which according to Appendix 1 of the sub-contract the Defendant would itself supply).  Certainly, insofar as supply of some equipment is concerned, the sub-contract would conceivably relate to the purchase of such equipment.  In those circumstances, it does not seem to be fanciful or stretching the bounds of English language to regard the parties as having intended the expression “Local Purchase Order” to mean the sub-contract as a whole.

14.  Ms Lam argues that, even if there is an arbitration agreement, the Plaintiff’s claim for retention monies is outside its ambit.  I disagree.  If one substitutes the words “sub-contract” for the expression “Local Purchase Order” in cl. 15.2, one sees that cl. 15.2 requires “[a]ny dispute or difference arising out of or in connection with [the sub-contract]” to be referred to arbitration.  The Plaintiff’s claim for retention monies arises out of the sub-contract.  That claim has not been admitted by the Defendant.  I therefore have no discretion except to stay the same to arbitration pursuant to cl. 15.2 and AO s. 6(1).

15.  I shall now hear the parties on costs.