HIP HING CONSTRUCTION CO. LTD. v. HOP LEE IRON WORK LTD.

HCA 1255 & 1256/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1255 & 1256 OF 2002

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J U D G M E N T

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1. This is an application by the Defendant under these two actions for a stay of proceedings based on one and the same arbitration clause.

2. The Plaintiff is the main contractor of a project at Pokfulam, Hong Kong. The Defendant used to be one of the Plaintiff's sub-contractors under a Sub-contract in Chinese between the two parties. To cut a long story short, disputes arose between the parties and eventually in February 2002, the Defendant no longer performed any Sub-contract work for the Plaintiff. The Plaintiff alleged that the Defendant was in breach of the Sub-contract and therefore commenced one of the two actions against the Defendant.

3. Furthermore, apparently there were former workers of the Defendant who had not been paid. They sued the Plaintiff in the Labour Tribunal as the main contractor for the wages. There apparently was a settlement with the workmen and a second action covering almost the same ground was therefore commenced by the Plaintiff against the Defendant asking for the same relief plus reimbursement of the money paid to the former workers.

4. Suffice it to say that the Defendant says it was the Plaintiff which had breached the Sub-contract in question and it was forced to accept the repudiation of the Sub-contract.

5. In support of the present application for a stay under the two actions, the Defendant relies on a clause in the Sub-contract between the parties. This is Clause 22; as I said the Sub-contract is in Chinese, and I will now read out the original clause in Chinese as follows:

"22.1 如總承建商和分判商之間就本分判合約的解釋或與分判合約及分判工程有關的任何事件或事項存有任何的爭端或歧見，無論是發生在分判工程進行其間或完工之後，或是分判合約被放棄或以任何形式被終止後，任何一方均可向對方發出書面通知，提出存在的爭端或歧見，並把此等爭端或歧見提交給一名雙方均同意的仲裁人作出裁決。如果任何一方向對方以書面提出委任某仲裁人後14天內，仍未獲對方同意時，任何一方可要求香港國際仲裁中心委任一名仲裁人進行仲裁。仲裁人的裁定應為最終決定，並對合約雙方具有約束力。

22.2 如果分判合約雙方依照第21.1款把任何爭端或歧見提交仲裁，合約雙方現同意在總承建商的要求下將爭端或歧見交由委任處理總承建合約下相關連的爭端或歧見的仲裁人來裁決，而這仲裁人可參照香港特別行政區法庭程序對共同被告或第三者或其他人士有權作出指引及裁決。

22.3 在分判工程全部完成前，未得到總承建商許可，不能按第22.1款正式進行仲裁。"

6. Subject to what I am going to say relating to the real bone of contention between the parties about the true construction of the Sub-contract and in particular, Clause 22.3, I have no doubt that the disputes between the parties as identified by the evidence filed in support of or in opposition to the present application as well as by the pleadings that they fall within the subject matter covered by Clause 22.1 for reference to arbitration. In my judgment, there are clearly disputes or differences between the parties that are fit for reference to arbitration.

7. I am not here concerned with the rights and wrongs of the parties; I am not here concerned with how strong or how weak a particular party's case is. There are ample authorities to the effect that short of an out-right admission by a defendant, or put another way, so long as there is a non-admission of a claim or difference between the parties, this would be sufficient for the purpose of referring the difference or dispute between the parties to arbitration. I find that this is such a situation here.

8. The real dispute between the parties lies with the true construction of Clause 22 and in particular Clause 22.3. After reading lengthy skeleton submissions submitted by counsel acting for the respective parties and hearing detailed submissions by counsel at today's hearing, it appears to me that the dispute boils down to this, namely, whether Clause 22.3 has the effect as a matter of true construction of giving the main contractor, i.e. the Plaintiff, an option to refuse arbitration if the Sub-contract work has not yet been completed, there being no dispute between the parties that the Sub-contract work has not yet been completed.

9. The Plaintiff's argument is that on a true and proper construction of Clause 22.3, in the present circumstances, where the Sub-contract work has not been completed, it has an option to decide whether to arbitrate or litigate, and by its action, i.e. by its commencement of the two actions, it has chosen to litigate; and the choice does not lie with the Defendant to choose arbitration as it seeks to do by the present application.

10. In construing Clause 22, I, of course, bear in mind the terms of the whole Sub-contract in question. I also bear in mind the obvious background that this is a building or construction contract between two contractors in relation to a project. Focusing on Clause 22 itself, Clause 22.1 clearly provides for the reference of differences and disputes to arbitration. It is worded widely and covers all disputes and differences relating to the proper construction of the Sub-contract and all other matters relating to the Sub-contract or the Sub-contract work. It refers to disputes or differences arising whether during the carrying out of the work or after its completion, it applies to the situation where the Sub-contract work has been completed by the sub-contractor, as well as the situation where the Sub-contract has been abandoned by the sub-contractor or has come to an end for any other reasons. In all of these situations, both parties have the option to give notice to the other to refer the matter to arbitration.

11. Clause 22.2 obviously deals with a fairly specific situation namely, that the dispute or difference between the parties relates to a similar dispute between the main contractor (i.e. the Plaintiff) and either the employer or other parties like other sub-contractors which has also given rise to arbitration. In that case, the parties to the Sub-contract must appoint the same arbitrator already appointed by the Plaintiff and its opponent under the other dispute or difference in question as the arbitrator to deal with the dispute or difference between the Plaintiff and the Defendant under the present Sub-contract.

12. Clause 22.3 deals with another situation. It says that before the completion of the Sub-contract work, in the absence of permission or consent by the main contractor, no formal arbitration can be proceeded with pursuant to Clause 22.1 ("不能按第22.1款正式進行仲裁").

13. Mr Poon, counsel for the Defendant, construes this as an absolute prohibition against arbitration in the absence of consent by the main contractor when the Sub-contract work has not yet been completed. I do not agree with this construction.

14. In this regard, I agree with Mr Li, counsel for Plaintiff. I can see the reasons behind Clause 22.3, and I can imagine situations where the main contractor may want to defer the holding of the arbitration hearing or proceedings between the main contractor and the Defendant relating to any difference or dispute between the two pending the completion of the Sub-contract work. Of course, there can be other situations where the withholding of the actual arbitration proceedings or hearing may not be necessary. Then in that case, one would expect the main contractor to give its consent to the holding of arbitration. I do not see any good justification for construing Clause 22.3 as meaning an absolute prohibition against arbitration.

15. Moreover, this construction of mine is supported by the actual wordings used in Clause 22.1 and Clause 22.3. The operative wording in Clause 22.1 is that either party may by written notice to the other side refer the difference or dispute between the parties to an arbitrator for arbitration. In case of disagreement between them relating to the choice of arbitrator, either party may request the Hong Kong International Arbitration Centre to appoint an arbitrator to proceed with the arbitration ("進行仲裁").

16. In Clause 22.3, it says that before the completion of the Sub-contract work and without the consent of the main contractor, one cannot, in accordance with Clause 22.1, formally proceed with the arbitration ("正式進行仲裁"). It does not prohibit the giving of a notice by one party to another referring the dispute between the two to arbitration. It simply prohibits, in the absence of consent from the main contractor, the proceeding with of arbitration formally ("正式進行仲裁").

17. In this regard, I note that section 31(1) of the Arbitration Ordinance (Cap. 341) provides that:

"An arbitration should be deemed to be commenced when one party to the arbitration agreement serves on the other party or parties a notice requiring him or them to appoint or concur in appointing an arbitrator."

18. In my judgment, Clause 22.1 clearly provides for the commencement of arbitration by enabling either party to a dispute to give notice to the other side referring the dispute to an arbitrator for arbitration. It provides for the commencement of arbitration within the meaning of section 31(1) of the Arbitration Ordinance. Clause 22.3, on the other hand, relates to certain circumstances under which the arbitration cannot be proceeded with for the time being without the consent of the main contractor. This is made clear by the use of the same phrase "進行仲裁" in both Clause 22.3 and Clause 22.1. In my judgment, on a true and proper construction of the Clauses in question, there is a clear distinction between referring the dispute or difference to arbitration and proceeding with the arbitration (進行仲裁); and moreover, the Chinese words "正式" are used here to distinguish the actual arbitration proceedings or hearing from the preliminary procedure in the arbitration, such as the giving of notice to the other side referring the dispute or difference to arbitration or choosing the arbitrator.

19. In my judgment, in short, Clause 22.3 does not prohibit arbitration. It merely suspends the arbitration procedure for the time being pending the finishing of the Sub-contract work in the absence of consent by the main contractor.

20. This is a domestic arbitration agreement. The days when the Court could in its discretion refuse to stay an action pursuant to a domestic arbitration agreement have long gone. Under the present section 6 of the Arbitration Ordinance, unless the case falls within sub-section (2) or (3), a situation which I am not concerned with in the present case, the Court must refer the parties to arbitration if there is a domestic arbitration agreement covering the matter in dispute. Article 8 of the Model Law applies to such a domestic arbitration agreement.

21. Under Article 8 of the Model Law, a court 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.

22. As I said, Clause 22.3 only has the effect of suspending the arbitration procedure that has been commenced by a party by giving a written notice to the other party asking for reference of the dispute between them to arbitration. It does not, in my judgment, render the arbitration agreement in question null and void, inoperative or incapable of being performed.

23. As I said, the Sub-contract work has not yet been completed, but there is no suggestion in the evidence that it will never be completed. During submission, some arguments were raised as to what would happen if the Sub-contract work was never going to be completed, particularly if that was brought about by reasons outside the control of the main contractor, say, for instance, somehow the employer decided to abandon the whole project resulting in the non-completion of the Sub-contract work. This is academic because nobody suggests that the Sub-contract work in the present case will never be completed. Of course, there is always such a risk at least in theory, but in my judgment, that is insufficient to render the arbitration clause null and void, inoperative or incapable of being performed.

24. Moreover, perhaps for the sake of completeness, I would say this. In my judgment, Clause 22.3 quite clearly pre-supposes that the Sub-contract work will be completed. But before the work is completed, in the absence of consent by the main contractor, the parties cannot proceed with the arbitration procedure. If, let us assume, one knows for sure that the Sub-contract work will never be completed, then in my judgment, on the proper construction of the whole clause in question, Clause 22.3 will simply have no application at all. In that case, one is left with Clause 22.1 and there is nothing to stop the parties from proceeding with the arbitration that has been commenced by the serving of a notice.

25. Another route leading to the same result is to say that although the contract is silent on the matter, if an officious bystander were to ask the parties before they signed the Sub-contract what should happen if the Sub-contract was never going to be completed, the parties would have no doubt answered, in my judgment, that in that case Clause 22.3 would have no application or they would have said: "Of course, in that case, the arbitration could be proceeded with because there would be no further reason for withholding arbitration!". A term to that effect should therefore be implied into the Sub-contract.

26. If I were wrong with all this, I would still say that there should be a stay of the present proceedings because as I said, at the moment, the Sub-contract work has not been finished and there is no suggestion that it will definitely not be finished. But in case after the grant of the stay, it turns out that the Sub-contract work will never be finished through no fault of the main contractor, the parties can come back to this Court to apply to lift the stay in question because by then, the arbitration clause may be said to have become inoperative or incapable of being performed (on the assumption that my above views on Clause 22.3 and its scope of application were wrong).

27. The upshot of all this is that there should be a stay of the two actions and the parties should be referred to arbitration; but because of Clause 22.3, because of the fact that the Sub-contract work has not yet been completed and because of the apparent reluctance on the part of the Plaintiff to proceed with the arbitration now, the arbitration may not be proceeded with until after the completion of the Sub-contract work. There is of course nothing to stop the Plaintiff from changing its mind and consenting to the holding of the arbitration after this judgment is given. That is really a matter up to the Plaintiff to decide.

28. So in other words, I make an order in terms of paragraph 1 in each of the two summonses before me. Mr Poon asks me to give liberty to apply in case the Sub-contract work would never be finished. I am not minded to give such a liberty at this stage. First, as I said, according to my construction of the two clauses in question i.e. Clause 22.1 and Clause 22.3, in case the Sub-contract work is never to be finished, the parties should simply proceed with the arbitration immediately.

29. Second, if I were wrong and the Sub-contract work is never to be finished, the parties can come back to the Court and apply, even without express liberty to apply. I am by no means suggesting that in such a scenario, the outcome of the application must be one way or another. I say nothing about that but as I said earlier, there is nothing to stop the parties from applying to remove a stay upon good ground. I do not attempt to affect in any way the outcome of such an application. And to avoid any misunderstanding, I am not minded to give liberty to apply expressly.

30. As regards costs, so far as this application for stay is concerned, costs should follow the event. As I said, I am not concerned with the rights and wrongs of the parties - these matters will have to be dealt with in the arbitration. The application for stay was opposed unsuccessfully by the Plaintiff, and I do not see any reason why it should not be ordered to pay the costs of the application. So I order that the costs of the application for stay be paid by the Plaintiff to the Defendant forthwith to be taxed if not agreed.

31. As for the costs of the two actions, I accept that before the summonses for stay were taken out by the Defendant, the Plaintiff had no specific reason to believe that the Defendant would insist on its right under the arbitration clause in question, though I must say that prima facie a party must act in accordance with his contractual obligation and should not take the chance of his opposite party waiving his right under the contract. Since, however, Mr Li does not press the point, I am minded not to make any order as to costs relating to the costs of the two actions. So what I am ordering is that subject to my above order as to the costs of the application for stay, there be no order as to costs of the two actions.