POLLARD CONSTRUCTION CO LTD v. LEE KWONG KONG and TO CHUN YIN t/a HUNG CHONG (FOUNDATION) CONSTRUCTION CO

DCCJ 5635/2016

IN THE DSTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5635 OF 2016

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D E C I S I O N

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1.  This is the hearing of the Defendant’s summons dated 7 April 2017 for an order that the action herein be stayed and for arbitration pursuant to section 20 of the Arbitration Ordinance, Cap 609 (“AO”) in accordance with the parties’ prior arbitration agreement (“the staying summons”). The Defendant also asks for costs on indemnity basis.

Brief Background

2.  The following background is basically not in dispute or believed not controversial unless otherwise stated. They can be gathered from the 2 affirmations filed by Mr To Chun Yin, the second-named Defendant, and the affidavit filed by Mr Tso Hung Chuen on the Plaintiff’s behalf.

3.  The Defendant is the Plaintiff’s sub-contractor in the construction of a hotel development located at New Market Street and Tung Loi Lane, Hong Kong (“project”) responsible for the design, supply and installation of excavation and lateral support and piling works. The parties signed a contract dated 23 August 2013 in respect of the said works for the project (“Sub-contract’). The contract sum is $6,800,000.

4.  Some of the Defendant’s workers for the project failed to receive wages, holiday pays and other terminal compensation from the Defendant. These workers lodged their claims with the Labour Tribunal under action number LBTC 466/2015 against, inter alia, the Plaintiff and Defendant in or about February 2015. From the claim forms of these workers, they were owed wages between September to November 2014. Despite the fact that the Plaintiff was not the workers’ employer, these workers sued the Plaintiff at the same time relying on section 43C of the Employment Ordinance, Cap 57 (“EO”). Section 43C(1)(a) of the EO provides:

“(1) Subject to this Part, if any wages become due to an employee who is employed by a sub-contractor on any work which the sub- contractor has contracted to perform, and such wages are not paid within the period specified in section 23,24 or 25, as the case may be, such wage shall be payable to the employee –

(a) where the sub-contractor has contracted with the principal contractor, by the principal contractor;”

5.  By consent of the parties, an award was made in favour of the workers by the Tribunal against the Plaintiff and the Defendant jointly and severally in the total sum of $523,774, being the workers’ outstanding wages, on 8 April 2015[1]. The Labour Tribunal award was eventually satisfied by the Plaintiff on 29 April 2015[2].

6.  By the present action, the Plaintiff sues the Defendant for reimbursement of the said sum of $523,774. According to the Statement of Claim, the Plaintiff relies on section 43F(1) of the EO which stipulates:

“(1) If a principal contractor or superior sub-contractor pays to an employee any wages under section 43C, the wages so paid shall be a debt due by the employer of that employee to the principal contractor or superior sub-contractor, as the case may be.”

7.  The Defendant filed no Defence but took out the staying summons on 7 April 2017.

8.  The Defendant relies on Clause 20(i) of the Sub-contract. Since the Plaintiff also refers to Clause 20(ii) of the same contract, both sub-clauses are reproduced below:

“(i) If any dispute arises between the Contractor [i.e. the Plaintiff] and the Sub-Contractor [i.e. the Defendant] in connection with this Sub-Contract, it 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 the Arbitration Ordinance or any statutory modification thereof for the time being in force and any such reference shall be deemed to be a submission to arbitration within the meaning of such Ordinance. For the avoidance of doubt, it is hereby agreed between the parties thereto that no legal proceeding, lawsuit or action shall be brought, filed, commenced or instituted in any court of any jurisdiction by any of the parties hereto in relation to the aforesaid dispute between the same parties unless and until an award shall have first be given by the aforesaid arbitrator regarding such dispute.

(Emphasis added by the Defendant)

(ii) If any claim arises or results from the dispute between the   Contractor and the Sub-Contractor abovementioned in Clause 20(i) and the party to whom such claim is made denies liabilities thereto, then the party making such claim   shall within twelve (12) calendar months from the date of such disclaimer refer the claim or dispute to arbitration under the provisions herein contained, failing which the claim shall for all purposes be deemed to have been abandoned by the party making it and shall not thereafter be recoverable.”

9.  It is the Defendant’s case that Clause 20(i) is an arbitration agreement within the meaning of the AO. Mr Cheung, counsel for the Plaintiff, does not seek to dispute that. Section 20(1) of the AO provides that Article 8 of the Model Law has effect. Article 8(1) provides:

“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.”

10.  Section 20(5) of the AO further states:

“If the court refers the parties in an action to arbitration, it must make an order staying the legal proceedings in that action.”

11.  The Defendant’s case (obviously disputed by the Plaintiff) is that since the Plaintiff’s claim in the action arose from a matter within the ambit of the arbitration agreement, the Plaintiff’s claim should be stayed pursuant to section 20(1) and (5) of the AO. Briefly, the Defendant says that pursuant to the Sub-contract, the contract sum would be effected by way of monthly interim payments according to the work done. They commenced work around August 2013. The excavation works, which was part of the works of the Sub-contract, had been completed[3]. However, their further work was suspended in October 2014 on the ground that certain pilings were built not at the right positions. Payment was stopped. As a result, they were unable to pay their workers’ wages. They say, so far, only $3,000,000 has been received from the Plaintiff under the Sub-contract. There remains unpaid contract sums which the Plaintiff is liable to pay to the Defendant[4]. They do not admit that they are liable, in terms of liability and quantum, to reimburse the Plaintiff its claim in the present action[5].

12.  The main grounds of the Plaintiff resisting the staying application are that the Defendant has never disputed liability and referred the matter to arbitration. There is therefore no genuine “dispute or difference” between the parties. Secondly, it is contested that the Plaintiff is basically exercising its statutory rights conferred upon it by the EO to recover payment of the Tribunal award as a debt which is an independent statutory claim outside the ambit of the arbitration agreement.

Discussion

13.  Both counsel approach the summons by asking the questions formulated in Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Anors[6] by Ma J (as the Hon CJ then was). That case concerned an application under the AO to stay proceedings in favour of arbitration pursuant to an arbitration agreement. The learned judge proposed to ask the following 4 questions in order to determine whether to stay the proceedings in favour of arbitration[7] :

i) 1^st question: Is the clause in question an arbitration agreement? If the answer is No, a stay will not be granted;

ii) 2^nd question: Is the arbitration agreement null and void, inoperative or incapable of being performed? If the answer is Yes, no stay can be ordered;

iii) 3^rd question: Is there in reality a dispute or difference between the parties? If the answer is No, no stay will be ordered; and

iv) 4^th question: Is the dispute or difference between the parties within the ambit of the arbitration agreement? This in turn will be a 2-stage analysis and involves firstly, analysing the nature of the dispute or difference between the parties and secondly, construing the arbitration agreement to see whether it comes within it. If the answer is No, a stay will not be ordered.

14.  The approach in Tommy (supra) has in fact been widely adopted with approval in many cases, e.g. Chevalier (Construction) Company Limited v Universal Aluminium Industries Limited [8], Bluegold Investment Holdings Limited v Kwan Chun Fun Calvin[9]. Although, as correctly pointed out by Ma J in Tommy (supra)[10] there are other ways to go about the question of stay, this Court will approach the dispute by asking the same Tommy’s questions as it is the parties’ common ground that such approach is to be adopted.

15.  Mr Cheung, counsel for the Plaintiff, accepts, and I think sensibly and correctly, that the first 2 questions are answered in favour of the Defendant. He accepts Clause 20(i) of the Sub-contract a valid arbitration agreement. He, however, submits that the 3^rd and the 4^th questions should be answered against the Defendant.

   3^rd Question: Is there in reality a dispute or difference     between the parties?

16.  The gist of Mr Cheung’s argument is this. The Defendant has in fact unequivocally admitted both liability and quantum of the workers’ claims in the Labour Tribunal. As a result, an award in favour of the workers was made by the Tribunal with the parties’ consent. Further, almost 3 years have elapsed after the suspension of the Sub-contract. Yet the Defendant has never raised any claim or dispute with the Plaintiff in respect of the Sub-contract. Neither has the Defendant referred any claim or dispute to arbitration pursuant to the arbitration agreement. Any dispute, according to Clause 20(ii), should have been barred.

17.  With respect, I disagree.

18.  First of all, it is important to distinguish between the 2 disputes, namely, that between the workers and the parties herein as a whole on one hand, and that between the 2 parties herein on the other. It is true that the Defendant does not dispute the workers’ claims and as such it is correct to say that as between the workers and the parties in the Labour Tribunal there is no dispute. That may, perhaps, be the reason why the Tribunal award was made by consent.

19.  However, the fact that the Defendant admits the labour claim does not mean that they admit their liability to repay the same to the Plaintiff, in light of their relationship under the Sub-contract. From the affirmation evidence summarized above[11], the Defendant is basically alleging that there are still payments under the Sub-contract due and owing to them by the Plaintiff. It is the Defendant’s case that because of the Plaintiff’s failure to effect Sub-contract payments, they became unable to settle wages of workers which were engaged to work on the project. Although the exact amount of the labour claim is not in dispute, it will be unrealistic to say the Defendant does not dispute the Plaintiff’s present claim in the context of the Sub-contract. The true nature of the dispute, considered against the background of the parties’ contractual relationship, is whether the Defendant is required to repay the Plaintiff the Tribunal award taking into account the Defendant’s overall rights and liabilities as alleged under the Sub-contract.  

20.  In any event, the Defendant does not admit the Plaintiff’s claim[12].

21.  Mr Cheung submitted that the Defendant’s defence, if any, is indisputable and is of no substance at all and not amounting to any real dispute referable to arbitration.

22.  Section 4 of the AO adopts the part of the provisions of the UNCITRAL Model Law that are expressly stated in the AO. Section 20 of the AO applies Article 8 of the Model Law. Article 8(1) provides:

“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 thedispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

23.  What constitutes a dispute has been discussed in the Court of Appeal decision of Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV [13]. Bokhary JA (as the learned PJ then was) had this to say when discussing what meaning the word “dispute” bears in Article 8(1) at p.372H – 373F:

“I gratefully adopt what Saville J said in Hayster v Nelson [1990] 2 Lloyd’s Rep 265 at 268:

The proposition must be that if a claim is indisputable then it cannot form the subject of a ‘dispute’ or ‘difference’ within the meaning of an arbitration clause. If this is so, then it must follow that a claimant cannot refer an indisputable claim to arbitration under such a clause; and that an arbitrator purporting to make an award in favour of a claimant advancing an indisputable claim would have no jurisdiction to do so. It must further follow that a claim to which there is an indisputably good defence cannot be validly referred to arbitration since, on the same reasoning, there would again be no issue or difference referable to arbitration. To my mind such propositions have only to be stated to be rejected – as indeed they were rejected by Kerr J (as he then was) in the M Eregli [1981] 2 Lloyd’s Rep 169, in terms approved by Templeman and Fox LJJ in Ellerine v Klinger. As Templeman LJ put it (at p 1383):

‘There is a dispute until the defendant admits that the sum is due and payable.’

   Now the Model Law governs the position of parties … as I understand    it, is to leave such parties to do what they agreed to do so, ie take their disputes to arbitration. That being so, it would be odd if the word     ‘dispute’ where it appears in the Model Law were to receive a    narrower meaning than it receives where it appears in an ordinary arbitration agreement.”

   (Emphasis added)

24.  Bokhary JA then concluded at p.373G-I:

“Under art 8(1) of the Model Law, the court is not concerned with investigating whether the defendant has an arguable basis for disputing the claim. If a claim is made against him in a matter which is the subject of an arbitration agreement and he does not admit the claim, then there is a dispute within the meaning of the article. And if he seeks a stay of the action, the court must grant a stay unless the plaintiff can show that the arbitration agreement is null and void, inoperative or incapable of being performed.”

   (Emphasis added)

25.  From the above, it is obvious that submission similar to that advanced by Mr Cheung has been expressly rejected by the Court of Appeal in Tai Hing Cotton Mill (supra). In fact, Ma J (as he then was) in Tommy (supra), which is the authority embraced by Mr Cheung, also applied the same approach and relied on Tai Hing Cotton Mill (supra). It was stated at [51] of Tommy (supra):

“…A dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum…”

26.  In the Court’s judgment, whether the claim of the Defendant, if any, will be time-barred by reason of Clause 20(ii) or whether there are provisions by virtue of which time can be enlarged depends on the construction of the agreement between the parties including the arbitration agreement. It will be a matter entirely for the arbitrator to whose jurisdiction the parties have expressly agreed to submit.

27.  The 3^rd question is therefore answered in the Defendant’s favour.

   4^th question: Is the dispute or difference between the parties    within the ambit of the arbitration agreement?

28.  The existence of a dispute is not enough to activate the arbitration agreement. It is necessary that the dispute is the sort of dispute intended to be covered by the arbitration agreement. As such, the scope of the arbitration agreement and nature of the dispute need be inquired into.

29.  Mr Cheung submits that the dispute has a separate and distinct statutory origin and solely arose out of section 43F of the EO. It is not connected with the Sub-contract. He relies on 2 CFI decisions of Aggressive Construction Company Ltd v Data-Form Engineering Limited[14] (per DHCJ To) and Lo Pui Fan & Anor v HongKong United Dockyards Limited & Keppel Fels Limited (third party)[15] (per Hon L Chan J) in support of his argument.

30.  Mr Chan, counsel for the Defendant, relies on Legend Interiors v Wing Mou Engineering Ltd & Anor[16] and Chevalier (Construction) Co Ltd v Universal Aluminium Industries Ltd[17]. In these 2 cases similar claims based on Labour Tribunal awards were considered and stayed by the CFI. It is also Mr Chan’s submission that on a proper construction, the dispute is within the ambit of the arbitration agreement.

31.  Mr Chan also relied on PCCW Global Ltd v Interactive Communications Service Ltd[18] to support his proposition that the matter should be stayed unless it is clear that the dispute does not so fall within the arbitration agreement. I think Mr Chan is correct in his approach when approaching the 4^th question.

32.  The full text of the arbitration agreement has been set out in [8] above. It is noted that the formulation of words “… any dispute arises between the [Plaintiff] and the [Defendant] in connection with this Sub-Contract, …” was employed. The choice of words is in fact very similar to Tommy (supra), in which similar words, namely, “… arising out of the Contract or in any way connected herewith …”[19] were used. The question of constructive trust was raised in Tommy (supra).

33.  It was held in Tommy (supra) words such as “arising out of … or … in any way connected therewith…” are wide words. In [57] of Tommy (supra) it was stated:

“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.”

   (Emphasis added)

34.  Given the Court’s analysis of the nature of the dispute between the parties[20], this Court accepts that the arbitration agreement is sufficiently wide to cover a reimbursement claim of the Labour Tribunal award which arises out of the relationship of the parties created under the Sub-contract and the payment or otherwise is connected with it.

   Chevalier (supra)

35.  The recent decision by DHCJ Seagroatt in Chevalier (supra) is squarely on this issue. In that case the parties are parties to a contract with an arbitration agreement. The plaintiff sued the defendant to recover wages paid to the latter’s workers pursuant to a Labour Tribunal award. In the application by the defendant to stay the proceedings for arbitration, the plaintiff contested similarly that the claim for reimbursement was a statutory claim under the EO and had an independent a separate origin. The defendant contented the inability to pay wages was caused by, inter alia, the plaintiff’s failure to make payment under their contracts.

36.  The learned deputy judge considered that the liability met by the plaintiff to satisfy its obligation under the EO is inextricably involved with the dispute between them arising out of their contracts. The learned deputy judge also stated that it was wholly artificial to seek to compartmentalize the plaintiff’s claim for reimbursement, when the principal live issues were subject of the arbitration: see [22] and [23] of Chevalier (supra).  

37.  This Court shares the above views of the learned judge.

   Legend (supra)

38.  Legend (supra) is another case relied on by Mr Chan. In brief, reimbursements under section 43C-H of the EO were sought by the main contractor against the sub-contractor, and the parties were related by contracts with arbitration agreement in which disputes should be referred to arbitration. The words “in connection with” and “in connection therewith” were employed. Reyes J held that the main contractor’s claim was within the terms of the arbitration agreement. He said at [12] of Legend (supra):

“… It seems to me on consideration that the claim does, because it arises in connection with the relation of main contractor and sub- contractor subsisting between Legend and Wing Mou. Insofar as essentially there is a dispute among the two as to the extent to which on a final account between them certain amounts (including all or part of the reimbursement paid by Legend under the EO) remain due and owing to Legend from Wing Mou, it seems to me that the claim for reimbursement should also go to arbitration.”

39.  I respectfully agree to the observation of the learned judge.

40.  Mr Cheung seeks to distinguish that in both Chevalier (supra) and Legend (supra), both defendants had a core dispute for arbitration. Further, in Chevalier (supra), the defendant had already initiated arbitration proceedings. Accordingly, the court saw fit to stay.

41.  I cannot accept Mr Cheung’s submission for the simple reason that his submission does not sit in well with the reasoning of the judges in both cases. Further, there is no basis for the existence of a core dispute before one could activate the arbitration agreement. As said by Ma J in Tommy (supra) and set out in [25] above, a dispute will exist unless there is a clear and unequivocal admission not only of liability but also of quantum. In the present case, neither liability nor quantum have been admitted by the Defendant. The arbitration agreement employs words the meaning of which is wide enough to cover the labour claims arising from their relationship under the Sub-contract.

   Aggressive Construction (supra)

42.  It is a case in which the arbitration agreement contained in the parties’ building contracts provided that “… if any dispute in relation to [their contract] arises”, the said dispute should first of all determined by the main contractor. It would be a “… final determination in terms of contract and in law…” unless within a prescribed time after the determination the subcontractor referred the matter to arbitration. The main contractor sued the sub-contractor for reimbursement of wages paid to the subcontractor’s workers. The subcontractor filed a defence and counterclaim putting the contractual disputes between the parties at issue. The main contractor applied to have the counterclaim stayed in favour of arbitration. One of the issue before the court was whether the main contractor’s claim for reimbursement was within the relevant arbitration agreement[21].

43.  DHCJ To (as he then was) held it was not. The judge apparently accepted the submission of counsel for the main contractor that determination by the main contractor, which is subject to arbitration, should only be restricted to the legal effect of the terms of the contract between the parties. The main contractor has no power to determine the effect of general law unrelated to the terms of the contract, such as the provisions of the EO which was not part of the terms of the contract between the parties[22]. Essentially, the deputy judge was understood to mean that the arbitration agreement simply did not cover matters in which the main contractor did not have power to determine in the first place, and the claim for reimbursement is one of them[23].

44.  It is noted that the arbitration agreement in Aggressive Construction (supra) is very different from that of the present case. The matters which are subject to arbitration in that case are qualified by the term “in terms of contract and in law’ which is absent in the present case. Further, the limitation caused by a lay party adjudicating on the effect of general law is also absent in the present case. In my judgment, the decision of Aggressive Construction (supra) should be confined to its own special facts and is distinguishable.

   Lo Pui Fan (supra)

45.  In this case, the plaintiffs were the adminstratrices of the estate of a deceased worker who was fatally injured in an accident. They sued the defendant who was the deceased’s employer. The defendant issued a third party notice against a third party for contribution and/or indemnity on the grounds that the fatal accident was caused by the latter’s defective design and use of inferior materials.  The claim against the third party were based, inter alia, on the Civil Liability (Contribution) Ordinance, Cap 377 and/or Employees’ Compensation Ordinance, Cap 282. They were said to be statutory in origin.

46.  The third party sought to stay the third party proceedings in favour of arbitration. There is an arbitration clause between its agreement with the defendant. The arbitration agreement provided:

“Any dispute arising under or by virtue of this Contract or any differences of opinion between the parties hereto concerning their rights and obligations under the Contract shall be resolved by arbitration.”

47.  Hon Louis Chan J was referred to a number of English authorities and Aggressive Construction (supra). It was held by the learned judge at [26] of the said decision:

“… Clause 14.1 is an all-encompassing arbitration clause only for ‘dispute arising under or by virtue of this Contract or any differences of opinion between the parties hereto concerning their rights and obligations under the Contract’. It does not cover the statutory claims brought by the defendant under s.3 of the Civil Liability (Contribution) Ordinance and s.25(1)(b) of the Employees’ Compensation Ordinance.”

48.  It is apparent that the learned judge considered the arbitration agreement in question not wide enough to cover the statutory claims. In my judgment, the learned judge in Lo Pui Fan (supra) is entitled to come to a narrower construction as he did because the apparently limiting words “…. concerning their rights and obligations under the Contract” were there. They were absent from the agreement in the present case. Further, it appears that only Aggressive Construction (supra) was cited to the learned judge. He did not appear to have the benefit of Legend (supra) when making the decision. In my judgment, Lo Pui Fan (supra) is also distinguishable.

Dispositions

49.  For the reasons above, the proceedings here should be stayed pursuant to Clause 20(i) aforesaid. I therefore make an order that the present action be stayed and the plaintiff’s claims herein be referred to arbitration.

50.  I also make an order that the Plaintiff do pay the costs of the Defendant’s application to stay these proceedings, with certificate for counsel, on District Court scale, on indemnity basis: see Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd[24]. It is an order nisi, and be made absolute if no application is made to have it amended within 14 days from today.