PACIFIC CROWN ENGINEERING LTD v. HYUNDAI ENGINEERING & CONSTRUCTION CO LTD

HCCT83/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.83 OF 2002

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D E C I S I O N

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1. This is an application by the defendant to stay proceedings pending arbitration pursuant to section 6 of the Arbitration Ordinance, Cap.341 which invokes Article 8 of the Model Law which in turn provides for a mandatory stay of proceedings in the following terms :

" (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. In the present case, there is plainly a dispute between the parties. That much is agreed. The parties do not agree, however, that the contract which binds them contains an arbitration clause. The plaintiff contends that the contract is evidenced by correspondence dated 3 and 12 February 2000 and a meeting on 6 February 2000. If that be the case then, certainly, there is no arbitration clause. The defendant, on the other hand, says that these letters and the meeting were merely negotiations and that the full contract (a substantial document which is an amended standard form contract) was sent to the plaintiff on 17 February 2000. That contract is not signed but the defendant says that the work proceeded on the basis of it and that future conduct and correspondence shows it to have been accepted.

3. The issues on this summons are therefore firstly, is it for this court to decide whether or not an arbitration clause exists or is it a matter for the arbitrator? Secondly, what is the proper test to be applied in determining that issue.

4. Mr J. Harris for the plaintiff relies on the wording of section 6, Cap.341 and in particular the word "is" namely "Article 8 applies to a matter that is the subject matter of ...(an arbitration agreement)..." Unless, he submits, it can be shown there is an arbitration agreement, there is nothing to refer to arbitration. He relies on two English authorities to support his argument that the matter should be determined by the courts at an interlocutory stage. In my judgment, those authorities carry little weight in the light of the law as it now stands. Those earlier decisions in Modern Builders Wales v. Limma and Trinidad Co. Ltd [1975] 2 AER 549 and Wilcocks v. Pickfords [1979] 1 L1 Report-244 were made at a time when the power to stay proceedings was discretionary and arbitrators had no power to rule on their own jurisdiction. Now, there is no discretion to stay, it is mandatory subject to conditions and the arbitrator does have power, and is frequently asked, to rule on his own jurisdiction.

5. I therefore think that Mr Harris's primary submission, namely that the onus is on the defendant to prove that an arbitration clause exists and that it is for this court to finally determine, is the wrong test.

6. In my judgment, the approach advanced by Mr A. Houghton for the defendant is the correct one. He submits that the onus is on him (the defendant) to demonstrate to this court that there is a good prima facie case, or a plainly arguable case, that an arbitration clause exists between the parties and, if so, to refer the matter to the arbitrator for final determination on the matter (upon which the arbitrator will have the benefit of testimony from witnesses on both sides).

7. In support, he cites four Hong Kong authorities. It is true that the first three were before the amendment to our legislation in 1997 and concern the appointment of an arbitrator under Article 11. Only the courts had such a power pre 1997. The issue in those cases, however, was the same issue as in the present case, namely the existence of an arbitration agreement. To that extent they provide persuasive guidance on the issue before me.

8. In Pacific International Lines v. Tsinlien Metals & Minerals [1993] 2 HKLR 249, Kaplan J said at p.255 :

" It follows, therefore, that if I am satisfied that there is a plainly arguable case to support the proposition that there was an arbitration agreement which complies with Article 7 of the Model Law, I should proceed to appoint the arbitrator in the full knowledge that the defendants will not be precluded from raising the point before the arbitrator and having the matter re-considered by the court consequent upon that preliminary ruling."

9. In Private Company Triple V. Inc. v. Star (Universal) Co. Ltd [1995] 3 HKC 129, Litton VP said at p.132 :

" If the judge were to go into the matter more deeply, he would in effect be usurping the function of the arbitrator. Whilst, clearly, the judge had to make a judgment as to whether there existed an underlying agreement to arbitrate, he could do no more than to form a prima facie view. Here, in exercising his jurisdiction under art 11(3), Leonard J in effect asked himself whether it was arguable that Contract No 1034HK is still subsisted, despite the existence of the subsequent agreement. This seems to me the correct approach. ..."

10. In ICC Chemical v. Zhuhai Minerals [1996] 2 HKC 64, Leonard J said at p.66 :

" I find that there is a prima facie case that there is an arbitration agreement in writing and that there is a prima facie case that the defendant was a party ... Since I have found that there is a prima facie case that the defendant is a party to the alleged agreement, I will appoint a second arbitrator."

11. More recently in Paladin Agricultural Ltd v. Excelsior Hotel (Hong Kong) Ltd [2001] 2 HKC 215, this court adopted the approach of Litton VP (supra).

12. The proper test is therefore is there a prima facie or plainly arguable case that the parties were bound by an arbitration clause. The onus being on the defendant to demonstrate that there is.

13. Mr Harris submits that even if this is the test, the defendant has still not reached the threshold. Again, I disagree. My consideration of both the law and the documentary and affirmation evidence leads me to conclude that a prima facie case has been clearly established.

14. The legal definition of an arbitration agreement is to be found in section 2AC, Cap.341. It provides a very wide definition. What "arguably" comes within the definition is not hampered by strict provisions, save that it must be in writing. It widens the scope of what is "in writing". There is no requirement for a signature (which earlier legislation had required). Section 2AC provides :

"(1) An agreement is not an arbitration agreement for the purposes of this Ordinance unless it is in writing.

(2) An agreement is in writing for the purposes of subsection (1) if

(a) the agreement is in a document, whether signed by the parties or not; or

(b) the agreement is made by an exchange of written communications; or

(c) although the agreement is not itself in writing, there is evidence in writing of the agreement; or

(d) the parties to the agreement agree otherwise than in writing by referring to terms that are in writing; or

(e) the agreement, although made otherwise than in writing, is recorded by one of the parties to the agreement, or by a third party, with the authority of each of the parties to the agreement; or

(f) there is an exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and is not denied by the other party in response to the allegation."

15. Turning now to the evidence, it is fair to say that, on the one hand there are pointers in support of the contention that the letter of 17 February 2000, containing the standard form contract and arbitration clause, did not bind the parties and on the other hand, there are pointers to the fact that it did.

16. When applying the test - has the defendant shown a prima facie case that it did - the court should look at the evidence in support of the contention first. If, cumulatively, that evidence is cogent and arguable, and not dubious or fanciful, then the test has been satisfied.

17. Mr Houghton points to the following :

(a) Throughout the contract the plaintiff adopted the contract number (HTS/DSC/A047-01) which had first appeared on the defendant's letter of 17 February 2000 (which the plaintiff said it had never received).

(b) The plaintiff's applications for interim payments are consistent which the rates set out in the contract contended for by the defendant.

(c) Correspondence from the plaintiff refers "our contractual obligations" when replying to the defendant's letters quoting "HTS/DSC/A047-01" as the sub-contract.

(d) In particular in October 2001 the plaintiff wrote :

"As per the Contract Agreement in its Appendix 4 between Hyundai Engineering & Construction Co. Ltd. and Pacific Crown Engineering Ltd, we would therefore request HDEC, pursuant of the clause (Sub-Contract Price, Period etc) of Form of Subcontract, to release 2.5 percent of the retention."

(e) Payment certificates referred to a 5% retention. Acceptance of the retention rate is consistent with the defendant's terms. The plaintiff's alleged terms in its letters of 3 and 12 February had said "no retention".

(f) The application of the defendant's terms and conditions to the works as they progressed, particularly the terms and timing of payment and the retention money, was never objected to by the plaintiff.

(g) After the completion of the works and in the course of attempted negotiations to settle their differences there are further references to the plaintiff's acceptance of the defendant's version of the contract. For example, at a meeting in May 2002 the plaintiff's minutes of a meeting say :

"HDEC noted that in 2.2 above PCE did not take account of SCSC clause 40 regarding ..."

(h) On 30 November 2000, the parties entered into a Supplemental Agreement which was expressed to be "additional contract conditions to the original contract documents. This supplementary agreement will be construed as part of the contract documents". It is arguably more likely than not that this, because of its wording, was supplemental to the defendant's standard form agreement and not the plaintiff's letters of 3 and 12 February.

(i) It is arguably more likely than not that a contract of this size and nature (it was a lump sum contract for $32,250,000) was to be governed by formal lengthy written terms rather than two letters from the plaintiff making an offer.

18. By making no specific reference to Mr Harris's submissions on the evidence, in opposition to the above, it should not be thought that I consider them to be devoid of merit. However, taken cumulatively they do not render the above points fanciful or dubious to the extent that they relegate them below the threshold required. They will receive fuller consideration by the arbitrator in the event that this preliminary point is re-argued in arbitration.

19. On this summons, I grant the stay of proceedings and costs as sought by the defendant in its summons dated 15 October 2002.

20. On 8 April 2003, the plaintiff had made an application that the affirmations of two defence witnesses could not be relied on unless they were called to give evidence and be cross-examined in the course of this application for a stay. I heard the arguments for and against and decided to reserve my decision until this summons was heard. In other words, I left open the possibility that this summons be adjourned so as to hear oral evidence on the issue. In the event, I have decided the issue without oral evidence. Permitting oral evidence in such application would be unusual. It would not have been particularly helpful to hear witnesses from one side only. Furthermore, it has been possible to determine the issue (as defined herein) and apply the test (as defined herein) by reference, largely, to documentary evidence. The oral evidence will be for the arbitrators to assess.

21. As it happens, the application to cross examine became academic because on further enquiries being made, after 8 April, it transpired that only one of the two witnesses was material to the issue in hand and he lived in South Korea and was not willing to come to Hong Kong to give evidence.

22. Nonetheless, the summons was taken out by the plaintiff and I now dismiss it with costs, although I will make this particular costs order on a nisi basis.