XCHRX LIU MAN WAI AND ANOTHER v. CHEVALIER (HONG KONG) LTD.

HCA2946/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2946 OF 2001

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J U D G M E N T

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The plaintiff's claims

1. The plaintiff's claims in this action arise out of work carried out as part of the re-development of Harbour City in Tsim Sha Tsui in a project called the "Gateway II Harbour City Re-development".

2. The employer under the project was Wharf Properties Limited and the main contractor, Chevalier Construction (Hong Kong) Limited. The defendant, a related company of the main contractor, was a nominated sub-contractor. The plaintiff was the sub-contractor of the defendant.

3. By five contracts contained in or evidenced by purchase orders dated variously between September 1996 and June 1999 as detailed in the Statement of Claim ("the Purchase Orders"), the plaintiff undertook to supply materials, labour, tools and instruments for the design, supply, installation, testing and commissioning for certain electrical installation works for the project.

4. Each of the Purchase Orders was subject to the defendant's standard terms ("the Standard Terms"). The important one for present purposes is clause 4 :-

"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 as stipulated in clause 39 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."

5. The plaintiff claims the sum of $5,615,920.68 being the outstanding balance of charges for work done and services rendered by it pursuant to the Purchase Orders and also for variation works. This sum can be broken down into two parts.

6. $3,176,540.00 relates to variation works carried out by the plaintiff under the Purchase Orders. The basis for the claim in this amount is an agreement alleged to have been reached between the parties in early July 1999. This agreement was said to be evidenced by a letter dated 13 July 1999. The sum agreed was $3,411,443.30, but discounted to $3,176,540.00 after a meeting which took place on or about 16 November 2000 between the two plaintiff partners and representatives of the defendant.

7. As for the balance, $2,439,380.68, this is alleged by the plaintiff to be in relation to retention monies, outstanding amounts due for the original work carried out under the Purchase Orders as well as for some variation works. About 2/3 of the claim is in relation to retention monies, the balance 1/3 in relation to variations and outstanding payments for work originally carried out under the Purchase Orders.

The application before the court

8. By a summons dated 5 September 2001, the defendant applies for a mandatory stay of the present proceedings relying on the arbitration agreement contained in clause 4 of the Standard Terms (which I have already set out in full above).

9. Mr Houghton for the defendant submits, quite simply, that all of the plaintiff's claims (which are disputed by the defendant) fall within the scope of the arbitration agreement.

The applicable law

10. Whether the relevant arbitration agreement is an international arbitration agreement or a domestic arbitration agreement, the court's approach is governed by Article 8 of the UNCITRAL Model Law. In the case of a domestic arbitration agreement, see section 6(1) of the Arbitration Ordinance Cap 341; for international arbitrations, see section 34C(1) of the Ordinance.

11. Article 8 of the Model Law states as follows :-

"(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."

12. If an action is brought in respect of a matter which is the subject of an arbitration agreement, the court must refer the matter to arbitration and stay the action unless the agreement is null and void, inoperative or incapable of being performed : Article 8 of the Model Law. Where there is no dispute between the parties to be referred to arbitration (and for this purpose, unless there is a clear and unequivocal admission of liability, there will exist a dispute) : see Tai Hing Cotton Mill Ltd v. Glencore Grain Rotterdam BV [1996] 1 HKC 363; Guangdong Agriculture Co. Ltd v. Conagra International (Far East) Ltd [1993] 1 HKLR 113; Zhan Jiang E&T Development Area Service Head Co. v. An Hau Co. Ltd [1994] 1 HKC 539; Louis Dreyfus Trading Ltd v. Bonarich International (Group) Ltd [1997] 3 HKC 597; F&D Buildings Services Engineering Co. Ltd v. Chevalier (E&M Contracting) Co. Ltd, unreported, 23 February 2001, Burrell J.

13. In applications such as the present, it is first important for the court to determine whether the dispute between the parties comes within the arbitration agreement at all. Before the court can refer a matter to arbitration under Article 8, it must first be satisfied that court proceedings have been brought in respect of a "matter which is the subject of an arbitration agreement". Of course, it must be recognised that the object of the Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense (see section 2AA(1)) and subject to the observance of such safeguards as are necessary in the public interest, the parties to a dispute should be free to agree how disputes between them should be resolved (see section 2AA(2)(a)). However, the court must first determine just what the parties have agreed to refer to arbitration and this must logically be the starting point. It goes without saying that if it cannot be shown that the dispute between the parties comes within the arbitration agreement, there is nothing to refer to arbitration and a stay will not be granted.

The present case

14. I have earlier in this judgment already set out the arbitration agreement contained in clause 4 of the Standard Terms (which is a domestic arbitration agreement).

15. The operation of clause 4 can be broken down as follows :-

(1) It only applies in the context of variations in the contract works performed by the contractor (in this case, the plaintiff).

(2) Where such variations result in the increase or decrease in the contract price, the parties should try to agree these differences to the contract price caused by the variations by reference to and on the basis of the unit rates contained in clause 39 of the Standard Terms.

(3) Where, however, there is a failure to agree as aforesaid on the difference to the contract price caused by the variations, the determination of this difference (whether by way of increase or decrease to the contract price) shall be referred to arbitration as provided for under clause 4(b).

16. In other words, the arbitration agreement becomes operative only where the parties have failed to reach agreement on the difference to the contract price occasioned by the variations performed by the contractor.

17. I should record here that Mr Houghton submitted that the arbitration agreement was wider than this and that it applied to "any dispute in respect of the increase or decrease in the contract price occasioned by the variation thereof " : see clause 4(b) of the Standard Terms. While this may well be a correct interpretation if one looked solely at clause 4(b), it ignores completely the effect of clause 4(a). As Lord Watson said in Chamber Colliery Co. v. Twyerould [1915] 1 Ch. 268, at 272,

"the words of each clause should be interpreted as to bring them into harmony with the other provisions of the deed."

Thus, in order to see what the words "dispute in respect of the increase or decrease in the contract price" mean, it is necessary in my judgment to refer to clause 4(a). There, in that sub-clause, is set out the nature of the dispute which should be referred to arbitration. As I have said, the relevant dispute arises where the parties have failed to agree on the amount of the increase or decrease to the contract price caused by the variation work carried out by the contractor. I also note that in clause 4(a), the dispute is to be referred to arbitration "as provided hereinafter". These words can only be a reference to sub-clause (b) and therefore provides another reason why clause 4(b) should not be looked at without reference to sub-clause (a).

Do the plaintiff's claims come within the scope of the arbitration agreement?

18. In my judgment, they do not.

19. In respect of the claim for $3,176,540.00, it will be seen that the issue which divides the parties is whether an agreement was reached as alleged by the plaintiff. If the plaintiff is right, there is nothing to refer to arbitration. The defendant disputes the existence of the alleged agreement. However, this dispute is not within the scope of the arbitration agreement. The arbitration agreement only applies if there is no agreement; it does not apply to the determination of whether an agreement exists in the first place. That issue is a matter which should be resolved by the court.

20. I now turn to the claim for $2,439,380.68. Insofar as this comprises the claims for retention monies, I am of the view that they are outside the scope of the arbitration agreement for the simple reason that, according to the plaintiff, they are not variations at all. It will be recalled that clause 4 of the Standard Terms only applies to variations. Mr Houghton submitted that they could be variations (although this seemed to me to be more theoretical than real), but whether or not these claims for the retention monies are essentially claims for variations, I have come to the conclusion that ultimately this is also a matter for the court to determine, not a matter that is within the ambit of the arbitration agreement. The reason for this is that even if the claims for retention monies were essentially claims for variations, these claims, like the balance of the claims under this head, which comprise 1/3 of this part of the plaintiff's claim, are also based on an agreement according to the plaintiff. Here, the plaintiff relies on a statement of account up to 19 March 2001 which, it is said, evidenced or represented an agreement made between the parties, since it was checked and signed by the defendant's project manager, one K.C. Ma on 23 March 2001. The plaintiff disputes that any agreement was reached but, again, as in the case of the claim for $3,176,540, this is an issue that is beyond the scope of the arbitration agreement and is one for the court to determine.

21. I finally add in relation to the claim for $2,439,380.68 that the plaintiff also says that, apart from retention monies and variations, the claim also includes claims for outstanding amounts under the Purchase Orders for work originally performed. The claims here amount to over $650,000. Whether or not these claims are for outstanding amounts, again, any dispute as to this is not a matter that is within the arbitration agreement.

22. For the above reasons, I am of the view that none of the disputes in this action comes within the scope of the arbitration agreement. There is therefore nothing to refer to arbitration and a stay should not be granted.

Order

23. Accordingly, the defendant's application is dismissed. I also make an order nisi that the defendant is to pay the plaintiff's costs of and occasioned by this application, such costs to be taxed if not agreed. Further, since this application is in respect of a discrete and independent part of this action, the costs will be taxable and payable forthwith.