XCHRX WECON LTD. v. LAW WONG KEE LAW'S CONSTRUCTION AND ENGINEERING CO. LTD. AND ANOTHER

HCA8245/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8245 OF 2000

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D E C I S I O N

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1. The plaintiff has brought a claim against the defendants as assignee of certain debts owed by the defendants. That is a contract of assignment in which there is no arbitration clause. The parties are also parties to a building contract in which there is an arbitration clause. The building contract has been terminated before its completion. The debts which are the subject of the assignment are debts which have arisen in the course of the defendants carrying out their works in the building contract.

2. In its defence and counterclaim to the plaintiff's claim on the assigned debts, the defendants have raised matters which relate solely to the building sub-contract. The plaintiff submits that those matters must be stayed pursuant to the arbitration clause in that contract. Mr Coleman submits the court has no discretion in the matter. The Arbitration Ordinance, Cap.341, provides for a mandatory stay (since the amendment of 1997) in such circumstances.

3. Mr Pirie, for the defendants, submits that because of the peculiar circumstances of the case, the court retains its pre-1997 discretion and should exercise it in the defendants' favour because the justice of the case requires that a stay not be granted.

4. The first defence submission is that because the terms of the arbitration clause dictate that an arbitration cannot commence until the contract works are complete, then the clause is not operative until then. Accordingly, so the argument goes, the clause is "inoperative". An inoperative clause is an exception to a mandatory stay and therefore the pre-1997 discretion is applicable.

5. This argument must fail. The plaintiff's readiness or willingness to arbitrate does not arise. The clause is in a proper form, duly signed and entered into by both parties. It is not rendered inoperative by virtue merely of the fact that the appropriate time to commence proceedings has not yet arrived.

6. Secondly, Mr Pirie submits that the plaintiff, by its conduct, has evinced an intention not to be bound by the arbitration clause. He points to the grievance harboured by his clients because of the plaintiff's conduct which he summarized as follows.

7. The plaintiff had entered negotiations with the defendants' sub-contractors before giving notice of termination of the defendants. They then sought an assignment of the defendants' debts due to the sub-contractors as a method of getting payment without arbitrating. Now, they sue the defendants on the assignment when there is no evidence of any payments having been made to the sub-contractors. This, Mr Pirie submits, evinces an intention not to arbitrate by the plaintiff. I do not accept this. Mr Coleman on the other hand points out that the plaintiff has every intention of arbitrating. There are obvious potential disputes arising out of the building contract which fall outside the narrow confines of the assignment contract which will, in due course, when the right time comes, be arbitrated.

8. Even if there is substance in the defendants' sense of grievance (which is not conceded by Mr Coleman), the fact remains that situations can and often do arise when one party finds itself in a less favourable position as a result of signing a contract, the terms of which are plain and unequivocal, which it openly entered into.

9. I find there to be no valid argument against the simple proposition that the disputes in the building sub-contract must go to arbitration. There must be a stay of those issues. Accordingly, they cannot be litigated as a counterclaim and set-off in the writ action which is based on a separate and distinct contract of assignment which contains no arbitration clause. Mr Pirie has made a valiant but inevitably unsuccessful attempt to argue the contrary.

10. Mr Pirie finally submits a "fall back" position. If the court is for the plaintiff, as it is, on the main issues, it is submitted that the court could exercise its inherent jurisdiction to stay the assignment proceedings pending the conclusion of the arbitration under Order 18, rule 9. The basis of this submission is that it would be oppressive for the defendants to have judgment entered against it in the assignment proceedings when its opportunity to arbitrate its dispute with the plaintiff under the building contract does not arise until the completion of the works which is likely to be in September 2001.

11. This "time factor" argument is factually correct but carries little weight in the face of the preceding arguments. In fact, the writ action has only just begun and so the entry of judgment against the defendants is hardly imminent. Moreover, the authorities cited by Mr Pirie in support : Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc (1978) QB 927, Esso Petroleum v. Milton (1997) 1 WLR 938 and Pollard Construction Co. Ltd v. Yung Yat Fan (1999) 3 HKC 109 are all, as Mr Colman correctly points out, cases dealing with the stay of execution of judgment. In the present case, that position is far from being reached.

The order

12. I grant the plaintiff's application. It is conceded, however, that the amended defence to the writ action does or may contain defences which are relevant solely to the assignment contract and thus falls outside those issues which must be arbitrated.

13. The summons as drafted reads as follows :

"... application on the part of the Plaintiff for an Order that all further proceedings in relation to the Defence and Counterclaim in this action be stayed pursuant to Section 6 of the Arbitration Ordinance, Cap.341 in so far as the same relate to the Sub-Contract made between the Plaintiff and the 1st Defendant dated 15 April 1999, the Plaintiff and the 1st Defendant having by an agreement agreed to refer to arbitration any disputes arising under the said Sub-Contract ..."

14. For the avoidance of doubt, the words "in so far as the same relate to the sub-contract ..." require more particularity. I invited submission from counsel on this so as to avoid further arguments at trial as to what did or did not "relate to the sub-contract". I therefore now make the following order :

1. Order in terms.

2. For the purpose of clarification, those issues which the defendants are at liberty to plead by way of defence in this action are limited to those contained in paragraphs 3, 27 and 28 of the draft amended defence and counterclaim dated 13 November 2000. It remains open to the plaintiff to argue at trial that the defences in paragraphs 3, 27 and 28 nonetheless relate to the sub-contract only and not this writ action.