KAT YUE CONSTRUCTION ENGINEERING LTD v. FAI LEE CONSTRUCTION (H.K.) LTD

HCA 2494/2024

[2025] HKCFI 3298

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2494 OF 2024

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Between

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J U D G M E N T

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1.  By a summons dated 12 February 2025, the Defendant applies for an order that these proceedings be stayed in favour of arbitration. The application is made pursuant to s. 20 of the Arbitration Ordinance (Cap 609) (the “AO”). The Plaintiff resists the application.

2.  In gist, the issue between them is as to the effect of a settlement agreement entered into between the parties on 11 November 2024 (the “Settlement Agreement”) on an arbitration clause in a contract entered into by the parties on 13 June 2024 (the “Contract”). The Plaintiff argues that the terms of the Settlement Agreement displace the arbitration clause in the Contract and that the claim in these proceedings is made under the Settlement Agreement and not under the Contract. The Defendant argues that the claim is based on the Contract and not on the Settlement Agreement, and so it falls within the arbitration clause, or at least prima facie falls within the arbitration clause, and hence it is entitled to a stay so that the matter can be determined in an arbitration.

The Contract

3.  Both parties are Hong Kong incorporated construction companies.

4.  The Contract entered into by the parties on 13 June 2024 is entitled “Sea-sand transportation and discharge contract” and is governed by Hong Kong law. Under its terms, the Defendant agreed to pay the Plaintiff to provide marine plant to receive and dispose of sand fill from the Defendant’s construction site at Kwai Chung Town Lot No. 531, New Territories. In turn, the Plaintiff contracted with other contractors to deliver sand. The sand was to be used as infill in connection with the 3^rd runway project at HKIA.

5.  Clause 6.1 of the Contract provided:

“Quantity: a total of approximately 180,000 to 300,000 m³. Party B [Defendant] shall supply about 36,000 to 60,000 m³ of sea sand per month. The weekly quantity shall be 9,000 to 15,000 m³, i.e. approximately 1,500 to 2,500 m³ per day. … ”

6.  By clause 6.2 of the Contract, the price to be paid by the Defendant was set at HK$ 45/metric tonne of sand disposed of by the Plaintiff.

7.  In the event of disputes, clause 12.3 of the Contact provided for mediation in accordance with the rules of the HKIAC, and in the event that this did not resolve the dispute, through arbitration in accordance with the laws of the HKSAR. In agreed translations:

“爭議處理 Dispute Resolution

12.1 因本合同引起或與之相關的任何爭議或分歧，雙方必須首先盡最大努力以合理、公平的方式解決任何爭議。

Any dispute or disagreement arising out of or in connection with this Contract shall first be resolved by both parties using their best efforts in a reasonable and equitable manner.

12.2 除非根據本合同，雙方已解除合同關係，否則在本合同沒有結束前，雙方均不得就合同中發生的爭議提交仲裁。

Unless the parties have terminated the contractual relationship pursuant to this Contract, neither party shall submit any dispute arising under the Contract to arbitration before the Contract has come to an end.

12.3 如雙方未能有效解決有關爭議，則在合同結束或解除後應首先根據香港國際仲裁中心的規則通過調解解決，如果無法解決，則應根據香港特別行政區的相關法律通過仲裁解決。

If both parties are unable to effectively resolve the subject dispute, the parties shall, after the conclusion or termination of the contract, first resolve the dispute through mediation in accordance with the rules of the Hong Kong International Arbitration Centre. If the same could not be resolved, it shall be resolved through arbitration in accordance with the relevant laws of the Hong Kong Special Administrative Region.”

The suspension of deliveries of sand

8.  From 16 July 2024, the Defendant supplied the Plaintiff with sand.

9.  However, on 27 September 2024 the Defendant notified the Claimant that because of various factors, it would have to suspend deliveries on 30 September 2024. The deliveries stopped at or about that time.

10.  The Defendant signed off the letter saying, 本公司有不足之處：請多多涵！(“Where the company has had shortcomings it asks for your understanding!” in the Plaintiff’s translation). The Plaintiff argues that this shows that the Defendant accepted that it was in breach of contract, so that the only matter left to decide is as to quantum. However, the Defendant submits that this reads too much into this statement. Viewed against the case as a whole, I do not consider that there was an acceptance of liability on the part of the Defendant.

11.  On 7 October 2024, the Plaintiff’s lawyers wrote to the Defendant stating that in stopping the supply of sand fill the Defendant was in repudiatory breach of the Contract. They demanded that the Defendant should rectify the breach by resuming the supply of sand fill in accordance with the Contract.

12.  On 16 October 2024, the Plaintiff’s lawyers wrote again to the Defendant to the effect that it had failed to rectify the breach, which was accepted as putting an end to the Contract. Demand was made for payment in the sum of HK$16,342,815 which was calculated by reference to the Contract. In default of payment, the lawyers said, they had standing instructions to commence the dispute resolution procedure under clause 12.3 of the Contract (the arbitration clause).

The Settlement Agreement

13.  The parties’ affirmations show that on 28 October 2024, executives of each company met to discuss the terms under which the supply of sand fill could be resumed by the Defendant.

14.  On 2 November 2024, the Defendant sent a draft settlement agreement to the Plaintiff capturing the matters discussed at the meeting, as the Defendant’s affirmation evidence puts it. This was a commendably simple agreement clearly intended to be entered into between people in the construction business. It stated the contents of the settlement agreement in five clauses. There was no reference to dispute resolution.

15.  On 9 November 2024, the Plaintiff’s lawyers wrote to the Defendant stating that they were instructed to amend the draft settlement agreement – the amended draft sensibly maintained the same format while proposing amendments to the terms. It was attached for the Defendant’s consideration and agreement.

16.  It is not in dispute that on 11 November 2024, the parties entered into the Settlement Agreement. The terms were straightforward:

a. The Defendant agreed to resume supplying sand according to a revised schedule (clauses 1.1 and 1.2);

b. Black mud and stones were not to be mixed with the sand (clause 1.3);

c. If the sand was supplied by the Defendant in accordance with the revised schedule, the Plaintiff would withdraw its claims arising from the temporary suspension of delivery on 30 September 2024 (clause 1.4);

d. If the Defendant failed to do so, the Plaintiff reserved its rights in relation to compensation claims arising from the suspension of the delivery of sand on 30 September 2024 (clause 1.5);

e. Clause 1.6 (which was one of the clauses added by the Plaintiff to the Defendant’s draft) provided that “Clause 12 of the original contract shall not apply to this settlement agreement”. Clause 12 is the dispute resolution clause set out above. It is the effect of this clause 1.6 in the Settlement Agreement that is the subject of the dispute between the parties.

f. There is a disagreement between the parties as to the translation of clause 1.7: 當雙方在 2024 年 11 月11日起繼續供應海沙料運作，即雙方同意及遵守以上和解協議。According to the Plaintiff, this translates as, “Upon the resumption of sand fill operations on 11 November 2024, thus both parties agree and will comply with the above settlement agreement”. According to the Defendant, this translates as, “Once both parties resume the sea-sand supply operation from 11 November 2024, both parties shall have agreed to and have complied with the above settlement agreement”. However, it was not suggested that anything turns on clause 1.7 or the differences in translation.

17.  Unfortunately, the parties fell out as to whether the settlement they had negotiated had been complied with. The Plaintiff’s case is that the sand supplied by the Defendant contained black mud and did not meet the quality requirements of the Settlement Agreement. The Defendant denies that the sand it supplied was contaminated or failed to meet the required standards its case being that the Plaintiff wrongfully failed and/or refused to collect it.

18.  Essentially, the question is by what mechanism that issue is to be determined. On 18 December 2024, the Plaintiff commenced the present proceedings. The Defendant issued the stay summons on 12 February 2025.

The parties’ contentions

19.  The Defendant contends that the stay summons is instigated by the Plaintiff’s conduct in commencing the present proceeding disregarding the arbitration clause. The Plaintiff, it contends, rests its claim on the alleged breach of the Contract, claiming for loss and damage suffered as a result of the Defendant’s alleged breach in that the Defendant failed to supply marine fill as prescribed by the Contract. In doing so, the Plaintiff flouted the parties’ mutual obligation to pursue arbitration in the event of disputes. It is audacious to suggest that the claim is based on the breach of the Settlement Agreement when the Plaintiff has twice pleaded that it is seeking relief for the Defendant’s wrongful repudiation of the Contract or breach of the Contract, not on the alleged breach of the Settlement Agreement.

20.  The Defendant contends that the Plaintiff’s reliance on Clause 1.6 of the Settlement Agreement is to no avail. The Plaintiff was legally represented during the negotiation of the terms of the agreement, and its proposed amendments, which culminated in the Settlement Agreement on 11 November 2024 and did not preclude arbitration. While clause 1.6 could be read as excluding the Contract’s dispute resolution framework from the Settlement Agreement, the clause neither precludes arbitration nor conflicts with the Contract’s arbitration clause. The subject disputes are unquestionably covered by the clause. The substance of the Plaintiff’s case rests solely on the alleged repudiation of the Contract, and the parties are bound to pursue arbitration to resolve that dispute. The Plaintiff’s commencement of the present proceedings is an abuse of process, which has been condemned by a wealth of precedents.

21.  The Plaintiff submits that prior to the Settlement Agreement, clause 12 of the Contract was effective. From 11 November 2024 onwards, the effect of clause 1.6 is that any disputes are to be resolved in the Hong Kong courts. By the clause, the parties evinced a clear intention that any disputes arising out of the Settlement Agreement should not be referred to arbitration. The effect of the presumption in favour of one-stop adjudication is that clause 1.6 supersedes clause 12 of the Contract, such that the parties need to resolve all disputes arising after the Settlement Agreement including matters that arise out of the original Contract through the Hong Kong courts.

22.  The Plaintiff submits that the “centre of gravity” of their claim is the Defendant’s breach of the Settlement Agreement. The same result comes from applying a one-stop adjudication approach. The Defendant’s liability for such failure has effectively been admitted in the Settlement Agreement, and any defence that the Defendant did not breach the Contract would be liable to be dismissed on summary judgment. The only outstanding issue with regard to the supply of sand pre-30 September 2024 is the quantum of damages based on the agreed formula in the Contract. On a purposive or commercial interpretation, clause 1.6 has the effect of superseding clause 12 (including the arbitration agreement) both for disputes arising out of the Settlement Agreement and for disputes arising out of the Contract.

The applicable legal principles

23.  In Jingdong E-Commerce (Trade) Hong Kong Corporation Ltd v Mavin Electrons Ltd [2024] HKCFI 3110, Deputy High Court Judge Jonathan Wong summarised the basic principles applicable to a stay in favour of arbitration at §3.2:

“The principles governing a stay in favour of arbitration are well-established. As set out at Mice Engineering Ltd v Johnson Controls Hong Kong Limited [2022] HKCFI 2768 §§17-18 (and the further cases cited therein):

(1) On a stay application under section 20 of the AO, the court would consider the following questions: (a) is there an arbitration agreement between the parties (b) is the clause in question capable of being performed (c) is there in reality a dispute or difference between the parties and (d) is the dispute or difference between the parties within the ambit of the arbitration agreement;

(2) The onus is on the applicant for stay to demonstrate only that there is a prima facie case that the parties are bound by an arbitration clause, and unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed in favour of arbitration, as it is for the tribunal to decide first on its jurisdiction.”

24.  I gratefully adopt that summary. The learned judge went on to consider the proper approach where the issue arises in the context of a number of contracts between the parties which variously contain an arbitration clause and a clause conferring jurisdiction on the Hong Kong courts (at §§3.3 et seq).

25.  In Houtai Investment Holdings Ltd v Leung Yat Tung & Ors [2021] HKCFI 1504 at §21, Mimmie Chan J refers to the “centre of gravity of the dispute” test in the case of multiple related commercial agreements, each dealing with different aspects of the parties’ dealings, with its own provision for choice of jurisdiction, law and/or mode of dispute resolution. She held as follows:

“Where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement ‘at the centre of gravity of the dispute’, as referred to in Trust Risk Group SpA v Amtrust Europe Ltd [2017] 1 CLC 456, or at the ‘commercial centre of the transaction’ in question, as referred to in paragraph 4.59 in Joseph on Jurisdiction And Arbitration Agreements And Their Enforcement, 6^th edition).”

26.  The situation where an agreement gives rise to a dispute and the parties subsequently enter into a settlement agreement, was considered in the English Commercial Court in Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 (Comm). The facts are different from the present case in that though the clause in the Settlement Agreement case does not prescribe either arbitration or the courts, it does state that the arbitration clause in the Contract is not to apply to the Settlement Agreement.

27.  Where the dispute resolution provisions are different in a settlement agreement from those in the original contract, the principles as discussed in Monde at §38 point to the significance that can attach to a “second in time” settlement agreement:

“Where the settlement/termination agreement contains a dispute resolution provision which is different from, and incompatible with, a dispute resolution clause in the earlier agreement, the parties are likely to have intended that it is the settlement/termination agreement clause which is to govern all aspects of outstanding disputes, and to supersede the clause in the earlier agreement, for a number of reasons. Firstly it comes second in time and has been agreed by the parties in the light of the specific circumstances which have given rise to the disputes which are being settled and/or the circumstances leading to the termination of the earlier agreement. Secondly it is the operative clause governing issues concerning the validity or effect of the termination/settlement agreement and therefore the only clause capable of applying to disputes which arise out of or relate to the termination/settlement agreement. Thirdly, in considering any dispute about the scope or efficacy of a settlement or termination agreement, the tribunal is likely to have to consider the background, of which an important element will often be the circumstances in which the dispute arose and the rights of the parties under the earlier contract. There will therefore often arise a risk of inconsistent findings if the tribunal addressing the validity or efficacy of the termination/settlement jurisdiction is not seised of disputes arising out of the earlier contract and the latter fall to be determined by a different tribunal.”

28.  Whatever the precise facts, it has been said that what is required is a careful and commercially-minded construction of the agreements providing for the resolution of disputes (the Amtrust case at §48). The Jingdong case is an example of a case where such analysis resulted in the “first in time” arbitration clause being held to govern the dispute, and the question is which outcome applies in the present case.

Discussion

29.  It is convenient to begin with the Jingdong case which is heavily relied on by the Defendant. However, there is an important difference between the Jingdong case and the present case. In Jingdong, the settlement agreement provided that, “In relation to all disputes or disagreements in relation to this agreement, the court of the Hong Kong SAR shall have jurisdiction”. It was held that this clause could sit in parallel with the arbitration clause in the SPA.

30.  By contrast, clause 1.6 of the Settlement Agreement in the present case provides that, “Clause 12 of the original contract shall not apply to this settlement agreement”. There is an issue as to what clause 1.6 means. As is pointed out on behalf of the Defendant, this is not a jurisdiction clause. Counsel for the Defendant submitted that it was a route for the parties to agree on a way to settle disputes, but does not commit the parties to litigation in the courts. Most importantly, clause 1.6 does not exclude arbitration.

31.  I would not disagree with that way of putting it. But there is a difference between construing the contractual terms so as not to exclude arbitration, and construing the terms so as to require the parties to arbitrate, which is the Defendant’s case. So far as claims arising under the Settlement Agreement are concerned, the arbitration route would require a fresh arbitration agreement between the parties because clause 12 of the Contract which contains the arbitration clause has been expressly disapplied. It is clear, therefore, that the arbitration clause in the Contract does not apply to claims arising under the Settlement Agreement. The “centre of gravity” test applies where there are a number of dispute resolution clauses which might govern the dispute as a whole, and it is necessary to refer the dispute to one of them. Unlike in Jingdong, there is no question of clause 1.6 and clause 12 sitting in parallel, because the one expressly excludes the other. This raises the issues which were raised by the court in Monde at §38 cited above.

32.  The argument at the hearing centred on whether the Plaintiff’s claims in these proceedings arose under the Contract (as the Defendant submitted), or under the Settlement Agreement (as the Plaintiff submitted).

33.  A starting point is the writ and statement of claim, with one caveat – it has been said in this context that in considering a claim, the court should look at the nature and substance of the claim and the issues to which it gives rise, rather than simply to the form in which it is formulated in a pleading (Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) and others [2023] UKSC 32 §49).

34.  The indorsement on the writ states that the Plaintiff claims against the Defendant for HK$16,342,815 being the under-recovery of overheads and profits due to the wrongful repudiation of the Contract, alternatively, damages for breach of the Contract. Read alone, this supports the Defendant’s case.

35.  However, the Statement of Claim explains the claim more fully. The first part sets out the terms of the Contract, and the Defendant’s alleged breach of the Contract. The second part (from paragraph 14 on) deals with the settlement discussions leading to the Settlement Agreement. It pleads breach of the Settlement Agreement on the grounds of the alleged failure to separate the sand from the black mud, and the consequent inability of the Plaintiff to dispose of any sand. By paragraph 23, it pleads that “Pursuant to Clause 1.5 of the Settlement Agreement, the Plaintiff's rights to seek loss and damage against the Defendant due to the Defendant's wrongful repudiation of the Contract remains”. The prayer is in substance the same as the indorsement on the writ.

36.  In substance, the pleading follows and reflects the terms of the Settlement Agreement. That agreement is structured in the form of a notice given by the Defendant (“our company”) to the Claimant. Clause 1.2 provides (with the agreed translation) that:

“本公司要在 2024 年11月11日起繼續供應海沙料給吉裕建築工程有限公司；

Our company shall resume supplying sea-sand to Kat Yue Construction Engineering Limited starting from 11 November 2024.”

37.  The heart of the settlement terms is in clauses 1.4 and 1.5:

“如本公司按表 1 內的時間和數量供應海沙料，則吉裕建築工程有限公司撤銷因在 2024 年 9 月 30 日暫停交付海沙料之追究及索償， 及就這事件前及事件後，不會再有追究及索償；

If our company supplies the sea-sand in accordance with the time and quantities set out in Schedule 1, Kat Yue Construction Engineering Limited will withdraw all pursuits and claims arising from the temporary suspension of sea-sand delivery on 30 September 2024, and will make no further pursuits or claims in respect of events before or after that incident;

如本公司未能按附表1內時間及數量供應海沙料， 吉裕建築工程有限公司保留一切 因本公司在 2024 年 9 月 30 日暫停交付海沙料的責任及有關賠償；

If our company fails to supply the sea-sand in accordance with the time and quantities in Schedule 1, Kat Yue Construction Engineering Limited reserves all rights in relation to our company’s obligations, and related compensation claims against our company, arising from the suspension of sea-sand delivery on 30 September 2024;”

38.  In other words, if the sand is supplied by the Defendant in accordance with the revised schedule, the Plaintiff withdraws its claims arising under the Contract from the suspension of delivery on 30 September 2024, but if the Defendant fails to do so, the Plaintiff reserves its rights pursue these claims. In one form or another, this is a standard feature of a settlement. If in case of breach by the Defendant, the Plaintiff chooses to pursue the claims arising under the Contract, the claims are assessed by the terms of the Contract, but brought under the Settlement Agreement.

39.  As already noted, clause 1.6 goes on to deal with dispute resolution:

“原合約條款12不適用於此和解協議。

Clause 12 of the original contract shall not apply to this settlement agreement.”

40.  I would follow the approach in the Monde case cited above. The Plaintiff’s claims are, in my view, brought under the Settlement Agreement. This is consistent with the terms of the Settlement Agreement. The fact that reference is made to the Contract in the writ and statement of claim follows from the fact that under clause 1.5 the Plaintiff has reserved its rights under the Contract in case the Settlement Agreement is breached. Because of clause 1.6, the Plaintiff is not bound to bring the claim in an arbitration, and can bring it in court. I consider that this is the commercially-minded way in which to construe the terms in question as called for in the Amtrust case at §48 cited above.

41.  In the light of the above, I come to apply the principles as summarised in the Jingdong case above. There is an arbitration agreement between the parties which is capable of being performed, but the dispute is not within the ambit of the arbitration agreement because the arbitration agreement has been disapplied for such dispute. The point is in my view clear, and it follows that the Defendant is not entitled to a stay.

42.  Consistent with the order in the Jingtong case, I make a costs order nisi that the Defendant is to pay the costs of this application on the indemnity basis.

43.  I thank Counsel for their assistance.