GETWICK ENGINEERS LTD. v. PILECON ENGINEERING LTD.

HCA558/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.558 OF 2002

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J U D G M E N T

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The applications before the court

1. By a summons dated 11 April 2002, the plaintiff has applied for summary judgment against the defendant in the sum of $545,675.82 and costs.

2. By a summons dated 30 April 2002, the defendant has in turn applied for a stay of the present action pursuant to section 6 of the Arbitration Ordinance, Cap.341 ("the Ordinance").

3. By an order dated 27 June 2002, Master Andrew Mak adjourned both summonses to the judge in charge of the Construction and Arbitration List.

4. At the hearing before me, Mr Hectar Pun appeared for the plaintiff and Mr Anson Wong, for the defendant.

The plaintiff's claims against the defendant : the application for summary judgment

5. By a sub-contract dated 8 August 1999 numbered PEB/SUB/C/ALF309/004 ("the Sub-contract"), the defendant employed the plaintiff as its sub-contractor for the supply and installation of electrical, mechanical ventilation and air-conditioning equipment and associated works in relation to conversion and extension work that the defendant was carrying out to various schools. The defendant was the main contractor engaged by the Architectural Services Department for this work under a main contract between these parties ("the Main Contract").

6. The contract sum stated in the Sub-contract for the works to be undertaken by the plaintiff was $7,435,650. In common with almost all building contracts, there were of course provisions for variations.

7. Also in common with most building contracts, the Sub-contract made extensive reference to the Main Contract. I shall be referring to one aspect of this later.

8. The plaintiff commenced work in about March 1999, completing it in about February or March 2001. In its Statement of Claim, the plaintiff claims against the defendant the sum of $693,664.47 being the outstanding amount allegedly due for works done under the Sub-contract (both for original work and variations).

9. Throughout the Sub-contract works, the defendant had regularly been making payment to the plaintiff under payment certificates. However, according to the plaintiff, the defendant has in breach of the Sub-contract failed to make payment under six payment certificates (Nos.19 to 24) issued by the defendant to the plaintiff. These certificates, dated variously between January and April 2001, are for a combined amount of $530,208.32.

10. In this connection, the plaintiff relies on a draft letter dated 28 April 2001 ("the 28 April letter") from the defendant in which it was stated that the certified amount payable to the plaintiff was $350,000 (the plaintiff says that this was wrong since the amount owing was $530,208.32). The defendant also stated in that draft letter that it intended to make payment of the said sum (of $350,000) by three post-dated cheques, one in the amount of $120,000 and two in the amounts of $115,000. It ended by saying, "The exact amount of further payment shall be agreed after the completion of our final account to this subcontract".

11. Three cheques were indeed issued to the plaintiff. Two were honoured. The last one (dated 31 September 2001 in the sum of HK$115,000) was dishonoured and the plaintiff makes reference to this in the Statement of Claim. Mr Pun says that a claim is made for the dishonour of this cheque in the application for summary judgment. Mr Wong disputes this. After hearing argument from counsel on this aspect, I concluded that it had been made clear to the defendant that a claim was made for the dishonoured cheque (even though it was not specifically stated in the O.14 summons itself) but, if necessary, leave was given to the plaintiff to amend the summons to include such a claim.

12. With payment of $235,000 having been made by the two cheques referred to earlier, the amount still due and owing under the payment certificates is therefore alleged by the plaintiff to be $295,208.32 (being $530,208.32 less $235,000). This of course includes the claim for the dishonoured cheque.

13. The second part of the plaintiff's claims is in relation to variation works carried out by it. The plaintiff relies on the fact that $112,322.60 was certified to be due from the defendant to the plaintiff by the quantity surveyor of the employer under the Main Contract. Reference is made to a fax dated 18 January 2002 from the quantity surveyor (WTP Partnership) to the defendant. That fax provided details of various electrical works valued at that sum, for the defendant's reference, verification and agreement. Of this, the amount said to be due to the plaintiff is $94,429.61.

14. The third part of the plaintiff's claims is for the sum of $138,458.47 being additional works carried out by the plaintiff pursuant to the defendant's request and instructions. These were either variations or involved works not covered by the Sub-contract. A number of quotations from the plaintiff to the defendant for the work carried out were produced to me. However, this part of the claim was not pursued in the plaintiff's application for summary judgment.

15. Accordingly, the combined sum for which the plaintiff claimed summary judgment was $389,637.93. Although the plaintiff's claim in the summons was originally for the said sum of $545,675.82, it has been scaled down.

16. The defendant disputes the plaintiff's claims. It has produced evidence of claims against the plaintiff which not only goes toward to the defence of set off but also forms the basis of a separate counterclaim. The defendant's primary complaint is that the plaintiff has failed to rectify certain defective work under the Sub-contract. The defendant also alleges that a part of the plaintiff's claims is prematurely made. The plaintiff says there is no defence to the claim for $389,637.93 and has served affidavit evidence to support this contention as well as to seek to undermine the defences. However, in the light of the conclusion I have reached on the stay application, it is not necessary for me to arrive at any view on this, except for one aspect.

The defendant's application for a stay

17. The Sub-contract contains an arbitration agreement between the parties in the following terms :

"18.1 If any dispute or difference arises between the Sub-Contractor and the Contractor (together termed 'the Parties' and either one termed 'the Party') in connection with this Sub-Contract, and if there exist within the Main Contract provisions allowing the reference of disputes or differences between the Contractor and the Employer to mediation and/or adjudication, then either party may request that the dispute or difference be referred to mediation and/or adjudication in accordance with whichever rules or other guide-lines for mediation and/or adjudication may be specified within the Main Contract (if any), or any modifications thereof for the time being in force.

18.2 If either party refuses such request for mediation and/or adjudication or if mediation and/or adjudication falls to resolve the dispute or difference then, within ninety (90) days of such refusal or failure or, should the Party instigating resolution of such dispute or difference as detailed in Clause 18.1, not wish to refer the matter to mediation and/or adjudication or should there exist no such mediation and/or adjudication provisions within the Main Contract, such dispute or difference 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 Part II 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. In the event the Parties are unable to agree upon the appointment of an arbitrator, then either party can apply to any 'appointing authority' specified in the Main Contract, or if none, the High Court of Hong Kong."

18. The Main Contract contains provisions regarding mediation and adjudication : see clause 86 of the General Conditions of Contract for Building Works issued by the Hong Kong Government (which are invariably included in building contracts involving in the Government).

19. The scheme of the arbitration agreement is thus roughly as follows :

(1) If any dispute or difference arises between the plaintiff or the defendant in connection with the Sub-contract, then either party may request the other party to refer the dispute or difference to mediation and/or adjudication in accordance with the mediation or adjudication provisions in the Main Contract.

(2) If a request is made but the other party refuses, then within 90 days of the refusal, the dispute or difference must be referred to arbitration under the provisions of the Ordinance.

(3) If the request is not refused and the matter goes to the mediation or adjudication procedure as stipulated in the Main Contract but no resolution of the dispute or difference is achieved, then within 90 days of the failure to resolve, the dispute or difference must again be referred to arbitration as aforesaid.

(4) If the party wishing to have a dispute or difference with the other party resolved, does not however wish to use the mediation or adjudication provisions in the Main Contract, then he must refer the dispute or difference to arbitration in accordance with the Ordinance.

20. We are concerned with the situation referred to in paragraph 19(4). The plaintiff wishes to claim against the defendant in respect of various matters under the Sub-contract but, I take it, does not wish to utilize the mediation or adjudication provisions in the Main Contract. This was implicit in a letter dated 7 February 2002 from the plaintiff to the defendant, in which the plaintiff stated its intention to institute proceedings against the defendant in the High Court.

21. Where an arbitration agreement exists (and in this case, a domestic arbitration agreement within the meaning of the Ordinance) and court proceedings are brought in relation to the matters covered by the agreement, section 6(1) of the Ordinance governs the matter :

"6. Court to refer matter to arbitration in certain cases

(1) Subject to subsections (2) and (3) [which are not relevant for present purposes], article 8 of the UNCITRAL Model Law (Arbitration agreement and substantive claim before court) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement."

22. Article 8 of the UNCITRAL Model Law states :

"Article 8. Arbitration agreement and substantive claim before court

(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) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court."

23. At the risk of repeating what are by now familiar principles in applications for stay under section 6 of the Ordinance (and Article 8 of the UNCITRAL Model Law), I set out the various steps involved in the analysis :

(1) The court first construes the relevant arbitration agreement to see just what matters are intended to be referred to arbitration. Among the most usual expressions are, for example, "all disputes or differences between [Party A and Party B] ... in connection with (or in relation to or in respect of) this contract". The present arbitration agreement is not unusual in this regard.

(2) Where the words "in connection with" are used, while every contract must of course be construed in accordance with its ordinary and natural meaning (and arbitration agreements are no exception), it seems to me that they are wide in nature. They would in general cover all disputes other than one entirely unrelated to the transaction covered by the contract in question : see Mustill & Boyd : Commercial Arbitration 2nd Edition, at 119.

(3) The existence or non-existence of a dispute or difference as envisaged under the relevant arbitration agreement between the parties is crucial to the granting of a stay. For this purpose, a dispute will exist unless there has been a clear and unequivocal admission not only of liability but also quantum : see Louis Dreyfus v. Bonarich International (Group) Limited [1997] 3 HKC 597; Tai Hing Cotton Mill Limited v. Glencore Grain Rotterdam BV [1996] 1 HKC 363, at 375A-B. In the absence of admissions as to both these aspects, a mere denial of liability or of the quantum claimed, even in circumstances where no defence exists, will be sufficient to found a dispute for the purposes of section 6 of the Ordinance (and Article 8 UNCITRAL Model Law). Thus, finding out whether a dispute (as defined in this way) exists, is the only exercise that the court carries out in a stay application (apart of course from construing the arbitration agreement to discover its full ambit) : it does not involve itself in evaluating the merits of the claim.

(4) A clear and unequivocal admission of liability and quantum can no doubt take a variety of forms. Admissions contained in correspondence or any other documents or even by conduct may, in my opinion, suffice. And, as will be apparent later in this judgment, the issuance of a cheque can (and does in the present case) suffice to establish the clear and unequivocal admission of liability and quantum (in the amount stated in the cheque).

(5) Once the court comes to the view that a dispute or difference exists, the granting of a stay is mandatory. On the other hand, if the court comes to the view that no dispute or difference exists, then the matter falls to be determined in the court proceedings. Of course, the relevant dispute or difference must relate to matters which are stated to be referable to arbitration in the relevant arbitration agreement. A dispute or difference in relation to a matter not intended to be referred to arbitration obviously does not come within the arbitration agreement and no stay can be granted in such circumstances.

(6) Where the court comes to the view that no dispute or difference exists, it is free to (and often, if not inevitably, will) decide the matter on an application for summary judgment. This would explain the practice of still having a plaintiff's application for summary judgment under RHC Order 14 heard at the same time as a defendant's application for a stay (although, as observed by Burrell J in Strategic Finance Relations Limited v. Chun Tai Holdings Limited, unreported, 30 November 2000, HCA 7940/2000, the stay application is heard and determined first). Before the introduction of section 6 of the Ordinance in its present form (and Article 8 of UNCITRAL Model Law) this was also the practice since the rationale was that the two applications were seen as mirror images of each other : the determination of one application determined the other. This, it is to be emphasized, however, is no longer the rationale. For this reason, cases like Peter Leung Construction Company Limited v. Tai Poon Company Limited [1985] 1 HKC 285 and Pilecon (Hong Kong) Limited v. Mightyton Limited [1993] 2 HKLR 435 (two of the cases in which both the stay and the summary judgment applications were before the court) must be viewed in the light of the statutory changes. In other words, the absence of an arguable defence for O.14 purposes, does not mean by itself that a stay will not be granted unless there is a clear and unequivocal admission of both liability and quantum as stated above.

24. What I have enumerated above is nothing new. The principles are distilled from many cases in this area, among them Tai Hing Cotton Mill Limited op. cit.; Guangdong Agricultural Company Limited v. Conagra International (Far East) Limited [1993] 1 HKLR 113; Zhan Jiang E & T Development Area Service Head Company v. An Hau Company Limited [1994] 1 HKC 539; Louis Dreyfus Trading Company Limited op. cit.; F & D Buildings Services Engineering Company Limited v. Chevalier (EM Contracting) Company Limited, unreported, 23 February 2001, Burrell J; and my own decision in Liu Man Wai v. Chevalier (Hong Kong) Limited, unreported, 29 January 2002.

25. In the present case, the plaintiff's claims, as I have identified above, fall under three heads : monies due under payment certificates (including the dishonoured cheque), variation works and additional works.

26. In my judgment all three claims (except for the sum of $115,000 the amount of the dishonoured cheque) must be resolved by arbitration and a stay is therefore granted of the action to this extent (I will deal with the claim for $115,000 later) :

(1) For the claim regarding variations and additional works, there is no admission of liability or quantum on the defendant's part, much less a clear and unequivocal one.

(2) On the claim regarding the six payment certificates, Mr Pun submitted that the plaintiff's claim was essentially for work done as reflected and certified by the defendant to be due under the said payment certificates. Under Clause 15.5 of the Sub-contract, payment was due under payment certificates within a stipulated time period, subject to deductions of previous payments and to retention monies being held. As these payment certificates came from the defendant, Mr Pun argued (very attractively) that they constituted clear and unambiguous admissions of liability and quantum in respect of the work carried out by the plaintiff. He referred to the underlying rationale of these interim payment certificates, being the provision of a ready cash flow to the sub-contractor. He also referred to Clause 15.6(c) of the Sub-contract which stated that if the defendant were to withhold payment under any payment certificate, it had to notify the plaintiff with written reasons no later than the date when payment was due. There was no such notification.

(3) In my judgment, such interim payment certificates are not clear and unambiguous admissions of liability for work done. They merely refer to interim payments due which involve no final acceptance by the defendant either that the work carried out by the plaintiff has been up to standard or that the amount stated in the payment certificate is ultimately unequivocally and indisputably due. As stated in Hudson's Building and Engineering Contracts (11th Edition) Vol.1 at paragraph 6-187 :

"As a rule, however, the payments contemplated by such provisions only represent the approximate value (or a proportion of it) of the work done, and possibly also of materials delivered to the site, at the relevant date, and, in the vast majority of cases, they will not be conclusive or binding on the owner as an expression of satisfaction with the quality of the work or materials. It makes no difference that they are frequently expressed to represent the value of work properly done, since such a qualification is an obvious one in any provision for payment on account, and will almost always be implied in any event, even if the concept of value did not itself involve the element of deduction for work containing a defect requiring to be repaired or re-instated. In addition the whole scheme of most contracts, including powers to order the removal of work exercisable at any time, to withhold the certificate of practical completion, and to order defects to be repaired during the maintenance period, is usually inconsistent with any such intention."

Although there is provision for retention monies in the Sub-contract, nevertheless there may be claims exceeding the amount of such monies arising from the same works or even as a set-off from other works (it is to be noted that nothing in the Sub-contract renders inapplicable the common law or equitable principles of set-off and cross claims; indeed quite the contrary : see Clauses 3.4, 10.4 and 15.6(a) of the Sub-contract; Hong Kong Civil Procedure 2002 Vol.1 at paragraph 14/4/50). It is only when one reaches final accounts that sums due and owing on either side become more or less finalized. I accept that, contractually, monies may become due under the payment certificates themselves at certain times, but this is different to saying that payment certificates demonstrate a clear and unequivocal admission that payment for the underlying work is indisputably due, for that can only really arise in final accounts. What then the plaintiff is essentially claiming in the present case is payment under the payment certificates pursuant to the contractual provisions in the Sub-contract. This claim, however strong it may be, is disputed because the defendant has not clearly or unequivocally admitted it.

(4) However, the cheque dated 31 September 2001 for $115,000 is in my view to be regarded as a clear and unequivocal admission on the defendant's part of its liability and quantum (in that amount) under payment certificates. This cheque was issued following the 28 April letter to which I have already referred above at paragraph 10. It was one of three cheques sent to the plaintiff by the defendant as an acknowledgement of its liability under payment certificates which had been issued to the plaintiff (although it only stated the sum of $350,000). In reaching this conclusion, I have borne in mind that cheques are to be regarded as cash and save in exceptional circumstances, no set off or counterclaim will be permitted : see Hong Kong Civil Procedure 2002 Vol.1 at paragraphs 14/4/15, 14/4/19. Two of the three cheques have been honoured. I see no reason why the third cheque should not be seen in the same light. I have not been referred to any case in which a cheque or bill of exchange has been regarded as constituting a clear and unequivocal admission of liability and quantum, but in principle, I do not see why it cannot be so regarded.

The application for summary judgment

27. It will be clear from the forgoing that the plaintiff's claims in this action, save for the said sum of $115,000, must be pursued in arbitration proceedings.

28. In relation to the $115,000, it is clear on the facts that the plaintiff must be entitled to summary judgment for this. I repeat the views expressed in paragraph 26(4) above. I therefore grant summary judgment in this sum to the plaintiff. The claim arises either out of the dishonour of the cheque itself or the work done to this extent by the plaintiff under the Sub-contract. It does not, I think, matters which basis is applicable.

29. I have not heard the parties regarding interest and therefore give the parties liberty to apply in case no agreement is reached.

Costs

30. At the conclusion of the hearing, I indicated to the parties that in handing down my judgment, I would make an order nisi as to costs.

31. On the whole, the defendant has succeeded in both applications although the plaintiff has obtained judgment in the sum of $115,000. Taking an overall view, I think that an order nisi should be made that the plaintiff should pay 2/3 of the defendant's costs, such costs to be taxed if not agreed. The costs should be paid forthwith since a significant stage of the present proceedings has been concluded. I have also treated both applications together as this is the way the parties have approached the matter and, as I have explained above, is the usual way in which they are dealt with.