HCA 1277/2021
[2022] HKCFI 3277
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1277 OF 2021
________________________
BETWEEN
TALENT MARK DEVELOPMENT LIMITED
Plaintiff
and
KWAN ON-U-TECH JOINT VENTURE
1st Defendant
U-TECH ENGINEERING COMPANY LIMITED
2nd Defendant
KWAN ON CONSTRUCTION COMPANY LIMITED
3rd Defendant
________________
Before: Deputy High Court Judge Le Pichon in Chambers
Date of Hearing: 11 October 2022
Date of Decision: 26 October 2022
_________________
D E C I S I O N
_________________
1. Kwan On-U-Tech Joint Venture (“D1”) is the joint-venture of U-Tech Engineering Company Limited (“D2”) and Kwan On Construction Company Limited (“D3”) (collectively “the Defendants”) who seek a stay of proceedings commenced by the plaintiff Talent Mark Development Limited (“the Plaintiff”) pending arbitration. At the conclusion of the hearing, the decision was reserved which I now give.
Background facts
2. D2 as contractor entered into 2 written subcontracts with the Plaintiff as subcontractor in May 2015 and 2016 respectively (collectively, the “TSW and Slopes subcontracts”).
3. The TSW and Slopes subcontracts contained “Conditions of Sub-Contract” which is referred to as (“GCC”) in the affirmations. The GCC was a template D2 used in its subcontracts and GCC 19 (a) contained an arbitration clause.
4. In February 2016, CEDD of the HKSAR invited tenders for the construction of universal access facilities for 7 footbridges.
5. According to the Plaintiff, it was initially intended that it would form a joint venture with D2 and D3 for bidding the Main Contract but the idea was abandoned due to D3’s objection. Instead, it was agreed that D1 would subcontract works to the Plaintiff upon successful bidding. But after being awarded the Main Contract, D1 changed its mind and subcontracted to the Plaintiff works for only 4 of the 7 footbridges.
6. On 9 August 2016, D1 was awarded the Main Contract. Section G1 of its Additional Conditions of Contract provided for “Settlements of disputes” through arbitration.
7. On 26 August 2016, CEDD arranged a site visit at Shun Lee Estate to which Andy Ha, one of the Plaintiff’s directors was invited by Ken Chan, D2’s general manager to attend.
8. It is common ground that after the site visit in late August 2016, Ken Chan and Andy Ha entered into an oral subcontract (“the Sub-Contract”) on behalf of their respective principals.
9. During an internal discussion between D1 and the Plaintiff in early 2017, it was proposed that D1 would enter into a Chinese subcontract with the Plaintiff. A draft (“the draft Agreement”) was prepared by D3 in late February 2017 and attached to an internal email chain. That email chain shows that the draft Agreement was forwarded to the Plaintiff on 31 March 2017. However, it was never signed by the parties.
10. The Plaintiff concluded all works under the Sub-Contract by 11 October 2019.
11. Thereafter disputes arose over the final account causing the Plaintiff to issue its writ on 25 August 2021. Its statement of claim was filed on 10 December 2021.
12. The Defendants sought 2 time summonses for the filing of their defence and counterclaim. They did not request a stay claiming that an arbitration agreement applied until 16 February 2022, a week after their 2nd time summons.
The Defendants’ case
13. The Defendants submitted that only issue that arises is whether an arbitration clause had been incorporated into the Sub-Contract.
14. It is the Defendants’ case that the parties agreed that the GCC of D2’s standard subcontract terms (used in the TSW and Slopes subcontracts) would be incorporated into the Sub-Contract[1] . Thus, they rely on what is stated immediately prior the preamble to the draft Agreement[2] which they contend expressly incorporated the GCC into the oral subcontract.
15. The draft Agreement also provided that the terms of the Main Contract, which necessarily included the arbitration clause, would be incorporated into the oral subcontract except those that contradicted the terms of the draft Agreement.
Legal principles
16. It is common ground that it is crucial in any application for a stay (whether under section 20 of the AO or article 8 of the UNCITRAL Model Law) that
(a) there exists an arbitration agreement: Tommy CP Sze & Co v Li & Fung (Trading) Limited [2003] 1 HKC 418 at §18; and
(b) the onus is on the applicant for a stay of proceedings to demonstrate that there is a good prima facie or plainly arguable case, predicated on cogent (not dubious or fanciful) evidence that an arbitration clause or agreement existed: see Pacific Crown Engineering Limited v Hyundai Engineering & Construction Co Ltd [2003] 3 HKLRD 440 at §§12 and 16; and
(c) if whether or not an arbitration clause has been incorporated is capable of giving rise to respectable arguments from both sides, the issue should be resolved in favour of arbitration: see Truearns Co Ltd v Wealthy Fountain Holdings Inc [2019] HKCFI 1840 §24.
17. Article 19 of the AO gives effect to Article 7 of the UNCITRAL and provides that an arbitration clause could be incorporated into an agreement by reference to another document.
18. As to the question of incorporation, the relevant test is that set out in Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300 at 313:
“In construction cases, one has to approach the question of incorporation by reference from the standpoint of the intention of the parties with no preconceived notions. One is entitled to take into account all the surrounding facts - the factual matrix - but, at the end of the day, one ends up trying to give contractual and commercial effect to the actual words used by the parties.”[3] (emphasis added)
19. In Building Authority v Appeal Tribunal (Buildings) (ENM Holdings Limited (2018) 21 HKCFAR 194, Ribeiro PJ set out the approach to be adopted in §53 in the following terms:
“SC 31 has to be construed in proper context, with regard to the purpose of the contractual term and the background that is objectively or reasonably known to the parties at the time of the agreement. The overriding objective is to give effect to what a reasonable person would have understood the parties to mean.”
20. The principles referred to in §§18-19 above were adopted by G Lam J (as he then was) in Yun Kwan Construction Engineering Limited v Shui Tai Construction Engineering Company Limited [2019] HKCFI 1841 at §5 (6) - (7).
Have the Defendants made out an arguable case?
21. In support of their case, the Defendants rely on 2 affirmations by their duly authorised representative Chung Chi Ngong (“Mr Chung”) respectively dated 16 February 2022 (“Chung 1st” ) and 24 May 2022 (“Chung 2nd ”).
22. Mr Chung is a project manager of D3. According to Mr Chung[4] , after a site visit in late August 2016, Ken Chan, the general manager of D2 on behalf of D1 and Andy Ha, director of the Plaintiff entered into the Sub-Contract orally. In Chung 1st at §13, he stated that
“wherein the parties agreed, inter alia, the following terms which are relevant to the Stay Application that:-
(i) The Sub-Contract works shall comply with the specification and requirements of CEDD;
(ii) The GCC shall be incorporated into this Sub-Contract, so that the dispute resolution under Clause 19 of GCC shall form part of the Sub-Contract.”
23. Mr Chung acknowledged that he was not directly involved in the “pre-contract negotiations” between Ken Chan and Andy Ha but because D3 is D2’s business partner for the Main Contract, Ken Chan would relate the discussions with the Plaintiff to D3 for consideration and agreement[5] . Pausing there, it is to be noted that (a) Mr Chung was not present at the meeting between Ken Chan and Andy Ha and has no firsthand knowledge of what transpired; and (b) there is no evidence that Mr Chung was the person to whom Ken Chan related his discussions with the Plaintiff.
24. Mr Chung explained that Ken Chan being stationed in Shenzhen could not return to Hong Kong to make the affirmation on behalf of D2 because of the pandemic. However, he has confirmed with Ken Chan that there was an agreement reached between him and Andy Ha as stated in Chung 1st at §13[6] .
25. In summary, there is but a bare allegation that after the site visit Ken Chan and Andy Ha agreed to incorporate clause 19 of the GCC into the Sub-Contract.
26. In his affirmation dated 4 April 2022 (“the Ha affirmation”), Andy Ha explained that the site visit arranged by CEDD did not relate to work awarded to the Plaintiff. However, Ken Chan invited him to attend because he (Ken Chan) wished to discuss with Andy Ha the price of the Sub-Contract after the site visit. Andy Ha therefore attended the site visit but Mr Chung was not present.
27. After the site visit, Ken Chan and Andy Ha discussed payment terms and arrangement of the Sub-Contract works. According to Andy Ha, it was agreed that
“(i) for the original Sub-Contract works, [D1] shall retain 6% of the payment received as management fee, and pay the remaining 94% the Plaintiff; and
(ii) for other variation works and compensation received, [D1] shall retain 10% of the payment received as management fee, and paid the remaining 90% to the Plaintiff.”
28. He and Ken Chan also agreed that the other terms and arrangement in relation to payment shall be the same as the TSW and Slopes subcontracts and include matters such as the calculation of price adjustment due to inflation or deflation. He emphasised that those discussions were limited to issues relating to payment.
29. They did not mention nor agree that the other terms of the TSW and Slopes subcontracts would also be adopted. Rather, it was expected that a new Sub-Contract terms would be prepared because unlike the earlier subcontracts, D1 rather than D2 would be the other contracting party; the Sub-Contract involved only half of the Main Contract works and did not include the preliminaries items for which D1 remains responsible.
30. Surprisingly, there is no evidence from Ken Chan in response to the Ha affirmation when there is a significant difference between the 2 versions as to what was agreed at that meeting. The only evidence of what actually transpired between Ken Chan and Andy Ha is in the Ha affirmation where it is categorically stated that the discussion “was limited to issues relating to payment”. There is no evidence from the Defendants that rebuts it.
31. Mr Chung has no firsthand knowledge of what had been agreed. In the absence of any direct evidence from Ken Chan as to the actual words used at his meeting with Andy Ha, there is not even a prima facie case of an agreement to incorporate clause 19 of the GCC into the Sub-Contract.
32. Ken Chan was in D2’s employment at the time of the Chung affirmations. As Mimmie Chan J remarked in Weili Su v Shengkang Fei [2019] 2 HKLRD 1214 at §80, after referring to the reminders in Hong Kong Civil Procedure 2019[7] at 41/5/4 on court on good and bad practice so far as the swearing affidavits is concerned:
“the fact of a party not being in Hong Kong would very rarely be a satisfactory explanation for not having an affidavit sworn and signed by the party outside Hong Kong, and exhibited …”
33. Not only was Mr Chung not present at the time, in so far as Ken Chan would relate discussions with the Plaintiff to D3[8] , as earlier noted, there is no evidence that Mr Chung was the direct recipient of what was relayed.
34. As regards the draft Agreement, the original version is in Chinese. It is Mr Chung’s evidence that it followed “the standard terms of agreement of [D3][9] ”. It was not his evidence that the draft Agreement embodied the Sub-Contract made orally.
35. As earlier noted, the email chain[10] containing the draft Agreement was forwarded to the Plaintiff on 31 March 2017, approximately 7 months after commencement of the works for the Sub-Contract following an internal discussion between D1 and Andy Ha in early 2017 when it was proposed that D1 would enter into a Chinese sub-contract with the Plaintiff[11] .
36. The relevant provisions of the draft Agreement for present purposes are the following:
(a) the sentence immediately preceding the preamble which reads:
“This [draft Agreement] includes the General Conditions of Sub-Contract, Activity Schedule & Payment Schedule, and Contract Drawings”; and
(b) the penultimate paragraph which reads:
“Except those contradicted with the terms of this Sub-Contract, the terms and conditions, specifications and plans of the Main Contract shall be applicable this Sub-Contract after necessary modifications; the parties confirm and agreed that Party A enjoys the rights of the Employer in the Main Contract and Party B takes up the obligations of Party A in the Main Contract.”
37. At the hearing, Mr Pakco Chan, counsel for the Defendants, focused on sub paragraph (b) above, (ie the penultimate paragraph of the draft Agreement) which he submitted incorporated the dispute resolution provision of the Main Contract.
38. The draft Agreement remained a draft in as much as it was never signed by either party, it arose in an internal discussion that occurred in early 2017[12] . There is no evidence that the Plaintiff ever responded to it or acknowledged its receipt. The Defendants appeared to submit that the Plaintiff’s silence amounted to acceptance.
39. The only evidence concerning the genesis of the draft Agreement is the Ha affirmation: see §26 above. There is no mention of any agreement that whatever D3 chose to draft would be binding. In those circumstances, I do not consider there to be a prima facie case that the provisions of the draft Agreement are binding.
40. For present purposes, I am prepared to assume that the draft Agreement is relevant[13] .
41. Turning first to the Defendants’ claim that the words in §36 (a) above incorporated GCC §19 into the draft Agreement, Mr Alex YH Lai, counsel for the Plaintiff, invited attention to the fact that the English phrase “General Conditions of Sub-Contract” actually appears as part of the original Chinese version which reads: “一般的有合約條件 (General Conditions of Sub-Contract) …”.
42. Reading the sentence relied on as a whole, one would expect to find those provisions set out in the body of the draft Agreement or as an attachment to the draft Agreement but there is none. There is no mention of the TSW and Slopes subcontracts either. The fact that the GCC was part of those subcontracts cannot assist because D2 rather than D3 was the contracting party: according to Mr Chung, the draft Agreement followed the standard terms of agreement of D3.
43. In my view, there is simply no prima facie case made out that the draft Agreement incorporated clause 19 of the TSW and Slopes subcontracts.
44. In construing the penultimate paragraph, it is necessary first of all to ascertain if any of the terms of the Sub-Contract contradicts the terms and conditions et cetera of the Main Contract. What is clear from the discussion relating to the incorporation of clause 19 is that the draft Agreement includes “General Conditions of Sub-Contract”. In the absence of content for those General Conditions, it is impossible to form a view as to whether the dispute resolution provision in the Main Contract “contradicts” the provisions of the draft Agreement.
45. In so far as the Defendants submitted that the dispute resolution provision of the Main Contract applies by default, that approach cannot be correct because it would disregard the express provision that requires an enquiry or assessment as to the existence of any contradiction with the terms of the draft Agreement.
46. It is to be noted that the confirmation and agreement referred to in the penultimate paragraph relate only to “rights” and “obligations” of the parties. In WH-SCG JV Ltd v Hong Kong Construction (Holdings) Limited, HCCT 48/2006, unrep., 9 August 2006, Reyes J observed (at §14) that as far as arbitration is concerned, it would be odd to describe arbitration as either an “obligation” or “liability” under the Main Contract.
Conclusion
47. For the reasons set out above, I do not consider that the Defendants have made out an arguable or prima facie case that an arbitration agreement existed. In my view, their case is predicated on evidence that, cumulatively, is far from ‘cogent and arguable’ but falls into the ‘dubious and fanciful’ category.
48. Accordingly, the Defendants’ summons for a stay of proceedings is dismissed. There is to be an order nisi of costs in favour of the Plaintiff with certificate for counsel, such costs to be summarily assessed and payable forthwith.
49. It is further directed that the Plaintiff lodge its statement of costs within 7 days of this Decision, the Defendants their objections within 14 days thereafter and the Plaintiff its reply (if any) within 7 days thereafter.
50. Summary assessment will take place in Chambers.
(Doreen Le Pichon)
Deputy High Court Judge
Mr. Alex Y. H. Lai, instructed by Kim & Company, for the plaintiff
Mr. Pakco P. F. Chan, instructed by S. K. Wong & Co., for the 1st – 3rd defendants
[1] See the Defendants' written submissions at §10.
[2] See §36(a) below.
[3] At lines 21-25.
[4] See Chung 1st at §13.
[5] See Chung 2nd at §4.
[6] See Chung 2nd at §4 and §22 above.
[7] HKCP 2022 at 41/5/4 cites the Weili Su case.
[8] See §23 above.
[9] See Chung 2nd at §6.
[10] The earliest email communication is dated 23 February 2017 when D2 requested D3 (Dennis Chan) to prepare subcontract with 6% management fee to D1.
[11] See the Ha affirmation at §16.
[12] See §35 above.
[13] At the hearing, Mr Chan submitted that it is common practice in the construction industry for the parties to proceed on the basis of an oral contract to be followed subsequently by a written contract (if any). As there was no such evidence before the court, that submission is to be disregarded.