LEE CHEONG CONSTRUCTION & BUILDING MATERIALS LTD v. THE INCORPORATED OWNERS OF THE ARCADIA

HCA 21/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 21 OF 2012

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BETWEEN

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D E C I S I O N

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1.  This is an application by the defendant for an order staying proceedings in favour of arbitration, pursuant to section 20 of the Arbitration Ordinance, Cap 609.

2.  The principles are well settled and not in dispute.  They were re-iterated by Ma J in Tommy C P Sze & Co. v Li & Fung Trading & Others [20003] 1 HKC.  Four questions need to be addressed:

(1) Is the clause in question an arbitration agreement?

(2) Is the arbitration agreement null and void, inoperative or incapable of being performed?

(3) Is there in reality a dispute or difference between the parties?

(4) Is the dispute or difference between the parties within the ambit of the arbitration agreement?

3.  If the answers to these questions are Yes, No, Yes and Yes respectively, the court will order a stay.

4.  The issue in the present application concerns questions (1) and (2) taken together.

Factual background

5.  The plaintiff and the defendant entered into a contract for the plaintiff to carry out refurbishment works at the defendant’s premises.  It claims to have been underpaid for the works it has carried out by a sum in excess of $12 million.

6.  On 30 December 2011, the plaintiff’s solicitors gave notice that it intended to commence arbitration proceedings. This appeared to be in accordance with clause 27 of the contract, which is the arbitration clause.  However, unexpectedly, 7 days later, the plaintiff issued a writ in support of their claim.  The defendant promptly issued a summons to stay the writ action.

The contract

7.  A letter of acceptance was issued by the defendant dated 7 December and was signed by the plaintiff on 10 December 2009.  Clause 11 of the Letter of Acceptance lists the contract documents which included the Conditions of Contract.  These matters are not in dispute.

8.  Mr Paul K N Wu’s (counsel for the plaintiff) primary submission is that the contract contains two inconsistent clauses, clause 25 and clause 27, the latter being the arbitration clause.

9.  The effect of the inconsistency, he submits, is that clause 25 must prevail and therefore clause 27 is rendered null and void, inoperative or incapable of being performed.

10.  The exact wording of the two clauses is as follows:

“Clause D25(b)

(b) The contract shall be interpreted in accordance with the laws of Hong Kong and shall be governed by the same and both parties submit to the non-exclusive jurisdiction of the Courts of Hong Kong.”

These words are also found in clause 23 of the Letter of Acceptance:

“Clause D27

Arbitration Agreement

This Contract is governed by, and shall be construed according to, the laws of Hong Kong Special Administration Region of the People’s Republic of China (Hong Kong).  Parties to this Contract agree to refer all the disputes in connection with this Contract to arbitration which shall be conducted in a way recognized by Hong Kong and be handled by Hong Kong International Arbitration Centre.”

11.  These clauses are, Mr Wu submits, inconsistent and thus, the basic principles of contract construction and the principle of contra proferentem requires that 27 is of no effect.  Clause 25(b) comes first and should therefore prevail.  Once the parties have submitted themselves to the non-exclusive jurisdiction of the Courts of Hong Kong there can be no referral to arbitration.

Inconsistency?

12.  In my judgment Mr Wu’s submission is incorrect.  The argument advanced by Mr Danny Choi, counsel for the defendant, is correct.

13.  Clause 25(b) is no more than a submission to the Hong Kong jurisdiction.  It does not impose a positive obligation to resolve all disputes only in the Hong Kong courts. The contract specifically states that clause 25(b) is concerned with the “substance of the Contract”.  If the effect of clause 25(b) was as contended for by Mr Wu there would be no reason to include clause 27 in the contract at all.  Clause 25(b) submits the parties to the Hong Kong jurisdiction, not their disputes.

14.  Mr Choi relies on authorities in support of the submission that a non-exclusive jurisdiction clause and an arbitration are reconcilable.  They are Paul Smith Ltd v H & S International Holdings Inc (1991) 2 Lloyd’s Rep 127, Shell International Petroleum Co. Ltd v Coral Oil Co. Ltd (1999) 1 Lloyd Rep 72 and Axa Re v Ace Global Markets Ltd (2006) Lloyd’s Rep 683.  The third of these, Axa Re, has been referred to by both counsel in this application.

15.  The case states, inter alia, that:

“(2) In cases of potential inconsistency between clauses, it was well settled that the contract had to be read as a whole. An effort should be made to give effect to every clause in the agreement and a clause should not be rejected unless it was manifestly inconsistent with or repugnant to the rest of the agreement. If, but only if, this could not successfully be done and there was a clear and irreconcilable conflict between a clause that had been specifically agreed and an incorporated clause in standard terms, the clause that was specifically agreed to would prevail.”

16.  Mr Wu relies on the second half of this holding.  He also submits that even if the case is authority for the proposition that the two clauses are not irreconcilable, it is, nonetheless, distinguishable from the present case because the wording of the arbitration clause is different.  In Axa Re the arbitration clause stated:

“15.1 The parties agree that prior to recourse to courts of law any dispute between them concerning the provisions of this contract shall first be the subject of arbitration.”

17.  I do not agree that this distinguishes the two cases so that the Axa Re authority has no application in the present case because on any sensible reading the meaning of clauses 25 and 27 taken together is the same as specifically expressed in 15.1 above.

18.  Later in the judgment Gloster J specifically deals with the issue in the following way.

“32. I accept Mr Berry’s submission that the fact that there are two clauses, with an express choice of English law, both in the jurisdiction clause and in the arbitration clause, does not result in any inconsistency. I accept Mr Berry’s submissions that Mr Green’s arguments are, in effect, based on a so-called presumption against surplusage in a contract. However, it is well recognized that there is no presumption against surplusage in a commercial contract and no conclusions can be drawn from the presence of two express choices of English law. In my judgment, in a commercial contract such as this, one should not be surprised to see parties stating clearly in a belt and braces way, the intention that English law is to apply.

33. Here, as was the position in the Paul Smith case and in the Shell International v Carol Oil case, it is perfectly possible to construe the two clauses in a harmonious manner. In my judgment, they can be read together in such a way as to avoid both conflict and surplusage. The arbitration agreement envisages the possibility that the proceedings will take place in court, though only after arbitration. The contract, when properly construed, demonstrates that the parties do not treat arbitration and court as mutually exclusive, but envisage arbitration as a step which may, or will, take place before any action in court.

34. I conclude, as did Steyn J in the Paul Smith case, that the reference to English jurisdiction operates in parallel with the arbitration provisions by fixing the supervisory court of the arbitration.  …”

19.  In short, Mr Wu’s contention that, in effect, once you have read clause 25 you must close your eyes to clause 27 is plainly not what  the parties intended.

Alternative submissions

20.  Mr Wu’s alternative argument was that if clause 27 remains it merely provides an option to arbitrate and no more.  It is therefore not binding on the plaintiff.

21.  This argument fails on two fronts.  Firstly, clause 27 cannot be regarded as an alternative option to clause 25(b).  As already stated the two clauses have different purposes and run in parallel in the context of the whole contract.  There is nothing to suggest that the parties regarded clause 25 as the first choice of dispute resolution and clause 27 as the second choice.

22.  Secondly, if there were to be any substance in the argument that arbitration was no more than an option, which I find there is none, it would only lie in the wording of clause 27.  It is clear that clause 27 contains no such words.  The words are “parties agree to refer all disputes”. This is standard wording which reflects the intention of the parties and binds them.

23.  In my judgment the argument that an arbitration clause is merely permissive and only confers an option on one party or the other cannot get off the ground without some word or words in the clause itself, such as “may”, which support the permissive nature of the clause.  Even then, each clause must be considered in context and it would not necessarily follow that a court would determine that it did not impose a binding intention on the parties to arbitrate.

24.  For the above reasons, I grant an order in the terms of paragraph 1 of the defendant’s summons dated 20 January 2012.  

25.  I further make an order nisi that the costs of and arising from this application be to the defendant on a common fund basis to be taxed if not agreed.