CHINA MERCHANTS HEAVY INDUSTRY CO. LTD. v. JGC CORPORATION

CACV 112/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 112 OF 2001

(ON APPEAL FROM HCCT NO. 5 OF 2000)

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J U D G M E N T

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Keith JA (giving the judgment of the Court):

The background facts

1. By a contract in writing dated 13 December 1996 ("the contract"), the Defendant, JGC Corporation ("JGC"), a Japanese corporation, engaged the Plaintiff, now known as China Merchants Heavy Industry Co. Ltd., to carry out piping works for the new terminal which China Resources Petroleum & Chemicals Co. Ltd. was having built on Tsing Yi Island. The works were completed, and on 7 December 1998 the Plaintiff submitted its draft final account to JGC. By letters dated 29 March 1999 and 10 June 1999, JGC rejected the Plaintiff's demands, saying that no further payments were due.

2. In due course, the Plaintiff issued proceedings claiming the outstanding amount due under the contract. JGC responded to the issue of the writ by issuing a summons which sought, inter alia, the stay of the proceedings on the ground that the parties to the contract had agreed to refer the matter in dispute to arbitration. Burrell J ordered that the proceedings be stayed, and the Plaintiff now appeals to the Court of Appeal.

The relevant clause

3. The relevant clause in the contract is clause 12. It is headed "SETTLEMENT OF DISPUTES", and provides as follows:

"If any dispute or difference of any kind shall arise between JGC and the contractor in connection with or arising out of the contract or the carrying out of the Works which cannot be settled by mutual agreement, JGC shall state its decision in writing and give notice of same to contractor.

Such decision in respect of every matter so referred shall be binding upon JGC and the contractor until Completion of the Works and shall forthwith be given effect to by the contractor, who shall proceed with the Works with all due diligence, pending the outcome of any arbitration proceedings as outlined below.

Without prejudice in any way to the foregoing, if, within fifteen (15) calendar days after the date of the above decision in writing made by JGC, the contractor shall by written notice to JGC so request, specifying such dispute or question, then the matter shall be referred to a single arbitrator to be agreed upon by the parties, or failing such agreement to three (3) arbitrators, one (1) of whom to be appointed by each party.

The two (2) arbitrators so selected shall appoint a third arbitrator. The dispute or disagreement shall be determined by a majority of the three (3) arbitrators and the decision of such majority shall be binding and conclusive upon the parties hereto, provided that if either party shall fail to select an arbitrator within twenty (20) calendar days after the date of the notice requesting arbitration, the arbitrator selected by the other party shall determine the question, and his decision shall be binding on the parties (There shall be no appeal from any arbitration determination to the Courts).

The arbitration shall be conducted in the English language, shall be held in Tokyo, Japan and determined under and governed by the laws of Hong Kong in accordance with the rules of Conciliation and Arbitration of the International Chamber of Commerce.

Neither the existence of any controversy or claim nor the fact that any arbitration is pending hereunder shall relieve either party of his obligations under the contract."

(The first two sentences were in one paragraph, but we have put them into separate paragraphs for ease of reference.) A number of issues of construction arise on the clause, but as Burrell J pointed out clause 12 was not the usual bilateral arbitration clause under which both parties to the contract have the right to submit their differences to arbitration.

4. Leaving aside the disputed issue of construction which arises on this appeal, the effect of clause 12 is as follows:

(i) Clause 12 would only be triggered if "any dispute or difference of any kind" between the parties could not be settled by mutual agreement.

(ii) Once clause 12 had been triggered by the parties' failure to settle any dispute or difference by mutual agreement, JGC was required to state its decision on the dispute or difference in writing and to notify the Plaintiff of that decision.

(iii) JGC's decision would be binding on both parties "until Completion of the Works".

(iv) Once JGC's decision had been notified to the Plaintiff, the Plaintiff was required to continue carrying out the works "pending the outcome of any arbitration proceedings".

(v) If the Plaintiff did not agree with JGC's decision on the issue in dispute, it had 15 days in which to notify JGC that it wished to refer the dispute or difference to arbitration.

Burrell J's findings

5. It was common ground before Burrell J that the dispute between the parties over the outstanding amount due to the Plaintiff under the contract was one which had not been settled by mutual agreement, and that clause 12 of the contract had been triggered. The first question which then arose was whether JGC had made a decision of the kind to which clause 12 related. Burrell J held that JGC had made such a decision and had notified the Plaintiff of it. The decision was contained in JGC's letter of 29 March 1999. He also held that if the decision contained in the letter of 29 March 1999 did not constitute a decision of the kind to which clause 12 related, the decision contained in the letter of 10 June 1999 did. Although these findings were challenged in para. 5 of the Plaintiff's Notice of Appeal, that challenge is no longer pursued in this appeal.

6. It was also common ground before Burrell J that the Plaintiff had not notified JGC, within 15 days of either 29 March 1999 or 10 June 1999, that it wished to refer the dispute to arbitration. The more contentious finding which Burrell J made relates to his conclusion as to the effect of the Plaintiff not giving such notice to JGC. The issue was whether the Plaintiff could commence proceedings against JGC under the contract. The Plaintiff contended that it could. Its argument was that its failure to comply with the 15-day time limit rendered the claim "inoperative", and clause 12 was therefore no bar to the commencement of proceedings. JGC contended that the Plaintiff could not commence proceedings against it. Its argument was that the only way in which the Plaintiff could contest JGC's decision was by arbitration, and if the right to refer the dispute to arbitration was held in the arbitration to have been lost by the failure to comply with the time limit, there was no other route by which it could contest the decision. Burrell J accepted JGC's argument. The issue which this appeal raises is whether he was right to do so.

7. We should add that, although Burrell J held that the letters of 29 March 1999 and 10 June 1999 contained decisions of the kind to which clause 12 related, he expressly said that his finding did not preclude the Plaintiff from re-arguing the point in any arbitration proceedings. He recognised, though, that the effect of his construction of clause 12 and of his conclusion that the letters contained a decision of the kind to which clause 12 related was that the Plaintiff's only route to challenge JGC's decision was by arbitration, in which the Plaintiff would be faced with a preliminary time bar defence. Burrell J was therefore alive to the impact which his findings would have on the Plaintiff's ability to challenge JGC's decision.

The inoperability of the reference to arbitration

8. Broadly speaking, two arguments were deployed on the appeal by Mr Clifford Smith SC for the Plaintiff. The first went like this. Art. 8(1) of the UNCITRAL Model Law (which applied to clause 12 by reason of section 6(1) of the Arbitration Ordinance (Cap. 341)) provides as follows:

"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."

There is, we think, no doubt that a clause in an agreement which gives only one of the parties the right to refer any dispute or difference to arbitration is an arbitration agreement within the meaning of Art. 8(1). That is in effect what the Court of Appeal in England held in Pittalis v. Sherefetin [1986] 1 QB 868. Accordingly, Burrell J had to stay the proceedings unless the agreement conferring on the Plaintiff the right to refer any dispute to arbitration was "null and void, inoperative or incapable of being performed". Mr Smith's point was that the Plaintiff did not have to refer the dispute to arbitration if it did not want to. Since it chose not to do so, there could be no question of the arbitration taking place, and if an arbitration cannot take place, the agreement conferring on the Plaintiff the right to refer the dispute to arbitration is "inoperative" within the meaning of Art. 8(1).

9. It is, we think, stretching the language of Art. 8(1) unduly to call an agreement conferring a right on a party to refer a dispute to arbitration "inoperative" merely because the party chooses not to exercise that right. But Mr Smith contended that there was some support for his argument from two English cases. We can dispose quickly of the Pittalis case, which was the first of the two cases on which he relied. There are dicta in that case that the effect of a party in the position of the Plaintiff not exercising his right of referring a dispute to arbitration is that the arbitration will not take place. Indeed, that is so obvious that it does not need to be said. But that does not begin to address the critical question, which is whether the effect of such non-election is to render the agreement conferring the right to refer disputes to arbitration "inoperative".

10. The second case relied upon by Mr Smith - Barni v. London General Insurance Co. Ltd. (1933) 45 Lloyd's Rep 68 - is, on analysis, no closer to the point. In that case, the Court of Appeal had to decide whether the party having the right to refer a dispute to arbitration had exercised that right. The Court held that it had, and that the exercise of that right had triggered the court's power to stay the proceedings. However, having decided that the right to refer the dispute to arbitration had been exercised, Romer LJ added: "That being so, the arbitration clause came into effect." Mr Smith seized on those words to argue that, in the absence of the exercise of the right to refer the dispute to arbitration, the arbitration agreement never came into effect and was therefore inoperative. In our judgment, that is to read far too much into the words of Romer LJ. He was not purporting to address the true legal effect of a failure to exercise the right to refer a dispute to arbitration. He was simply saying that, since the right had been exercised, the dispute would now be resolved by arbitration.

11. It follows that the agreement in clause 12 conferring on the Plaintiff the right to refer the dispute to arbitration was not inoperative within the meaning of Art. 8(1), and therefore Burrell J had to stay the proceedings (subject to Mr Smith's second point to which we shall come in a moment). However, before leaving this argument, we ought to identify a serious drawback for the Plaintiff had the argument been successful. Mr Smith accepted that if JGC's decision on the issue in dispute is not referred to arbitration, and if it survives the other attack to which Mr Smith subjected it, JGC's decision on the issue in dispute stands, subject to any other rights or remedies which the Plaintiff may have. If those rights or remedies include the right to commence proceedings against JGC to resolve the issue in dispute, the Plaintiff will inevitably be met by the argument that the proceedings are an abuse of the court's process because it had agreed in the second sentence of clause 12 that JGC's decision on the issue in dispute was binding. Thus, even though JGC might not be entitled to a stay of the proceedings because the arbitration agreement was inoperative, JGC would in all probability be entitled, not merely to a stay of the proceedings, but to the striking out of the Plaintiff's claim, on the ground that the proceedings amounted to an abuse of the court's process. As it turned out, it was not open to Burrell J to take either of these courses, because although JGC's summons had sought the dismissal of the action, alternatively a stay of the proceedings, on the ground that the proceedings constituted an abuse of the court's process, JGC had elected not to pursue that relief.

The completion of the works

12. Mr Smith's second argument was based on the fact that pending the outcome of any arbitration, the Plaintiff had to proceed with the works with all due diligence. That showed that the thinking behind clause 12 was to ensure that any dispute or difference between the parties would not interrupt the works. The Plaintiff would have to continue carrying out the works even if JGC's decision on the issue in dispute went against the Plaintiff. For that reason, although any decision made by JGC on any dispute or difference between the parties was to be binding on the parties, it was only to be binding while the works were being carried out. That was why clause 12 expressly provided that any decision made by JGC on any dispute or difference between the parties was to be binding on the parties "until Completion of the Works". The corollary of that is that any decision made by JGC on any dispute or difference between the parties after the completion of the works was not binding on the parties.

13. As it was, the works had been completed by the middle of March 1999. The unchallenged evidence before Burrell J was that the certificate of completion had been issued on 13 January 1998, and the performance bond had been released by JGC on 12 March 1999. Thus, by the earlier of the two dates on which the letters containing JGC's decision were written (29 March 1999), the works had been completed. Thus, the decision contained in the letters was no longer binding on the parties. Since the Plaintiff had the right to refer to arbitration only those decisions of JGC on any dispute or difference which was binding on the parties, the Plaintiff never had the right to question the decision in those letters by arbitration. Since they never had that right, they could not be barred from having the dispute resolved by litigation.

14. We cannot go along with this argument. We accept entirely that the thinking behind the second sentence of clause 12 was to prevent the works being interrupted in the event of a dispute. But when the first three sentences of clause 12 are read together, it is plain that they addressed the question as to how any dispute or difference between the parties was to be resolved, not merely a dispute which resulted in a decision by JGC before the works were completed. The reference in the second sentence of clause 12 to decisions being binding on the parties "until Completion of the Works" did not mean that the decisions would only be binding while the works were being carried out. In our opinion, the words "until Completion of the Works" were included in clause 12, not to limit the binding effect of the decisions to a period prior to the completion of the works, but to reinforce the point that there was to be no interruption to the works. We agree with the point made by Mr Adrian Huggins SC for JGC that there was no need to refer to the binding effect of any decisions after the completion of the works, since any dispute over such a decision could no longer delay the completion of the works.

15. There are two additional factors which, in our view, support that construction of clause 12. First, if it was intended to limit the Plaintiff's right to refer to arbitration only those disputes which arose over decisions made by JGC before the completion of the works, we would have expected suitable words of limitation to appear in the third sentence of clause 12, which is the sentence in which the Plaintiff's right to refer disputes to arbitration is conferred, rather than in the second sentence of clause 12, which is the sentence providing for the continuation of the works without interruption in the event of a dispute. Secondly, it is permissible, as an aid to construction, to consider which construction makes for greater commercial sense. We acknowledge that there would be some sense in the agreement providing for disputes over decisions made while the works are still being carried out to be resolved quickly by arbitration, and for disputes over decisions made after the works had been completed to be resolved at a more leisurely pace by litigation. But we think that it would have made much more commercial sense for all disputes over decisions made by JGC to be resolved either by litigation or by arbitration, because otherwise different disputes would have to be resolved in different forums.

16. Mr Smith referred us to a number of other provisions in the contract which he contended supported the construction of clause 12 which he was advancing. We intend no discourtesy to him by simply saying that we have not regarded those provisions as helping, one way or the other, on the issue of construction which we have had to decide. We should add that we have not overlooked the warning given Harman LJ in Monmouthshire County Council v. Costelloe & Kemble Ltd. (1965) 5 BLR 83 at p. 91 that contractual provisions have to be construed "with some strictness" and "against the person putting [them] forward" if they are said "to shut out the ordinary citizen's right to go to the court to have his grievances ventilated". This is, we think, a rather outdated view in the modern climate of alternative dispute resolution and of disputes over major construction projects commonly being resolved by arbitration as a result of an arbitration clause. But for what it is worth we have borne Harman LJ's strictures in mind. They have not caused us to doubt the correctness of our construction of clause 12.

Conclusion

17. It follows that this appeal must be dismissed. At present, we see no reason why costs should not follow the event, and the order nisi which we make as to costs is that the Plaintiff must pay to JGC its costs of the appeal, to be taxed if not agreed.