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

HCA 2494/2024

[2026] HKCFI 408

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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DECISION

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1.   Introduction[1]

1.1  By a written decision handed down on 20 August 2025 (“Decision”)[2], DHCJ Sir William Blair (“Judge”) dismissed the Defendant’s application for an order that the present proceedings be stayed in favour of arbitration (“Stay Application”) and made a costs order nisi that the costs of the application be paid by the Defendant to the Plaintiff on the indemnity basis, which nisi order has become absolute as no application for its variation was made (“Costs Order”).

1.2  Essentially, the learned Judge was of the view that whilst there is an arbitration agreement between the parties contained in clause 12.3 of the Contract (“Arbitration Agreement”)[3], it is in his view clear that the Arbitration Agreement has been disapplied by the terms of the subsequent Settlement Agreement between the parties, the effect of which is that the disputes in the present proceedings do not fall within the ambit of the Arbitration Agreement[4].

1.3  By a summons dated 2 September 2025 (“Summons”), the Defendant seeks leave to appeal against the Decision. Three grounds are advanced in the draft Notice of Appeal annexed to the Summons, the first two against the substantive order refusing an arbitration stay and the third against the Costs Order. At the hearing before me, the Defendant confirmed that it no longer pursues the third ground as a standalone ground. In other words, the Defendant is content to leave the Costs Order undisturbed unless leave to appeal is granted to the Defendant and it eventually succeeds in the proposed appeal.

1.4  At the hearing, the Defendant was represented by Mr Rex Yam and the Plaintiff by Mr Paul Lee, the same counsel who appeared before the Judge.

1.5  This is my decision on the Summons.

2.   Background

2.1  The relevant background matters have been set out in the Decision. For present purposes, it is only necessary to recite the following matters[5].

2.2  On 13 June 2024, the Plaintiff and the Defendant entered into the Contract, by which the Defendant agreed to pay the Plaintiff to provide marine plant to receive and dispose of sand fill material from the Defendant’s construction site situate in Kwai Chung. As stated at Clause 5.1 of the Contract, the contract period was provisionally agreed to commence on 2 July and to conclude on 31 December 2024 (“Contract Period”).

2.3  As recited at Decision §§5 and 6, Clauses 6.1 and 6.2 of the Contract respectively provide for the contractual quantity of the sand fill material to be supplied by the Defendant, and the unit price to be paid by the Defendant to the Plaintiff. I note that the contractual quantity to be supplied by the Defendant during the Contract Period was not exact but was to be within a stated range (180,000 to 300,000 m³). The contractual quantity was further broken down into monthly, weekly and daily ranges.

2.4  Decision §7 recites Clause 12 of the Contract (including the Arbitration Agreement).

2.5  Following the commencement of the Contract Period, as noted at Decision §8, from 16 July 2024, the Defendant supplied the Plaintiff with sand fill material.

2.6  As set out at Decision §§8-12, disputes subsequently arose between the parties due to the Defendant’s suspension of its delivery of sand fill material. By a letter dated 16 October 2024 addressed to the Defendant, the Plaintiff’s solicitors (“WL”) purported to accept the Defendant’s repudiatory breach and demand was made for payment in the sum of HK$16,342,815 to compensate the Plaintiff for under-recovery of its overheads and profits, which sum was calculated by reference to the Contract (“Claimed Sum”). WL threatened to commence arbitration proceedings in default of payment.

3.   The Settlement Agreement

3.1  The parties entered into the Settlement Agreement on 11 November 2024, pursuant to which the Defendant agreed to resume supplying sand fill material according to a revised schedule (“Schedule”). Under the Schedule, the Defendant was obliged to deliver a total of 36,969.70 m³ of sand fill material to the Plaintiff by 30 November 2024 at stipulated quantities on identified dates.

3.2  In so far as relevant, the Settlement Agreement provides as follows:

(1) Clause 1.3: “[The Defendant] will handle by itself all non-sea-sand materials, including but not limited to black mud and stones; such materials shall not be mixed with the sea-sand delivered to [the Plaintiff]”;

(2) Clause 1.4: “If [the Defendant] supplies the sea-sand in accordance with the time and quantities set out in [the Schedule], [the Plaintiff] 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”;

(3) Clause 1.5: “If [the Defendant] fails to supply sea-sand in accordance with the time and quantities in [the Schedule], [the Plaintiff] reserves all rights in relation to [the Defendant’s] obligations, and related compensation claims against [the Defendant], arising from the suspension of sea-sand delivery on 30 September 2024”;

(4) Clause 1.6: “Clause 12 of the [Contract (including the Arbitration Agreement)] shall not apply to this settlement agreement”.

4.   Commencement of the present proceedings

4.1  As noted at Decision §17, the parties fell out as to whether the Settlement Agreement had been complied with. The Plaintiff’s case is that the sand fill material supplied by the Defendant contained black mud and did not meet the quality requirements of the Settlement Agreement. The Defendant denied 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 the sand fill material.

4.2  The Plaintiff commenced the present proceedings on 18 December 2024 to recover the Claimed Sum.

4.3  It is pertinent to note that not only was there a dispute between the parties at the Settlement Agreement level, the learned Judge also found at Decision §10 that there were disputes between the parties even at the Contract level as there was no acceptance of liability on the part of the Defendant.

5.   The Decision

5.1  The learned Judge first set out the principles applicable to an application made under section 20 of the Arbitration Ordinance Cap 609 (“AO”). In essence:

(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 (“Four Questions”);

(2) The onus is on the applicant for a 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.

5.2  The learned Judge referred to Mimmie Chan J’s observation at Houtai Investment Holdings Ltd v Leung Yat Tung & Ors [2021] HKCFI 1504 on the “center 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:

“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).”

5.3  In the particular context of the present case involving a settlement agreement, the learned Judge referred to the observations made at Monde Petroleum SA v Westernzagros Ltd [2025] EWHC 67 (Comm) §38:

“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.” (emphasis added)

5.4  As set out at Decision §§32-41:

(1) The learned Judge noted that the argument before him centered 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);

(2) Whilst the writ and the statement of claim, in claiming the Claimed Sum arising from the alleged breach of the Contract, support the Defendant’s case, the learned Judge noted that 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 §49);

(3) The learned Judge was of the view that whilst the Plaintiff’s claims are assessed by the terms of the Contract, they were brought under the Settlement Agreement;

(4) Importantly, whilst Clause 1.6 of the Settlement Agreement is not a jurisdiction clause and does not exclude arbitration, 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. So far as claims arising under the Settlement Agreement are concerned, the arbitration route would require a fresh arbitration agreement between the parties because the Arbitration Agreement in the Contract has been expressly disapplied and there is no question of Clause 1.6 of the Settlement Agreement and the Arbitration Agreement sitting in parallel because the one expressly excludes the other;

(5) As such, following Monde, because of Clause 1.6 of the Settlement Agreement, the Plaintiff is not bound to bring its claim in an arbitration and can bring it in court. The learned Judge considered that this is the commercially-minded way in which to construe the terms in question as called for in the Amtrust case (referred to in Houtai);

(6) He therefore came to the conclusion as set out at §1.2 above.

6.   The proposed grounds of appeal

6.1  In the draft Notice of Appeal, it is said that the learned Judge was in error for the following reasons.

6.2  First, the learned Judge erred in finding that the claims in the present proceedings do not fall within the Arbitration Agreement (“Ground 1”) since:

(1) As noted at §4.3 above, the learned Judge found that there were disputes even at the Contract level;

(2) Clause 1.5 of the Settlement Agreement has the effect of preserving the Plaintiff’s right to claim under the Contract, and in seeking the Claimed Sum in these proceedings, the Plaintiff has elected to claim damages under the Contract rather than the Settlement Agreement thereby engaging the Arbitration Agreement;

(3) The center of gravity lies in the Contract, which is the commercial center of the dispute.

6.3  Secondly, the learned Judge erred in finding that a commercially-minded construction of Clause 1.6 of the Settlement Agreement excludes arbitration (“Ground 2”) since:

(1) As found by the learned Judge, Clause 1.6 of the Settlement Agreement does not exclude arbitration nor serve as a jurisdiction clause;

(2) The learned Judge ought to have given due weight to the undisputed fact that the parties did not include a dispute resolution or jurisdiction clause in any form in the Settlement Agreement. By the decision/choice of the parties, there is only one dispute resolution clause between the parties, namely the Arbitration Agreement.

7.   The applicable principles

7.1  Under Section 14AA(4) of the High Court Ordinance (Cap. 4), leave to appeal shall not be granted unless the court hearing the application for leave is satisfied that the appeal has a reasonable prospect of success[6]. This applies to a leave to appeal on dismissal of a summons for a stay for arbitration: Magnus Leonard Roth v Vitaly Petrovich Orlov [2021] HKCA 639 §§10 and 17.

7.2  Reasonable prospect of success involves the notion that the prospects of succeeding must be “reasonable” and therefore more than “fanciful” without having to be “probable”: SMSE v KL [2009] 4 HKLRD 125 at §17.

8.   Analysis

8.1  Of the Four Questions identified at §5.1(1) above, the learned Judge dismissed the Stay Application since he found that it was clear that the fourth question should be answered in the negative for the reasons summarized above. Mr Yam has reminded me that, for the purpose of the Summons, he only needs to demonstrate that there is a prima facie case that the fourth question should be answered in the affirmative and it is reasonably arguable that the learned Judge’s conclusion to the contrary (which he regarded as clear) is erroneous.

8.2  I do not accept that the proposed grounds have a reasonable prospect of success for the reasons set out below.

(i) Ground 1

8.3  In relation to Ground 1, Mr Yam’s submissions may be summarized as follows:

(1) The crux of the present proceedings is whether the Defendant breached the Contract, and if so, the damages to which the Plaintiff is entitled. There can be no dispute that the Claimed Sum is based on the Contract;

(2) Clause 1.5 of the Settlement Agreement has the effect of “reserving” the Plaintiff’s rights to pursue remedies under the Contract and the Plaintiff has elected to claim under the Contract as opposed to the Settlement Agreement;

(3) He therefore reasons that the Settlement Agreement is “plainly irrelevant” and that the Contract is the center of gravity of the dispute. It therefore follows (he argues) that the Arbitration Agreement is applicable.

8.4  Having reflected on the matter, I am unable to agree with Mr Yam’s submissions:

(1) In my view, Mr Yam’s attempt to minimize the relevance of the Settlement Agreement is misplaced. To the contrary, the Settlement Agreement is pivotal. First, as Mr Yam accepted, had the Settlement Agreement been performed, that would bring the contractual relationship between the parties to an end. Secondly, the combined effect of Clauses 1.4 and 1.5 of the Settlement Agreement is that a breach of the Settlement Agreement is a “condition precedent” to be satisfied before the Plaintiff is entitled to claim any relief;

(2) As noted at §4.1 above, the Defendant disputes the Plaintiff’s position that the Defendant was in breach of the Settlement Agreement. That dispute is plainly not subject to the Arbitration Agreement, and given the existence of Clause 1.6 of the Settlement Agreement, for that dispute to be arbitrated, as found by the learned Judge, it would require a fresh agreement to refer that dispute to arbitration;

(3) As noted by the learned Judge at Decision §38, the reservation of a party’s right to pursue its original claim should the other party breach a subsequent settlement agreement is a standard feature of a settlement;

(4) I therefore agree entirely with the learned Judge’s characterization of the Plaintiff’s claim made in the present proceedings set out at Decision §38, namely 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;

(5) Where, as here, the establishment of a breach of the Settlement Agreement is the “condition precedent” to be satisfied before the Plaintiff can seek any relief, it seems to me that the learned Judge is entirely correct in concluding that the Settlement is the center of gravity of the dispute.

(ii) Ground 2

8.5  Mr Yam’s submissions may be summarized as follows:

(1) Since Clause 1.6 of the Settlement Agreement does not displace/exclude arbitration, arbitration remains the only agreed dispute resolution venue, not litigation;

(2) The manifest purpose of Clause 12 of the Contract (containing the Arbitration Agreement) is to ensure that all disputes are resolved through arbitration therefore giving effect to the Fiona Trust presumption, ie a presumption favouring one-stop adjudication.

8.6  I am unable to agree with the Defendant’s submissions for the following reasons:

(1) Clause 1.6 of the Settlement Agreement expressly provides that Clause 12 of the Contract shall not apply to the Settlement Agreement. I agree with the learned Judge’s finding (as set out at §5.4(4) above) that there is no question of Clause 1.6 of the Settlement Agreement and the Arbitration Agreement sitting in parallel because the one expressly excludes the other;

(2) Viewed thus, the Defendant’s submission premised on the presumption of one-stop adjudication is tantamount to a submission that the Plaintiff is obliged to refer the dispute arising out of the Settlement Agreement to arbitration. Further, the effect of the Mr Yam’s submissions is to render Clause 1.6 of the Settlement Agreement completely otiose. I cannot accept the foregoing to be reasonably arguable;

(3) Where the Plaintiff is entitled to litigate the dispute relating to whether there was a breach of the Settlement Agreement in court, I agree with the learned Judge’s conclusion at Decision §40, namely, following Monde, the commercially-minded way to construe Clauses 1.5 and 1.6 of the Settlement Agreement is that the Plaintiff is not bound to bring the present claim in arbitration. Were it otherwise, it would lead to fragmentation, namely that the Plaintiff has to first establish that there was a breach of the Settlement Agreement in court proceedings, and were it to prevail, then bring a claim for damages under the Contract in arbitration.

8.7  For avoidance of doubt, I have considered whether despite reaching the conclusions set out above, a contrary position is prima facie maintainable, and if so, I should order a stay such that the foregoing issues can be determined by an arbitral tribunal. Like the learned Judge, I am of the view that the points are clear.

9.   Conclusion

9.1  For the above reasons, the Summons is dismissed.

9.2  I also make a costs order nisi that the Defendant is to pay to the Plaintiff the costs of the Summons. The Plaintiff is to lodge and serve its Statement of Costs within 3 days hereof and the Defendant their Statement of Objections within 3 days thereafter. I will then assess the costs summarily on the papers.