CHEE CHEUNG HING & CO LTD v. ZHONG RONG INTERNATIONAL (GROUP) LTD

HCA 1454/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1454 OF 2015

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REASONS FOR DECISION

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1.  This is the Defendant’s application under s 20 of the Arbitration Ordinance (“Ordinance”) for a stay of these proceedings instituted by the Plaintiff, and for the dispute between the parties to be referred to arbitration. At the conclusion of the hearing on 2 March 2016, I granted the stay sought in terms of its application. The following are my reasons for the decision.

2.  The Plaintiff commenced proceedings against the Defendant, claiming that it had submitted a tender for works to be carried out (“Works”) at a development in Lantau Island (“Tender”), for the price of approximately HK$57 million.  The Tender price was subsequently reduced to HK$51.6 million.  The Plaintiff claims that despite the Defendant’s issue of a letter of intent dated 5 April 2012 (“Letter of Intent”), and despite the reference in the Tender to the Main Contract to be entered between the Plaintiff and the Defendant for the Plaintiff’s execution of the Works, no contract had been signed by the Defendant.  The Plaintiff therefore seeks in these proceedings a declaration that the parties had not entered into any contract for the execution of the Works, and that the Plaintiff is entitled to payment of a sum of HK$55.8 million (instead of the revised Tender price of HK$51.6 million), as the reasonable value of the Works actually carried out by the Plaintiff in respect of the development. 

3.  The Defendant claims that the Tender had been accepted by the Defendant, as evidenced by the parties’ signing of the Letter of Intent, and that the parties’ conduct and the Plaintiff’s execution of the Works affirmed and evidenced the existence of a binding contract between the parties, on the terms of the Agreement and Schedule of Conditions of Building Contract referred to in the conditions of the Tender, which terms include an arbitration clause.  On the basis of there being a binding contract and a binding arbitration agreement made between the parties, the Defendant seeks a stay of this action under s 20 of the Ordinance. 

4.  Under  s 20 (1) of the Ordinance, Article 8 of the Model Law has effect and Article 8 (1) provides :

“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 to the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

5.  The approach to be taken by the Court in dealing with an application for stay has been clearly set out in Tommy CP Sze & Co v Li & Fung (Trading) Ltd.  There are 4 questions for the court.  (1) Is there an arbitration agreement between the parties?  (2) Is the clause in question capable 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?

6.  The authorities are clear that the onus on the applicant for stay is only to demonstrate that there is a prima facie case that the parties were bound by an arbitration clause.  Unless the point is clear, the Court should not attempt to resolve the issue and the matter should be stayed in favor of arbitration (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309).  When there is a dispute as to whether there was an arbitration agreement or clause, the onus on the applicant for stay is to prove that there is a good prima facie or plainly arguable case, predicated on cogent, and not dubious or fanciful, evidence that an arbitration clause or agreement existed (Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd [2003] 3 HKC 659).

7.  In this case, the issue in dispute between the parties is whether the Tender had been accepted by the Defendant, and whether a binding agreement existed between the parties for the Defendant’s execution of the Works on the terms and conditions set out in the Tender, which provide for the Agreement and Schedule of Conditions of Building Contract with its Appendix issued by the Hong Kong Institute of Architects (“Agreement and Schedule”) to apply. 

8.  There is no dispute as to the form and terms of the Tender.  These expressly provide:

“Unless and until a formal agreement is prepared and executed this tender together with the written acceptance thereof by the (Defendant) subject to the provisions of Clause 3 hereof shall constitute a binding contract.”

9.  The Plaintiff’s case is premised on the fact that the Letter of Intent signed by the Plaintiff and the Defendant does not constitute the Defendant’s acceptance of the Plaintiff’s offer, as comprised in the Tender, to execute the Works, such that there was no contract concluded.  The arguments are :

(1) The Letter of Intent only states that the Tender together with the subsequent correspondence for the Main Contract “are acceptable” to the Defendant, as opposed to their being “accepted by” the Defendant.

(2) The Letter of Intent only sets out the Plaintiff’s obligations, including its obligations to enter into the Main Contract, without setting out or providing for the Defendant’s obligations.

(3) The Letter of Intent only constituted the Defendant’s request to the Plaintiff to offer to enter into the Main Contract.  Such offer was made by the Plaintiff’s signing the Letter of Intent.

(4) There was no acceptance of the Plaintiff’s offer by the Defendant.

10.  Whether or not the Letter of Intent constitutes the Defendant’s acceptance of the Plaintiff’s offer by Tender, to execute the Works, is a matter of construction of the relevant documents.  As a matter of general principle, a letter of intent is capable of being a binding contract, and the fact that the parties envisage that the letter of intent is to be superseded by a later and more formal contractual document does not, of itself, prevent the letter of intent from taking effect as a binding contract (Chitty on Contracts, Vol 1, 32^nd edition, para 2-132; Bryen & Langley Ltd v Martin Boston [2005] BLR 508).  Counsel for the Plaintiff has highlighted the distinction drawn in Hudson’s Building and Engineering Contracts, 12^th edition, para 3-050 at pp 416-417:

“The phrase is used in at least 2 different senses.  First, it covers a letter which “is no more than the expression in writing of a party’s present intention to enter into a contract at a future date” and of which it can be said that “save in exceptional circumstances it can have no binding effect” and that “it will create no liability in regard to that future contract”.  Secondly, it covers a letter which is intended to create a binding contract pending conclusion of the contract for the whole works.  … Every such document must be interpreted individually in the light of the circumstances of the case.”

11.  In this case, I am satisfied that there is a prima facie and plainly arguable case that the Letter of Intent is more than an expression of the parties’ intention to enter into a contract at a future date, which creates no binding effect.  The Letter of Intent expressly states that unless and until a formal agreement is executed, the Tender and the relevant correspondence, together with the Letter of Intent, shall be binding.  Counsel sought to distinguish the fact that such statement in the Letter of Intent only imposes a binding obligation on the Plaintiff, but not on the Defendant, to enter into the Main Contract.  However, the Tender, which constitutes the Plaintiff’s offer to execute the Works on the terms and conditions of the Tender and the relevant Tender documents, expressly states that when the Tender is accepted by the Defendant in writing, it shall constitute a binding contract. So long as there is written acceptance of the Tender, the Defendant will likewise be bound.

12.  The Plaintiff does not claim that the Letter of Intent issued by the Defendant contained any variation or additions to the terms and conditions of the Tender.  Nor does the Plaintiff claim that there is any uncertainty in the terms set out in the Tender and the Letter of Intent.  In these circumstances, I fail to see how the expression that the Tender and the subsequent correspondence “are acceptable to” the Defendant, as opposed to the expression that they “are accepted by” the Defendant, can make any material difference to the parties’ understanding of the terms of their agreement, or to their intention to enter into a binding agreement.  Nor do I accept that properly read and construed in the context of the correspondence exchanged in relation to the Tender and the Main Contract, the Letter of Intent imposes no corresponding and reciprocal obligations on the Defendant (for example, to make payment of the awarded Main Contract sum for the Plaintiff’s completion of the Works). 

13.  The Chinese text of the Letter of Intent would have made it obvious and clear to the parties, that the Tender and the subsequent correspondence for the Main Contract was accepted by the Defendant, since the language used was “被接納” (“accepted”, instead of “acceptable”).  Nevertheless, the Plaintiff relies on the provision in the Letter of Intent that the English text should prevail, in the event of there being any discrepancies between the English and Chinese texts.

14.  Even if it is arguable, as the Plaintiff sought to do, that the Letter of Intent does not constitute an acceptance of the Tender, but only an invitation to the Plaintiff to make an offer (which the Plaintiff did by signing and returning the Letter of Intent), the Plaintiff’s offer had been accepted by the Defendant’s conduct.  It is not disputed that, as the Plaintiff alleges, it commenced the Works in April 2012, and later, submitted applications for interim payment for the executed Works pursuant to the terms and conditions of the Main Contract and eventually completed the Works.  It is indisputable that the Defendant had permitted the Plaintiff to enter the site, to commence and to carry out the Works. 

15.  The Plaintiff’s complaint of the Defendant introducing “minor” variations to the terms of the Main Contract relates to matters which took place in March 2013.  As Leading Counsel for the Defendant rightly submitted, these are irrelevant to the question of the construction of the Letter of Intent, and whether it constituted an acceptance of the Tender, and whether the parties had intention in April 2012 to enter into a binding agreement.  If, on construction, a binding agreement had been made between the parties in April 2012, then the Defendant’s refusal to sign the Main Contract in 2013 and 2015 may, at most, be treated as a breach on its part.

16.  I reject the argument that any offer comprised by the Plaintiff’s signing of the Letter of Intent could only be accepted by the Defendant’s execution of the Main Contract (paragraph 27 of Counsel’s skeleton).  There is no such stipulation in the Letter of Intent, nor any other evidence of such requirement.

17.  Even if the Tender for the execution of the Works had not been validly accepted by the Defendant’s issue of the Letter of Intent, it is arguable that there was a valid and binding arbitration agreement, evidenced in writing, even if the Main Contract was not signed.  It is trite that an arbitration agreement can be separate from the underlying contract, in this case the underlying contract for the Works. 

18.  It is clear from the Court of Appeal’s decision in PCCW Global Ltd v Interactive Communications Service Ltd  [2007] 1 HKLRD 309 that unless the point is clear, the Court should not decide the matter, but should refer the parties to arbitration, for the Tribunal to determine its own jurisdiction.  Considering the provisions of the Tender and the Tender documents, the Letter of Acceptance, and particularly, considering the fact that the parties had been performing and conducting themselves in accordance with the the terms and conditions of the Main Contract from April 2012 until May 2015, I have grave reservations in concluding that the point is clear that there was no contract made between the parties at all.  I am satisfied that there is a prima facie case that there is an arbitration agreement between the parties. 

19.  The arbitration clause in clause 35 of the Agreement and Schedule provides for “any dispute or difference” “during the progress or after the completion or abandonment of the Works, as to the construction of the Contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith” to be referred to arbitration.  This extends to the dispute in this action, relating to the Plaintiff’s claim for the value of the Works executed.  The Tribunal has power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.  This includes determination of whether there had been proper acceptance of an offer or a tender.  The Court should be slow to usurp the functions of the Tribunal.

20.  For all the above reasons, I was satisfied that the Defendant established a prima facie and plainly arguable case that the parties are bound by an arbitration clause, and that a stay of proceedings is justified.  I accordingly made an order in terms of the Defendant’s Summons issued on 9 September 2015. 

21.  I further made an order that the Plaintiff should pay the Defendant’s costs of the Summons on an indemnity basis (A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, Gao Haiyan v Keenyeye Holdings Ltd (No 2) CACV 79/2011, 12 January 2012, Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd HCA 2416/2014, 3 December 2015).