ADORN WORKSHOP LTD v. STEICKE, DAVID PAUL AND ANOTHER

DCCJ 4350/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4350 OF 2009

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D E C I S I O N

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1.  This is the Defendants’ application for stay of these proceedings instituted by the Plaintiff for the dispute between the parties to be referred to arbitration.

2.  The facts of the case are simple at this stage.  The Plaintiff claims that it had carried out design services and interior fit-out works for the Defendants at their home.  It claims that despite completion of the project, the Defendants have failed to pay the balance of the design fees and the costs of materials purchased by the Plaintiff on their behalf.  On their part, the Defendants claim that they have a set-off and counterclaim for the damages sustained by them as a result of the Plaintiff’s delay in the works, defective workmanship and defective materials supplied by the Plaintiff, and for the Plaintiff’s unauthorized use of pictures of their home.

3.  There is no dispute that the agreement between the parties is contained partly in and evidenced by a written contract dated 25 September 2008 (“the Contract”), as the Plaintiff so pleads in the Statement of Claim, and as the Defendants admit.

4.  The parties are not in dispute as to the applicable legal principles to an application for stay such as this.  The approach to be taken by the court in dealing with an application for stay has been clearly set out in Tommy Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418.  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? 

5.  The authorities are also clear that the onus on the applicant for stay is 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 favour of arbitration (PCCW Global Limited v Interactive Communication Services Limited [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 case 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).

6.  I can deal very quickly with the first and third questions posed in the Tommy Sze case.  It cannot be disputed that there is an arbitration agreement between the parties.  The parties agree that the written Contract contains a Clause 15, and that allowing for a typing error in the clause, the intention and effect of Clause 15 is that “should there be any dispute during the course of the execution of the contract, arbitration shall apply”.

7.  There is clearly a dispute between the parties, as otherwise they will not be before me today.  The Plaintiff claims that a sum of $897,720 is outstanding and unpaid by the Defendants, and is due for services provided and the costs of materials purchased by the Plaintiff under the Contract.  The Defendants claim, amongst other things, that there are defects and incomplete works and delay in the execution of such works under the Contract, and these are not admitted by the Plaintiff.

8.  The only real issue between the parties is whether the dispute which has arisen falls within the scope of the arbitration agreement contained in Clause 15.  The Plaintiff argues that Clause 15 only applies when works are being executed, or performed, under the Contract, as arbitration of disputes when works are in the course of execution can settle the dispute and enable the parties to continue with the Contract. 

9.  The Plaintiff suggests that as the Plaintiff is no longer carrying out works, the arbitration clause no longer applies. 

10.  The Plaintiff also claims that the Contract had been terminated by reason of the Defendants’ breach in failing to make payment, and that such repudiatory breach has been accepted by the Plaintiff.  Hence, the Plaintiff argues, the dispute does not arise during the subsistence of the Contract, and there is no longer a contract in force for Clause 15 to operate.  In my judgment, this only begs the question of whether or not there is a breach on the part of the Defendants in failing to make payment of the sums allegedly due, which is the centre of the dispute between the parties.  It is the Defendants’ case that the Plaintiff’s works under the Contract are incomplete and defective, and that for such reason, the Plaintiff is in breach of the Contract such that the Defendants are entitled to withhold payment.

11.  On the Defendants’ case, their claims of incomplete and defective works arise in the course of the execution of the Contract.

12.  With regard to the scope of and meaning of the words used in Clause 15, the Plaintiff seeks to distinguish the operation of the arbitration clause to disputes arising in the course of the Contract, and disputes arising after its termination, suggesting that the latter type of dispute falls outside the arbitration clause and can be litigated in the courts.  I agree with counsel for the Defendants that in construing arbitration clauses, the court would assume that rational businessmen are likely to have intended to have any dispute arising out of the relationship into which they had entered to be decided by one and the same tribunal, unless there is very clear language expressed that certain disputes are intended to be excluded from the arbitrator’s jurisdiction (Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40).

13.  I am not satisfied that such clear language is used in Clause 15 so as to exclude the present dispute from the scope of the clause, but in any event, the proper test is whether there is a prima facie case that the parties are bound by an arbitration clause.  Unless the point is clear, I should not attempt to resolve the issue and the matter should be stayed for arbitration so that the arbitral tribunal can determine, if necessary, any objection to the validity and existence of the arbitration agreement (PCCW Global Limited v Interactive Communication Services Limited, supra).

14.  I am satisfied that there is a good prima facie case that an arbitration clause existed to bind the parties in this case to refer to arbitration a dispute such as the present one before the court.  I am satisfied that it is plainly arguable that a dispute has arisen between the parties as to whether the Plaintiff’s works under the Contract have been completed during the term of the Contract, whether there are defects, whether the Defendants have a counterclaim and set-off for damages which they allege they have sustained as a result of the defects and delay, and whether the Plaintiff is entitled to the sums claimed.

15.  I fail to see how the arbitration clause is incapable of being performed.

16.  For the above reasons, I am satisfied that a stay of proceedings is justified, and accordingly make an order in terms of the Defendants’ Summons issued on 3 November 2009.

17.  I allow the claim for costs on an indemnity basis, since the Defendants have notified the Plaintiff as early as on 26 February 2009 that the Defendants consider that there were outstanding works under the Contract.  When the Plaintiff sought payment from the Defendants, the Defendants’ solicitors notified the Plaintiff on 6 March 2009 of the Defendants’ claim of defects in the work and of delay.  They further notified the Plaintiff in the letter of 6 March 2009 that if the Plaintiff should seek further payment from the Defendants, the Defendants shall attend arbitration pursuant to Clause 15 of the Contract.

18.  When the Plaintiff instituted these proceedings on 2 October 2009, they had clear notice that the Defendants dispute its claim and have a counterclaim, and that the Defendants wish to arbitrate in accordance with the arbitration agreement which they had freely contracted for.  These proceedings were instituted in knowing breach of Clause 15.  With the introduction of the Civil Justice Reform and the emphases on costs efficiency, procedural economy and fair distribution of the resources for the Court, I consider that this is an appropriate case for ordering that the costs of the institution of these proceedings and of the application for stay should be paid by the Plaintiff on an indemnity basis, with certificate for Counsel.