CHEVALIER (CONSTRUCTION) COMPANY LTD v. UNIVERSAL ALUMINIUM INDUSTRIES LTD

HCA 2338/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2338 OF 2013

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D E C I S I O N

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1.  The plaintiff in this case is the principal contractor of two developments in the New Territories known as ‘the Tuen Mun project’ and ‘the Tai Po project’. The defendant was engaged as a subcontractor to design, make and install aluminium windows and other materials and structures for both projects. The subcontracts are respectively dated 9 and 26 May 2011.

2.  At the end of 2012, the defendant had completed its work under the Tuen Mun contract.  It was to be sold in May and June 2014.  In July 2013, it submitted a final account to the plaintiff in excess of HK$10.577 million.  That has not been paid. 

3.  In May 2013, the plaintiff formally terminated the defendant’s subcontract for the Tai Po project.  The defendant claims that about HK$20 million is due to it and the plaintiff disputes this. The defendant contends that as a result of the plaintiff’s failure to make the payments claimed by it, it has been unable to pay the wages due to its employees and those of its subcontractors in respect of both projects.

4.  In July and August 2013, the parties agreed that the plaintiff would make direct payments to the employees of the defendant’s subcontractors which would then be set off against any payments found to be due to the defendant.  It is clear that this was accepted by the defendant. 

5.  On or about the same time, the plaintiff called upon the bondsman, Shanghai Commercial Bank, to pay over HK$1.93 million under a surety bond taken out by the defendant for the Tai Po project.  This was met by the bondsman.  I do not need to consider this aspect even though it may itself be the subject of dispute between the parties. 

6.  More importantly in the sequence of events concerning the disputes between the parties over payments arising out of the two subcontracts is the fact that, on 17 September 2013, the plaintiff served a Notice of Arbitration referring the dispute over the Tai Po project to arbitration.  The parties then set about the process of appointing an arbitrator but no appointment had been made by the time the plaintiff commenced proceedings in the High Court.

7.  On 3 October 2013, the plaintiff served a statutory demand on the defendant for HK$2,272,025, being the wages paid by the plaintiff to the employees and/or subcontractors of the defendant in respect of both contracts, ie, Tuen Mun and Tai Po.  It threatened winding-up proceedings in default.

8.  The next step was service by the defendant on 9 January 2014 of a Notice of Arbitration referring the dispute in respect of the Tuen Mun contract to arbitration.  Up to March 2014, the parties were in contact concerning the appointment of an arbitrator.  In the meantime, on 30 November 2013, the plaintiff issued and served its writ and statement of claim, claiming the HK$2,272,025 million which it had paid under the Employment Ordinance, Cap 57, at the request of the defendant.

9.  On 10 January 2014, the defendant took out an application to stay these proceedings on the basis that the parties had agreed to refer the matters at dispute to arbitration.  There is no doubt that the defendant has a substantial claim against the plaintiff which requires resolution.  The plaintiff has indicated earlier that it has a claim against the defendant in respect of the latter’s performance of the work under the subcontract.  In any event, the amount it has paid to the employees and/or subcontractors of the defendant will have to be dealt with by way of counterclaim or setoff.

The Dispute Clause in the Subcontracts

10.  The defendant’s contention is that the dispute falls to be dealt with by, and the parties have agreed to, arbitration under clause 18 of the contracts or subcontracts.  On the other hand, the plaintiff argues that the statutory claim under which it made the payments on behalf of the defendant falls outside the ambit of the arbitration agreements between the parties.  It does not dispute that the agreements referred to apply to both the Tuen Mun and Tai Po subcontracts.  It accepts that there is good authority supporting the proposition that arbitration agreements should be liberally and widely construed, but it argues that such a liberal and broad construction does not embrace a dispute arising out of a statutory claim.  The starting point is the clause in the subcontract dealing with the resolution of disputes. 

Clause 18 Dispute

11.  Paragraph 18(1) need not concern this dispute.  It is predicated on the basis that the main contract contains a mediation or adjudication clause.  It does not, and so one goes directly to paragraph 18(2). 

18(2)

12.  I have followed the certified English translation at the back of hearing bundle A: 

“Where there is no mediation clause under the main contract, the dispute shall...”

and I have underlined that; my emphasis.

“...be referred to and resolved by way of arbitration in accordance with Part II of the Arbitration Ordinance of Hong Kong. [If either party refuses to mediate pursuant to clause 18(1) or if the mediation fails, within 90 days, the dispute may be referred to arbitration in accordance with the said method.]”

I have repeated that sentence simply for completion of the clause and I have bracketed it because it is relevant only if clause 18(1) applies and it does not: 

“If the parties cannot agree on the appointment of an arbitrator, either party may make an application to the relevant appointing authority in accordance with the main contract. If there is no relevant clause, the application should be made to the High Court of Hong Kong.”

13.  Clause 18(3) is not directly of concern.  However, clause 18(4) has some relevance: 

‘If, before the appointment of an arbitrator, the contractor and the employer have already commenced legal proceedings in court to resolve the dispute and the contractor considers that such dispute involves subcontract works, the contractor may notify the subcontractor, in writing, to nullify clause 18(2). Unless the parties or the relevant court agrees, the dispute under the subcontract cannot be resolved by way of arbitration.”

14.  Clause 18(5), in my judgment, need not be considered.  It is clear from my initial and straightforward consideration and construction of clause 18(2) that nothing in it excluded from arbitration the involvement of a statutory claim. 

15.  The defendant relies upon the decisions in Fiona Trust and Holding Corporation v Privalov (2008) 2 Lloyds Reports, page 254; Yinde Gases Investment Limited v Shihlien China Holdings Company Limited, unreported, HCA 2059/2012, 20 January 2014; Ashville Investments Limited v Elmer Contractors Limited (1989) QB 488; and others. I will consider these in turn.

Fiona Trust

16.  The dispute between the parties involved allegations of bribery which the owners contended took the charterparties out of the ambit of the arbitration clause on the basis that the charterparties had been rescinded for bribery.  They had commenced proceedings in the English court, claiming damages in tort and an account of profits.  The charterers commenced London arbitration proceedings in accordance with the arbitration clause.  The House of Lords held in favour of the charterers.  Lord Hoffmann, at page 257, paragraphs 13 and 15, said:

“The construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered, or purported to enter, to be decided by the same tribunal. The clause should be construed in accordance with this presumption, unless the language makes it clear that certain questions were intended to be excluded from the arbitrators jurisdiction.”

That authoritative statement accords wholly with my initially expressed view.  Lord Hoffmann went on:

“If one adopts this approach, the language of the clause contains nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else.”

The second major holding, as set out in the headnote, does not apply to the position I am considering. 

The Yinde Gases case

17.  Madam Justice Mimmie Chan held that in the case before her, which was more detailed and convoluted than that before me, that part of the subject matter of the High Court action fell within the scope of clause 27 of the joint venture agreement which provided for arbitration in the following terms:

“27(1): Any dispute arising out of or is in connection with the interpretation, implementation, breach, termination or validity of the present arrangements shall...

my underlining -

“...be first resolved by the parties by way of amicable negotiation....

27(2): If the parties cannot resolve the dispute through negotiation, either party should be entitled to submit the dispute to CIETAC in Beijing for arbitration and...”

and she said - within the scope of clause 12 of the Gas Supply Agreement:

12:  For all disputes connected to this agreement, parties shall resolve, through friendly negotiation, failing which the parties agree to arbitrate.  The award of arbitration shall be the final determination of the dispute between the parties.”

18.  The learned judge concentrated on the ambit of the arbitration clauses to determine whether a particular dispute fell within it.  With respect, I adopt the same approach and pay, I hope, due regard to the terminology as well as the intentions of the parties derived from their relationship.

The Ashville case

19.  In 1978, a strong English Court of Appeal headed by May LJ and including Balcombe and Bingham LJJ, had to consider the following arbitration clause: 

‘In the case of any dispute or difference as to the construction of this contract, or as to any matter or thing of whatsoever nature arising there under or in connection therewith, such dispute or difference shall be and is hereby referred to the arbitration and final decision of...”

20.  That was considered in the context of a dispute over differences between specifications in the tender and in the building contract.  The court had no difficulty in concluding that the disputes between the parties, viz. mistake at the time they entered into the contract, and an allegation of misrepresentation or negligent misstatement arose in connection with the contract and were within the scope of the arbitration clause.

21.  The plaintiff relies upon a number of other decisions to support its contention that a claim based upon statute - somewhat misleadingly, I consider, referred to as a statutory claim as if there was some magic attached to it by virtue of its statutory origin - cannot fall within the ambit of an arbitration clause unless specifically stated.  A plaintiff in a running-down action may rely upon a conviction of the defendant tortfeasor under a statute, such as the Road Traffic Ordinance or the Construction and Use Regulations, but that does not constitute a statutory claim on his part.  A defendant in such action may allege contributory negligence on the part of a plaintiff, or bring in a third party on a contribution notice, relying upon the Civil Liability Contribution Ordinance. Another plaintiff may rely upon a breach of a statutory duty in isolation or together with common law negligence.  Their actions are not thereby statutory claims.

22.  In this case, the statutory claim for payment of a worker’s or workers’ wages is triggered by the inability of the defendant as subcontractor to pay wages because he contends he has not been paid what is due to him under the subcontract.  He has a large claim against the plaintiff based on a dispute with the plaintiff under one or both subcontracts and the plaintiff has a claim based allegedly on the defendant’s failure to carry out the work on the subcontract properly.  The payments made by the plaintiff were to satisfy its obligations under the relevant Ordinance, Employment Ordinance, Cap 57, section 43C.  But this liability met by the plaintiff is inextricably involved with the dispute between the plaintiff and defendant arising out of both subcontracts. 

23.  It is, in my judgment, wholly artificial to seek to compartmentalise the plaintiff’s claim for reimbursement.  I have no hesitation in going as far as saying that it is quite inappropriate to commence proceedings to recover the sum paid when the principal live issue remains between the parties and each party has not only triggered the reference to arbitration under the clause in the contract by a Notice of Arbitration in respect of one or other of the subcontracts, but the parties have been in contact concerning the arbitrator to be appointed.

24.  As Ma J, as he then was, in Tommy CP Sze & Co v Li & Fung Trading Limited, said, the four questions to be considered are: 

(1) Is there an arbitration agreement between the parties? 

  The answer is ‘yes’. 

(2) Is the clause in question capable of being performed? 

  Yes, it is distinct, all-embracing and excludes no form or subject matter of dispute. 

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

  Answer: decidedly so and its nature is quite clear. 

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

  Answer: It is and the payment under the Ordinance is but one aspect of it.  The amount is not disputed.  It falls to be decided, ultimately, according to the findings in respect of the core dispute between the parties.  To exclude what has been described as a statutory claim from the ambit of arbitration would be, in my view, an illiberal and constricting interpretation of the arbitration clause. 

25.  I have been aided by both counsels’ written submissions, which I received in advance of the hearing, which were well set out and both counsel today have been commendably direct and succinct. Mr Jonathan Wong, for the plaintiff, added to his written submissions by an interesting argument based on section 43F, section 2A of the Employment Ordinance to suggest that because of the possibility of multiparty involvement in a statutory claim, so termed, it could not fall within the ambit of an arbitration clause as expressed in this case.  As I indicated to Mr Wong, it was essentially an academic argument removed from the particular circumstances of this dispute between these parties and the discrete nature of the plaintiff’s claim for reimbursement of the payment made by it which, as I have said, are inextricably linked. 

26.  A stay of the Hong Kong proceedings is appropriate.  In my view, they should never have been started and I suspect it was done in order to obtain some *tactical advantage by the plaintiff over the defendant in the way of economic pressure.

27.  Costs should follow the event.

28.  I was referred by Mr Danny Choi to Burrell J’s decision on the basis of costs in Otis Elevator Company (HK) Ltd v Chun Wo Building Construction Ltd, unreported, HCCT 9/2001, 6 June 2001. I adopt his criterion that the law on this issue was clear and the result virtually inevitable.  This litigation was essentially wasteful of time and effort.  I have already expressed my form of censure.  I have also considered the decision in respect of costs by Colman J in A v B [2007] Lloyd’s Reports, volume 1, page 358, when he awarded indemnity costs. 

29.  Without going into the detail, I have decided not to follow that decision although the initial part of paragraph 1(b) of the headnote has some, but not total, application to this case.  I prefer to adopt the approach of Burrell J and order costs to be paid on a common fund basis.