SUCCESS ELECTRIC ENGINEER LTD v. RYODEN ENGINEERING CO LTD

HCA 1557/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1557 OF 2004

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R U L I N G

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Introduction

1.  This is an application by the Defendants to have this action stayed pursuant to Section 6 of the Arbitration Ordinance (“the Ordinance”) where it is said that the parties have, by agreement, agreed to refer to arbitration the matters which are the subject of the action.

2.  The Plaintiff is an electrical sub-contractor and the Defendants a substantial contractor concerned in, inter alia,electrical engineering works in the building industry.

3.  The background to this is that the Defendants had obtained contracts for the refurbishment of five aided-schools of which they wished to sub-let some of the electrical installation works.  The Plaintiffs entered into a sub-contract with them for some of these works.  The Defendants say that the contract was one based on their standard terms which included an arbitration clause which covers this dispute and the Plaintiffs say that the contract was partly based on their quotation in writing, as amended orally, and which had no arbitration clause.  I am therefore required to consider the evidence to determine the matter.

The Law

4.  Before I do so it is helpful to have regard to the legal principles which the Defendants must satisfy in order to obtain their stay.  Section 6 of the Ordinance which adopts article 8 of the UNCITRAL Model Law gives the court the power to stay an action if there is an arbitration agreement covering the dispute between the parties provided;

“	(a)	that there is no sufficient reason why the matter should not be referred to in accordance with the agreement; and
	(b)	the applicant was ready and willing at the time that the proceedings were commenced to do all things necessary for the proper conduct of the arbitration, and remains so.” per S. 6(2).

No issue arises from these provisions.  Article 8 of the Model Law says;

“

(i)

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.”

Similarly, no issue arises from the Article save of course the fundamental one as to whether there is an operative arbitration agreement.  In this regard, it is important to have regard to S. 2AC of the Ordinance which defines an arbitration agreement and which does so in wide terms.  The crucial matter is that the agreement to arbitrate must be in writing but the expression “in writing” is given a broad and generous definition.  There is also no requirement for a signature to the agreement.  S. 2AC is as follows:-

(1)	An agreement is not an arbitration agreement for the purposes of this Ordinance unless it is in writing.
(2)	An agreement is in writing for the purposes of subsection (1) if
	(a)	the agreement is in a document, whether signed by the parties or not; or
	(b)	the agreement is made by an exchange of written communications; or
	(c)	although the agreement is not itself in writing, there is evidence in writing of the agreement; or
	(d)	the parties to the agreement agree otherwise than in writing by referring to terms that are in writing; or
	(e)	the agreement, although made otherwise than in writing, is recorded by one of the parties to the agreement, or by a third party, with the authority of each of the parties to the agreement; or
	(f)	there is an exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and is not denied by the other party in response to the allegation.”

5.  These being the statutory materials governing the application the next matter concerns the extent of the burden on the Defendants, who apply for the stay, to demonstrate the existence of the relevant agreement.

6.  The most recent decision appears to be that of Burrell J. in Pacific Crown Engineering Limited v Hyundai Engineering and Construction Company Limited (2003) 3 HKC 659 in which he had referred to him two, in particular, decisions of the Court of Appeal being Private Company ‘Triple V’ Inc. v Star (Universal) Company Limited (1995) 3 HKC 129 and Paladin Agricultural Limited v Excelsior Hotel (Hong Kong) Limited (2001) 2 HKC 215.  From these cases Burrell J. concluded at 663 B that:

"	The proper test is therefore is there a prima facie or plainly arguable case that the parties were bound by an arbitration clause.  The onus being on the defendant to demonstrate that there is."

I propose to adopt that test.  If the Defendants can make this out I have no discretion in the matter and will stay the action.  The Plaintiff can then re-ventilate the issue (if they wish to) before the arbitrator who, with the benefit of live evidence from witnesses called by both parties, can finally determine the matter.  This therefore is how, procedurally, the matters stands.

The evidence

7.  Mr Shaw, for the Defendants, submits that the matter is overwhelmingly straightforward on the evidence and in his client’s favour.  He starts with the Defendants’ letter dated 12 December 2002 to the Plaintiffs bearing a reference 3826/02/2323-2112/KPW-15, to which he attaches importance because he says this clearly identified the contract between the parties which incorporated the arbitration agreement [page 70 of the bundle].  This letter invited the Plaintiffs to tender for the sub-contracted works.  It includes an invitation to inspect, inter alia, the Form of Contract which included the arbitration clause now relied on by the Defendants.  Mr Shaw then moves to the Plaintiffs’ reply dated 16 December 2002 [page 74] which bears the Defendants’ reference number at its foot.  The relevant contract is ALL 333.  The letter constitutes the Plaintiffs’ submission of their quotation pursuant to the Defendants’ invitation of 12 December.  Mr Shaw then points to the arbitration clause [page 91] which he says bites and is referable to the dispute between the parties.  The offer by the Plaintiffs contained in their letter of 16 December was accepted by the Defendants, the evidence for this coming from the affirmation of Mr Yan Wing Hong in support of this application [paragraph 14, page 12].  This course of events – invitation to tender, quotation for the work and acceptance of the quotation – says Mr Shaw constitutes the necessary “plainly arguable case” that an agreement to arbitrate exists between the parties which warrants a stay of the action.

8.  Mr Cheung, in opposing the stay, submits that this analysis is far too simplistic, fails to recognize the full picture and is therefore quite wrong.  Mr Cheung says that the evidence afforded by the documents in the bundle indicates a number of difficulties in the way of the Defendants including, but not only restricted to the identity of the party contracting with the Defendants, the history of the negotiations which go back to at least September 2002 and the absence of a signature to the agreement relied on, which was purportedly entered into after the contracted works had started.  All of this makes it far from clear that the parties had entered into a written contract which included an arbitration clause.

9.  Mr Cheung starts at page 229 of the bundle with a quotation for these works dated 18 September 2002 on the Plaintiffs’ letterhead (it refers to contract in ALL 333) for $8.6 million.  This price, according to the affirmation evidence, was too high for the Defendants and there were discussions about this, between Mr Yan of the Defendants and Mr Ng of the Plaintiffs, which resulted in the Plaintiffs agreeing to reduce their price to $5.6 million – see the letter of 3 December 2002 on the letterhead of Success Electric Engineer (not the limited company) which would appear to have been further reduced to $5.5 million in the letter of 16 December [see page 74 supra] also on the letterhead of Success Electric Engineer rather than the Plaintiff, that is, the limited company.  Mr Cheung submits that it is by no means clear whether the offer and acceptance of the contract was by the firm or the limited company.  The position concerning the coming into existence of the limited company which now sues for damages for breach of contract, to which I will return presently, is that the Defendants had indicated to Mr Ng that they were disposed to put work his way provided he incorporated his business and became a limited company.  Mr Cheung has drawn attention to page 52 of the bundle which is an internal memorandum of the Defendants dated 17 December 2002 which concerns the awarding of these contracts, this being the day following Success Electric Engineer’s (the firm’s) quotation of $5.5 million for these contracts including of course ALL 333.  The memorandum recommended accepting Success’s quotation with a note at the foot of the memorandum;

“	As advised by CMD, Success Electric Engineer is going to change to limited company, the sub-contract will be awarded to them if the change is successful.”

It should be observed that the Success limited company had already been incorporated as early as 2 June 1997 (page 54) and notified its registered office on 16 September 2002 which, of course, is the same address as the unincorporated firm. 

10.  The internal memorandum at page 52 is of particular assistance – it is a document which pre-dates this dispute and in an untendencious way demonstrated the Defendants thinking on the matter.  Success’s price was now acceptable and provided it became incorporated, which it already was, it would get the contract, which it did.

11.  In the statement of claim the contract relied on by the Plaintiff is the one based on the quotation for $8.6 million (page 229) from the limited company subsequently orally “bargained down” and agreed on at $5.5 million.

Is there a prima facie case?

12.  Plainly, there are competing accounts as to the terms of the contract, and indeed which contract is the one under which these works were done.  The Defendants need to show a prima facie case or, to put it another way, a plainly arguable case that the Defendants’ version of how the contract came about, and was concluded, has been established.

13.  Burrell J. in Pacific Crown Engineering supra considered that;

"	… the court should look at the evidence in support of the contention first.  If, cumulatively, the evidence is cogent and arguable, and not dubious or fanciful, then the test has been satisfied."  [see 663 I to 664 A]

Then having regard to the contrary argument and how one treats it in the enquiry he had this to say;

"

By making no specific reference [to the submissions] in opposition …, it should not be thought that I consider them to be devoid of merit.  However, taken cumulatively they do not render [the Defendants’ argument in support of a stay] fanciful or dubious to the extent that they relegate them below the threshold required.  They will receive fuller consideration by the arbitrator in the event that this preliminary point is re-argued in arbitration." [at 665 B]

Whilst Burrell J., of course, made these remarks in relation to the evidence before him I propose to adopt his approach to the material before me in deciding whether Mr Shaw has crossed the threshold. 

The result

14.  In my judgment he has.  The analysis appears to be that having bid too high, the price was reduced dollar and on the understanding that the September bid was to be $5.5 million, the Plaintiffs were invited to re-submit a quote which was to be on the standard terms which included the arbitration clause at page 91.  This they did and the bid was accepted on the basis that the contract was to be with the limited company.  Mr Cheung’s points do not in my judgment sufficiently detract from this factual situation to reduce Mr Shaw argument to below that of a prima facie or plainly arguable case (for these purposes meaning the same thing).  Mr Cheung will need to run these points before the arbitrator if he so wishes but, for my part, Mr Shaw has done more than sufficient to entitle him to his stay.  There will be an order in terms of the summons including the order for costs about which I have already heard provisional argument.