MICE ENGINEERING LTD v. JOHNSON CONTROLS HONG KONG LTD

HCA 1748/2021

[2022] HKCFI 2768

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1748 OF 2021

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BETWEEN

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DECISION

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1.  This is the Defendant’s Summons filed on 11 January 2022 for this action to be dismissed or stayed on the ground that the disputes herein should be submitted to arbitration (“Summons”).

Background

2.  The Plaintiff was the sub-contractor of the Defendant in respect of part of the work which the latter had contracted with the MTR Corporation Ltd, namely, the Building Services Control System in Express Rail Link of West Kowloon Terminus referred to as Contract 816B.

3.  The Plaintiff and Defendant signed a Letter of Intent dated 20 April 2017 which formed the basis of the Subcontract between them. The fixed sum for the works covered under the Subcontract was HK$17,320,000 (“Original Works”).

4.  Apart from the Original Works, it was common ground that the Defendant had engaged the Plaintiff to carry out additional works for the total sum of HK$14,000,000 (“Additional Works”). However, the parties differed as to whether the Additional Works were carried out under the Subcontract.

5.  In this action, the Plaintiff claims, firstly, the payment for some of the Additional Works, namely, those carried out under Purchase Order 4504793964 dated 28 September 2020 (“PO”) in the total sum of HK$8,056,325. The Plaintiff said that it had completed all the works under the PO but there remains an outstanding balance of HK$5,370,885 which the Defendant had refused to settle (“Additional Works Claim”).

6.  The Additional Works Claim was covered under 2 Invoices issued to the Defendant, ie, (i) HK$2,684,440 under Invoice IN 1903/20 (“Sum 1”) and (ii) HK$2,685,445 under Invoice IN 1930/21 (“Sum 2”).

7.  Secondly, in respect the Original Works, there is also an unsettled outstanding balance of HK$760,046.11 in total (“Sum 3”) for which the Plaintiff had issued 3 invoices to the Defendant all dated 18 August 2021 for (i) HK$48,846.05 (under Invoice IN 1931/21); (ii) HK$477,463.96 (under Invoice IN 1932/21); and (iii) HK$233,736.10 (under Invoice IN 1933/21). It was common ground that these are actually the Retention Money due under the Subcontract.

8.  The total payment claimed by the Plaintiff in this action stands at HK$6,130,931.11.

9.  By a letter dated 16 September 2020 (“Letter”) and signed by the parties, they had agreed on the Final Account and Outstanding Works. According to the Letter, Sum 1 would be paid upon completion of all outstanding works and defects rectification. Sum 2 would be settled upon the issue of the Final Certificate. Sum 3 would be released in accordance with Clause 87 of the Conditions of Contract.

10.  The Final Certificate had been issued to the Defendant by MTR in 2021. The Plaintiff said that on the basis of such Certificate the Defendant must have completed all the works in the Main Contract to MTR’s satisfaction, and the payment obligation of the Defendant to the Plaintiff for all 3 Sums had no doubt arisen.

11.  The Defendant disputes both the liability and quantum of the Plaintiff’s claim, and maintains that these disputes must be resolved by the arbitral tribunal pursuant to the Arbitration Agreement embodied in the Subcontract. In respect of the dispute on liability, the Defendant’s position is that the conditions precedent for the Plaintiff’s claim had not been met, and it is not entitled to payment under the Letter.

Arbitration Clause

12.  Clause 6.7 of the Terms and Conditions attached to a “SUBCONTRACT” annexed to the Letter of Intent stated as follows:

“In the event of any dispute whether arising during the execution or after the completion of the Subcontract works, in regard to any matter or thing of whatsoever nature arising out of this Subcontract, such dispute or difference shall be reference to the arbitrated (sic) as an Internation (sic) Arbitration for the purposes of the Hong Kong Arbitration Ordinance (CAP 341) or any statutory modification or re-enactment thereof and shall be conducted in accordance with the UNCITRAL Arbitration Rules for the time being in force.

Any arbitration or dispute resolution method shall only be commenced after the Practical Completion of the Project. Notwithstanding any dispute arising in the course of project works, the Subcontractor is liable to complete the project without delay. The arbitration of such person as the parties hereto may agree to appoint as Arbitrator or failing such agreement as may be appointed on the request of either party by the President or Vice-President for the time being of The Hong Kong Institute of Architects co-jointly with the President or Senior Vice-President for the time being of the Hong Kong Institute of Surveyors and in accordance with and subject to the Arbitration Ordinance or any statutory modification thereof for the time being in force, and in either case the Award of such Arbitrator shall be final and binding on the parties.”

Issues

13.  There are 3 issues in this application, namely :

(1) Whether the Arbitration Clause was incorporated into the Subcontract;

(2) Even if the Arbitration Clause was so incorporated, whether:

(a) the dispute concerning Sums 1 and 2 are within the ambit of the Arbitration Clause;

(b) the Defendant had made an unequivocal admission as to its liability to pay Sum 1, and there was thus no dispute to be submitted to arbitration regarding that part of the Plaintiff’s claim.

Applicable principles

14.  The applicable principles are trite and there was no dispute over them. Section 20(1) of the Arbitration Ordinance, Cap 609 gave effect to Article 8 of the UNCITRAL Model Law, which provided as follows :

“(1) 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.

(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”.

15.  “The court’s approach these days in dealing with applications for stay emphasise the twin icons of party autonomy and minimal court interference as far as arbitration agreements are concerned. In short, the parties are left to the tribunal that they have by contract chosen to determine the disputes or differences between them”: Dah Chong Hong (Engineering) Ltd v Boldwin Construction Co Ltd, unrep, HCA 1291/2002 (11 October 2002), [20(6)], per Ma J (as he then was).

16.  Section 20 provides for a mandatory stay in favour of arbitration in that the court “shall” refer the parties to arbitration. “It is of course to be borne in mind that the Court has no discretion under s 20(1), if the action brought before the Court is one which is the subject of an arbitration agreement – unless the agreement is null and void, inoperative or incapable of being performed”: Lim Choon Hock v Hung Ka Hai Clement, unrep, HCA 1282/2016 (24 August 2016), [9], per Mimmie Chan J.

17.  On a stay application under s 20, the Court would consider the following questions: “(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?”: Kinli Civil Engineering Ltd v Geotech Engineering Ltd [2021] HKCFI 2503, [6], per Mimmie Chan J, citing Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, per Ma J (as he then was).

18.  “[T]he onus is on the applicant for stay to demonstrate only that there is a prima facie case that the parties were 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”: Kinli Civil Engineering, at [7].

Incorporation of the Arbitration Clause

19.  With respect to the industry and ingenuity of the submissions of Ms Liu, who appeared for the Plaintiff, I do not believe that this issue is open to serious argument.

20.  It was common ground that the Subcontract was contained in the Letter of Intent. The captioned subject was: “Contract 816B – Building Services Control System for West Kowloon Terminus Software Modification Works and Testing and Commissioning”.

21.  The Letter of Intent expressly provided that: “[t]his letter together with the following tender documents (marked in Appendices) shall constitute the subcontract documents between [the parties]”. There were altogether 13 Appendices.

22.  Appendix 1 (consisted of 41 pages) was described as “Tender documents by email, including all documents enclosed and referred therein” (underline added). One of such enclosed documents was marked “(Appendix 3)” and it was a “SUBCONTRACT” between the Defendant as Contract and the Plaintiff as Subcontractor. The description of work was stated to be “Software Modification Works (E1033) and Testing and Commissioning Works (Whole System) for Building Services Control System”.

23.  The SUBCONTRACT was governed “by the provisions set forth below and the [Defendant’s] Terms and Conditions attached hereto”. In the attached Terms and Conditions, the Arbitration Clause could be found.

24.  The express incorporation of the SUBCONTRACT and its Terms and Conditions was abundantly clear. Arbitration was a common means for dispute resolution in the construction industry. I am unable to agree with the Plaintiff.

Ambit of the Arbitration Clause

25.  Also, I am unable to agree with the Plaintiff’s argument that the Arbitration Clause could only apply to the Original Works but not the Additional Works, in particular Sums 1 and 2.

26.  Firstly, I cannot see the basis for construing the Subcontract such that the Arbitration Clause would not apply to Additional Works. Clause 4.1 of the Terms and Conditions allowed the Defendant to “modify, change, omit or add to the Work to be performed pursuant to this Subcontract” as follows :

“Contractor may at any time, by written orders in the form of Attachment 7, and without notice to the sureties, modify, change, omit or add to the Work to be performed pursuant to this Subcontract (a “Change Order”). If any such Change Order affects the cost of, or the time required for, performance of this Subcontract, an equitable adjustment in the Fixed Subcontract Price or the Completion Date shall be made. Where necessary to prevent undue delay, Contractor may issue a Change Order before agreement as to an equitable adjustment has been reached. In such event, Subcontractor shall immediately proceed in accordance therewith notwithstanding any delay in reaching agreement. Neither the issuance, nor performance of such a Change Order shall prejudice the rights of either party as to the adjustments, if any, either may be entitled to on account of such a Change Order. …

Any Change Order issued pursuant to this paragraph shall not in any way modify the terms and conditions of this Subcontract.”

27.  Under Clause 4.1, the Plaintiff was obliged to carry out additional work ordered by the Defendant, subject to price and completion date adjustments where appropriate. Such terms were commonplace in the construction industry. There is no reason to construe the Subcontract such that the Arbitration Clause would not apply to the Additional Works. Such Works were, like the Original Works, part of the work required to be performed by the Plaintiff under the Subcontract.

28.  Secondly, I agree with Mr Kok, who appeared for the Defendant, that the construction advocated by the Plaintiff is contrary to the Fiona Trust presumption: “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 their 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 arbitrator’s jurisdiction” (see C v D [2022] HKCA 729, [62], per Chow JA).

29.  Thirdly, the terms of the Arbitration Clause were very wide and clearly designed to capture any dispute between the parties arising from the Subcontract. In Leung Kwok Hung v Johnson Controls Hong Kong Ltd [2018] HKCFI 1500, Mimi Chan J had the opportunity to consider the scope of an arbitration clause which was identical to the one before this court. It was held at [3] :

“The Subcontract contains an arbitration clause, whereby “any dispute whether arising during the execution or after the completion of the Subcontract works, in regard to any matter or thing of whatsoever nature arising out of” the Subcontract is to be arbitrated. This is a widely drafted clause. It covers disputes which arise during the execution of the Subcontract works, or which arise after the completion of the Subcontract works, and such disputes are covered by the clause if they are “in regard to any matter or thing of whatsoever nature arising out of” the Subcontract, which is very wide indeed in scope.”

30.  Fourthly, in respect of Ms Liu’s submission that the Additional Works under Sums 1 and 2 were governed by the PO instead of the Subcontract, the evidence before the court was that Purchase Orders were issued for all the Additional Works carried out by the Plaintiff for the Defendant. There is no suggestion that the PO was governed by a different set of contractual terms. This feature would not assist the Plaintiff here.

31.  There is little doubt in my mind that the Arbitration Clause would cover any disputes over Sums 1 and 2.

Admission

32.  It was held in Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV [1996] 1 HKC 363, at 373H, per Bokhary JA (as he then was) that “the court is not concerned with investigating whether the defendant has an arguable basis for disputing the claim. If a claim is made against him in a matter which is the subject of an arbitration agreement and he does not admit the claim, then there is a dispute within the meaning of [art 8(1) of the Model Law].”

33.  The Plaintiff relied upon an email from Mr WK Kwan, the Project Manager of the Defendant, to the Plaintiff dated 10 August 2021 (“Email”) as an admission that Sum 1 was due and payable to it. The Email contained one sentence: “[w]e will release payment in amount HK$2,685,440.00 (2^nd milestone) to you on 9 Sep 2021”.

34.  The Defendant’s evidence was that at the time of the Email, Mr Kwan did not have in mind the condition precedent to the payment of Sum 1. It can be seen from the Letter that the payment of Sum 1 was “upon the completion of all outstanding works and defects rectification”. The Defendant maintained that such condition had not been fulfilled and the payment of Sum 1 was therefore not made.

35.  In light of the evidence, I am not inclined to accept the Plaintiff’s case that the Sum 1 was admitted to be due and payable. According to Dah Chong Hong, supra, [20(7)], a dispute exists unless there has been “a clear and unequivocal admission of liability and quantum”. I am unable to see such an admission based on the evidence before the court.

Disposition

36.  For these reasons, I grant the stay sought in para 1 of the Summons. I order that the costs of and occasioned by this application be paid by the Plaintiff on an indemnity basis (see G v T [2022] HKCFI 2214, [18] and Kinli Civil Engineering, supra, [34]), to be taxed if not agreed.

37.  Last but not least, I am grateful to counsel for their assistance.