XCHRX MARSHALL-KARSON CONSTRUCTION AND ENGINEERS LTD. v. KOWLOON CANTON RAILWAY CORPORATION

Con. List No. 38 of 1994

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

CONSTRUCTION LIST

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R E A S O N S  F O R  D E C I S I O N

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1. These are my reasons for ordering a stay of proceedings in this case.

2. The application for a stay was made by the Defendant in the proceedings, Kowloon Canton Railway Corporation to which I shall refer as the Applicant. I shall refer to the Plaintiff in the proceedings, namely Marshall-Karson Construction and Engineers Limited as the Respondent.

3. In 1993, the Applicant sought tenders for an Automatic Train Protection (ATP) project at Pak Shek Kok in the New Territories. The Respondent was in due course awarded Contract 5 in connection with Phase B of the project, subject to provision of a banker's undertaking to secure $5m of dedicated funds for the Respondent's ability to perform its obligations under the contract. That undertaking was duly given and on the 3rd of December 1993 the parties entered into the contract for the carrying out of the works to the value of $10,081,100.

4. The Respondent began the work but in August 1994 the Applicant's Representative certified that, in his opinion, the Plaintiff was failing to proceed with the works with due diligence and was therefore in breach of its obligations under the contract.

5. Clause 65(1) of the contract is headed 'Default of Contractor' and the material part for the purposes of these proceedings reads as follows :

"... if the Employer's Representative certifies in writing to the Employer with a copy to the Contractor that in his opinion the Contractor

(e) ....

(f) ....

(g) ....

(h) ....

(j) despite previous warnings by the Employer's Representative in writing is failing to proceed with the Works with due diligence or is otherwise persistently or fundamentally in breach of his obligations under the Contract

then the Employer may after giving 7 days notice in writing to the Contractor specifying the default enter upon the Works and any other parts of the Site provided by the Employer and expel the Contractor therefrom without thereby avoiding the Contract or releasing the Contractor from any of his obligations or liabilities under the Contract."

6. Clause 65(2) provides that where the Employer has entered upon the Works and any other parts of the Site as set out in sub-clause (1) he may complete the Works himself or employ any other contractor to complete them.

7. Clause 65(5) deals with payment after termination and it reads :

"65(5) Payment after termination

If the Employer enters and expels the Contractor under this Clause he shall not be liable to pay to the Contractor any money on account of the Contract until the end of the Defects Correction Period and thereafter until the costs of completion damages for delay in completion (if any) and all other expenses incurred by the Employer have been ascertained and the amount thereof certified by the Employer's Representative.

The Contractor shall then be entitled to receive only such sum or sums (if any) as the Employer's Representative may certify would have been due to him upon due completion by him after deducting the said amount. But if such amount shall exceed the sum which would have been payable to the Contractor on due completion by him then the Contractor shall upon demand pay to the Employer the amount of such excess and it shall be deemed a debt by the Contractor to the Employer and shall be recoverable accordingly."

8. Clause 66 deals with the settlement of disputes. It is in the following terms :

"66(1) Settlement of disputes

Except as otherwise provided in these Conditions if a dispute of any kind whatsoever arises between the Employer and the Contractor in connection with or arising out of the Contract or the carrying out of the Works including any dispute as to any decision, opinion, instruction, direction, certificate or valuation of the Employer's Representative (whether during the progress of the Works or after their completion and whether before or after the determination abandonment or breach of the Contract) it shall be settled in accordance with the following provisions.

66(2) Notice of Dispute

For the purpose of sub-clauses (2) to (5) inclusive of this Clause a dispute shall be deemed to arise when one party serves on the other a notice in writing (hereinafter called the Notice of Dispute) stating the nature of the dispute. ...."

9. Following the issue of the certificate, re-entry took place on the 29th of August 1994 and the Respondent was expelled from the site.

10. There is an issue between the parties as to whether the re-entry and expulsion amounted to repudiation of the Contract by the Applicant and whether clause 65 continues to apply. It will be seen that the clause includes a provision that such re-entry and expulsion takes place 'without thereby avoiding the Main Contract or releasing the Plaintiff from any of its obligations or liabilities under the Main Contract'.

11. By a letter dated the 5th of October 1994 the Respondent wrote to the Plaintiff giving written Notice of Dispute, for which provision is made in Clause 66(2) of the Contract. Clause 66(3) provides for any dispute so notified to be referred to conciliation.

12. There is provision for arbitration where conciliation does not work. Clause 66(5) reads :

"Arbitration (5) Where either

(a) the Employer or the Contractor is dissatisfied with any recommendation of a conciliator appointed under sub-clause (3) of this Clause or

(b) the conciliator fails to give such recommendation for a period of three calendar months after the service of the Notice of Disputeb then either the Employer or the Contractor may within three calendar months after receiving notice of the conciliator's recommendation or within three calendar months after the expiry of the period of three months referred to in paragraph (b) of this sub-clause (as the case may be) refer the dispute to the arbitration of a person to be agreed upon by the parties by serving on the other party a written Notice to Refer."

13. On the 1st of November 1994 the Respondent's solicitors wrote to solicitors acting for the Applicant, referring to the Notice of Dispute of the 5th of October. Part of the letter reads :

"Since it is unlikely that either party would be satisfied with the decision of a mediator in view of their entrenched positions, we suggest that it would be sensible for both parties to consent to by-passing mediation and referring the disputes straight to arbitration. We would be grateful if you would obtain your clients' instructions on the same."

14. On the very next day the 2nd of November 1994, having evinced by the letter of the previous day an intention to invoke the dispute resolution procedure provided for in the contract, the Respondent's solicitors issued the writ in these proceedings. The Respondent alleges in the Statement of Claim that by issuing the Notice of Termination when it was not entitled to do so, the Applicant repudiated the contract and, that repudiation having been accepted by the Respondent, the banker's undertaking has become frustrated. It was also pleaded that it was an implied term of the undertaking that the irrevocable instructions given by the Respondent to the bank, that the bank was to operate the credit facility solely in accordance with the terms of the undertaking, had been revoked upon the determination of the Plaintiff's employment under the Main Contract.

15. The reliefs sought in the writ are a declaration that the undertaking is frustrated and that the irrevocable instructions have been revoked.

16. The bank was not made a defendant in the proceedings.

17. On the 24th of November 1994 the Applicant's solicitors wrote to the solicitors for the Respondent saying that they had instructions that their client insisted that the contractual procedures for dispute resolution be followed. They then took out on the 26th November 1994 the Summons for a stay of proceedings in favour of the contractual dispute resolution procedure. On the same day, they filed the Applicant's Defence.

18. In the summons of the 26th of November, the Applicant relies upon the inherent jurisdiction of the Court to grant a stay because, having filed a Defence, it says that it cannot invoke the provisions of Section 6 of the Arbitration Ordinance, under which any party to the proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court for a stay.

19. In accordance with the provisions of the contract, which I do not need for present purposes to recite in detail, the solicitors for the Respondent wrote to the Secretary General of the Hong Kong International Arbitration Centre on the 13th of December 1994, formally requesting that he nominate a mediator to deal with the matters raised in the Respondent's request for mediation dated the 15th of November 1994.

20. To complete the history of the matter, I note that on the 23rd of December 1994 the Applicant's solicitors wrote to the Respondent's solicitors, with a copy to the Hong Kong International Arbitration Centre, nominating Neil Kaplan, Q.C. as a suitable mediator.

21. The Applicant's case is straightforward. The parties in their contract agreed upon a procedure for the settlement of disputes 'of any kind ... whatsoever... in connection with or arising out of the Contract or the carrying out of the works ....'. Notice of Dispute has been served by the Respondent and in that notice 7 matters are listed. The 4th is 'whether KCRC was entitled to terminate the Contract with Marshall-Karson by notice given on 22nd August 1994'.

22. Though the writ purports to limit the issues to questions concerning the status of the banker's undertaking, the Court cannot decide those questions without first deciding whether the contract between the parties has been repudiated or determined. That question falls squarely within the terms of the contractual dispute resolution procedure and, according to the Applicant, the Respondent should be held to its bargain and should not be permitted to litigate issues which are covered by the contractual dispute resolution procedure.

23. The Respondent's position is that there was no express provision in the standard form contract between the parties requiring a banker's undertaking and that the undertaking in question was executed several months after the contract works had commenced. The effect of the undertaking was that credit facilities granted to the Respondent by the bank would be operated only for the purposes of the Main Contract. The Respondent secured these credit facilities by a guarantee and a letter of pledge over a deposit, executed by directors of the Plaintiff. Since the Plaintiff's removal from the site the Defendant has refused to give any release to the bank with the result that the credit facilities are frozen. According to the Respondent that situation hampers its business and yet produces no discernible benefit to the Defendant.

24. As to that last proposition, it seems obvious that the Applicant desires the undertaking to remain in force because, on its view of the true construction of the contract between the parties, it is entitled to draw down moneys from the bank in accordance with the bank's undertaking, to meet the costs incurred by the Applicant in completing the works which the Respondent has not completed. The Applicant maintains that it is clear on the face of the contract that the Respondent's contractual obligations continue after re-entry upon the site by the Applicant.

25. The Respondent further submits that the undertaking was given by the bank and it does not contain an Arbitration Clause. It contends that the undertaking is self-contained in its terms and no award rendered by an arbitrator could be binding on the bank.

26. According to the Respondent the request for mediation canvasses issues different from those raised in the statement of claim in these proceedings.

27. It is submitted on behalf of the Respondent that the same discretionary considerations as are applied to a stay application under the Arbitration Ordinance should apply to an application for a stay under the inherent jurisdiction of the Court. On that basis, the Respondent says that the Applicant is precluded from making the application. In the alternative, it is submitted that the discretionary considerations all point against the grant of a stay. Mention is made of the following matters :

(i) The ambit of the Arbitration Clause in the Main Contract

(ii) The effect of any award on the bank

(iii) The separateness of the arbitration agreement

(iv) The issue is purely a question of law

(v) The Defendant's conduct in filing a Defence and also applying for security for costs.

I should mention that an application for security was taken out at the same time as the application for a stay and that application for security is adjourned sine die as a result of my decision to order a stay of the proceedings.

28. A final point is that the Respondent submits that it is a requirement that the Defendant show on affidavit that it is ready and willing to proceed to arbitration. In fact, the Applicant's position is that it is ready and willing to proceed with the contractual dispute resolution procedure which begins with mediation and, if necessary, proceeds to arbitration. The Applicant has nominated a mediator and counsel for the Applicant has undertaken to file an affidavit to the effect that the Applicant is ready and willing to mediate or arbitrate in accordance with the contractually agreed procedure. That undertaking meets the last objection.

29. When one looks at the reality of the situation, it is clear that there is a dispute between the parties as to the circumstances in which the Applicant re-entered upon the site and as to whether the Applicant was entitled, under the terms of the contract and in the circumstances, to re-enter. There is a dispute as to whether the Applicant's conduct was such as to evince an intention on its part no longer to be bound by the terms of the contract. There is a dispute as to the legal effect of the re-entry in relation to the obligations of the parties under the contract. The Respondent's Notice of Dispute is concerned with those matters. The parties have agreed upon a contractual procedure for the resolution of disputes of that kind and they have embarked upon that procedure.

30. The Applicant says that it is oppressive to bring the present proceedings for they necessarily involve the litigation of a dispute between the parties which is covered by the contractual dispute resolution procedure.

31. The Respondent is trying in effect to obtain from this Court a declaration as to the Applicant's right to enforce the undertaking against the bank and as to the bank's right to rely upon the irrevocable instructions given to it by the Respondent. But the bank is not a party to the proceedings. The bank is seeking no declaration and, so far as I am aware, there is no dispute at present between the Applicant and the bank or between the bank and the Respondent. When I enquired why the bank was not a party to the proceedings, I was informed by counsel for the Respondent that the reason is that the bank is quite content to accept whatever decision the Court may make. That is not surprising, for it has security in the form of a deposit pledged by the directors of the bank as well as a guarantee. The proceedings are misconceived.

32. I am satisfied that if these proceedings are permitted to continue, two tribunals may be called upon to decide substantially the same issues as to the contractual liabilities of the two parties. A multiplicity of proceedings is to be avoided.

33. If the Court is the first tribunal to decide the issues relating to the contract, then the Applicant will be deprived of its contractual right to have them dealt with on their merits by an arbitrator.

34. It is apparent from the correspondence that the Respondent desires to evade the dispute resolution procedure for which it contracted. It thinks that conciliation will be pointless and prefers litigation. The fundamental issues are the same but it is trying to dress up the fundamental issue in the proceedings as something different.

35. The dispute concerning the contract should be allowed to proceed to mediation and, if necessary, to arbitration. In due course, if the parties cannot arrive at a settlement, there will be an award. The parties will then know their rights and obligations inter se, which is the fundamental matter in question.

36. In Channel Tunnel Group Ltd. & Another v. Balfour Beatty Construction Ltd. & Others [1993] AC 334, there was contractual provision for a two-stage system for the resolution of disputes. First they would to be referred to a panel of experts and then, if necessary, to arbitration. Lord Mustill said, at p. 353:

"It is plain .... that all concerned must have recognised the potential weaknesses of the two-stage procedure and concluded that despite them there was a balance of practical advantage over the alternative of proceedings before the national courts of England and France. Having made this choice I believe that it is in accordance, not only with the presumption exemplified in the English cases cited above that those who make agreements for the resolution of disputes must show good reasons for departing from them, but also with the interests of the orderly regulation of international commerce, that having promised to take their complaints to the experts and if necessary to the arbitrators, that is where the appellants should go. The fact that the appellants now find their chosen method too slow to suit their purpose, is to my way of thinking quite beside the point."

In the same case, Lord Browne-Wilkinson said, at page 343:

"I consider that the action can and should be stayed pursuant to the inherent jurisdiction of the court to inhibit proceedings brought in breach of an agreed method of resolving disputes."

One of the cases referred to by Lord Mustill is Racecourse Betting Control Board v. Secretary for Air [1944] Ch.114, where MacKinnon L.J. said 'it is , I think, rather unfortunate that the power and duty of the Court to stay the action was said to be under Section 4 of the Arbitration Act 1889. In truth, that power and duty arose under a wider general principle, namely, that the court makes people abide by their contracts, and, therefore, will restrain a plaintiff from bringing an action which he is doing in breach of his agreement with the defendant that any dispute between them shall be otherwise determined.'

37. That principle requires that these proceedings be stayed, and I have made an order accordingly.

38. There has been considerable argument as to whether, if the dispute over the contract eventually goes to arbitration, the arbitrator will have jurisdiction to consider the question whether the bank's undertaking has been frustrated or whether the irrevocable instructions given by the Respondent to the bank have been revoked. The Applicant says that the undertaking was accepted in lieu of an undertaking provided for in the contract and that the contractual dispute resolution procedure is wide enough in its terms to catch a dispute over the validity of the undertaking. If either party does refer to an arbitrator any question relating to the undertaking it will be for the arbitrator to decide in the first instance whether he has jurisdiction.

39. For my part, I consider that if either party wishes to seek a declaration as to its rights and obligations vis à vis the bank, it must bring proceedings against the bank once the rights and obligations of the parties inter se have been decided by an arbitrator.

40. It is not easy to imagine, however, circumstances in which such a course might be necessary. If the arbitrator holds that money is due to the Applicant under the contract, it seems unlikely that the Respondent will be able to prevent the Applicant from drawing against the banker's undertaking. If the arbitrator's decision is that no money is due to the Applicant, he may well order the Applicant to release the bank from its undertaking, whereupon the Respondent will again have access to its money.

41. It has been common ground between the parties for the purposes of the application that the Applicant cannot rely upon Section 6 of the Arbitration Ordinance and I have not been called upon to decide that question.

42. There will be an order nisi that the Applicant's costs of the application be taxed if not agreed and paid by the Respondent.