NIN HING ELECTRONIC ENGINEERING LTD v. AOKI CORPORATION

HEADNOTE

                Non-domestic arbitration - the factors which have to be considered in deciding whether it can be said that a dispute has arisen or whether the matter can be disposed of under an application for summary judgment under Order 14.

                The extent to which it is permissable to set off payments against an interim certificate issued by an Architect.

                What constitutes an Architect's certificate.

Held.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is an appeal from a Master's Decision. He heard two summonses. The 1st was the Plaintiff's application for summary judgment under Order 14 and the 2nd was the Defendant's application for a stay of the proceedings for arbitration. The master entered judgment for the Plaintiff in the amount claimed and dismissed the Defendant's application.

2. The litigation concerns a building dispute in respect of the development of property at Manderley Gardens Shouson Hill.

3. The main contract was dated 7th May 1985 and is between a company called Queboton Ltd. (The Employer) and the Defendant (Aoki). There is also a sub-contract between Aoki and the Plaintiff (Nin Hing).

4. It is Nin Hing's case that Aoki received $466,320 from the Employer in relation to sub-contracting work undertaken by them. Two Architects' certificates have been issued in respect of this work and Nin Hing claim that Aoki have failed to pass on these moneys to them in accordance with the terms of the sub-contract. Standard forms of contracts have been adopted and where appropriate the sub-contract adopts the terms of the main contract.

5. It is common ground that if there is to be an arbitration it would be a non-domestic one. Accordingly the scope of the court's discretion to decline to order a stay is narrowly circumscribed. It may be of assistance to consider the approach to be adopted in determining the extent to which a Plaintiff has to satisfy the court that there is not in fact any dispute between the parties. Kerr L.J. considered the test at page 1401 of Sethia Liners Ltd. v. State Trading Corporation of India⁽¹⁾.

"I need not refer to the provisions of R.S.C., Order 14, which are well known. But it is important to bear in mind that section 1 of the Arbitration Act 1975 obliges the court to stay an action and to refer the matter to arbitration unless the court is satisfied 'that there is not in fact any dispute between the parties with regard to the matter agreed to be referred'.

The submissions of both parties have proceeded on the basis that the summonses under Order 14 and section 1 are the reverse sides of the same coin, and we have been referred to Mustill & Boyd, Commercial Arbitration (1982) pp. 90-92. Without expressing any concluded view on everything which is stated there, it seems to me that the position can be summarised as follows. If a point of law is raised on behalf of the defendants, which the court feels able to consider without reference to contested facts simply on the submissions of the parties, then it is now settled that in applications for summary judgment under Order 14 the court will do so in order to see whether there is any substance in the proposed defence. If it concludes that, although arguable, the point is bad, then it will give judgment for the plaintiffs. This course will also be adopted where there is a counter-application for a stay of the action. If the contract between the parties contains an arbitration clause to which section 1 of the Act of 1975 applies, then the court is not thereby precluded from considering whether there is any arguable defence to the plaintiffs' claim. If the court concludes that the plaintiffs are clearly right in law then it will still give judgment for the plaintiffs. In the same breath, as it were, it will then have decided that in reality there was not in fact any dispute between the parties. If the court is satisfied that the plaintiffs are clearly right in law, and that the defendants have no arguable defence, then it will not avail the defendants to have raised a point of law which the court can see is in fact bad. In those circumstances the defendants cannot be heard to say that there was a dispute to be referred to arbitration. But if the court concludes that the plaintiffs are not clearly entitled to judgment because the case raises problems which should be argued and considered fully, then it will give leave to defend, and it is therefore then bound to refer the matter to arbitration under section 1 of the Act of 1975".

6. Section 6A of Chap. 341 is in similar terms to section 1 of the 1975 Act. I accept that this is a correct statement of the law.

7. I accept that if all that is involved is the determination of a point of law and there are no problems with the facts it is in order for a judge or master to resolve the question of law on Order 14 proceedings. That however seems to me to be far from the position in the present case.

8. As I am in effect hearing these summonses de novo and the burden is placed upon Nin Hing to establish that there should be no stay I think that the most satisfactory approach is for me to consider the submissions which were advanced by Mr. Pennicott on their behalf. I will deal with these under separate headings.

1.             The Employer had no right to make any deduction of moneys payable to Aoki.

9. For this submission Mr. Pennicott placed reliance upon the provisions contained in clause 22 of the main contract. This reads:

"If the Main Contractor fails to complete the Works by the Date for completion stated in the appendix to these Conditions or within any extended time fixed under clause 23 or clause 33 (1)(c) of these Conditions and the Architect certifies in writing that in his opinion the same ought reasonably so to have been completed, then the Main Contractor shall pay or allow to the Employer a sum calculated at the rate stated in the said appendix as Liquidated and Ascertained Damages for the period during which the Works shall so remain or have remained incomplete, and the Employer may deduct such sum from any monies due or to become due to the Main Contractor under this Contract".

10. The point which Mr. Pennicott makes is that there is no evidence of any architect's certificate being issued as is required under the clause. Indeed it is common ground that no such certificate exists.

11. Mr. Pennicott went on to argue that the deductions which had been made were unauthorised. Aoki had a contractual right to be paid in full on both of the relevant certificates which were C20 and C21A. The fact that Aoki had not chosen to assert their rights could not constitute grounds or good authority to justify their making deductions in respect of payments to Nin Hing.

12. I regret that I do not think that this submission has any prospect of success. The most obvious objection is that no direct contractual nexus exists between Nin Hing and the Employer. Put rather more elegantly there is no privity of contract. I accept that Clause 12 of the sub-contract provides:

"12. The Main Contractor will so far as he lawfully can at the request and cost of the Sub-Contractor obtain for him any rights or benefits of the Main Contract so far as the same are applicable to the Sub-Contract works but not further or otherwise".

13. However, I understand that Nin Hing have not made any request to Aoki to assist them in this connection.

14. Also perhaps even more important Nin Hing have not pleaded Clause 22 of the Main Contract in their Statement of Claim. Their claim is framed on Aoki's failure to account to them with moneys due and owing to them in accordance with the Architect's certificates referred to. That is the claim they have chosen to make and that is the claim I will consider in the context of this appeal.

15. Mr. Scott who represented Aoki argued that it would be wrong not to have regard to the realities of the situation.

16. Negotiations were still proceeding between the Employer and Aoki under the Main Contract. If Aoki was to commence proceedings in respect of allegedly unauthorised deductions of amounts due they would almost inevitably be met with an application for a stay under section 6A.

17. It was also unrealistic to contemplate separate litigation for every individual dispute which arose under the main contract and the various sub-contracts. It would be far more satisfactory for an arbitrator to be appointed in due course to consider and arbitrate upon all these matters in consolidated arbitration proceedings when it was appropriate that the issues should be ventilated. I reject Mr. Pennicott's contention under this head. Perhaps it is more relevant to state that Nin Hing totally fail to meet the criteria laid down by Kerr L.J. in Sethia which I have referred to.

2.             That payments of moneys in respect of certificates C20 and C21A had been received by Aoki and that accordingly they had no right to make any deductions from the amounts payable to Nin Hing under the said certificates.

18. The most formidable difficulty which Mr. Pennicott encounters under this head is that Mr. LEE Chun-tin on behalf of Aoki states on affirmation that no such payments have been received by Aoki. He directly contradicts the unsupported assertion by Mr. Mak of Nin Hing to this effect which he made in the supporting affidavit to the Order 14 summons.

19. It is of course no part of either my function at this stage or the Master's to attempt to determine the veracity or otherwise of affidavits which have been filed or where there are conflicts of evidence where the truth lies. Mr. Pennicott endeavoured to overcome this difficulty by referring to the 2 certificates and examining the surrounding correspondence which was exhibited. So far as certificate C20 was concerned it was evident from the Employer's letter of 19th January 1987 that the total amount under the certificate was $1,282,500 and that $248,000 odd had been deducted. It could be seen from this that Aoki had received a sum in excess of $1M. Mr. Pennicott argued that in the absence of a certificate under Clause 8(a) of the sub-contract blaming Nin Hing for delay it must be assumed that their money was part of the balance I have above referred to. In this situation no justifi-cation had been shown for a deduction to be attributable to Nin Hing.

20. A similar argument was adopted in relation to payments under certificate C21A. In this case the total moneys received by Aoki were $1,038,032 from which a deduction of $341,000 odd had been made leaving a balance of approximately $695,000. Mr. Pennicott did not produce any authority for the proposition that a burden was placed upon Aoki to prove the manner in which all moneys received by them had been applied.

21. A more basic difficulty arises from the part of the submission referring to the absence of a Clause 8(a) certificate. I will be dealing with this under the next head of the submission made by Mr. Pennicott.

22. Suffice it to say that for the reasons I will be giving I am satisfied that a valid certificate has been issued under Clause 8(a) of the sub-contract. In that certificate the blame for at least part of the delay complained of is fairly and squarely placed upon Nin Hing. I reject the contention that Nin Hing have established that Aoki have in fact received the relevant payments under C20 and C21A.

3.             Has a valid certificate been issued under Clause 8(a) of the sub-contract.

23. This clause reads as follows:

"8(a)     The Sub-Contractor shall commence the Sub- contract works within an agreed or, if none is agreed, then within a reasonable time after the receipt by him of an order in writing under this Sub-Contract from the Main Contractor to that effect and shall proceed with the same with due expedition.

The Sub-Contractor shall complete the Sub-Contract Works and each section thereof within the period specified in Part II of the Appendix to the Sub- Contract or within such extended period or periods as may be granted pursuant to the provisions hereinafter contained.

If the Sub-Contractor fails to complete the Sub-Contract Works or any section thereof within the period specified or any extended period or periods as hereinafter provided, he shall pay or allow to the Main Contractor a sum equivalent to any loss or damage suffered or incurred by the Main Contractor and caused by the failure of the Sub-Contractor as aforesaid. The Main Contractor shall at the earliest opportunity give reasonable notice to the Sub-Contractor that loss or damage as aforesaid is being or has been suffered or incurred.

Provided that the Main Contractor shall not be entitled to claim any loss or damage under this clause unless the Architect shall have issued to the Main Contractor (with a duplicate copy to the Sub-Contractor) a certificate in writing stating that in his opinion the Sub-Contract Works or the relevant section thereof ought reasonably to have been completed within the specified period or within any extended period or periods as the case may be".

24. It is true that when these applications were before the Master, no such certificate was in existence.

25. However, in the interim period between the respective hearings Aoki have filed additional evidence. They have exhibited to an affidavit a letter from the Architect which reads as follows:

26. Subsequent to this certificate being issued there was an exchange of correspondence between Nin Hing and the Architect. I do not think that it is necessary for me to go into any detail on the matters raised. It is sufficient to state that the Architect did say that if representations were made by Nin Ring in the matter they would be prepared to reconsider the matter. From this, it can be taken that to an extent it is possible that the position stated in the letter of 2nd November is not necessarily immutable.

27. In this connection I would add that up to the date of the hearing before me Nin Hing have not made any representations to the Architect.

28. Mr. Pennicott argued that as there was a possibility that the so called certificate may still be varied it could not be regarded as a certificate for the purposes of Clause 8(a). His authority for this was a passage which appears at p.238 and 239 of H.K. Teakwood Works Ltd. v. Shui On Construction⁽²⁾.

"The plaintiffs' submission here is simple. Clause 8 they say is the clause governing liability for delay. No liability arises under that unless and until an Architect's certificate has been issued. No such certificate has been issued. Until a certificate is issued the Sub-Contractor is not "liable". If the Sub-Contractor is not liable, then Clause 13 of the Sub-Contract does not operate. Now that does constitute in my judgment a formidable argument. But the question, as I see it, for me under Order 14 is whether it is necessarily right, or whether there is an arguable counter which entitles the defendants in this case leave to defend. In effect three things have been advanced.

The first is that a letter which the Architect wrote on the 8th September 1983 constitutes a certificate. The material paragraphs in the letter are "The information available is not complete, however on the basis of this information it appears that the plaintiffs should have completed their works by the 22nd July 1982". That is followed immediately by this paragraph "Should further information become available this opinion would be subject to review and thus this statement cannot be treated as being final". Mr. Walker submits that this constituted a certificate. I cannot accept that because of the phrase "this Statement cannot be treated as final". I think that an Architect only gives something which constitutes a certificate for the purpose of this clause, if he is expressing an opinion which he is prepared to certify. I do not think that someone who says something is provisional only, can be said to be giving a certificate".

29. It can immediately be seen that the letter which Mr. Justice Hunter was considering in that case was entirely different to the Architect's latter here. There is nothing on the face of the Architect's letter to indicate that the determination or certificate that is being made is of a provisional nature.

30. Equally I don't think that the correspondence exchanged between Nin Hing and the Architect takes matters further. There is nothing in Clause 8(a) to say that any certificate given under the clause must be final and beyond any appeal. The fact that the Architect is prepared to given the matter further consideration is neither here nor there.

31. The result of this is that almost certainly the Architect's letter is in such a form as to comply with the requirements of Clause 8(a). Put another way it is undoubtedly arguable that it does constitute an Architect's certificate under the clause which is all that Aoki have to establish. Mr. Pennicott's submission under this head cannot succeed.

4.               It is not permissable to set off payments against an interim certificate issued by an Architect in respect of work which has been performed.

32. The landmark decision concerning this proposition is the House of Lords case Gilbert Ash Ltd. v. Modern Engineering Ltd. ⁽³⁾.

33. There had been a whole series of cases where Courts had held that an interim certificate was virtually sacrosant. This perhaps being best demonstrated by Lord Denning in Dawnays v. Minter ⁽⁴⁾.

Here he said:

"An interim certificate is to be regarded virtually as cash. It must be honoured. Payment must not be withheld on account of cross claims whether good or bad - except in so far as the contract specifically provide".

34. This principal was not accepted in Gilbert Ash. At page 85 Lord Dilhorne dealt with Dawnays' case as follows:

"A great deal has been said in Dawnays' case and the cases which followed it, as well as in this case, as to the importance of a 'cash flow' in the building industry. I cannot think that the building industry is unique in this respect. It is, of course, true that the contract makes provision for payments as the work proceeds, but, it is to be observed, a fact to which I feel insufficient attention has been paid, that the contractor is only entitled to be paid for work properly executed. He is not entitled to be paid on interim certificates for work which is defective. The Architect should only value work executed properly that is to say, to his reasonable satisfaction (Clause 1); and no interim certificate is of itself conclusive evidence that the work was in accordance with contract (Clause 30(8))".

35. This line of reasoning was also followed by the other members of the Court. There is a particularly helpful summary of the position given in Lord Salmon's speech at page 100 of the report.

36. Mr. Scott in the course of a most helpful submission referred me to a number of other cases on the point. I do not think that it is necessary for me to refer to these other authorities for the purposes of this judgment save to referring to H.K. Teakwood Works Ltd. v. Shui On⁽²⁾, a local case where Mr. Justice Hnnter applied the principals in a situation which was in many respects similar to the present one.

37. It is a particularly helpful case as it would appear that similar contract forms were adopted. In that case reference was made to "receipt of payment".

38. Clause 11(b) of the sub-contract in our case reads:

39. Mr. Justice Hunter was satisfied that difficult issues were involved and that it was appropriate that the dispute should be the subject of arbitration. He was disposed to follow the authority of Gilbert Ash Ltd. v. Modern Engineering Ltd.⁽³⁾.

40. There is a further matter to be considered. There is a dispute in the present case as to whether Aoki have in fact received payment. For the reasons I have already given I am satisfied that this is still an open question. For the purposes of this exercise I must proceed on the assumption that it has not been established that Aoki have received payment. This is yet another matter which would be a proper matter for reference to an Arbitrator.

41. I have no doubt in the present case that Mr. Scott has demonstrated that a dispute has arisen which should be referred to arbitration in accordance with the agreement between the parties.

42. I am also mindful of the approach which has been adopted in other cases in Hong Kong. Again in another case which in many ways is not dissimilar to the present one the Court of Appeal found that the dispute which arose must be referred to arbitration. I refer to Schindler Lifts v. Shui On Construction Co. ⁽⁵⁾. That case involved a domestic arbitration whereas the present one is a non-domestic arbitration. There are accordingly even more compelling reasons why it is appropriate that such a reference should be ordered.

43. Certainly if consideration is given to the guidance laid down by Kerr L.J. in Sethia it becomes clear that this matter must proceed by way of arbitration.

44. The consequence of this is that this appeal must succeed. I therefore order that the Order 14 judgment must be set aside and the Defendant's application for a stay must be granted. I will hear the parties on costs.

(1)    [1986] 1 WLR 1398

(2)    [1984] HKLR 235

(3)    1 BLR 73

(4)    1 BLR 16

(5)    [1985] HKLR 188