SCHINDLER LIFTS (HONG KONG) LTD v. SHUI ON CONSTRUCTION CO LTD

Headnote

                Dispute between parties to a sub-contract under a building contract as to interpretation of a clause relating to payment of the sub-contractor - the agreement between the head contractor and the sub-contractor included an agreement to arbitrate all differences arising between them -.

                Judgment given in the High Court for the sub-contractor under O.XIV proceedings. Held: allowing that appeal: such proceedings are inappropriate where the parties have bound themselves to arbitrate even though the point at issue is a straight-forward execution of legal interpretation.

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JUDGMENT

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McMullin, V.-P. :

1. This is an appeal from the decision of Power, J. who, on the 26th July, 1984, gave judgment for the plaintiff company in Order 14 proceedings for two sums of money totalling $1,951,000. He dismissed an application by the defendant company for a stay of the proceedings under Section 6 of the Arbitration Ordinance.

Background

2. The history of the matter is briefly as follows. The defendant company (Shui On) is the main contractor under a building contract, in the standard form in use in Hong Kong, which was entered into between itself on the one hand and Moon Yik Co. Ltd. and Xipho Development Co. Ltd. (the employers) on the other, for the construction of a large commercial building (Great Eagle Centre) on a site known as I.L. 8392 abutting on Harbour Road and Fleming Road, Kowloon. The contract was signed by the parties on the 18th September, 1981. It provided for the nomination by the employers' architect of sub-contractors for the carrying out of works and the supply of materials pursuant to the contract.

3. The plaintiff company (Schindler) is one of several such nominated sub-contractors. On the 15th July, 1983 Schindler entered into an agreement with Shui On for the supply of 28 lifts and 32 escalators to the Great Eagle Centre and their installation therein. The total contract price under this sub-contract was $29,800,000.

4. The progress of the works under the main contract had fallen behind schedule prior to the signing of the sub-contract. Originally it had been stipulated that the contract works would be carried out in three phases. The completion dates for these were provided in the appendix to the contract. Shui On applied for extensions of time in relation to all three phases. It has been their case throughout this dispute that the delay was due to the acts of the employers or their architect.

5. Under Clause 30 of the main contract, the architect was obliged to issue interim certificates stating the amounts due to Shui On. Under Clause 11(a) of the sub-contract, Shui On would apply for the inclusion in such certificates of sums due for work done by a nominated sub-contractor. Between the commencement of the works and the end of 1983, a number of such interim certificates had been issued and had been duly met by the employers by making payment thereon.

6. It is, however, not disputed by Shui On that Schindler did not receive the cash payment due to Schindler under two certificates. These were No. 25 (dated 25th November, 1983 and due for payment on 9th December, 1983) which included a sum of $1,353,000 due to Schindler; and No. 28 (dated 7th February, 1984 and due for payment on 3rd March, 1984) which included a sum of $598,000 due to Schindler.

7. On the 5th December, 1983, the architect, on behalf of the employers, wrote to Shui On in the following terms:-

"         BY RECORDED DELIVERY

Our Ref. 78010

5th December, 1983.

 

Shui On Construction Co., Ltd.

7-9/F., Shui On Building,

79, Hung To Road,

Kwun Tong.

Kowloon.

Dear Sirs,

 

Superstructure Contract Office/Commercial Building on I.L. 8392- Harbour Road and Fleming Road, Hong Kong

 

        We refer to the contract for the above works, and in particular to Clause 22 of the Conditions of Contract applicable thereto.

 

        We have considered all your claims for extensions of time and made our assessment of them in our letter dated 5th December, 1983.

 

        The dates of Completion for the three Phases of works have therefore been extended as follows:-

 

Phase I - 4th September, 1982.

Phase II - 23rd October, 1982.

Phase III - 14th March, 1983.

 

        We hereby certify pursuant to Clause 22 of the Conditions of Contract that in our opinion the Works ought reasonably to have been completed by the above dates, being the Dates for Completion stated in the Appendix to the Conditions of Contract.

 

Yours faithfully,

LO YUK SUI

 

YSL/pk

 

c.c. Moon Yik Co., Ltd.

Xipho Development Co., Ltd.

Levett & Bailey

 

This letter was followed by two further letters, dated respectively 20th December, 1983 and 2nd March, 1984, in which the employers gave notice to Shui On that they were setting off the sums stated to be due to Shui On under the certificate against liquidated damages due, as they alleged, to them under Clause 22 of the main contract.

Clause 22 reads as follows:-

8. In April l984 Schindler instituted proceedings for the sums unpaid and took out a summons under Order 14 for judgment for that amount.

Order 14 proceedings

9. Counsel for Shui On contended that Clause 11(b) of the subcontract does not by its terms encompass payment by setoff in this fashion.

 

Clause 11(b) reads as follows:-

10. Secondly, Counsel argued that even if the clause could be interpreted in the sense contended for by Counsel for Schindler, it must be shown, before any debt could be said to arise between Schindler and Shui On, that the architect's certificate under Clause 22, upon which the alleged setoff depended, had been validly issued, in the sense that it correctly reflected the state of affairs which was said to support the employers' claim to liquidated damages. This, he said, in its turn depended on the resolution of the dispute as to what had been the cause of the delay which had occasioned the issue of the certificate under Clause 22 in the first place and that would entail a wide ranging scrutiny of the history of the project and its copious documentation.

11. Both the main contract and the sub-contract contained arbitration clauses in closely similar terms, which obliged the parties to refer all disputes or differences between them to arbitration. On the hearing of the appeal, it was common ground that as between Shui On and the employers such proceedings had actually been set in motion at the time of the hearing of the Order 14 summons.

12. On the question of the construction of Clause 11(b), Counsel for Schindler in the court below relied upon Larocque v. Beauchemin⁽¹⁾, in which Lord MacNaghten approved certain dicta in the old case of Spargo⁽²⁾, to the effect that in certain circumstances a setoff between opposing parties of two legitimate claims will support a plea of payment in cash. He submitted that if the architect issued a certificate under Clause 22, and the employer sought to set off, against a sum due from him to Shui On, the amount of liquidated damages which had been imposed upon him under Clause 22, this would amount to "the receipt by Shui On of payment" against the Certificate. This would have the effect of obliging Shui On to pay Schindler, under Clause 11(b) within fourteen days.

13. Counsel for Schindler acknowledged that the parties to the main contract had bound themselves by Clause 35 to refer all disputes arising under their agreement to arbitration, but he pointed to the proviso to that clause which, in a manner closely similar to the corresponding provision in the sub-contract, provides that arbitration is not to be entered upon until after practical completion of the contract works without the consent of the employer or the architect. He maintained that the words of exception in the proviso which would permit arbitration before completion if a certificate were "improperly withheld" or was "not in accordance with the conditions of the contract" did not apply.

14. These arguments found favour with Power, J. who, although expressly stating that he found the point of construction to be one which was "not without difficulty", nevertheless set himself to deicde it on the basis that, full argument having been advanced upon it, it was proper for him to do so. In this regard, he relied especially upon the observations of Goff, L.J. in European Asian Bank v. Punjab & Sind Bank⁽³⁾, who, following Cow v. Casey⁽⁴⁾ held that it is appropriate under Order 14 to decide questions of law, even questions of some complexity, where a simple clear-cut issue is involved, on the basis that the effect of not deciding it when full argument has been addressed to the Court would be "that the case will go for trial and the argument will be rehearsed all over again before a judge, with the possibility of yet another appeal"

15. Power J. found that the setoff claimed by the employers, pursuant to the certificates issued by the architect under Clause 22, constituted receipt of payment within the meaning of Clause 11(b) of the sub-contract and that it was therefore not open to Shui On to challenge the Clause 22 certificate until the works had been completed. He found further that the fact that a certificate of practical completion had been issued by the architect on the 2nd June, 1984 was not material in that the contractual debt had arisen at the time when the certificate under Clause 22 had been given.

16. In refusing the application for stay of proceedings, Power J. was strongly influenced by the consideration that the dispute between Shui On and the employer was one with which Schindler was "wholly unconnected". He relied upon the dictum of Lord Parker in Bristol Corporation v. Aird⁽⁵⁾ to the effect that, where the only issue was the construction of a contract not involving the meaning of technical terms, it is "absolutely useless to stay the action, because it will only come back to the court on a case stated". Power, J. referred also to a passage in the 4th edition of Keating on Building Contracts which reflects the same opinion.

17. On the appeal, Mr. Waller for Shui On relied upon the decision of Hunter, J. in Hong Kong Teakwood Works Ltd. v. Shui On Construction Co. Ltd.⁽⁶⁾. In circumstances closely similar to those obtaining in the present case, and involving the same defendant, Hunter, J. dismissed an appeal from the decision of Master Wilson who, upon Order 14 proceedings taken out against Shui On in that case, had dismissed the application for summary judgment and had stayed the proceedings, thus leaving the parties to pursue their rights by arbitration.

18. In that action, as in the present case, the plaintiffs were claiming judgment for sums of money said to be owing upon two interim certificates issued under a building contract; the same clause with which we are concerned - Clause 11(b) - was relied upon in seeking summary judgment. As in the present case, the question proposed to the High Court for decision was whether liquidated damages claimed by' way of setoff amounted to receipt of payment. Hunter, J. refused to follow the line taken by the court in the European Asian Bank case. Noting the difference between the Hong Kong clause and the corresponding clause in the English standard form of contract - which makes it clear that payment is to be made by the head contractor to a sub-contractor upon receipt of the architect's certificate - he was of the opinion that "receipt of payment" in the Hong Kong clause could not be extended to cover setoff but went on to say:-

"So I am not purporting at this moment to put any final construction upon this contract which remotely binds either party or any future adjudicator. It is quite unnecessary to do so. For the plaintiffs to succeed here, they have to satisfy me that the construction for which they contend is really the only construction, the right construction of this contract. For the reasons I have already given I cannot accept that. I think the more probable construction is the natural meaning of the words that I have indicated, and I think that is the more probable construction in this particular clause which deals with interim provision. "

19. Mr. Rich, who appeared for the respondents, asked us to say that Hunter, J. was wrong both in the view which he took of the clause and also in his refusal to decide the matter and to leave the parties to their rights in arbitration. Secondly, he argued that the Teakwood case is distinguishable from the present case because (a) at the time of the Order 14 proceedings in Teakwood the contractor and sub-contractor were already at grips in arbitration; (b) there were several other matters in dispute which were aired before the judge upon appeal upon which he expressed an opinion without deciding them; and (c) because it was suggested in Teakwood that the sub-contractor were claiming money for works which had not been done whereas in the present case it is common ground that Schindler is owed the money which was certified by the architect.

20. We do not think that these are valid points of distinction. The primary question with which we are concerned is whether this case was appropriate for decision under Order 14 proceedings. Hunter, J.'s reason for this decision to uphold the master and leave the parties to arbitrate their differences, was that the point being urged upon him was not so clear-cut and unarguable that it would have been proper to have made an order for summary judgment under Order 14. Furthermore, the judge was of the opinion that the forum chosen by the parties in their agreement was the proper one for the determination of disputes between them.

21. In the present case, Power, J. expressly linked his finding that setoff could amount to payment (page 14 of the judgment) with the consideration that the certificate under Clause 22 could not be challenged until after practical completion'. Before us, Mr. Rich's argument, depended upon his contention, that Clause 22 of the main contract between the employers and Shui On constituted an agreement to permit the employers to treat any claim for liquidated damages, so long as it was supported by an architect's certificate, as constituting present payment in whole or part for any legitimate claim made by the head contractor for payment for works done. Given the complexity of the chain of contract binding the employers, the sub-contractor and the main contractor, these were not questions fit for determination upon Order 14 proceedings, even though the resolution of them depended upon the legal interpretation of the contractual documents.

22. It is well established that under modern conditions a skilled arbitrator, familiar with such standard forms of contract, may well be the best tribunal for dealing with questions of law and of fact.

23. While we do not purport to decide the point of construction, we nevertheless think it proper to comment that we incline to the view of Clause 11(b) taken by Hunter, J. We recognize that Power, J. was moved by the laudable intention of avoiding delay by deciding a question which was certainly within the competence of the court to decide, but it is noteworthy, especially in relation to his refusal of a stay, that the authorities upon which he specifically relied pre-date the change in the law brought about by the 1979 Arbitration Act in England - subsequently followed by an equivalent change in the local Arbitration Ordinance - whereby the power of an arbitrator to state a case for the consideration of the High Court has been removed.

24. Furthermore, his attention was not drawn to the guidelines established by the House of Lord (the "Nema Guidelines") in Pioneer Shipping Ltd. & others v. B.T.P. Tioxide Ltd.⁽⁷⁾ and subsequently reinforced in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. ⁽⁸⁾ which sharply circumscribe the rights of parties to arbitration to challenge, upon appeal in the High Court, the decision of an arbitrator even upon a point law.

25. The Nema Guidelines were very recently held to apply under the law as it stands in Hong Kong in Attorney General v. Technic Construction Co. Ltd.⁽⁹⁾, a case which was, however, not yet decided at the date of the hearing before Power, J. The general effect of these decisions is in favour of holding parties to their agreements to arbitrate; they reflect a general hardening of the attitudes of the courts both in England and in Hong Kong against what had been a growing tendency of parties to arbitration agreements to complicate and lengthen proceedings by resort to the courts.

26. For these reasons we think the present appeal should be allowed. We set aside the judgment entered under Order 14 in favour of the sub-contractor and we order a general stay of those proceedings.

(1) (1897) A.G. 358

(2) L.R. 8 Ch. 407

(4) (1949) 1 All E.R. 197

(5) (1913) A.C. 241

(6) Civil Action 10969 of 1984 - unreported

(7) (1982) A.C. 724

(8) (1984) 3 W.L.R. 592

(9) Civil Appeal 137 of 1984