XCHRX CLINTON ENGINEERING LTD. v. B-TECH (HOLDINGS) LTD.

HCA 3608/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3608 OF 1998

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D E C I S I O N

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The Application

1. By a Summons dated 22 March 2001, the Plaintiff applies to remove the stay of proceedings in this action imposed by the Order of Findlay J dated 12 May 1998 ("the Order") and for leave to amend its Writ of Summons. By an amendment to the Summons at the hearing, the grounds for removing the stay are as follows:

(1) The material grounds on which Findlay J made the Order have ceased to exist on the grounds that -

(i) the Defendant is no longer willing to be bound by the arbitration award between the Plaintiff and Guangzhou Dong-Jun Real Estate Interest Company Limited ("Defendant's Subsidiary"); and/or

(ii) there is no longer a valid arbitration agreement between the Plaintiff and the Defendant's Subsidiary.

(2) An arbitration award has now been made between the Plaintiff and the Defendant's Subsidiary as referred to in paragraph 1 of the Order.

(3) Further or alternatively, the liability of the Defendant's Subsidiary has been determined as referred to in paragraph 2 of the Order.

The Background

2. The background leading up to the Defendant's application for a stay of these proceedings has been stated in the judgment of Findlay J given on 15 May 1998 ("the Judgment"). In brief, by an agreement in writing dated 31 December 1993 ("the Building Services Contract"), the Defendant's Subsidiary employed the Plaintiff to provide design, supply and installation of mechanical and electrical building services for a building project in Guangzhou ("the Project"). Under the Building Services Contract, the parties agreed to refer any dispute to arbitration in the PRC. By another agreement in writing dated 20 May 1994 ("the Management Contract"), the Plaintiff undertook to provide project management consultancy services to the Defendant's Subsidiary in connection with the Project. In this action, the Plaintiff alleges that the Defendant's Subsidiary owes it $114.792 million under the Building Services Contract and $14,131,085.00 under the Management Contract.

3. By Writ issued on 9 March 1998, the Plaintiff claims these sums from the Defendant on the basis of an undertaking to pay given by the Defendant to the Plaintiff. The Plaintiff relies on two letters respectively dated 6 and 22 May 1997 from the Defendant in alleging the provision of a "guarantee". In the letter dated 6 May 1997, the Defendant stated: "We confirm that we will do our best endeavour to pay off the aforementioned balance at Hong Kong Dollar Prime Rate plus 2%". In the letter dated 22 May 1997, the Defendant stated: "We hereby confirm our agreement that we will assume and honour all the obligation of (the Defendant's Subsidiary) under the above mentioned contracts if (the Defendant's Subsidiary) were unable to meet its commitments".

4. On 21 March 1998, the Defendant issued a Summons to stay these proceedings. On 28 April 1998, the Defendant's Subsidiary applied to the Guangzhou Arbitration Commission to refer the disputes between it and the Plaintiff to arbitration.

The Order

5. By the Order:

(1) all further proceedings in this action are stayed pending the award of the arbitration between the Plaintiff and the Defendant's Subsidiary; and/or

(2) further or alternatively, all further proceedings are stayed pending upon determination of the liability of the Defendant's Subsidiary.

The Judgment

6. Findlay J identified the crucial argument in the Defendant's case for a stay as the effect of the undertaking given by the Defendant. Mr Lin appearing for the Plaintiff and Mr Chan appearing for the Defendant, and neither of whom appeared before Findlay J, differ in their interpretation of the Judgment concerning this undertaking. Mr Lin understands this as the Defendant's undertaking to pay the Plaintiff what the arbitral award finds the Defendant's Subsidiary is liable to pay, if the Defendant's Subsidiary is unable to meet its commitments. Mr Chan understands this rather as the Defendant's undertaking to be bound by the arbitral award as the measure of its liability if the Defendant is at all liable to the Plaintiff on the alleged "guarantee".

7. While neither party has referred me to the previous affidavits/affirmations placed before Findlay J, it would appear that the Defendant did state in its Summons for stay and its affidavits/affirmations in support the argument that there was no agreement of guarantee entered between the Plaintiff and the Defendant: see ground (4) of Defendant's Summons dated 21 March 1998 as proposed to be amended by Summons dated 1 May 1998; para.6(c) of the 1st affidavit of Amy Cheung Sin Man; para.6.2 of the affidavit of Wong Ngai Lee Barbara. The position advanced by the Defendant at the hearing before Findlay J is however not entirely clear.

8. From the Judgment, it would appear that Findlay J proceeded upon the assumption that the Defendant was liable on the alleged "guarantee", the only question being the measure of that liability, that is, the measure of liability of the Defendant's Subsidiary under the Building Services Contract. Findlay J adopted the reasoning and conclusion of Glidwell LJ in Alfred McAlpine v. Unex Corporation [1994] 70 BLR 26 and distinguished that case on the basis that Unex "was not bound, and was not willing to be bound, to accept the arbitrator's award as the measure of its liability". Glidwell LJ refused the stay because Unex did not accept that it was liable to the Plaintiff or that if liable it was bound to pay the amount of the arbitration award but not any lesser amount. It was noted that Unex wished to raise in the action possible issues which did not arise in the arbitration: 45A-D. Evans LJ also noted that Unex was unwilling to admit their liability under the guarantee: 39C-F. It would therefore appear that Findlay J stayed these proceedings upon the basis that the Defendant was liable under the alleged "guarantee", the only question being the measure of that liability, a question which would be determined in the arbitration. According to the terms of the Defendant's undertaking, Findlay J considered that both parties to this action would be bound by the arbitrator's award as far as the Defendant's liability to the Plaintiff was concerned. The stay of the action as far as it concerned the claim under the Building Services Contract was hence granted to avoid inconsistent results. The action concerning the claim under the Management Contract was also stayed because of a dispute as the contract under which the Plaintiff had been paid the sum of $32,928,915.00.

Principle for lifting of stay

9. It is common ground between the parties, and I think it is right that, the principle for staying proceedings applies equally to the lifting of a stay. Mr Lin refers to the following passage in the judgment of Vaughan Williams LJ in Shackleton v. Swift [1913] 2 KB 304 at 311-312 as providing the basis principle:

"..... it is a strong thing to say to a plaintiff who is bringing an action that his complaint will not be heard, to say that it will be stayed without there having been a trial, without the evidence having been heard ..... but the general practice is that you should not stay actions unless the action, beyond all reasonable doubt, ought not to go on ....."

The above general practice was adopted in King Prosper Trading Limited v. Tenbase Trading Limited [1997] HKCU 744 where the action was stayed on the basis that the parties had concluded an agreement to compromise the action. It should however be observed that the above passage of Vaughan Williams LJ goes on as follows:

"In other words, you ought not to stay an action unless one of two things occurs: either the action before the Court is what in old days would have been held to be a demurrable claim, or the action is of such a character that, although it may not be demurrable, there is plain reason why it must fail."

In my view, the above principle applies where a stay having a permanent as opposed to a temporary effect is sought. Where a temporary stay is sought, I think the correct approach should be that as adopted by Glidwell LJ in Alfred McAlpine v. Unex Corporation at 45D and by Findlay J, namely, to consider the balance of convenience and fairness as between the parties. In considering the Plaintiff's application for lifting the stay, I have to look at events subsequent to the making of the Order and to see if there are material changes in the circumstances as affecting the balance of convenience or the fairness between the parties, and if the conditions of stay imposed by the Order have been satisfied.

Subsequent events

10. On or about 31 July 1998, the Guangzhou Arbitration Commission transferred the application for arbitration to the Foshan Arbitration Commission. On 30 November 1998, the Foshan Arbitration Commission issued an award concerning the disputes between the Defendant's Subsidiary and the Plaintiff under the Building Services Contract ("the Award"). By the Award, it was decided, inter alia, that:

(a) the Building Service Contract should be determined from the date of Award; and

(b) the Defendant's Subsidiary should pay the sum of HK$12,000,000.00 to the Plaintiff within 30 days of the Award, failing which late payment charge at 0.04% of the amount in arrears should be calculated and paid.

11. The Defendant's Subsidiary refused to accept the Award and on 25 May 2000 applied to the Foshan Immediate People's Court to set aside the Award. On 17 October 2000, the Foshan Intermediate People's Court rejected the application ("the Foshan Order").

12. On 23 November 2000, the Plaintiff applied to the Guangzhou Intermediate Court to enforce the Award.

13. On 8 January 2001, the Plaintiff wrote to the Defendant's Subsidiary demanding payment of the amount stated in the Award.

14. On 10 January 2001, the Defendant's Subsidiary applied to the Guangdong Higher People's Court for a re-trial of its application to the Foshan Intermediate Court ("the Guangdong Application").

15. On 23 January 2001, the Plaintiff's Solicitors wrote to the Defendant's Solicitors demanding payment of the amount stated in the Award. Neither the Defendant's Subsidiary nor the Defendant has paid the amount.

16. In April 2001, the Defendant's Subsidiary applied to the Guangzhou Intermediate Court for an order "not to enforce the Award".

17. On 18 July 2001, the Guangzhou Intermediate Court issued an order not to allow the enforcement of the Award ("the Guangzhou Order") on the ground that one De Zheng Account Firm ("De Zheng") was not qualified and was ineligible to act as an appraiser of construction works. The Award was, to a large extent, based on the Assessment Report prepared by De Zheng. The Defendant says that evidence of the lack of qualification of De Zheng as an appraiser only became available on 26 May 2001. In view of the Guangzhou Order, the Defendant's expert on PRC law does not consider it necessary for the Defendant's Subsidiary to pursue the Guangdong Application.

Effect under PRC Law

18. For the purpose of this application, the parties have adduced expert opinions on the effect of the above events under PRC law. It may be convenient first to set out the relevant Articles of the Arbitration Law and the Civil Procedure Law.

19. I shall first set out the relevant Articles of the Arbitration Law.

Article 9 provides:

"A system of a single and final award shall be practised for arbitration. If a party applies for arbitration to an arbitration commission or institutes an action in a people's court regarding the same dispute after an arbitration award has been made, the arbitration commission or the people's court shall not accept the case.

If an arbitration award is set aside or its enforcement is disallowed by the people's court in accordance with the law, a party may apply for arbitration on the basis of a new arbitration agreement reached between the parties, or institute an action in the people's court, regarding the same dispute."

Article 57 provides:

"An award shall be legally effective on the date it is given."

Article 58 provides:

"A party may apply for setting aside an arbitration award to the intermediate people's court in the place where the arbitration commission is located if he can produce evidence which proves that the arbitration award involves one of the following circumstances:

..... ..... .....

(3) The formation of the arbitration tribunal or the arbitration procedure was not in conformity with the statutory procedure;

..... ..... .....

The people's court shall rule to set aside the arbitration award if a collegial panel formed by the people's court verifies upon examination that the award involves one of the circumstances set forth in the preceding paragraph. If the people's court determines that the arbitration award violate the public interest, it shall rule to set aside the award."

Article 59 provides:

"A party that wishes to apply for setting aside the arbitration award shall submit such application within six months from the date of receipt of the award."

Article 60 provides:

"The people's court shall, within two months from the date of accepting an application for setting aside an arbitration award, rule to set aside the award or to reject the application."

Article 61 provides:

"If, after accept an application for setting aside an arbitration award, the people's court considers that the case may be re-arbitrated by the arbitration tribunal, it shall notify the tribunal that it shall re-arbitrate the case within a certain timelimit and shall rule to stay the setting-aside procedure. If the arbitration tribunal refuses to re-arbitrate the case, the people's court shall rule to resume the setting-aside procedure."

Article 63 provides:

"If the party against whom the enforcement is sought presents evidence which proves that the arbitration award involves one of the circumstances set forth in the second paragraph of Article 217 of the Civil Procedure Law, the people's court shall, after examination and verification by a collegial panel formed by the people's court, rule to disallow the award."

Article 64 provides:

"If one party applies for enforcement of the arbitration award and the other party applies for setting aside the arbitration award, the people's court shall rule to suspend the procedure of enforcement.

If the people's court rules to set aside the arbitration award, it shall rule to terminate the enforcement procedure. If the people's court rules to reject the application for setting aside the arbitration award, it shall rule to resume the enforcement procedure."

20. I next set out the relevant Articles of the Civil Procedure Law.

Article 140 provides:

"An order in writing is to be made in any of the following conditions:

..... ..........

(9) refusal to enforce an arbitration award;

..... ..... ....."

Article 141 provides:

"..... judgments and written orders that may not be appealed against according to the law ..... shall be legally effective."

Article 178 provides:

"If a party ..... considers that there is error in a legally effective .... Order, he may apply to ..... a people's court at the next higher level for a retrial; however, execution of the ..... order shall not be suspended."

Article 217 provides:

"If a party fails to comply with an award of an arbitral organ established according to the law, the other party may apply for execution to the people's court which has jurisdiction over the case. The people's court applied to shall enforce the award.

If the party against whom the application is made furnishes proof that the arbitral award involves any of the following circumstances, the people's court shall, after examination and verification by a collegial panel, make a written order not to allow the enforcement:

..... ..... .....

(3) the composition of the arbitration tribunal or the procedure for arbitration contradicts the procedure prescribed by the law;

(4) the main evidence for ascertaining the facts is insufficient;

..... ..... .....

If the execution of an arbitral award is disallowed by a written order of the People's court, the parties may, in accordance with a written agreement on arbitration reached between them, apply for arbitration again; they may also bring an action in a people's court."

Article 259 provides:

"..... the other party may apply for its enforcement to the intermediate people's court of the place where the party against whom the application for enforcement is made has his ..... assets ..... located."

21. According to Wang Jing & Co., the Plaintiff's experts on PRC law, the Award remains legally valid despite the Guangzhou Order and the Guangdong Application because the Award has not been cancelled by any court which has jurisdiction to cancel it. The Award has been legally effective since the date it was given (Art.57, Arbitration Law). The Foshan Intermediate People's Court, being the only court with jurisdiction to cancel the legal validity of the Award (Art.58, Arbitration Law) has rejected Defendant's Subsidiary's application to set aside the Award. The legal validity of the Award has been confirmed by the Foshan Order. The Foshan Order cannot be appealed against (Art.140, Civil Procedure Law) and is legally effective (Art.141, Civil Procedure Law). The Defendant's subsidiary could apply to the Guangdong Higher People's Court for a retrial of its application to the Foshan Intermediate People's Court but execution of the Foshan Order should not be suspended (Art.178, Civil Procedure Law). The Foshan Order is final, binding and legally effective. The Guangzhou Intermediate People's Court had no jurisdiction to cancel the legal validity of the Award and did not rule on the same. It merely made an order not to allow the enforcement of the Award (Art.217, Civil Procedure Law). The legal validity and enforceability of the Award through the Guangzhou Intermediate People's Court are two distinct concepts. The effect of the Guangzhou Order is that the Guangzhou Intermediate People's Court will not allow enforcement of the Award under its jurisdiction. However, the Guangzhou Order does not bind any other Intermediate People's Courts in the PRC. It is open to the Plaintiff to enforce the Award in the Foshan Intermediate People's Court (Art.259, Civil Procedure Law), and the Court is bound to enforce the Award (Art.64, Arbitration Law). The Guangzhou Order does not extinguish the debt created under the Award and the legal obligation to pay under the Award remains. Article 217 of the Civil Procedure Law only provides an option to Plaintiff if it wishes to enlist the assistance of the Guangzhou Intermediate People's Court to enforce its claim against the Defendant's Subsidiary.

22. According to Guangdong Da Tong Law Office, the Defendant's expert on PRC law, the Guangzhou Order was validly made pursuant to Article 63 of the Arbitration Law and Articles 140 and 217 of the Civil Procedure Law. It was appropriate for the Guangzhou Order to be made, notwithstanding the Foshan Order - the nature of the two applications and the applicable law and evidence available to the tribunals were different. The Foshan Order was made under Article 58 of the Arbitration Law whereas the Guangzhou Order was made under Article 217 of the Civil Procedure Law. Evidence concerning the qualification of De Zheng was not before the Foshan Intermediate People's Court, but was before the Guangzhou Intermediate People's Court. In accordance with the Article 9 of the Arbitration Law, as a result of the Guangzhou Order, the dispute between the Defendant's Subsidiary and the Plaintiff will have to be re-adjudicated, whether by way of arbitration or legal actions.

23. Mr Lin on behalf of the Plaintiff submits that the opinion of the Defendant's experts does not specifically deal with the legal validity of the Award.

24. On behalf of the Defendant, Mr Chan argues that Article 9 of the Arbitration Law draws no distinction between an arbitration award being "set aside" or its enforcement being "disallowed. In either case, the dispute has to be re-adjudicated, by way of arbitration or legal action in the People's Court. Similarly, Article 217 of the Civil Procedure Law provides for re-adjudication, if the execution of an arbitral award is disallowed by a written order of the People's Court, by way of arbitration or legal action in the People's Court. He hence argues that there is no binding debt under the Award because of the Guangzhou Order. He submits that the opinion of the Plaintiff's experts does not deal with Article 9 of the Arbitration Law, and argues that the opinion of the Plaintiff's experts does not stand up to scrutiny when one examines Article 9 of the Arbitration Law and Article 217 of the Civil Procedure Law. He submits that after the Guangzhou Order, the Award is no longer valid, effective, enforceable, or determinative of the liability of the Defendant's Subsidiary which has an accrued right to have the dispute re-adjudicated in the People's Court, a consequence flowing from the arbitration clause contained in the Building Services Agreement. He further submit that if the evidence of expert witnesses conflicts as to the effect of foreign sources, the Court is entitled, and indeed bound, to look at those sources in order to decide between the conflicting testimony. In support of this proposition, Mr Chan refers to Bumper Development Corp. v. Commissioner of Police of the Metropolis [1991] 1 WLR 1362. As referred to in the judgment of Purchas LJ (at 1369H), the proposition was quoted from Dicey & Morris, Vol.1, p.233. In Earl Nelson v. Lord Bridport, 8 Beav. 527 at 537 also referred to in the judgment (at 1370A), Lord Langdale MR said:

"..... I am not disposed to say, that there may not be cases, in which the judge may, without impropriety, take upon himself to construe the words of a foreign law, and determine their application to the case in question, especially, if there should be a variance or want of clearness in the testimony."

In Sussex Peerage Case [1844] 11 Cl. & Fin. 85 at 115, quoted in Duchees Di Sora v. Phillipps [1863] 10 H.L. Cas. 624 at 640 also referred to in the judgment (at 1369G), Lord Brougham said:

"the judge has not organs to know and to deal with the text of foreign law, and therefore requires the assistance of a lawyer who knows how to interpret it."

Purchas LJ also said (at 1368G):

"It is however the duty of the judge when faced with conflicting evidence from witnesses about a foreign law to resolve those differences in the same way as he must in the case of other conflicting evidence as to facts."

These are well-established principles which I should apply in this application insofar as the circumstances admit.

25. On the basis of the opinion of the Plaintiff's experts which has not really been contradicted by the Defendant's experts, it would appear that the Award is legally valid and effective, unless and until it is set aside by the Foshan Intermediate People's Court. The Foshan Order would also appear to be legally effectively and should not be suspended unless and until a higher court orders a retrial. It does appear that the Guangzhou Intermediate People's Court has no jurisdiction to set aside the Award. It only has jurisdiction to disallow the enforcement of the Award upon an application for enforcement made to it. The consequence of the Guangzhou Order is however unclear. According to Article 217 of the Civil Procedure Law, the parties may re-arbitrate if they agree or litigate in a People's Court. According to the Plaintiff's experts, this is merely an option to the Plaintiff particularly if it wishes to enlist the assistance of the Guangzhou Intermediate People's Court to enforce its claim against the Defendant's Subsidiary. The Defendant's experts express no opinion on this. However, they opine that according to Article 9 of the Arbitration Law the dispute between the parties should be re-adjudicated, whether by way of arbitration or legal actions. It would appear that similar to Article 217, re-arbitration has to be agreed between the parties. It is however unclear whether under Article 217 and Article 9, litigation of the dispute has to be brought in the same People's Court which disallows the enforcement of an arbitration award. It is also unclear whether and how the outcome of such litigation would affect the legal validity and effectiveness of the Award. According to the Plaintiff's experts, the Foshan Intermediate People's Court is bound to enforce the Award. But what about other Intermediate People's Courts? Neither side's experts have addressed these issues, nor do the sources referred to by the experts provide an answer. I should not therefore speculate on the implications of re-adjudication by way of litigation in the People's Court under Article 217 and Article 9: see Lord Brougham in Sussex Peerage Case at 115. On the basis of the expert evidence before me, there is thus nothing to question the present legal validity and effectiveness of the Award.

Ground (1) of the application

26. Mr Lin submits that the Defendant is no long willing to be bound by the Award. The Plaintiff has not agreed with the Defendant to re-arbitrate and there is no pending litigation in the PRC Court. In the circumstances, the material grounds on which Findlay J made the Order have ceased to exist. Mr Chan argues that after the Guangzhou Order, the Award is no longer valid in determining the liability of the Defendant's Subsidiary which has an accrued right to litigate in the PRC Court, a consequence flowing from the arbitration clause contained in the Building Services Contract. The Court should stay this action pending the decision of the PRC Court. He also makes it clear that the Defendant will dispute liability in this action. This should also be clear from paragraph 6.5 of the affidavit of Wong Ngai Lee Barbara.

In my view, the assumption made by Findlay J that the Defendant was liable on the alleged "guarantee" can no longer be made. As the Defendant does not accept that it was liable to the Plaintiff, this will be issue which has to be tried irrespective of the measure of liability: see Glidwell LJ and Evans LJ in Alfred McAlpine v. Unex Corporation at 45A-D, 39C-F. In addition, there is no concurrent proceedings in the PRC - the parties have not agreed to re-arbitrate and no litigation is pending before the PRC Court.

The Award has been made and, unless and until it is set aside, would appear to remain legally valid and effective under PRC law irrespective of the refusal by the Guangzhou Intermediate People's Court to enforce it. I accept the opinion of the Plaintiff's experts, which has not been contradicted by the Defendant's experts, that the Guangzhou Order does not extinguish the debt created under the Award and that the legal obligation to pay under the Award remains. Unless and until it is set aside, the Award determines the measure of the Defendant's liability if the Defendant is found liable to the Plaintiff in this action. The Defendant's Subsidiary no longer pursues the Guangdong Application. Without any agreement to re-arbitrate, it's only option is to litigate the same dispute in the People's Court. Thus far, it has not pursued the option. Further, even if this option is pursued, the outcome and the legal implications of the same under PRC law are unknown. In particular, it is not know how this may affect the legal validity and effectiveness of the Award which has been confirmed by the Foshan Intermediate People's Court. There are thus material changes in the circumstances as affecting the balance of convenience and fairness as between the parties. I should next consider whether the conditions of stay imposed by the Order have been satisfied.

Ground (2) of the application

27. At the hearing before Findlay J, the Defendant's Subsidiary had already applied to the Guangzhou Arbitration Commission for arbitration. From the judgment (at p.5), it is clear that the action was stayed until the publication of the arbitrator's award, or further order. The action was stayed until the arbitrator's award was known. In my view, this award must have been contemplated by the parties and the Court at that time to refer to the Award subsequently made by the Foshan Arbitration Commission. The Award has been published and for the same conclusions that I have arrived under ground (1) of the application, I am of the view that the first condition of stay imposed by Findlay J has been satisfied.

Ground (3) of the application

28. I am also of the view that the liability of the Defendant's Subsidiary towards the Plaintiff, and hence the measure of liability of the Defendant towards the Plaintiff in this action if found liable, has been determined by the Award, unless and until the Award is set aside. For the same reasons I have given under grounds (1) and (2) of the application, I am of the view that the second condition of stay imposed by the Order has also been satisfied.

Discretion

29. The Order was made to avoid inconsistent results. Now that the result is known through the Award, the stay should be lifted. Should there be future developments in the PRC affecting the legal validity or effectiveness of the Award, it is always open to the Defendant to apply for a further stay of this action. However, in view of he Award, the Plaintiff's action should no longer be put on hold. I have also taken into consideration the Defendant's refusal to admit liability in this action. This issue did not feature in the Arbitration and will have to be resolved in this action. On a balance of convenience and considering the fairness as between the parties, I would accede to the Plaintiff's application to remove the stay imposed by the Order.

Order

30. For the above reasons, I make the following orders:

(1) The stay of proceedings imposed by the Order be removed.

(2) Leave be granted to the Plaintiff to amend its Writ of Summons in the form as annexed to the Plaintiff's Summons and to serve the same within 7 days from the date of this order, the Defendant to serve a defence within 28 days thereafter, and the Plaintiff to serve a reply if so advised within 14 days thereafter.

I also make an order nisi as to costs in terms of paragraph 3 and 4 of the Plaintiff's Summons.