YUI TARK CONTRACTORS LTD v. DAH CHONG HONG LTD

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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Background

1. The defendant was employed by the main contractor to supply and install false ceilings in a development at Harbour City, Tsim Sha Tsui. The plaintiff was the defendant's sub-contractor.

2. On 24 May 1997, the plaintiff issued a writ of summons against the defendant. In its statement of claim, the plaintiff claims -

3. On 3 July 1997, the defendant issued a summons seeking an order that further proceedings in this action be stayed under section 6(1) of the Arbitration Ordinance (Cap. 341). On the same day, defendant issued another summons asking for an order that the time for filing its defence and counterclaim be extended for 28 days from the date of determination of the defendant's application for a stay.

The Arbitration Clause

4. The agreement between the plaintiff and the defendant contains an arbitration clause. This clause empowers the defendant to direct the plaintiff "to alter, amend, omit, add to, or otherwise vary" the work contracted, and provides that the plaintiff shall carry out these variations. The clause then goes on to provide -

"4 (a) ... If the said variations and/or additional works result in an increase or decrease in the contract price, the difference in price shall be adjusted with reference to and on the basis of the Schedule of unit rates annexed hereto and to be agreed between [the parties] and failing which the difference shall be submitted to arbitration as provided hereinafter. Provided Always That irrespective of any failure of the parties to agree on the increase, or decrease in the contract price, the [plaintiff] shall forthwith continue to carry out the said works... (b) If there is any dispute in respect of the increase or decrease in the contract price occasioned by the variation thereof, it shall be referred to ... [arbitration] ... and with the subject to on the basis of the Schedule of unit rates annexed hereto..."

5. There is a fundamental difference between Mr Lam and Mr Clayton as the construction of this clause.

6. Mr Clayton argues that it should be interpreted as meaning that the parties have agreed to refer to arbitration any dispute that may affect the amount payable by one party to the other; any dispute that may increase or decrease the overall contract price. For example, Mr Clayton says, if there is a dispute as to whether work was a variation or covered by the original contract, or whether the work was carried out, or carried out properly, or whether the price for the variation work is properly charged, these must be referred to arbitration.

7. Mr Lam, on the other hand, argues that the disputes that the parties have agreed to refer are of a much narrower compass. He says that the only disputes that the parties agreed to refer to arbitration are those that relate to the difference between the parties as to the amount by which the contract price should be increased or decreased by reason of a variation where the parties have failed to agree on that amount. To be more specific, he says that a dispute relating, for example, to whether or not the variation work has been carried out, or carried out properly, is not a dispute that the parties have agreed to refer to arbitration.

8. I agree that the only disputes that the parties agreed to refer to arbitration are those that relate to the difference between the parties as to the amount by which the contract price should be increased or decreased by reason of a variation where the parties have failed to agree on that amount, but I do not accept this means that an arbitrator cannot inquire into, and decide upon, for example, whether the contract price should be increased where there is a variation for which the price has been agreed, but it is in dispute whether or not the work covered by the variation has been done, or done properly. Quite clearly, if an arbitrator finds that the price for a variation has been agreed, but that, for example, the work covered by that variation has not been done, he must find that the contract price has not been increased by reason of that variation.

The Dispute

9. In an affirmation in support of the defendant's application for a stay. Mr Chan Kwok Keung, the defendant's assistant project manager, says that the plaintiff submitted various invoices relating to variations. On completion of the works in the middle of 1995, Mr Chan examined these invoices and set them of in a statement dated 11 July 1995. This is the statement mentioned in the plaintiff's statement of claim under the reference "SK-321/95-1 to SK-321/95-4". Mr Chan says "From my perusal of the invoices ... I was of the firm view that the invoices under which the Plaintiff could expect some payment were ... [five invoices identified]. In the statement I offered on behalf of the Defendant to pay the Plaintiff the sum of $194,915.87 subject to adjustment on the assessment of the Defendant's claims based on the Plaintiff's claims by the quantity surveyor of the Project."

10. The statement mentioned says "Yui Tark's variation claims could be categorized into the following:" There follows a list of the plaintiff's invoices and the amounts claimed. The statement then says "Remarks: As the claims of variation orders are being assessed by the Client's Q.S. and the amounts of V.O. we submitted to [the main contractor] are not yet confirmed, therefore. 30% of the total amount you claimed us for variation orders could be able to release to you for the time being HK$649,719.47 x 30% - HK$194,915.84."

11. Mr Chan goes on to say that the defendant also disputes the variation claims because they failed to take account of work omitted, and he quotes two examples amounting to $330,082.35.

12. Mr Chan says that there are disputes between the parties and all the disputes, except that relating to retention money, are caught by the arbitration clause.

13. On behalf of the plaintiff, Mr Leung Wai Hung, its project manager, affirms that each invoice in respect of variation work "is based on the expressly agreed quantity at the unit price which is either expressly agreed or provided by the Original Contract." Mr Leung points out that the defendant has failed to say which of the invoices is disputed and why. He says Mr Chan fails to suggest "that any invoice which is not for variation works or which is based on disputed quantity or unit price."

14. Reacting to this challenge, Mr Chan filed a further affirmation in which he deals with each invoice, saying which are disputed and the reason why they are disputed.

15. On this evidence, as at the date of the issue of the writ, there was no agreement as to the amount by which the contract price should be increased or decreased by reason of variations. Mr Lam does not suggest that there was such an agreement, but he says that there is evidence that the price for each variation claimed was agreed by the parties. That may be so, but it is clear that there were several variations to the contract including, according to the defendant, omissions, and that there is no evidence that the parties had agreed on the amount by which the contract price should be increased or decreased as a result of these variations. There being no evidence that such agreement, express or implied, was reached by the parties before the issue of the writ, it must be taken that there was a dispute between the parties as to the amount by which the contract price should be increased or decreased as a result of these variations, and that is a dispute that the parties agreed to refer to arbitration.

Discretion

16. This is a domestic arbitration so there is a discretion to be exercised as to whether the dispute should be referred to arbitration. In the ordinary course, the court should exercise its discretion in a way that maintains the bargain between the parties. The parties agreed that a dispute of this nature should be referred to arbitration. The nature of the dispute is such that it is eminently suitable for arbitration. The defendant wishes arbitration over the disputes relating to the omissions. It is undesirable that these disputes should go before an arbitrator, but the plaintiff's claims relating to the variations remain in this court. The only factor that tells against exercising the discretion to grant the stay is that it is undesirable that part of the plaintiff's claim should go to arbitration and part remain in this court. But the defendant has made it quite clear that it is happy that all the plaintiff's claims should be referred to arbitration. I cannot order that, but the matter is in the plaintiff's hands. The problem of having two tribunals involved can be avoided if the plaintiff agrees to an ad hoc reference to arbitration of the claim relating to the retention money.

17. In these circumstances, I believe it is right that there should be a stay in respect of the plaintiff's claim for an increase in the contract price by reason of the variations.

Result

18. I order that any further proceedings in relation to the plaintiff's claim for payment by reason of the variations be stayed.

19. Mr Lam does not object to an order in terms of the summons for an extension of time. I grant this.

Costs

20. I can see no reason why the costs should not follow the event. I make an order nisi that the costs of the stayed proceedings and the application for the stay be paid by the plaintiff.