YEU SHING CONSTRUCTION CO LTD v. ATTORNEY GENERAL

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HEADNOTE

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A contract for building works contained an arbitration clause. A dispute arose about the quality of the concrete used in carrying out the works. The parties (the Government on the one hand and the building company on the other) entered into an arbitration agreement which was expressed to supersede the arbitration clause. At a late stage, the arbitrator gave leave to the Government to allege (among other things) that its servant had been bribed by the company. On the application of the company under Section 26(2) of the Arbitration Ordinance, Cap.341 to have the bribery point decided by the APPEAL COMMITTEE>

HELD:

(Russell v. Russell (1880) 14 Ch.D 471, considered).

1987, No. M.P. 2705

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. This is an urgent application, made under section 26 of the Arbitration Ordinance, Chapter 341. The result will affect the course of an arbitration due to commence next Monday, 18th January 1988. The arbitration arises out of a dispute between the Hong Kong Government ("the Government") and Yeu Shing Construction Company Limited ("the company"). The company had succeeded, by novation, to the benefit and burden of two contracts made in 1969 between its predecessor firm ("the contractor").and the Government for the construction of 8 blocks of flats and 2 schools at Kwai Fong in the New Territories. The two contracts contained provisions for arbitration in the event of dispute between the parties. The provisions were in identical form and were in the following terms (set out in each case in Clause 116):

2. I need not read sub-clause (6); but I have found it necessary to read the whole of the rest of Clause 116 because, as it seems to me, this clause contains a carefully defined code for the conduct of the settlement of disputes, including a reference to arbitration, which the parties had agreed for themselves. I would also mention in passing the provisions of Clause 114, which are referred to in Clause 116. Clause 114 provides (among other things) by sub-clause (1) : "In the case of any question arising as to any of the following matters (hereafter called "the excepted matters") ...... the Architect shall state his decision thereon in writing and the Architect's decision shall be final and binding upon the parties ....." The "excepted matters" included quality of materials but before me the Government and the company were united in submitting that the provisions of Clause 114 have no relevance to the question which I have to decide. I therefore make no further reference to it.

3. The building works for which the contracts provided were carried out between 1969 and 1971. The Government alleges that in the course of carrying out the works use was made of sub-standard concrete. The Government instituted an action against the company in that regard but that action has been overtaken by an agreement made on 4th July 1986 between the Government and the company. (Initially the Hong Kong Housing Authority for whom the works were carried out was also a party, but it is now accepted that the Hong Kong Housing Authority has no cause of action against the company and it plays no further part in the story.) By the agreement of 4th July 1986 it was recited that the Government and the Housing Authority had made claims against the company arising from the construction of Government low cost housing at Kwai Fong Estate, Kowloon, Hong Kong under Contracts 91 of 1969 and 92 of 1969 (referred to as "the contracts"). It was also recited that the parties desired to have the said claims and all connected disputes or issues between them determined by arbitration. The agreement, although of course made against the background of the two contracts, including the provisions of Clause 116, is not expressed to be made supplemental to the contracts. The parties agreed as follows:

4. The earlier provisions of Clause 116 were, then, expressed to be "superseded" by the provisions of the 1986 agreement.

5. As I have said, the Government's case against the company is that sub-standard concrete was used in the course of the construction of the works. The company's answer is that the Government's cause of action is statute-barred. The Government's reply is a plea of concealed fraud. In section 26 of the Limitation Ordinance, Chapter 347, provision is made for the postponement of limitation periods in case of fraud or mistake. Section 26 provides as follows:

the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it."

6. I need not read the proviso to that section. There is an issue between the Government and the company as to the application of these provisions; in particular, there is a question as to when the Government could with reasonable diligence have discovered the alleged fraud.

7. The reference to "fraud" in Section 26 may for present purposes be taken as a reference to unconscionable behaviour : see Clark v. Woor [1965] 1 WLR 650, per Lawton J at p.655. It is not limited to common law fraud. The allegation of concealed fraud is contained in the points of reply. I read paragraph 3 of the original points of reply: "3. The causes of action relied upon by [the Government] were concealed by the fraud of [the company] within the meaning of section 26(b) of the Limitation Ordinance, Chapter 347, which it could not with reasonable diligence have discovered earlier than a date not earlier than 12 years before the commencement of proceedings herein. In the premises, by virtue of the said section, paragraph 17 of the points of defence [which raised the plea of limitation] affords no defence to the claim which is the subject matter of this reference. PARTICULARS [The Government] contends that each and every breach of contract referred to in the points of claim was caused by the deliberate failure of [the company] to comply with both the expressed and implied requirement of adding the correct amount of cement to the concrete mix. [The Government] contends that at all material times [the company] knew that the amount of cement that was actually added to the concrete mix was inadequate for the purpose for which the said concrete mix was required, whereby, inter alia, the water cement ratio was too high. Alternatively, they were reckless as to whether the said amount was adequate or not. At no time during the course of construction of the works comprising the contracts was this conduct made known to the Government. It did not come to the knowledge of [the Government] earlier than 12 years before the date of the commencement of the proceedings herein."

8. Recently there has been added by amendment, with the leave of the arbitrator, two further allegations. They are now (B) and (C) respectively in the Particulars. These read as follows:

9. I have no doubt that the allegation originally made in the points of reply, that is to say, an allegation that the company deliberately failed to comply with the requirements of the contracts as to the quality of the concrete, is an allegation at least of unconscionable behaviour. Indeed I see no reason to shrink from describing the allegation of the deliberate supply of sub-standard concrete as an allegation of fraudulent conduct.

10. The allegation (added by amendment) as to the test cubes is also an allegation of fraudulent conduct. However, it is only the third allegation, that it bribed the Government's Clerk of Works, which the company says causes a special difficulty. The company says that this (unlike the other two allegations) is an allegation of fraud for the purpose to which I now come. Paced at a late stage with the bribery point, the company makes this application under Section 26 of the Arbitration Ordinance. Section 26(2) confers a power on the Court to give relief where the dispute involves a question of fraud. It provides as follows:

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Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute which so arises involves the question whether any such party has been guilty of fraud, the Court shall, so far as may be necessary to enable that question to be determined by the Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement."

11. The purpose of the present application is to remove from the arbitrator any decision upon the allegation of bribery. The first point I have to consider is whether I have power to make the order which I am invited to make by the company. It is a condition precedent to the exercise of that power that the agreement for arbitration shall be an agreement concerned with disputes which may arise in the future. At the date of the agreement of 4th July 1986, the disputes had already arisen. But it is contended for the company that sub-section 2 should be given a purposive construction. The agreement of 4th July 1986 was made against the background of the arbitration provisions contained in the original contracts of 1969. That is true. But when I find that the parties have expressly agreed that their original agreement for arbitration shall be "superseded" by another, I find it impossible to give to this background the significance for which the company contends. In my judgment, this arbitration is not an arbitration under an agreement providing for the resolution of disputes which may arise in the future. On the contrary, it is an arbitration under an agreement for the resolution of disputes already existing.

12. The second point goes to the merits of the application. This point has been fully argued before me, and although my decision on the first point is sufficient to dispose of this application, I intend to deal with the arguments addressed to me on the merits, so that this judgment may be read as resolving the differences between the parties on this present application on both the first and second points. So far as the merits are concerned, the company candidly (and clearly rightly) accepts that the most convenient course would be to allow the arbitrator to deal with all the issues which arise in the arbitration, including the bribery point. But justice is not always the handmaiden of convenience, and the company's contention is that it is, as a matter of justice, entitled to have the bribery point decided by a Court. There is no suggestion that a Judge of the High Court of Hong Kong is a tribunal any better able to decide this question than Sir Edward Eveleigh. The difference between arbitration and litigation is not one of personalities. It is that the one is conducted in private and the other in public. It is important that justice shall not be done behind closed doors. But it is equally important that those who agree for a private resolution of their disputes should not lightly be denied the right to have the agreement between them carried into effect. I think Section 26(2) of the Arbitration Ordinance is a reflection of the view that, when an allegation of fraud is made against a man, he is entitled to ask to have that issue heard in public, so that his name may be cleared in public. The reasoning which the company invites me to adopt in support of its contention on the merits is to be found in a judgment of Sir George Jessel, the Master of the Rolls, in Russell v. Russell (1880) 14 Ch. D. 471. That was a case of a dispute between partners. The partnership articles provided that if the business should not be conducted to the satisfaction of one of the partners, who who was the brother of the other, he should have power to give notice to his brother to determine the partnership. The articles also contained an arbitration clause, providing that any differences in relation to the partnership should be referred to arbitration. One brother gave notice to the other for the partnership to be determined. The brother on whom the notice was served brought an action against the other, making various charges of fraud. He claimed that the notice should be declared void, and that his brother should be restrained from announcing the dissolution of the partnership. The defendant moved that the matters in question should be referred to arbitration. The Court held that a prima facie case of fraud had not been established, and accordingly that the matter in question should be referred to arbitration.

13. I accept that the case is authority for the proposition that where fraud is charged, the court will in general refuse to send the dispute to arbitration if the party charged with the fraud desires a public inquiry. However, in Russell v. Russell, the court was concerned with a charge of fraud made against the party desiring an arbitration. Sir George Jessel, at pp.476, 477 put the matter in this way: "I now come to the first ground, where personal fraud is in issue. Though I quite agree it is within the discretion of the court to say, where one of the two parties desires it, that a dispute shall not be referred to arbitration, yet I must consider for a moment which of the two partners does desire to exclude arbitration. Does the party charging the fraud desire it, or the party charged with fraud desire it? Where the party charged with the fraud desires it, I can perfectly understand the court saying : "I will not refer your character against your will to a private arbitrator." It seems to me, in that case, it is almost a matter of course to refuse the reference." And then Sir George Jessel goes on to the question whether the same consideration follows when the publicity is desired by the person charging the fraud. Towards the bottom of page 477, Sir George Jessel again says that the rule that the reference should be refused ought only to be applied "as a matter of course, without investigating the circumstances, in cases where the person charged with the fraud desires the inquiry to be public." However, arbitration has changed very considerably since 1880, and a dispute such as the court was concerned with in Russell v. Russell is miles away from the sort of dispute which commonly arises in these courts now between building owners and contractors I do not forget that more recently the Court of Appeal in England, in T.F. Unwin and Co. Ltd. v. Wates, 5th July 1977 (unreported) -referred with approval to Russell v. Russell, Roskill LJ said: "No doubt in considering any application under [the section], all relevant factors have to be taken into account, but for my part if I may respectfully say so, I find, nearly hundred years later, that judgment of great help in considering what are at least some of the many factors which the court should take into account, particularly where the application to revoke is made by the party alleging fraud and not by the party against whom the charge of fraud is alleged." The discretion conferred on the court under Section 26(2) of the Arbitration Ordinance must be exercised according to well settled principles. I put to counsel that what was required was a balancing exercise, taking all relevant factors into account, at the end of which the judge would have to decide what was the just and convenient course to take. Counsel for the Government is willing to accept this approach. Counsel for the company, however, maintains that even if it may be more convenient, as he concedes, to allow this issue to be dealt with by the arbitrator, the company is as a matter of justice entitled to have it dealt with by the court. He does not rely exclusively on the fact that, a hundred years ago, this was a course which would be likely to commend itself to a judge appealed to by a party against whom fraud was charged. He points out that there is a certain solemnity about proceedings heard in open court, compared to those heard in an arbitration room, a solemnity no doubt enhanced by the publicity which attends proceedings in court as distinct from the privacy which attends proceedings in an arbitration. I did not understand him to contend that this solemnity has any merit in itself. His point is that in such an atmosphere those who give evidence are under some additional compulsion to tell the truth to the tribunal which is absent in the more informal surroundings of an arbitration. Applications of the sort which I have to consider have been rare; but I must, I think, decide this present application in accordance with the conditions which obtain in 1988 and not those of 1880. I do not for a moment believe that there is any reason to think that the witnesses who have to give evidence on the issue of bribery are really more likely to tell the truth to a Judge of the High Court of Hong Kong then to the arbitrator. Since, as it seems to me, there is little or no substance in this point, I am compelled to find that there is little or no substance in the company's expressed preference for the issue to be dealt with by the court. Even if I held the view which I do not, that there was some advantage to the company, real and tangible, in having this issue dealt with by the court, I would still be of the opinion that the advantage was miniscule, and was much outweighed by the injustice which would be done to the Government by interfering at this stage with the course of the arbitration. I deliberately refrain from commenting on the allegations and counter allegations which have been made before me as to the strategy and tactics of each side to this dispute. The Government have made criticisms of the conduct of the company and the company has made criticisms of the Government in like manner. It is the fact that, for whatever reason, the issue of bribery was raised late in the day. It is, however, also the fact that the arbitrator has given leave to the Government to raise it, If at a later stage the interests of justice require any adjournment, the arbitrator will no doubt grant it. I am concerned now only with whether justice requires that this issue be dealt with by the court rather than the arbitrator. I am satisfied it does not. For these reasons, I refuse this application.