YEUNG SUK CHONG t/a WAN CHEONG ENGINEERING CO v. LEUNG YAU BUILDING LTD

HCA 1008/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1008 OF 2008

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REASON FOR JUDGMENT

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1.  There were 2 summonses before me:

(1)     The Plaintiff’s summons dated 3 July 2008 for summary judgment;

(2)     The Defendant’s summons dated 18 July 2008 to stay the proceedings under s. 6 of the Arbitration Ordinance (Cap. 341).

2.  At the hearing, I dismissed the application for stay and granted unconditional leave to defend.  I now give my reasons.

Background

3.  Both the Plaintiff and the Defendant are building contractors.

4.  On 26 March 2007, the Defendant entered into a renovation contract in Chinese with the Incorporated Owners of Peony House in Tai Kok Tsui (“IO”) in the sum of about $4.9 million (“Main Contract”). 

5.  On 23 May 2007, the Defendant and Wan Cheong Engineering Co entered into a contract in Chinese stating the Main Contract was “sold” to Wan Cheong for about $1 million and 21% share of the costs of additional works done (“2^nd Contract”).  At that stage, Wan Chong was a partnership between the Plaintiff and Mr Yuen Kwong Hung.

6.  Notice of commencement of work was given on 28 May 2007.  The works were to be completed within 120 working days from the notice of commencement.  Subject to certification for inclement weather, if any, works should have been completed on 16 November 2007.  No rainy day was certified.

7.  Wan Cheong undertook the works, and submitted invoices to the Defendant for certification by the engineering consultant under the Main Contract.  The Defendant collected payments from the IO and paid the Plaintiff.

8.  There were substantial delays in completing the works.

9.  In about January 2008, Yuen retired from Wan Cheong and the Plaintiff carried on the business as a sole proprietor. 

10.  On 21 April 2008, the Defendant served a notice of termination of the 2^nd Contract on the Plaintiff, alleging excessive delay and material non-disclosure.  On 23 April 2008, the defendant sent a letter proposing suspension of the termination upon conditions to be fulfilled by the Plaintiff by 24 April 2008.  The Defendant alleged that the Plaintiff failed to response and they took over the site on 24 April 2008. 

11.  The Plaintiff disputed the take-over and alleged that she carried on with the works notwithstanding the notice of termination.

12.  On 13 May 2008, the consultant issued a Certificate of Practical Completion with a list of outstanding works (“1^st Certificate”).

13.  On 14 May 2008, the Plaintiff submitted the 8^th Invoice for $ 576,665 to the Defendant.  The Defendant refused to pass the 8^th Invoice onto the IO.  The IO also refused to entertain the 8^th Invoice directly from the Plaintiff.

14.  On 2 June 2008, the Plaintiff issued the proceedings herein, claiming:

(1)     an order to compel the Defendant to submit the 8^th Invoice and any subsequent invoices to the IO;

(2)     payment of sums received by the Defendant on trust for the Plaintiff from the IO.

15.  On 18 June 2008, the Defendant received a cheque for $274,798 from the IO.  The Plaintiff alleged that was the sum certified by the consultant under the 8^th Invoice.

16.  On 2 July 2008, the Defendant took out a time summons to file the Defence and Counterclaim.

17.  On 3 July 2008, the Plaintiff took out an O. 14 application for judgment on the $274,798.

18.  The Defendant filed evidence that the costs of carrying out the outstanding works as per the 1^st Certificate amounted to $3.426 million, and resisted summary judgment on retention for such potential exposure.

19.  The Defendant then withdrew the time summons.

20.  After the O. 14 call-over hearing, the IO had by-passed the Defendant and instructed the Plaintiff to carry out certain works direct.  The Plaintiff alleged these were additional works outside the Main Contract.

21.  The Plaintiff has since rendered the 9^th Invoice for $990,586, which is not included in the Statement of Claim.  The Plaintiff alleged they were works under the Main Contract and not the additional works instructed by the IO direct. 

22.  On 13 October 2008, the consultant issued a second Certificate of Practical Completion (“2^nd Certificate), listing the following outstanding matters:

(1)     demolition and removal of the scaffoldings;

(2)     10 year warranty on the roof top water proofing issued by the contractor;

(3)     warranty issued by the paint supplier SKK;

(4)     Certificate WR2 issued by the Electrical and Mechanical Services Department (“EMSD”).

23.  The Plaintiff just obtained the WR2 certificate last week.

24.  Mr Lau, for the Plaintiff indicated that the Statement of Claim will be amended for an order to compel the Defendant to pass the 9^th Invoice for $990,586 to the IO.

Stay of proceedings

25.  In Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd (2003) 3 HKC 659, Burrell J referred to the decisions of the Court of Appeal in Private Company “Triple V’ Inc v Star (Universal) Co Ltd (1995) HKC 129 and Paladin Agricultural Ltd v Excelsior Hotel (Hong Kong) Ltd (2001) 2 HKC 215 and said at p. 663B:

“The proper test is therefore is there a prima facie or plainly arguable case that the parties were bound by an arbitration clause.  The onus being on the defendant to demonstrate that there is.”

26.  The Main Contract contained an arbitration clause between the IO and the Defendant (cl. 11.4).  The 2^nd Contract contained a clause that “The above terms are to be carried out together with the Main Contract”.

27.  Mr Cheung referred to s. 2AC(3) of the Arbitration Ordinance:

“(3)   A reference in an agreement-

(a)          to a written form of arbitration clause; or

(b)          to a document containing an arbitration clause,

constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.”

28.  He submitted that the 2^nd Contract incorporated the arbitration clause in the Main Contract, and there is an arbitration agreement between the Plaintiff and the Defendant.

29.  The arbitration clause in the Main Contract is between the IO and the Defendant.  The 2^nd Contract was not in existence at the time of the Main Contract.  There is no indication that the Plaintiff, the Defendant and the IO had subsequently entered into any tri-partes agreement, and in fact, the contrary was indicated.

30.  As to adoption by reference, the clause in question simply means the terms the 2^nd Contract are to be carried out together with the Main Contract.  It did not create any arbitration agreement between the Plaintiff and the Defendant.  At most it may be argued that the arbitral award between the Defendant and the IO is binding on the Plaintiff.

31.  Hence, I am not persuaded that there is an arbitration agreement between the Plaintiff and the Defendant.

32.  Mr Lau also argued that the Defendant has taken steps in the proceedings herein by taking out the time summons, and is deprived of the right, if any, to refer the dispute to arbitration.

33.  In Euro-America Insurance v Lite Best Co Ltd [1993] 1 HKLR 217, Kaplan J said at p. 221:

“Section 6 of the Arbitration Ordinance gives the court a discretion to grant a stay in domestic cases if the court is satisfied ‘that there is no sufficient reason why the matter should not be referred in accordance with the agreement, and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration.

To avail oneself for the benefits of s. 6, it is necessary to make application to the court to stay the proceedings before ‘... taking any steps in the proceedings.’  What is or is not a step in the action is not always clear and the authorities are far from easy to reconcile.

Mustill & Boyd at p. 472 identify two requirements to be fulfilled before the court can be satisfied that the applicant has taken a step in the action. They put the matter thus:

‘First, the conduct of the applicant must be such as to demonstrate an election to abandon his right to stay, in favour of allowing the action to proceed. Second, the act in question must have the effect of invoking the jurisdiction of the Court. An extrajudicial proceeding in the action, such as obtaining by correspondence a consent to the enlargement of time for delivery of pleadings, is not sufficient.

The circumstances which accompany an act may be looked at to see whether the act amounts to an election to give up the right to a stay.  Thus, an application to the Court which might otherwise amount to a step in the proceedings is deprived of this characteristic if the applicant makes it clear - by stating that his application is without prejudice to a subsequent request for a stay, or by simultaneously taking out a summons to stay - but he intends to insist on a reference to arbitration.’”

34.  The Hong Kong Civil Procedure 2009 Vol. 2 at para. H1/6/1 cited Paul Y Construction Ltd & Ors v Golik Metal Industrial Co Ltd & Ors [2004] 1 HKLRD D26 where Reyes J held that under the Arbitration Ordinance the 1^st defendant was entitled to apply to stay the action before the delivery of its substantial defence in the matter.  The fact that the 1^st defendant had sought an extension of time for the service of defence or has sought discovery of the policy does not amount to delivery of a defence in this matter.  Therefore the 1st defendant is entitled at this stage to challenge the action brought by the plaintiff and seek a stay.

35.  Here, the Defendant filed a time summons and withdrew it, and filed the summons for stay and evidence defending the O. 14 application at the same time.  It is equivocal as to whether its statement of defence is without prejudice to the application for stay.  Since I have already found against any arbitration clause, it is not necessary for me to decide on this point.

36.  Hence, the application for stay was dismissed.

Summary judgment

37.  Mr Lau pointed out that under the 2^nd Contract, the Defendant shall upon receipt of each instalment (from the IO) pay to the Plaintiff after deducting sums due within 5 days of receipt the documents from the Defendant (cl. 5).  Hence, the $274,798 is due and owing.

38.  The defence is that the Plaintiff has failed to submit the 3 warranties/certificate mentioned in the 2^nd Certificate, and the Defendant is exposed to the costs of remedying the defects in order to obtain the certificates for the IO.

39.  The Plaintiff has lately obtained the EMSD Certificate.  Mr Lau submitted, at bar, that the obtaining of the paint warranty is an administrative matter, and asked for a short adjournment for the Plaintiff to obtain it from the supplier.  If so, I query why there has been an unexplained delay since May this year when the 1^st Certificate was issued.

40.  Mr Lau submitted that the Defendant is the contractor responsible for issuing the water proofing warranty.  The consultant did not list any defect on water proofing.  Hence, it does not befall the Defendant to raise the lack of the warranty as a defence.

41.  Mr Cheung accepted it is the responsibility of the Defendant to issue the water proofing warranty.  However, the Defendant has to be satisfied with the quality of the water proof before issuing the warranty.  The remedial works were done without the supervision of the Defendant, and it had no chance of inspecting the roof yet.

42.  Mr Lau submitted that the additional works instructed by the IO direct did not include water proofing.  At any rate, the Defendant could always carry out an inspection, and if remedial work were required, there is no reason why the Plaintiff would not do it to the satisfaction of the Defendant.

43.  Mr Cheung pointed out that the 2^nd Affirmation of the Plaintiff stated the remedial works undertaken after the O. 14 call-over mainly related to water proofing and electrical wiring.  That flatly contradicted the submissions of Mr Lau.  Mr Cheung also complained that the Plaintiff’s case has continued to shift with the ongoing development of the case.

44.  I share the sentiment on the shifting goal posts.  Furthermore, submissions on updated facts orally by advocates is not satisfactory.

45.  In any svent, the case has to go to trial on the 9^th Invoice.  There is dispute as to whether those works related to the Main Contract. 

46.  On the 8^th Invoice, there is the dispute on the paint certificate and water proofing warranty.  The 2^nd Contract stated that the Defendant is entitled to make deductions and to make payment within 5 days of receipt of the documents from the Plaintiff.  It is also not clear whether the deduction must be certified by the consultant.

47.  All in all, the state of the evidence is not entirely satisfactory, and the disputes are interrelated and not suited for summary judgment.  Hence, the application was dismissed.

Costs

48.  I awarded the costs of the application for stay to the Plaintiff, and the application for summary judgment to the Defendant.

49.  As to apportionment of the costs of the hearing, I allotted ¼ of the time to background common to both summonses, and there be no order as to costs.  I allotted ¼ of the time to the stay, and 2/4 to the summary judgment.  Hence, the Plaintiff shall pay ¼ of the costs of the hearing to the Defendant upon taxation.

Postscript

50.  The need to proceed with ongoing building works amidst disputes between the parties underpinned the value of alternative dispute resolution in construction cases.  Whilst that was not undertaken before, I have commended parties to actively consider ADR now in order to avoid more arguments from arising.  Notwithstanding I have found against any arbitration agreement, the Defendant can always invite the Plaintiff to participate in mediation.  Any unreasonable refusal to participate may be conduct relevant in costs consideration in due course.