SHUI ON CONSTRUCTION COMPANY LIMITED AND ANOTHER v. MOON YIK COMPANY AND OTHERS

Arbitration - consolidation - extent to which principles applicable to consolidation in arbitrations are analogous to consolidation in litigation - whether there should be formal consolidation or both arbitrations merely heard at the same time - costs - Held: 1. Litigation principles of limited guidance for consolidation in arbitration; 2. Unless incompatibility of parties status or other disadvantages formal consolidation is to be preferred to having both arbitrations merely heard at the same time; 3. In the particular circumstances there would be no order for costs on the consolidations

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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REASONS FOR JUDGMENT

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1. In this originating summons filed on 25th June 1987 the claimants, pursuant to Section 6B of the Arbitration Ordinance, Cap. 341, sought orders that two arbitrations to which they are a party, should be consolidated or alternatively should be heard at the same time. The arbitrations arise out of the construction of the twin thirty-four storey buildings on the Wanchai Reclamation, known as the Great Eagle Centre and Harbour Centre, for an original contract sum of $408,600,000.

2. Under the building contract for those buildings, Moon Yik Company and Xipho Development Co. Ltd. (hereinafter called the "Employers") were the employers. Shui On Construction Co. Ltd., (hereinafter called "Shui On") was the main contractor. There were twenty-two different nominated sub-contractors, one of which was Dah Chong Hong Ltd. (hereinafter called "DCH"). Under this sub-contract DCH was responsible for the supply and installation of curtain walling and a skylight. The sub-contract sum was $8,450,000.

3. After a dispute arose between the Employers and Shui On under their building contract the latter on 28th September 1984, required the dispute to be referred to arbitration (hereinafter called "the Main Contract Arbitration"). Later a dispute arose under the sub-contract between Shui On and DCH and the former, on 27th March 1987, required that it also be referred to arbitration (hereinafter called "the DCH Arbitration"). Shui On is the claimant under both arbitrations with the Employers and DCH being the respective respondents. Mr. Christopher Haffner, a registered architect, was appointed arbitrator for the Main Contract Arbitration on 23rd September 1985 and for the DCH Arbitration on 30th June 1987.

4. As arbitrator, of course, has no power to consolidate arbitrations evan though he is the arbitrator in each and the parties and issues are similar. However, in 1982 the Arbitration Ordinance was amended and Section 6B enacted which gives the Court a discretion, in the circumstances therein set out, to make consolidation and related orders, in respect of two or more arbitrations. Arbitrations, with certain statutory exceptions, are founded on the parties agreement to resolve disputes by arbitration instead of by litigation. The rules governing arbitrations similarly have a contractual basis except that, in limited circumstances, the parties can have recourse to statutory assistance. In recent years arbitration appears to have increased in popularity. No doubt because, rather than in spite of that trend, a parallel development has seen the enactment of substantial amendments to long established but relatively rudimentary arbitration legislation. This has in fact occurred in Hong Kong, to the extent that our new Section 6B, has no counterpart in United Kingdom legislation and, I am told, has no equivalent in other Commonwealth legislation. Although Courts in New York and Holland have similar consolidation powers - see 'Consolidation in Hong Kong: the Shui On case' (1987) 3 'Arbitration International' 87.

5. The Court has a discretion under Section 6B where, in relation to two or more arbitrations, some common question of law or fact arises or the rights to relief arise out of the same transaction or series of transactions or for some other re reason it is desirable to make an order. where the Court elects to exercise its discretion it may make one of the following four types of order:

If the Court were to elect not to make any of these four discretionary statutory orders it would, in effect, be making a fifth alternative order by making no order under the Section.

6. Counsel for Shui On sought an order for full consolidation under the first statutory alternative but, if unsuccessful, was prepared to accept an order under the second alternative, namely that the two arbitrations be heard at the same time. The Employers had no objection to either order being made but expressed a clear preference for an order under the second alternative. DCH was opposed to any order being made under Section 6B and submitted that no order should be made.

7. The major dispute in the Main Contract Arbitration concerns delay but there are also disputes over whether some of the contract works were defective. One consequence of delay on the part of Shui On is that under Clause 22 of the contract, liquidated damages may become payable to the Employers. Where this position arises the Employers are entitled to deduct from remaining payments, the liquidated damages payable by Shui On for those delays. The Architect has given a Certificate under Clause 22, holding Shui On responsible for delay, as a consequence of which substantial sums otherwise due by the Employers to Shui On have been retained and applied towards payment of liquidated damages. Shui On disputes the Architect's Certificate and that is one of the issues to be reviewed in arbitration.

8. One of the disputes between Shui On and DCH concerns the failure of Shui On to make payment in full of the sub-contract sum. Shui On claims the reason for non-payment is the Employer's action in wrongly applying payments due, towards the liquidated damages. Shui On has given, notice that its claim against DCH may amount to at least $37 million. Alternatively, Shui On claims that the delay was caused by DCH and that its work was defective. I am satisfied that part of the dispute between Shui On and the Employers relates to work carried out by DCH. I further find that, to some extent, the interests of Shui On and DCH as against the Employers, are common. However, in other respects, there are major disputes, between Shui On and DCH.

9. There is no privity of contract between the Employers and DCH. However, DCH was a nominated sub-contractor and not merely the domestic sub-contractor of Shui On. The contract was entered into under the Standard Building Contract Form (with Quantities) Second Edition 1976 (May 1979 Revision) issued by the Hong Kong Institute of Architects, The Royal Institution of Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong. The sub-contract was in the form of a related Standard Form of Building Contract for use where the sub-contractor is nominated. These standard contract and nominated sub-contractors forms, interrelate and include interlocking indemnities.

10. As against this identity or similarity of facts and issues there are, of course, differences between the two arbitrations. The Main Contract Arbitration deals with the whole of the contract, of which the work to be carried out by DCH under the sub-contract forms only a minor, if in money terms, a substantial part. Conversely, due to alterations to Clause 23 in the standard provisions of the contract, it was submitted that DCH may, in some circumstances, be entitled to further time under the sub-contract as against Shui On, but the latter may not be entitled under the contract to an extension of time, for the same period, from the Employers.

11. After being taken through the contract, sub-contract, correspondence and pleadings in some detail, I am well satisfied that common questions of law and fact arise in both arbitrations.  I further find that the rights to relief arise out of a related contract and sub-contract both of which were concerned with the construction of the same buildings. On these findings, I hold that the Court's statutory discretion has arisen under Section 6B. The next question is the manner in which, on the instant facts, that discretion should be exercised.

12. The exercise of the Court's discretion under Section 6B was last year considered in depth by Rhind J., in Re Shui On Construction Co. Ltd. and Schinder Lifts (H.K.) Ltd. (1986) HKLR 1177. There are also factual similarities between that case and the instant proceedings. That earlier Section 6B application, also concerned the same Main Contract Arbitration and one of the other nominated sub-contracts between Shui On and Schinder Lifts (H.K.) Ltd. The Court ordered that both arbitrations should be heard together. The Court declined to order a formal consolidation principally on the ground that Shui On, while the claimant in the arbitration against the Employers, was the respondent in the sub-contract arbitration initiated by Schinder Lifts (H.K.) Ltd.

13. Counsel for Shui On, in the instant proceedings, submitted that the procedural difficulties which arose in the former case, did not exist in these proceedings. For here Shui On is the claimant in both arbitrations. It was submitted that here there is a stronger case for consolidation, than in the application before Rhind J. and that the procedural difficulties which prevented formal consolidation in that case, do not exist in the present case. Counsel conceded that while the Main Contract Arbitration was very advanced and could be heard early in 1988, the sub-contract arbitration had only recently formally commenced. However, it was submitted that the primary issue before the Court' was consolidation. If consolidation were justified, then timing of remaining interlocutory steps and fixing dates for hearing, were subsequent matters to be determined by the arbitrator.

14. It may be useful at this stage to record the relative progress of the two arbitrations. The Main Contract Arbitration, which commenced in 1984, is nearly ready for hearing. Points of claim were served on 1st July, 1986 and Points of Defence and Counterclaim on 14th March 1987. The Arbitrator has made a number of interlocutory directions which include the order that expert reports be served by 15th October 1987. The parties appeared before the Arbitrator on 28th April 1987 when he indicated that he was available to hear the arbitration during the period from 29th February to the end of May 1988. In his letter of 28th April 1987, the Arbitrator recorded that it was provisionally agreed that the parties would investigate the availability of Counsel during that period. So while no firm dates had been fixed, I am satisfied that it was the parties intention that the Arbitration, if possible, would be heard during that period. I am further satisfied that the Main Contract Arbitration should be ready to be heard during that period.

15. The position in relation to the DCH Arbitration which commenced on 27th March 1987 was quite different. The Arbitrator was appointed on 30th June 1987. Points of claim were filed only 14 days before the present hearing, namely on 16th July, 1987. Points of defence are yet to be filed. It will be some time before the Arbitrator is in a position to give directions and it will take even further time thereafter for compliance with those directions. For completeness I would also record that during April 1987, Shui On's solicitors had forwarded to DCH, a copy of the Employer's Points of Defence and Counterclaim in the Main Contract Arbitration, observing that those allegations would form the basis of Shui On's claim, in the DCH Arbitration.

16. These bare dates give no indication of the consistent attempts by Shui On, until this hearing, to have the DCH Arbitration heard in accordance with the Main Contract Arbitration time table. On 27th March 1987 Shui On's solicitors raised with the solicitors for DCH, the possibility of consolidation. In reply, on 8th April 1987, DCH stated that until it received Shui On's Points of Claim, it simply was not in a position to consider the possibility of consolidation. Particulars of Shui On's claim were sought.

17. In view of the fact that Shui On had brought the DCH Arbitration, was raising the consolidation issue, had throughout being pressing for the early disposal of the dispute, it is at least surprising that this request for further particulars, resulted in Shui On's solicitors on 13th April 1987, making a curt and unhelpful reply, which included this paragraph:

"Without actually serving detailed Points of Claim, we cannot see what more we can usefully say. Protracted correspondence will be of no benefit to either of our clients."

18. Letters couched in that type of phraseology may at times be appropriate at an interlocutory stage. But they are singularly inappropriate where the sender is wanting matters to proceed with some haste and the fundamental reason for the addressee's prior enquiry is the failure of the sender to supply detailed Particulars of Claim. Shui On's solicitors attitude, as evidenced by that letter was, at best, unlikely to accelerate or be conducive to the early resolution of the dispute.

19. In a letter dated 12th June 1987, Shui On's solicitors expressly raised with DCH's solicitors their wish that the DCH Arbitration, after consolidation, be heard during February-June 1988. On the same date, they wrote to the Employers solicitors stating that if the DCH Arbitration "could be advanced sufficiently quickly" it could be heard at the same time as the Main Contract Arbitration during the period February to May 1988. On 18th June 1987, DCH's solicitors replied that the 7 days they had been given to consent to consolidation, before application to the Court, did not allow sufficient time for them to consider that question. In the event they rightly anticipated that part of Shui On's haste was that, if necessary, they wished to apply to the Court and have the application disposed of before the pending Long Vacation.

20. In that letter DCH's solicitors did not oppose consolidation but pointed out that they needed more time to consider that issue. Clearly, DCH might after consideration have been willing to agree to consolidation, as the following sentence in that letter expressly indicates:

"We believe that if all 3 parties agree to a form of consolidation of the 2 arbitrations, this matter could be dealt with by agreement without any application to the Court at all."

The letter went on to seek details of directions in the Main Contract Arbitration and whether the Employers had agreed to consolidation. The letter concluded that because the DCH Arbitration was at such an early stage, it was difficult to anticipate whether it would be ready to be heard during the suggested 1988 dates but that those dates appeared to be unduly optimistic.

21. On 19th June 1987 Shui On's solicitors refused DCH's request for a further 14 days to consider whether it could agree to the proposed consolidation. One ground of refusal was the Shui On wanted to obtain a hearing date before the Long Vacation. Shui On's solicitors went on to observe that they considered the issues in the DCH Arbitration well defined and the suggested time table not to be unduly optimistic. I would record that at the date of this letter neither Points of Claim or Defence, had been filed in the DCH Arbitration. The former were not filed until nearly 1 month later, on 16th July 1987. The Points of Defence are not yet filed. I also note that on 19th June 1987 the Employers solicitors replied to Shui On's solicitors indicating that they had no objection to both arbitrations being heard at the same time. However, as to timing, the significant part of that letter was the Employers solicitors statement, that they had reservations whether even the time table for the earlier Main Contract Arbitration was realistic. On 22nd June 1987 Shui On's solicitors wrote to DCH's solicitors simply informing them that the Employers had no objection to the two arbitrations being heard at the same time.

22. DCH's solicitors replied to Shui On's solicitors on 26th June 1987. In this letter they expressed their concern at the haste with which Shui On was proceeding with the DCH Arbitration in their attempt to have it heard in March 1988 with the Main Contract Arbitration. DCH's solicitors also referred to the time required for discovery and expressed the view that more than 1 expert for each party would be necessary. They asked for Shui On's proposed time table and also requested that Shui On forward its Points of Claim. So at this relatively recent stage, Shui On had still not served Points of Claim.

23. Shui On's solicitors replied on 2nd July 1987 denying that they were rushing the DCH Arbitration and instead self-described their action as pursuing the claims "diligently." They also set out their proposed time table for the DCH Arbitration. Points of claim were to be served on 15.7.87; service of Points of Defence 15.9.87; service of Reply and Defence to Counterclaim 30.9.87; exchange of Lists of Documents 30.9.87; inspection during October 1987; exchange of experts reports 15.10.87. They repeated the request to DCH to investigate the availability of Counsel for the period March to May 1988.

24. Counsel for Shui On submitted, that while it had only served Points of Claim on 16th July 1987, the issues between the parties were sufficiently well defined for proper consideration to be given to consolidation. For it was submitted through other documents and actions, those issues had been well known to both parties for some time. The Court was reminded that Section 6B closely follows the provisions of Rules of the Supreme Court Order 4 Rule 9, Cap.4. It was submitted that, by analogy, the principles well established under that rule, provided helpful guidance to the exercise of the Court's discretion under Section 6B. Apart from saving costs, time and the repetition of evidence, it would also avoid the possibility of contradictory or inconsistent decisions. The latter possibility had been a major consideration which had led Rhind J., to order that the two arbitrations in Re Shui On Construction Co. Ltd. and Schinder Lifts (H.K.) Ltd. should be heard at the same time. Finally, it was submitted, again citing Rhind J. 's judgment, that if there were to be consolidation, it should occur at the earliest convenient moment.

25. Counsel for DCH submitted that because the issues in the DCH Arbitration were not yet properly defined, it was premature for the Court to consider consolidation. Accordingly, it was submitted, no order should be made at this stage. This stance reflected DCH's attitude in the pre-hearing correspondence which had never opposed consolidation, but sought further time for consideration. Counsel for DCH further submitted, that because of the fundamental differences between arbitration and litigation, any analogy sought to be drawn with Order 4 Rule 9 was limited. In any event, there were substantial procedural differences between the superficially similar Section 6B and Order 4 Rule 9. Under Section 6B the Court is simply given a power to consolidate. But that power is irrevocable. There is no power to deconsolidate. The Court, unlike when it controls its own procedure, has no inherent jurisdiction but is limited to the statutory powers created by the Arbitration Ordinance.

26. Counsel for DCH further referred to the note to Order 4 Rule 9 in 'The Supreme Court Practice 1985' 25 which states that the Rule should be read with Order 15 Rule 5 "which is to some extent its counterpart". Under the latter Order there is express power to deconsolidate an action by ordering separate trials. It was submitted that this major limitation on the Court's supervisory powers in arbitration, compared to litigation, considerably qualified the application to arbitration of the litigation principle that consolidation should ideally take place at the earliest convenient moment. If, however, weight was to be given to litigation principles, then a recognised factor against consolidation, is where one action is much nearer trial than the other. Counsel further submitted that DCH's opposition to consolidation at this stage, was also related to Shui On's proposed timetable and its determination to have the DCH Arbitration, heard at the same time as the probable February - June 1988 dates of the Main Contract Arbitration.

27. Shui On's proposed timetable is at least in part relevant, to the issue of consolidation and will become more relevant on the subsequent issue of costs. As to the consolidation timing, until this actual hearing, Shui On's attitude was not only consistent but implacable. DCH's opposition to the impracticability of Shui On's timetable did not stand alone. The Employer's solicitors by letter, had informed Shui On's solicitors that they had reservations whether the timetable was realistic. When I review the pleadings and the correspondence I am well satisfied that Shui On's timetable was both unrealistic and impractical. I fully accept the criticisms made by DCH's Counsel in relation to that timetable.

28. In fact after this hearing commenced, Shui On's Counsel accepted much of this criticism. He acknowledged that the timetable was impractical and that if the arbitrations were consolidated then the hearing would have to be deferred to a later date. But in his view, the timing and fixing of dates was not a matter that need concern the Court, for it would be determined by the Arbitrator. However, that submission was an oversimplification of the position. In the light of Shui On's previous stance, Counsel's acknowledgement certainly took the other parties by surprise. It even caused the solicitor for the Employers to intervene and ask whether Shui On's Counsel had specific instructions to make that concession. Counsel replied that he would receive instructions depending on the fate of the instant application but he himself accepted that the timetable would have to be altered.

29. DCH's response throughout was obviously conditioned by Shui On's insistence on an impractical timetable. The relevance of the timetable in relation to Section 6B, is that the Court, when making an order thereunder, is empowered to order consolidation "on such terms as it thinks just." If Shui On's Counsel had not given the indication that the timetable would require change, I may not have been prepared to order consolidation at this stage or been willing to order consolidation simpliciter. I would only have considered ordering consolidation, subject to the condition that the hearing not take place before a particular date, later in time than Shui On's timetable. However, it is generally undesirable for the Court to reduce the freedom of an arbitrator by imposing conditions which would amount to arbitration directions, or otherwise unnecessarily to usurp the arbitrator's powers. If consolidation were to be ordered, Counsel for Shui On's acknowledgement that the timetable was impractical, would reduce the need for such a condition.

30. After reviewing all the relevant factors to which my attention had been drawn and considering Counsels submissions in the light of the circumstances which have arisen at the hearing, I am satisfied that this is a proper case where I can exercise my discretion and make an order under Section 6B. As to the type of order, there are two serious alternatives. First, an order for formal or full consolidation. Secondly, an order that the arbitrations be heard at the same time. The procedural difficulty, which led to the latter type of order being made in Re Shui On Construction Co. Ltd. and Schinder Lifts (H.K.) Ltd., does not exist, as Shui On is the same claimant in both arbitrations.

31. Shui On seeks a formal consolidation. The Employer would prefer the alternative order that the arbitrations be held at the same time. Counsel for DCH recognised that if there were to be an order, more advantages resulted from a formal order than from the alternative order. The main advantage from a formal order, is that interlocutory orders can then be made affecting all 3 parties. For example, there could be mutual discovery between Employers, Shui On and DCH. These advantages are lost, if there is merely an order that both arbitrations be heard at the same time.

32. A formal order increases the power of the Arbitrator and facilitates the better disposal of the issues between all 3 parties. If a formal order is made, the future progress of the arbitrations will benefit, from the advantages of full consolidation. Where the circumstances otherwise support formal consolidation, I do not think the consequential need to amend prior pleadings is a significant detrimental relevant factor, although I appreciate that reference is made to this in Re Shui On Construction Co. Ltd. and Schinder Lifts (H.K.) Ltd. In the present application I am satisfied that it is desirable to make an order for a formal consolidation.

33. The remaining issue relates to costs. Shui On sought costs against DCH and submitted that no order should be made against it for the Employers costs. It was submitted that, as between Shui On and DCH, costs should follow the event. The Employers sought costs against the other parties, on the ground that it was only their dispute which had obliged the Employers to appear. DCH submitted that no order should be made as to costs. It was submitted that the impractical timetable which Shui On had maintained until after the hearing commenced, was the main reason why the proceedings were brought. Further, that in view of the Employers attitude and limited participation at the hearing, it could have elected not to have appeared.

34. In normal circumstances a Court would probably have exercised its discretion as to costs, by ordering that they should follow the event and be paid by DCH. However, in my opinion there is considerable merit in Counsel for DCH's twofold submission, that in this particular case, each party should bear their own costs. I have already recorded that prior to the hearing DCH did not oppose consolidation but considered that the application wss premature. The early stage of the DCH Arbitration in relation to Shui On's impractical timetable, made that attitude reasonable. Even the Employers, who were not directly involved in the more recent DCH Arbitration, considered that the Main Contract Arbitration timetable may have been unrealistic. The then pending Long Vacation was obviously also one other reason why Shui On elected to bring this application earlier than it might otherwise have done.

35. It was only during the hearing that Shui On, by its Counsel, faced up to the fact that its timetable, which until then it had been anxious to preserve, was impractical. That recognition had a material effect on the nature and the outcome of the hearing. Otherwise the order now made, might not have been made or, if made, might have imposed conditions to avoid an unduly early hearing. After taking all these factors into account I consider there should be no order as to costs. My formal orders therefore are: