CHINA MERCHANTS HEAVY INDUSTRY CO., LTD. v. JGC CORPORATION

HCCT 5/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.5 OF 2000

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D E C I S I O N

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1. By this summons, the defendant seeks a stay of proceedings commenced by writ by the plaintiff on 17 December 1999. The defendant's application is made under section 6 of the Arbitration Ordinance, Cap.341. It also applies for the writ to be set aside, as an alternative remedy.

2. The parties entered into a building contract on 13 December 1996. The defendant engaged the plaintiff as its contractor.

3. The clause of the contract which is at the core of this application is the arbitration clause, clause 12. Miss Teresa Cheng, SC for the plaintiff and Mr Denis Brock for the defendant invite the court to interpret the clause in different ways. The court's determination as to its meaning and effect will resolve the several issues between the parties. The entire clause reads as follows :

"12. SETTLEMENT OF DISPUTES

If any dispute or difference of any kind shall arise between JGC and the Contractor in connection with or arising out of the contract or the carrying out of the Works which cannot be settled by mutual agreement, JGC shall state its decision in writing and give notice of same to Contractor. Such decision in respect of every matter so referred shall be binding upon JGC and the Contractor until Completion of the Works and shall forthwith be given effect to by the Contractor, who shall proceed with the Works with all due diligence, pending the outcome of any arbitration proceedings as outlined below.

Without prejudice in any way to the foregoing, if, within fifteen (15) calendar days after the date of the above decision in writing made by JGC, the Contractor shall by written notice to JGC so request, specifying such dispute or question, then the matter shall be referred to a single arbitrator to be agreed upon by the parties, or failing such agreement to three (3) arbitrators, one (1) of whom to be appointed by each party.

The two (2) arbitrators so selected shall appoint a third arbitrator. The dispute or disagreement shall be determined by a majority of the three (3) arbitrators and the decision of such majority shall be binding and conclusive upon the parties hereto, provided that if either party shall fail to select an arbitrator within twenty (20) calendar days after the date of the notice requesting arbitration, the arbitrator selected by the other party shall determine the question, and his decision shall be binding on the parties (There shall be no appeal from any arbitration determination to the Courts).

The arbitration shall be conducted in the English language, shall be held in Tokyo, Japan and determined under and governed by the laws of Hong Kong in accordance with the rules of Conciliation and Arbitration of the International Chamber of Commerce.

Neither the existence of any controversy or claim nor the fact that any arbitration is pending hereunder shall relieve either party of his obligations under the Contract."

4. It should be noted, firstly, that this is not the usual bilateral arbitration clause giving both parties the right to arbitrate their difference. It is, nonetheless, a valid arbitration clause. Both parties have invited the court to break it down into its constituent parts in order to determine its meaning. Both sides agree that a dispute has arisen. What the clause then provides appears to be as follows :

(i) the parties should attempt a mutual settlement;

(ii) if there is no settlement, the defendant must give a decision on the dispute in writing to the plaintiff;

(iii) that decision will be binding on both parties until the completion of the works;

(iv) the plaintiff shall continue the works with all due diligence, pending arbitration proceedings;

(v) if the plaintiff does not agree with the defendant's decision at (ii), it has 15 days in which to notify the defendant that it does not accept the decision and that it wishes to refer the matter to arbitration;

(vi) the arbitration shall be held in Tokyo and be heard in English under Hong Kong law; and

(vii) if one arbitrator can be agreed upon, so be it, if not, three arbitrators will hear it.

5. The events and correspondence, which have been the subject of detailed analysis by both Miss Cheng and Mr Brock, have given rise to a number of issues. The primary issues seem to be :

(a) did the defendant ever comply with (ii) above? The defendant submits that its letter of 29 March 1999 is a "decision letter" (its fallback position is that if the 29 March letter is not a decision letter, then its letter of 10 June 1999 certainly is. The plaintiff's submission is that the defendant has not issued any decision letter;

(b) if a decision letter has been written, what is the effect of the plaintiff's failure to comply with (v) above and the 15-day period expires? The plaintiff submits that the arbitration clause thereby becomes inoperable and it has a right to commence a writ action. The defendant submits that if the plaintiff loses its right to arbitrate by failing to comply with the 15-day period, it loses its right to dispute the decision letter and remains bound by it;

(c) the plaintiff submits that regardless of whether a decision letter was written, the defendant in later correspondence has repudiated the arbitration clause and that repudiation has been accepted by the plaintiff; and

(d) does the failure to comply with the 15-day period act as a bar to the plaintiff's claim in its entirety or does it act as a bar to pursuing its remedy in arbitration?

6. Other sub-issues have emerged, but depending on the court's decision on issues (a) and (b) above, it may not be necessary to address them in this application.

7. I will deal with issue (b) first of all.

Issue (b): The effect of a failure to comply with the 15-day period

8. I have found this a difficult issue. There is some merit in both of the competing submissions.

9. Miss Cheng submits, correctly, that only the plaintiff has the right to choose arbitration. It is a unilateral clause. She argues that if the 15-day period elapses, either by oversight or deliberately, the clause is of no effect and the plaintiff can commence a writ action. She submits that the court cannot compel the plaintiff to arbitrate, therefore, it cannot stay the action in favour of arbitration. The clause says "if" the 15-day period is complied with, "then" the matter shall be referred to arbitration. The argument continues, if it is not complied with, there can be no arbitration at all. That is what has happened here (assuming there was a "decision letter"). Therefore, there is nothing to go to arbitration, therefore, there is no purpose in staying proceedings. If the stay application fails, the writ action must proceed.

10. At first blush, Miss Cheng's argument is attractive. However, after careful analysis with the assistance of Mr Brock's submission, I have come to the conclusion that it is wrong.

11. As well as examining the constituent parts of clause 12, it is also helpful to consider it as a whole. The defendant is a Japanese company, it engaged the plaintiff, they wanted arbitration to be in Tokyo. The clause, read as a whole, is a strong clause in the defendant's favour. It gives the defendant the right to settle any dispute by giving a written decision. That decision binds the parties. It gives the plaintiff one opportunity to dispute the decision. That opportunity only arises if the plaintiff, within 15-days, says, in writing, it wishes to invoke the arbitration procedure. If it does so, both parties are bound by the outcome of the arbitration. There is no appeal. If it does not do so, it remains bound by the decision letter. It is to be noted that the first paragraph of clause 12, which binds the plaintiff, ends with the words "pending the outcome of any arbitration proceedings as outlined below".

12. The weakness of Miss Cheng's submission is that her interpretation suggests that after any decision letter from the employer, the contractor can simply deliberately allow the 15-day period to pass and then serve a Hong Kong writ on the defendant. This would completely defeat the purpose of clause 12 which was to put the defendant in the driving seat of any clause 12 dispute resolution, namely by either its own decision letter or by arbitration in Japan. The point is further enforced by the fact that the defendant has no right to arbitrate under clause 12. It does not want to and it does not have to because, failing arbitration, its decision letter is final and binding. If, on the other hand, a situation arose in which JGC was the plaintiff, it could bring an action in Hong Kong where the defendant (the plaintiff here) lived.

Issue (a): Did the defendant write a "decision letter"?

13. Clearly if it did, given my decision on issue (b) above, the plaintiff's only avenue is arbitration, in which it will be faced with a preliminary time bar defence. If it did not, new issues arise for determination. I have decided that I should decide this issue but solely in relation to the issue of whether or not the 15-day period had started to run. This decision does not preclude the plaintiff from re-arguing the point in arbitration.

14. Counsel have referred the court to the whole history of the case as it appears in correspondence. I shall endeavour to confine this judgment to the material letters only. The first letter upon which the defendant relies is that of 29 March 1999. Miss Cheng submits that this letter was just another step in negotiations between the parties when trying to settle their differences. The differences were prompted by the plaintiff's draft final account submitted on 7 December 1997. At least 20 exchanges of letters followed, most of them were open correspondence.

15. The 29 March letter was a two-page document which summarized the recent history of the negotiations and concluded :

"Our final assessment is fair and reasonable, and since the total amount of final assessment has been paid you already, we have no obligation to pay any more amount to you including interest."

16. In support of the contention that this was the decision letter which triggered the 15-day period to run, Mr Brock relies on the finality of the words used. He submits that it plainly represents the end of negotiations. He further relies on the fact that the plaintiff's response was immediately to engage solicitors for the first time who, on 1 June, responded as follows :

"If we do not receive the above amount within 10 days from the date of this letter, we will take appropriate legal action, including initiating arbitration as per the Contract, to recover the amount, and will also claim the interest accrued and legal costs incurred."

17. Against the argument that a decision letter had been written, Miss Cheng submits that it should not be so regarded, firstly, because it did not say it was a decision letter pursuant to clause 12 and, moreover, correspondence continued thereafter.

18. In my judgment, the 29 March letter should be regarded as a decision letter. It was sufficiently final in its terms. There had been many previous letters but this one stated unequivocally that the defendant's position was that this assessment "is reasonable", the money "has been paid" and they have "no obligation to pay any more". Further, there is no requirement that a decision letter should specifically state that it is a clause 12 decision letter.

19. If the court's assessment of the 29 March letter as a decision letter is unduly harsh on the plaintiff, then the matter is put beyond doubt in the defendant's 10 June letter which I set out in full :

"We have received your letter reference no.099313.006 dated 1 June 1999 which was faxed to us on 1 June 1999 and was delivered to us via air mail on 7 June 1999.

In respect of the amount of the Final Account under the captioned contract (the 'Contract') between JGC Corporation ('JGC') and Yiu Lian Engineering & Heavy Industry Ltd ('Yiu Lian'), we believe that JGC has already replied to Yiu Lian via our letter to them Ref. No. P3-L-JY/OT-111 dated 29 March 1999.

We believe that JGC has acted in good faith to settle the Final Account under the Contract, and has assessed the claim from Yiu Lian in a reasonable manner.

As reiterated in the various meetings with Yiu Lian and our correspondence with them, we are of the view that Yiu Lian's claim for HK$26,300,000.00 as Final Account is not substantiated under the Contract.

Accordingly, we can not agree that JGC is indebted to Yiu Lian for HK$4,300,060.06 as stated in your letter.

We believe that the foregoing duly explains JGC's position."

20. For the purposes of this application, therefore, I am satisfied that the defendant complied with clause 12, if not on 29 March, then certainly on 10 June. It does not matter which because the plaintiff's response did not come until November.

21. I have thus decided, on the whole of this summons, that the correct answer is the simplest one. Clause 12 is a valid arbitration clause which binds the parties. The defendant complied with its terms, the plaintiff did not. The issue of whether or not the arbitration clause was repudiated does not fall for consideration in this application; neither does the issue as to whether clause 12 included a time bar which was a claim bar or a remedy bar.

22. The clause is not null and void, inoperative or incapable of being performed; a dispute exists, therefore it is mandatory on this court to stay the writ action pending arbitration in Japan.

23. This ruling has unfortunate practical consequences. On the face of it, the parties now must go to Japan where the plaintiff will be faced with an immediate preliminary time bar defence. Even if that is successful, it may not be the end of the matter. This court is merely staying the action pending arbitration. The claim itself may not be described as small, but it certainly is not large either. Much effort has been put in to settle this matter, both between the parties themselves during 1998 and 1999, and between the solicitors during 1999 and 2000. Further attempts were made between the adjourned hearing of this application between September and December 2000. All attempts have so far failed.

Setting aside the writ

24. The application to set aside is an alternative remedy sought by the defendant in the event that the court refuses the stay application. That has not happened. It is nonetheless appropriate briefly to state whether the court would have been minded to set the writ aside as an alternative remedy. It would not.

25. The application is based on a technical error in failing to accompany the writ with a properly numbered acknowledgement of service. I regard that as a mere technicality which should not defeat the plaintiff's rights to litigate. The error was rectified and there could have been no prejudice to the defendant.

26. My rejection of the defendant's submission on the alternative remedy sought, will however have no effect on my costs order which is that the costs of the summons be to the defendant in any event.