Kenon Engineering Ltd v. Nippon Kokan Koji Kabushiki Kaisha
Read the full judgment text of CACV 216/2003 on BabelCite. This Court of Appeal judgment was delivered on 7 May 2004.
1. I agree with the judgment of Le Pichon JA.
Cited by 2 cases · Cites 5 cases
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CACV000216/2003 CACV 214/2003, CACV 215/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NOS. 214, 215 & 216 OF 2003 (ON APPEAL FROM HCA NO. 3492 OF 2002, HCA NO. 3973 OF 2002 & ____________________ HCA 3492/2002
____________________ AND HCA 3973/2002
____________________ AND HCCT 21/2003
____________________ Coram: Hon Rogers VP and Le Pichon JA in Court Date of Hearing: 27 April 2004 Date of Handing Down Judgment: 7 May 2004 ____________________ J U D G M E N T ____________________ Hon Rogers VP: 1.I agree with the judgment of Le Pichon JA. Hon Le Pichon JA: 2.This is the judgment in three appeals which were heard together from orders made by Deputy High Court Judge Muttrie in HCA 3492/2002, HCA 3973/2002 and HCCT 21/2003 respectively. 3.Kenon Engineering Limited ("Kenon") was the plaintiff in HCA 3492/2002 and HCCT 21/2003 and the defendant in HCA 3973/2002. Nippon Kokan Koji Kabushiki Kaisha also known as Nippon Kokan Koji Corporation ("NK3") was the other party in each of those actions. NK3 applied for a stay of further proceedings in favour of arbitration or alternative dispute resolution in HCA 3492/2002 and a stay of Kenon's counterclaim in HCA 3973/2002. On 2 July 2003, the judge dismissed those two applications by NK3. The third application was Kenon's summons in HCCT 21/2003 for a declaration that clause 21.1 of the contract executed by Kenon and NK3 on 6 March 2001 ("the subcontract") was not an arbitration agreement and that there was no valid arbitration agreement between the parties obliging Kenon to refer the matters in dispute in the other two High Court actions to arbitration. The judge made the declaration sought. At the conclusion of the hearing, judgment was reserved which we now give. Background 4.NK3 was the specialist subcontractor for the erection and engineering of the structural steel package for the 88 storey high commercial building known as North East Tower ("the building") at the Hong Kong Station Development. Kenon was the erection subcontractor to NK3. The parties entered into the subcontract which contained the following provision:
As appears from clause 4 of the subcontract, it was a remeasurement contract with the contract price based on unit rates fixed throughout the duration of the subcontract. 5.On 19 July 2001, the parties entered into a supplemental agreement ("the 1st supplemental agreement"). It would appear from the recitals that Kenon was experiencing financial difficulties relating to its obligations under its subcontract. These led to the 1st supplemental agreement whereby certain terms of the subcontract were amended and NK3 gave assistance to Kenon by (1) purchasing the items listed in schedule 1 but making them available for Kenon's use; (2) purchasing the equipment and materials on site listed in schedule 2; and (3) paying on Kenon's behalf rental payments under lease/tenancy agreements set out in schedule 3 which sums would rank as a debt owed by Kenon to NK3. The 1st supplemental agreement contained a saving provision preserving the terms and conditions of the subcontract save as provided for therein. 6.On 16 November 2001, the parties entered into another supplemental agreement ("the 2nd supplemental agreement"). Effectively, this was to terminate the relationship between the parties. This was achieved through varying the subcontract so as to omit the Scope of Work from the subcontract. Clause 3 dealt with the use and ownership of equipment listed in schedules 2 and 3 to the 2nd supplemental agreement. Clause 5 provided as follows:
7.There were substantial unresolved disputes arising from the subcontract. On 13 August 2002, Kenon's solicitors wrote to NK3 giving them notice of Kenon's exercise of its rights to proceed with mediation in accordance with clause 5.5 of the 2nd supplemental agreement, proposing two potential mediators. NK3 replied on 16 August 2002 expressing a preference for one of the potential mediators and sought further information concerning his experience. On the same day, Kenon's solicitors wrote to NK3 claiming (a) damages following a fire accident that occurred on 6 July 2002; (b) the amount due to Kenon in respect of equipment (referable to clause 3 of the 2nd supplemental agreement); and (c) rental and handling charges in respect of acetylene an oxygen cylinders that had been rented by Kenon. Kenon's solicitors also sought the return of equipment listed in schedule 3 to the 2nd supplemental agreement, threatening legal proceedings if Kenon's claims were not met. That letter prompted a reply from NK3 on 19 August 2002 to the following effect:
8.On 20 August 2002, NK3 wrote in respect of the mediation stating that:
9.Kenon's solicitors then wrote on 28 August to the effect that the intended mediation pursuant to clause 5 of the 2nd supplemental agreement was an agreed mechanism for resolving and settling disputes as to the final account of the subcontract solely and exclusively and that the issues relating to schedule 2 and schedule 3 equipment, the cylinders and damages for the fire accident were outside the scope of clause 5. By a letter dated 6 September 2002, Kenon's solicitors gave notice to NK3's solicitors that should NK3 fail to execute the mediation agreement sent on 28 August 2002, they would be in breach and Kenon would take an alternative route to claim against NK3 for the final account. 10.On 12 September 2002, various events occurred. Kenon's new solicitors, Jones, Day, Reavis and Poge gave notice of their appointment, they wrote to Kenon's solicitors asserting (1) that as the timetable for the appointment of a mediator contemplated by clause 5 of the 2nd supplemental agreement had long expired, the "parent" dispute resolution procedure contained in clause 21.1 of the subcontract had "kicked in". On behalf of NK3, they made a proposal that (a) all disputes arising out of the subcontract be mediated before Mr Ho; (b) such mediation should commence no later than 27 September 2003 and conclude within 30 days thereof; and (c) failing a settlement, all disputes and differences remaining shall be finally settled by arbitration. On the same day, Kenon issued the writ in HCA 3492/2002. 11.On 18 September, NK3 issued a Notice of Reference of Disputes relying on clause 21.1 and proposing Mr John Scott, QC, SC as arbitrator. 12.On 25 September, Kenon's solicitors advised NK3's solicitors that Kenon did not accept that the notice was valid, it disagreed with the appointment of Mr Scott and that legal proceedings would be commenced. 13.The Hong Kong International Arbitration Centre appointed Mr Scott to act as arbitrator upon the notice being referred to it. Meanwhile, on 21 October 2002, NK3 commenced HCA 3973/2002 in respect of payments made by NK3 of over $6 million for and on behalf of Kenon under section 43 of the Employment Ordinance. Kenon defended the claim and counterclaimed what it said it was owed by way of final account as a setoff and counterclaim amounting to over $16 million. 14.On the arbitration front, Kenon made no objection to the arbitrator's jurisdiction. Directions were given as to the filing of submissions and evidence concerning the validity of the arbitration agreement by the arbitrator with a view to his ruling on the issue pursuant to article 16(3) of the UNCITRAL Model Law. Ten days later, on 22 March, Kenon commenced HCCT 21/2003. The originating summons was amended on 22 April. Then on 13 May 2003, Mr Scott stayed the arbitration proceedings generally pending the hearing of HCCT 21/2003. The judgment below 15.On the primary issue namely, whether clause 21.1 is an arbitration clause, the judge held that it was not. In view of that conclusion, the further question whether clause 21.1 of the subcontract was superseded by clause 5.5 of the 2nd supplemental agreement did not arise for decision. On the question whether the court should stay proceedings so that the parties could adhere to their agreement, the judge concluded thus:
This appeal 16.In this appeal, Mr Manzoni, who appeared for NK3, raised three issues:
The correct approach 17.In essence, Mr Manzoni's submission amounts to this: unless the argument that a valid and binding arbitration agreement existed between the parties has no prospect of success, the procedure set out in article 16 of the UNCITRAL Model Law should be observed, that is to say, the arbitrator should be allowed to decide the question in the first instance. If either party is dissatisfied with the arbitrator's determination, it is at liberty to apply to the court for a review of the arbitrator's decision. 18.Articles 8 and 16 of UNCITRAL provide as follows:
What the judge decided was that the jurisdiction of the arbitrator under article 16 was not exclusive, that there would be no practical advantage in referring the matter back to the arbitrator, that any decision made by the court would not usurp the jurisdiction of the arbitrator and, consequently, the court had jurisdiction finally to determine the matter. 19.Whilst accepting that article 16 provides for concurrent jurisdiction, Mr Manzoni maintained that the matter must be determined by the arbitrator first unless the point of there being an arbitration agreement is not arguable. He cited Fung Sang Trading Ltd v Kai Sun Sea Products & Food Co. Ltd [1992] 1 HKLR 40 in support. In that case, the contract between the parties contained an arbitration clause which was not itself in issue. What was in dispute was whether the person who signed the contract on behalf of the defendants had the necessary authority to enter into it. There the court declined to rule on the issue as to whether there was in fact a binding agreement between the parties, observing that the tribunal might rule on that point as a preliminary issue or as part of an award on the merits. The reason it did so is understandable: to have resolved the authority issue would have meant making a finding of fact on the affidavits when the defendants' case was that the person who signed the contract allegedly on behalf of the defendants did not have and was known not to have the necessary authority to bind the defendants. It is to be noted that if Fung Sang be authority for the proposition that article 16 required the jurisdictional issue to be decided by the arbitrator first, it does not have the qualification that Mr Manzoni has conceded in cases where the arbitration point is not arguable. 20.Mr Leong SC, who appeared for Kenon, submitted that the question of the arbitrator's jurisdiction is called into question in three scenarios: the first arises under the 'competence-competence' principle which concerns the scope of the arbitrator's power under a particular arbitration clause; the second arises under the separability principle, that is to say the issue which arose in Fung Sang, which is whether or not the contract of which the arbitration clause forms part was indeed entered into. It was submitted that article 16(1) contemplated the two situations set out above but not the present case where the existence of an arbitration agreement itself was in issue. It was further submitted that the correct approach is for the court to form a provisional view as to whether the provision in issue is an arbitration clause and whether it would be just and convenient for the issue to be decided by the court. Mr Leong SC submitted that practicalities dictated that the court should decide the existence or otherwise of the arbitration agreement. 21.Since the arbitrator's jurisdiction to rule on the existence or otherwise of an arbitration agreement is not exclusive under article 16, it cannot be said that article 16 requires the matter to be resolved by the arbitrator first in every case. As I understand it, that is not NK3's position. Hence the qualification it concedes. In my view, a clear distinction does exist between the Fung Sang issue which involves making factual findings and the present case which turns on a pure question of construction i.e. a question of law. I am inclined to the view that Mr Leong's formulation of the correct approach involving the twin considerations is correct. The epithets 'unarguable', 'hopeless', 'marginally arguable' or 'arguable', are very much different shades in a spectrum, involving a value judgment which is largely a matter of impression. Given the concurrent jurisdiction, it stands to reason that whether or not the court should decide the issue would depend on considerations of convenience and what falls to be decided. In my view, the judge's approach in the present case was both sensible and realistic. NK3's criticisms are misplaced. 22.In any event, even if NK3's submission be correct, the judge was right to have decided the question whether or not clause 21.1 amounted to an arbitration agreement. It was simply not arguable that clause 21.1 constituted an arbitration agreements for the reasons appearing below. Clause 21.1 23.Mr Manzoni acknowledged that the terms "mediation" and "mediation procedure" were used in clause 21.1. That, he submitted, was not important, being a mere label and what really mattered was the fact that the clause had all the attributes for arbitration. He referred to the following passage in Mustill & Boyd on The Law and Practice of Commercial Arbitration, 2nd Edition at 41:
24.Whilst I accept that for there to be a valid arbitration agreement, the attributes identified in the passage above have to be satisfied, the converse is not true: the fact that an agreement may satisfy those attributes does not mean that it must be an arbitration agreement. Indeed, the paragraph preceding the passage cited above makes that abundantly clear:
25.Taken at face value, clause 21.1 is, at best, ambiguous. It expressly referred to "mediation" and, at the same time, contemplated an award that would be final and binding. Be that as it may, the correspondence between the parties during the month immediately proceeding the issue of the writ in HCA 3492/2002 is instructive. That correspondence is dealt with in some detail in paragraphs 7 to 8 above. The letters dated 16, 19 and 20 August 2002 from NK3 make it plain beyond peradventure that from NK3's standpoint at that time, what the parties had agreed to in the subcontract and the supplemental agreements was mediation. In that connection, the observations of Ribeiro PJ in Shanghai Tongji Science & Technology Industrial Company Limited v Casil Clearing Limited, FACV No. 13 of 2003 at paragraph 65 are particularly apposite:
In those circumstances, for my part, I do not consider it arguable that clause 21.1 was an arbitration agreement. 26.In any event, clause 21.1 was plainly superseded by clause 5.5 of the 2nd supplemental agreement. The purpose of clause 5 was to provide for the settlement of "the final account" of the subcontract. Mr Manzoni submitted that only the matters specified in 5.1 i.e. "variation orders, claims and day-works orders ... under the subcontract" were within the ambit of the mediation agreement contained in clause 5. That submission is demonstrably wrong. Clause 5.3 brought into the scope of the mediation agreement claims arising under clauses 3.1 and 3.2 of the 2nd supplemental agreement which in turn are referable to the purchase and use of equipment and materials on site dealt with under the 1st supplemental agreement. What clause 5 envisaged was in truth a final account and that must mean all claims and disputes between the parties arising out of the subcontract and the two supplemental agreements.
27.Mr Manzoni sought to criticise the judge for not exercising his discretion to stay the High Court proceedings to enable the parties to adhere to the agreed method for settling disputes. The judge's reasoning appears in paragraph 34 of the judgment reproduced in paragraph 15 above. Mr Manzoni referred to the observations made in Hyundai Engineering and Construction Co. Ltd v Vigour Ltd, HCCT 100 of 2003, unreported, 14 April 2004 at para 98 to the effect that "there is probably no hard and fast rule that agreements to negotiate or mediate in good faith are per se unenforceable." 28.But what Reyes J held was that the court must look at each situation and ask whether it is possible to frame objective criteria against which a party's compliance or non-compliance with a particular obligation can be assessed. As Mr Leong SC pointed out, Cable & Wireless PLC v IBM United Kingdom Ltd [2003] BLR 89 and The Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 are examples of the court enforcing agreements to mediate where the procedures for mediation are clearly identified such as the CEDR mediation rules or where the provision is sufficiently certain for the court to stay the court proceedings. Cf. See Halifax Financial Services Ltd v Intuitive Systems Ltd [1999] 1 All ER 303 where the provision was for the parties to negotiate and did not bind them to any method of determining the dispute. Mr Leong submitted, and I agree, that in the present case, the objective criteria are lacking. In my view, no valid criticism can be made of the judge's exercise of his discretion in declining to stay the court proceedings. Conclusion 29.For the reasons set out above, I would dismiss this appeal. I would also make an order nisi that costs be to Kenon. Hon Rogers VP: 30.There will therefore be an order accordingly.
Representation: Mr Alan Leong SC and Mr Yeung Ming Tai, instructed by Messrs Chong & Partners, for Kenon Engineering Limited Mr Charles Manzoni, instructed by Messrs Jones Day, for Nippon Kokan Koji Kabushiki Kaisha also known as Nippon Kokan Koji Corporation |
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