Yun Kwan Construction Engineering Ltd v. Shui Tai Construction Engineering Co Ltd

HCA 1316/2018

[2019] HKCFI 1841

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1316 OF 2018

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BETWEEN

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Before: Hon G Lam J in Chambers (not open to public)

Date of Hearing: 18 July 2019

Date of Decision: 18 July 2019

Date of Reasons for Decision: 23 July 2019

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R E A S O N S   F O R   D E C I S I O N

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1.The plaintiff is a company that carries on the business of steelworks for construction. The defendant is a construction company. By this action, the plaintiff sues the defendant for alleged outstanding sums under sub-contracts relating to 4 different projects. By the summons before me, the defendant seeks an order that further proceedings in the action in relation to 2 of the projects be stayed for arbitration. I shall refer to those 2 projects as “Project 1” and “Project 3” respectively, being the first and third projects referred to in the Statement of Claim. At the conclusion of the hearing I dismissed the summons with costs for reasons to be handed down. These are my reasons.

2.The sole issue is whether the arbitration clause contained in the contracts between the defendant and its own respective head contractors in the 2 projects has been incorporated into the corresponding contracts between the defendant and the plaintiff.

3.For present purposes, the relevant facts are not in dispute.  In the case of the Project 1, which concerns a proposed residential and commercial development in Kai Tak:

(1)  Konwall Construction & Engineering Co Ltd (“Konwall”) was the main contractor, who had entered into a main contract with the employer, Handy Solution Ltd, relating to hoarding, basement excavation and lateral support, foundation and pile caps.  I shall refer to this as the “Employer-Konwall Contract”.[1]

(2)  By a contract letter dated 3 October 2015 and countersigned by the defendant on 5 October 2015, Konwall sub-contracted certain excavation and lateral support and RC works to the defendant.  I shall refer to this as the “Konwall-D Contract”.  Clause 7 of that letter expressly stated that a number of documents, including in particular the General Conditions of Sub-Contract (“GCSC”), shall form part of the contract.

(3)  GCSC clause 18 provides:

“ 18.1  If any dispute arises between you and us in connection with the Sub-Contract, then either party shall give to the other notice in writing of such dispute and such dispute shall be referred to arbitration of such person as the parties may agree to appoint as the arbitrator in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory modification thereof for the time being in force and any such reference shall be deemed to be a submission to arbitration, within the meaning of such Ordinance.

…

18.3  Any reference to arbitration under Clause 18.1 shall not be opened until after the completion or alleged completion of the Main Contract Works or termination of the Main Contract and the Sub-Contract without our written consent.”

(4)  By a contract between the defendant and the plaintiff dated 30 September 2015 (“D-P Contract 1”), the defendant in turn sub-sub-contracted to the plaintiff part of the works.  Clause 10 of the D-P Contract provides:

「 總承判商與甲方立下承判合約，將總工程承判或分判予甲方（承判合約）。乙方清楚明白，這份分判工程承判合約工程為總合約及承判合約之[全部/一部份]，雙方並訂下以下條款。」

In English translation:

“ The Principal Contractor entered into a sub-contract with Party A to sub-contract the main works to Party A (Sub-Contract). Party B understands clearly that the works of this sub-contracting agreement were [all/part] of the Main Contract and Sub-Contract, and both parties agreed to the following terms.”

4.The contractual chain in Project 3, which concerns a proposed residential development in Tuen Mun, is similar:

(1)  Vicon Construction Co Ltd (“Vicon”) had entered into a contract for foundation works.  It is not clear whether this was entered into with the employer (Green Lotus Ltd) or the main contractor (New Concepts Foundation Ltd).

(2)  By a letter of contract dated 4 March 2016, Vicon sub-contracted the earthwork to the defendant (“Vicon-D Contract”).  Clause 2 of that letter states that the terms and conditions of the Standard Form of Domestic Sub-Contract (2008 Addition) published by the Hong Kong Construction Association shall apply (“SFDSC”).

(3)  Clause 18 of the SFDSC provides as follows:

“ 18. DISPUTES

18.1  If any dispute or difference arises between the Sub-Contractor and the Contractor (together termed “the Parties” and either one termed “the Party”) in connection with this Sub-Contract, and if there exist within the Main Contract provisions allowing the reference of disputes or differences between the Contractor and the Employer to mediation and/or adjudication, then either party may request that the dispute or difference be referred to mediation or adjudication in accordance with whichever rules or other guide-lines for mediation or adjudication as may be specified in the Main Contract, or any modification thereof for the time being in force.

18.2  If either Party refuses such request for mediation or adjudication or if mediation or adjudication fails to resolve the dispute or difference then, within ninety (90) days of such refusal or failure or, should either Party not wish to refer the matter to mediation or adjudication or should there exist no such mediation and/or adjudication provisions within the Main Contract, such dispute or difference shall, subject to the provisions of this Clause, be referred to the arbitration and final decision of a single arbitrator in accordance with and subject to the provisions of Part II of the Arbitration Ordinance or any statutory modification thereof for the time being in force and any such reference shall be deemed to be a submission to domestic arbitration within the meaning of such Ordinance. In the event the Parties are unable to agree upon the appointment of an arbitrator, then either Party can apply to any “appointing authority” specified in the Main Contract, or if none, to the Secretary General of Hong Kong International Arbitration Centre for an arbitrator to be appointed.

18.3  If any dispute or difference arises in connection with the Main Contract and the Contractor is of the opinion that such dispute touches or concerns the Sub-Contract Works then, provided that an arbitrator has not already been agreed or appointed in pursuance of Clause 18.2, the Contractor may by notice in writing to the Sub-Contractor require that any dispute under this Sub-Contract shall be referred to the mediator or adjudicator to whom the dispute under the Main Contract is referred and if such mediator or adjudicator or arbitrator be willing so to act, such dispute under the Sub-Contract shall be so referred. In connection with any such joint dispute, the Sub-Contractor shall be bound in like manner as the Contractor by any recommendation, decision or award of the mediator or adjudicator or arbitrator.

18.4  If, at any time before an arbitrator has been agreed or appointed in pursuance of Clause 18.2, any dispute arising in connection with the Main Contract is made the subject of proceedings in any Court between the Employer and the Contractor, and the Contractor is of the opinion that such dispute touches or concerns the Sub-Contract Works, the Contractor may by notice in writing to the Sub-Contractor abrogate the provisions of Clause 18.2 and thereafter no dispute under the Sub-Contract shall be referable to arbitration without either the mutual consent of the Parties or the consent of the said Court.

18.5  No steps in any reference to arbitration under Clause 18.2 shall be taken until after the completion or alleged completion of the Main Contract Works or termination of the Main Contract and the Sub-Contract without the written consent of the Contractor.”

(4)  By a written agreement entered into on or around 4 March 2016, the defendant in turn sub-sub-contracted the shoring works to the plaintiff (“D-P Contract 3”).  This agreement contained the same clause referred to in §3(4) above as in the D-P Contract 1.

5.The legal principles applicable seem to me to be as follows:

(1)  By Art 8(1) of the UNCITRAL Model Law, given effect by s 20(1) of the Arbitration Ordinance (Cap 609), this court must refer any matter which is the subject of an arbitration agreement and, therefore, stay further proceedings in the action to that extent.

(2)  Art 7 of the UNCITRAL Model Law (Option I), given effect by s 19(1) of the Arbitration Ordinance, makes provision as regards what constitutes an “arbitration agreement”.  In particular, Art 7(6) prescribes how an arbitration clause in a separate document may be incorporated as part of the contract:

“ The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.”

Section 19(3) of the Arbitration Ordinance likewise provides:

“ A reference in an agreement to a written form of arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.”

(3)  For the purpose of Art 7(6), it is not essential for there to be an explicit reference to the arbitration clause itself.  Reference to a document, which contains the arbitration clause relied upon, may be sufficient, provided “the reference is such as to make that clause part of the contract”: Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300, 305-307; Gay Construction Pty Ltd & Another v Caledonian Techmore (Building) Ltd (Hanison Construction Co Ltd, Third Party) [1994] 2 HKC 562, 566D.

(4)  The document referred to need not be a contract between the same two parties.  It is possible under Art 7(6) to incorporate into a contract between A and B an arbitration clause, by reference to an agreement between B and C or even between X and Y or to an unsigned standard form of contract, which contains the arbitration clause: Astel-Peiniger, p 307.

(5)  Insofar as authorities in other jurisdictions suggest that for incorporation of an arbitration clause into a contract between A and B by reference to an agreement between B and C or X and Y, there must be a specific reference to the arbitration clause itself, they do not reflect the law of Hong Kong which is based on Art 7(6) and which has been established since Astel-Peiniger for 25 years.[2]

(6)  The question of incorporation, in particular whether the reference is such as to make the arbitration clause part of the contract, is one of construction.  The task of the court is to ascertain, with no preconceived notions, the parties’ intentions when they entered into the contract by reference to the words that they used: Astel-Peiniger, pp 311 & 313.

(7)  Like other questions of contractual construction, this involves examining the wording of the documents against the relevant background to identify what a reasonable person would have understood the parties to be using the language in the contract to mean: see eg Building Authority v Appeal Tribunal (Buildings) (ENM Holdings Ltd) (2018) 21 HKCFAR 194, §53.

6.With these principles in mind, I examine the materials in the present case.  For simplicity of expression I shall refer below only to Project 1 but the same reasoning applies to Project 3. 

7.In the relevant clause in D-P Contract 1, it is clear that the “Sub-Contract” (承判合約) means the contract between the defendant and its head contractor (ie the Konwall-D Contract), and the “Main Contract” (總合約) means the Employer-Konwall Contract.  I reject Mr Chu’s submission that the term “Sub-Contract” (承判合約) means different things in the two lines of the same clause.

8.The wording of the relevant sentence in the clause seems to me to mean that the works under the D-P Contract 1 are the whole or part[3] of the works under the Employer-Konwall Contract and the Konwall-D Contract.  The subject of that sentence seems to me to be the works under the D-P Contract 1 (分判工程承判合約工程), not the D-P Contract 1 itself.  As Mr Ho, who appeared for the plaintiff, submitted, it would not make sense for the parties to say that the D-P Contract 1 formed the whole or part of the Employer-Konwall Contract and the Konwall-D Contract, for that would be to suggest that the former (a sub-sub-contract) was incorporated into the latter (a main contract and a sub-contract).

9.It is also notable that the clause makes no reference to the “terms and conditions” of the Employer-Konwall Contract or the Konwall-D Contract, and does not in any way state that either of those contracts apply to the relationship between the plaintiff and the defendant, or that the D-P Contract 1 is “back to back” with or is to be performed “in accordance with” the Konwall-D Contract.

10.There is no dispute that until disclosure in these proceedings, the plaintiff had never been given a copy of the Konwall-D Contract, let alone the Employer-Konwall Contract.

11.It is also hard to see, if the reference is sufficient for incorporation, why only the terms of the Konwall-D Contract are incorporated (as the plaintiff contends), and not also the terms of the Employer-Konwall Contract, which is also referred to in that sentence.  But equally it is difficult to see how it could have been the intention of the plaintiff and the defendant to incorporate both sets of contracts, when the plaintiff has not even disclosed in these proceedings the Employer-Konwall Contract and it is not therefore known whether the two upstream contracts contain dispute resolution clauses that conflict with each other.

12.As such, I accept Mr Ho’s submission that the reference to the Employer-Konwall Contract and the Konwall-D Contract in the relevant clause is intended to mean that the specifications, standards and requirements relating to the works as specified in those contracts should be followed by the plaintiff in executing the works, being part of the works required under those contracts, and not to incorporate each and every clause, mutatis mutandis, including any arbitration clause, into the D-P Contract 1.  Indeed, the defendant did not contend that any of the provisions in the Employer-Konwall Contract (as opposed to the Konwall-D Contract) is thereby incorporated.

13.As pointed out in Hudson’s Building and Engineering Contracts (13^th edition), §9-083, p 1078, in a passage applied by Reyes J in Sunbond Engineering Ltd v Konwall Construction & Engineering Co Ltd (unrep, HCCT 15/2003, 25 May 2004) at §61:

“ As a matter of first principle and in the light of the usual real-life intentions of sub-contracting parties, doubtful or ambiguous references to main contract documents or terms are much more likely to be aimed at the technical descriptions of the sub-contract work to be found in the drawings, specifications or bills of quantities of the main contract rather than at the contractual or legal provisions in the main contract documentation, it is submitted.”

14.The same applies in relation to D-P Contract 3.

15.For these reasons I came to the conclusion that the arbitration provisions relied upon by the defendant have not been incorporated into the contracts between the plaintiff and the defendant, and the defendant’s summons must therefore be dismissed.

Mr C C Ho, instructed by Cheng & Wong, for the plaintiff

Mr George Chu, instructed by Leung Kin & Co, for the defendant