H v. G

HCCT 71/2021

[2022] HKCFI 1327

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 71 OF 2021

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Before:  Hon Mimmie Chan J in Chambers

Date of Hearing:  11 March 2022

Date of Decision:  10 May 2022

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D E C I S I O N

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Background

1.In these proceedings, H seeks from the Court an order to set aside the determination of the arbitral tribunal (“Tribunal”) made on 29 July 2021, in an arbitration commenced by G against H (“Arbitration”), that the Tribunal has jurisdiction over specified claims made by G against H in the Arbitration. The application is made under section 34 (1) of the Arbitration Ordinance, Cap 609 (“Ordinance”).

2.Under section 34, which applies Article 16 of the Model Law, the Tribunal may rule on its own jurisdiction, either as a preliminary question or in an award on the merits. In this case, the Tribunal’s ruling on its jurisdiction was made as a preliminary question, and under Article 16 (3), any party may request the Court to decide the matter afresh.

3.G is a property developer and on 1 March 2010, it entered into a Building Contract with H, a building contractor, whereby H as the Main Contractor agreed to carry out certain building works (“Building Works”) for G’s project in Hong Kong (“Project”). The Building Contract between G and H contains a dispute resolution clause (“Clause 35”), whereby the parties agreed that if any dispute could not be resolved by a specified mechanism, it shall be referred to and finally resolved by arbitration under the Domestic Arbitration Rules in accordance with the Hong Kong International Arbitration Center procedures for domestic arbitrations.

4.The Specification Preliminaries which form part of the Building Contract expressly provided for H to give a guarantee/warranty in respect of a waterproofing system to be installed and produced as a result of the Building Works, that such waterproofing system would be free from defects for 10 years commencing from the date of practical completion. The guarantee/warranty was to be in a specified form of Deed of Warranty (“Warranty”), set out and appended to the Building Contract itself. The Warranty was to be executed under seal by H as the Main Contractor and by H’s subcontractor or supplier, with the warrantors assuming joint and several liability thereunder.

5.On 20 June 2011, some 15 months after the Building Contract was signed between H and G, H and its subcontractor, SC, jointly executed the Warranty, in essence warranting the performance of the waterproofing systems for the Project (“Product”) in accordance with the requirements specified in the Building Contract, and further warranting that the Product shall remain free from any deficiencies or defects, and shall remain fit for its intended purpose. The submission of satisfactory guarantee/warranties in full compliance with the contract requirements is stated, under clause 8.11 of the Specification Preliminaries to the Building Contract, to be one of the pre‑requisite requirements for issuance of the Certificate of Practical Completion for the Project.

6.The Warranty, in the form appended to the Building Contract and in the form as executed, contains an express choice of law and jurisdiction clause (“Clause 11”):

“This Warranty shall be construed and governed in accordance with the Laws of Hong Kong Special Administrative Region and the Warrantors hereby agree to submit to the non-exclusive jurisdiction of the Courts of Hong Kong Special Administrative Region.”

7.The Certificate of Practical Completion for the Project was issued on 20 January 2012.

The dispute

8.Disputes arose between the parties, and on 10 February 2020, G commenced the Arbitration against H, claiming (inter alia) that there was extensive render cracking across all face elevations of the relevant structures of the Project, extensive debonding/delamination on the external façade across all façade applications, and cohesion and adhesion failure of the joint sealant to the expansion joints. G claims that the faults and defects were caused by the negligence of H, its servants or agents, and/or by their breach of contract under the Building Contract and/or the Warranty. G claims in the Arbitration that H had failed (inter alia) to install any, or any adequate, expansion joints in the render, failed to make adequate allowance for flexible movement joints, failed to install expansion joints to the full depth of the external render, failed to install any backing rod to the joint sealant, which was improperly applied to the external render, and had failed to comply with the maximum width to depth ratio for the sealant. G accordingly seeks damages of approximately HK$24.9 million from H, as a result of its alleged breach of both the Building Contract and the Warranty, and negligence.

9.H contended in the Arbitration that the Tribunal did not have jurisdiction over any claims made by G under the Warranty, and this was made the subject matter of the Tribunal’s determination as a separate issue. The Tribunal handed down its Determination on the question, on 29 July 2021. As highlighted by G, the Tribunal found that the true construction of the dispute resolution clauses in the Building Contract and the Warranty is that issues in the Arbitration which are alleged also to constitute breaches of the Warranty are within the scope of the matters referred to arbitration (paragraph 51 of the Determination). At paragraph 52 of the Determination, the tribunal found as follows:

“Having regard to the above principles, and looking at these agreements as a series, the only conclusion, it appears to me, is that it was intended that matters arising under the Main Contract which might also amount to breaches of the Deed of Warranty may be determined within any arbitration convened in respect of such matters under the terms of the clause 35 Arbitration Agreement.”

10.In reaching the above decision, the Tribunal had considered whether, as a matter of construction, Clause 35 encompassed claims brought under the Warranty; whether Clause 11 and Clause 35 are in conflict with each other; and the fact that the issues which arise as disputes under the Building Contract and as disputes under the Warranty are the same, such that according to G, breaches of the Building Contract are also breaches of the Warranty.

11.The parties do not dispute that the Court’s decision on the jurisdiction of the Tribunal is on de novo basis. On behalf of H, Counsel argued that the Tribunal had erred by deciding the question of its jurisdiction solely on the basis that the language of Clause 35 was wide enough to encompass matters which were contended to be breaches of both the Building Contract and the Warranty, and had failed to properly consider and reconcile the two dispute resolution clauses, when there was no conflict between the two. It was argued that on its proper interpretation, the jurisdiction clause contained in Clause 11 did not seek to capture any disputes falling within the ambit of Clause 35, and Clause 35 should yield to the clear, contrary intention expressed in Clause 11 with regard to claims made under the Warranty.

12.There is no dispute between the parties that Clause 35 is a non‑exclusive jurisdiction clause. In Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631, Ma CHJC (as he then was) set out a clear analysis of exclusive and non-exclusive jurisdiction clauses, and their relevance and effect for the purposes of jurisdiction and forum. Counsel for G referred to the summary stated in the headnote of the report:

“The only difference in principle between an exclusive jurisdiction clause and a non-exclusive jurisdiction clause was that in the former case both parties were contractually bound to the chosen forum whereas in the latter case neither party was bound to bring an action in Hong Kong, but each party agreed to submit to the jurisdiction if an action was brought against it (Mercury Communications Ltd v Communication Telesystems International [1999] 2 All ER (Comm) 33 applied).”

13.Counsel for G contended that the non-exclusive jurisdiction clause in Clause 11 does not preclude G from referring the dispute to arbitration, when the arbitration agreement in Clause 35 is by its plain wording wide enough to include the disputes in question under the Warranty. Mr Niehorster argued that Clause 11 is reconcilable and not inconsistent with Clause 35, but operates in parallel to Clause 35. Counsel highlighted the fact that no court proceedings have been commenced, and there is in principle no impediment to G prosecuting its case in the Arbitration.

14.On this, the short point is that whilst G may not be precluded from commencing the Arbitration despite the non-exclusive jurisdiction clause in Clause 11, there is also nothing to preclude H from challenging, in the Arbitration brought, the jurisdiction of the Tribunal and the scope of the reference to Arbitration, as H has sought now to do.

15.On behalf of G, Counsel argued that, adopting the Fiona Trust presumption on construction, parties as rational businessmen are likely to have intended any dispute arising out of the relationship in which they have entered to be decided by the same tribunal, and given the width of the language used in Clause 35, “dispute” in Clause 35 should be construed widely to encompass the claims made by G under the Warranty. G contends that it would make no commercial sense for the claims under the Building Contract to be decided separately to the claims made under the Warranty, when they all relate to the same subject matter: being the alleged faults and defects in the Building Works carried out by H. It was argued that the parties could not have intended for some of these claims to be submitted to arbitration under the Building Contract, and for others to be decided by the Hong Kong courts allegedly pursuant to Clause 11 of the Warranty.

16.Counsel for G also argued that if the approach, with regard to different but related agreements entered into by the parties, is to decide and identify the contract which gave rise to the dispute as to the alleged defects, then it is clear that the present dispute arose out of the Building Contract, and should be referred to arbitration in accordance with Clause 35.

The issue of construction

17.The issue at the core is the interpretation of the relevant contracts – the Building Contract, the Warranty, and Clauses 35 and 11 which contain the parties’ agreement on the manner of resolution of disputes. The Tribunal’s jurisdiction depends solely on the construction of Clause 35 under which the parties had referred the dispute to the Tribunal for arbitration. As Lord Hoffman observed in Fiona Trust v Privalowv [2007] Bus LR 1719 at 1722:

“Arbitration is consensual. It depends upon the intention of the parties as expressed in their agreement.” (Emphasis added)

18.The presumption applied in Fiona Trust itself is not directly applicable in this case. There was only one contract made between the parties in Fiona Trust itself, the dispute being whether claims as to the validity of that contract, said to have been induced by bribery, should be determined separately to the rest of the claims made in the arbitration. It was held that the construction of the arbitration clause should start from the assumption that the parties, as rational businessmen, were likely to have intended that disputes arising out of their relationship should be decided by the same tribunal. There was no clear language in the clause to exclude disputes as to the validity of the contract and they should be determined together in the same forum.

19.In this case, there is the Building Contract between G and H, which contains the arbitration clause, and there is the separate Warranty between G, H and a third party, SC, which was not privy to the Building Contract.

20.Is it to be presumed that G and H had intended disputes arising under the Building Contract, and disputes arising under the Warranty which involves the joint and several liability of SC, should be determined by the same tribunal, in one forum, by arbitration?

21.Even in Fiona Trust, the Court made the important point that if there is language in the relevant contract which makes it clear either that certain disputes are to be excluded, or that the parties did not intend to have all their disputes resolved by one tribunal, but to have them determined separately, the presumption has no role to play.

22.It is of material relevance in this case, as Counsel for H highlighted, that at the time when the Building Contract was negotiated and signed by G and H in March 2010, both of them had anticipated the execution of the Warranty, and both had knowledge of and had agreed on the contents of the Warranty in the precise form appended to the Building Contract. The form of Warranty clearly stated that it was to be given, not only by H as Main Contractor, but by a third party to be appointed as subcontractor of the relevant Building Works, and it contained a specific clause as to how disputes under the Warranty were to be resolved. Under Clause 11, the parties to the Warranty, which included H as Main Contractor, the subcontractor, and G as the Employer, all agreed to submit to the non-exclusive jurisdiction of the Courts of Hong Kong. This was notwithstanding the fact, as the parties also knew and had agreed, that the Building Contract contained a different mechanism, of an arbitration agreement in Clause 35.

23.In this case, I agree with Mr Sussex SC, that Clause 35 and Clause 11 must be construed in the context, and the context must include the above matters. According to Mr Sussex, Clause 35 is the general provision, that any dispute, controversy or claim arising out of or relating to the Building Contract shall be settled in the manner provided, and ultimately to be resolved by arbitration. However, Clause 11 deals with the particular and specific disputes under the Warranty, and the liability of H and SC thereunder, and provides that the parties should submit to the jurisdiction of the Hong Kong Courts for litigation of such disputes. I agree that G and H had clearly intended, at the time when the Building Contract was made, to carve out disputes under the Warranty from the arbitration agreement contained in Clause 35. As Mr Sussex argued, the general provisions of Clause 35 should give way to the specific provisions of Clause 11.

24.H further contends that there was logical reason and rationale for G and H to have intended and agreed that disputes under the Warranty should not be dealt with under the arbitration agreement in Clause 35. The Warranty was to be given jointly and severally by H and the sub-contractor undertaking the relevant Building Works. The subcontractor to be made a warrantor was not a party to the Building Contract and could not be compelled to submit disputes under the Warranty to arbitration in accordance with Clause 35. However, it was reasonably foreseeable at the time of the Building Contract that if claims should be made by G under the Warranty, it was likely that H would wish to seek contribution or indemnity from the subcontractor, and that it would be desirable to have the disputes under the Warranty to be decided with all relevant parties present before the same forum, which would not be achieved in the Arbitration between G and H under the Building Contract, in the absence of any direct arbitration agreement between G and the subcontractor. As the subcontractor was not a party to the arbitration agreement contained in the Building Contract, a finding by the arbitral tribunal would not give rise to an issue estoppel against the subcontractor, and the process of seeking contribution would be more fragmented and cumbersome.

25.Finally, Counsel for H pointed out that the Building Contract and the Warranty in fact deal with separate and independent matters as to G’s rights against H. On H’s case, the Warranty gives rise to obligations which are distinct from the duties and obligations imposed by the Building Contract. In essence, H as the Main Contractor and SC as the subcontractor which installed the waterproofing system covered by the Warranty, jointly and separately guaranteed that the design as required by the Building Contract, and the supply and installation of the waterproofing systems have resulted in a Product which will remain free from deficiency or defect, and be fit for purpose, for 10 years. Under clause 3 of the Warranty, the warrantors indemnify G against consequential (as opposed to direct) loss arising from the failure of the Product, and agreed (under clause 6) to reimburse G for damage occasioned to the property which may be affected by the failure of the Product. The duty of the warrantors was to replace or repair the Product, and to restore the Product to the satisfaction of G, upon being notified by G (clause 4). Such duty on the part of H continued even after the defects liability period expired on 24 June 2013, when the Engineer of the Project issued the Certificate of Making Good Defects. The Warranty expressly provided that it was to remain in full force and effect for 10 years from the certified date of Practical Completion under the Building Contract. In Counsel’s submission, it was “a warranty of a state of affairs that will exist when all the work is performed”.

26.By contrast, H’s obligation to repair or replace under the Building Contract did not survive the defects liability period which came to an end on 24 June 2013. According to H, the Building Contract was concerned with the work undertaken to achieve the finished product. The Building Contract provided (in clause 6 (1)) that “all materials and workmanship shall be of the respective character, quality or kind required by the Contract Documents and in accordance with the instructions and to the satisfaction of the Engineer”. H as the Main Contractor was engaged to provide design work, supply materials, and perform installation work.

27.Again in contrast, Counsel for H has highlighted the fact that the Warranty was concerned with the finished Product collectively brought about by the design, the supply of materials and the installation work carried out under the Building Contract. H and SC guaranteed under the Warranty that the finished Product (the waterproofing system) was free from deficiency or defect and was fit for purpose for 10 years. The Warranty is silent on the quality of the design work performed, the nature of the material supplied, or the quality of the installation work carried out.

28.It was on the above basis that Mr Sussex submitted that a defect in the work undertaken under the Building Contract did not ipso facto give rise to a breach under the Warranty.

29.Theoretically, even if H and/or SC had supplied materials and provided a design in accordance with the requirements and specifications of the Building Contract, if the finished Product was not fit for its purpose of being a waterproofing system, H and SC could still be liable to repair and replace upon being notified by G. On Mr Sussex’s contention, the obligations consequent upon the failure of the Product were clearly spelt out in clauses 3, 4 and 6 of the Warranty, and it was irrelevant for the purposes of the Warranty exactly how the deficiency or defect or unfitness for purpose came about, save that clause 5 excluded liability if the failure of the Product was caused by matters beyond the responsibility of the warrantors.

30.Given the nature of the guarantee provided under the Warranty, and the relative ease with which a breach of the Warranty could be proved, Counsel argued for H that the parties must have considered it sensible and rational in 2010 to bypass the more cumbersome dispute resolution procedure contained in Clause 35 of the Building Contract (which involved at the outset a first determination by the Engineer of the Project), and to have a separate mechanism for dispute resolution under the Warranty by litigation, with the option of summary judgment available.

31.According to Counsel, all the above constituted sensible rationale for the parties to have agreed on a free-standing and independent dispute resolution mechanism for the Warranty. The provisions of clauses 8 and 10 of the Warranty lend support to and evidence such an intention:

“8. This Warranty shall not deprive the Employer of other action, right or remedy available to him under the Main Contract or at Common Law or otherwise.

10. The Warrantors shall not be released to from liability under this Warranty by reason of unenforceability, invalidity or termination of the Main Contract for any reason whatsoever.”

32.I accept these forceful arguments advanced by Counsel on H’s behalf. At the time when the Building Contract was made, H and G contemplated the coming into effect of the Warranty, involving a third‑party as the subcontractor actually carrying out the installation of the waterproofing system, and potential claims being made under the Warranty against the different parties. Both H and G agreed on the form of the Warranty appended to the Building Contract and in particular the dispute resolution mechanism set out in Clause 11 of the Warranty. They contemplated and agreed for there to be a different manner of resolving claims under the Warranty, which was distinct from the resolution of the claims under the Building Contract by arbitration. They expressed the clear intention in Clause 11 that there should be a mechanism different to arbitration, and further agreed to submit to the jurisdiction of the Hong Kong Court for the resolution of those claims under the Warranty. The presumption advocated in Fiona Trust is clearly displaced by the language expressed in Clause 11 of the Warranty, which formed part of the contract documents agreed to by G and H in the Building Contract.

33.As Beatson LJ recognized in Amtrust Europe Ltd v Trust Risk Group SpA [2016] 1 All ER (Comm) 325, the Fiona Trust presumption has limited application in a case where the overall contractual arrangements between the parties gave rise to agreements containing different dispute resolution provisions. His Lordship noted, at paragraph 46 of his judgment:

“Where the overall contractual arrangements contain two or more differently expressed choices of jurisdiction and/or law in respect of different agreements, however, the position differs in that one does not approach construction of those arrangements with a presumption. So, the 14^th edition of Dicey, Morris and Collins on the Conflict of Laws stated:

‘The decision in Fiona Trust has limited application to the questions which arise where parties are bound by several contracts which contain jurisdiction agreements for different countries. There is no presumption that a jurisdiction (arbitration) agreement in contract A, even if expressed in wider language, was intended to capture disputes in contract B; the question is entirely one of construction…’”

34.Counsel referred to the oft-cited passage of Rix LJ’ judgment in Credit Suisse First Boston (Europe) Ltd v MLC Bermuda Ltd [1999] 1 All ER (Comm) 237 at 250:

“… where different agreements contain different terms as to jurisdiction, it would seem to be applying too broad and indiscriminate a brush simply to ignore the parties’ careful selection of palette.”

35.In the context of contractual construction, it is also useful to bear in mind the observations made by Hamblen LJ in BNP Paribas v Trattamento [2020] 1 All ER 762 (at para 68):

“(2) A broad, purposive and commercially-minded approach is to be followed.

(3) Where the jurisdiction clauses are part of a series of agreements they should be interpreted in the light of the transaction as a whole, taking into account the overall scheme of the agreements and reading sentences and phrases in the context of that overall scheme…

(4) It is recognized that sensible business people are unlikely to intend that similar claims should be subject to inconsistent jurisdiction clauses…

(5) The starting presumption will therefore be that competing jurisdiction clauses are to be interpreted on the basis that each deals exclusively with its own subject matter and they are not overlapping, providing the language and surrounding circumstances so allow…”

36.In Deutsche Bank AG v Comune di Savona [2018] 4 WLR 151, Longmore LJ pointed out where there are theoretically competing jurisdiction clauses, the natural reaction whould be that it should be possible to assign any particular dispute to one or such other clause and that there should be no overlap between them. At para 30 of the judgment, His Lordship further observed:

“It is, of course, desirable that potentially conflicting jurisdiction clauses should be given a mutually exclusive construction as indicated by the authorities…”

37.Considering the authorities, and bearing in mind the matters outlined in paragraphs 25 to 29 above, I accept Mr Sussex’s submissions, that Clause 35 and Clause 11 deal separately with the claims made under the Building Contract on the one hand, and the guarantee claims made under the Warranty on the other hand. The parties had apparent reasons to choose, and they did choose, different dispute resolution provisions for these different claims.

38.A construction that Clause 35 extends to G’s claims of breach of the Warranty by H would in fact bring about the unattractive result, that whereas G would be entitled to claim against H either in arbitration or by litigation (pursuant to Clause 11), H would only be able to pursue its claims for contribution and indemnity against SC by litigation. That would indeed necessitate multiplicity of proceedings in respect of the same issues of the liability for breach of the guarantees under the Warranty, with the risks of inconsistent findings and duplication in costs - the exact mischief rational businessmen are assumed to be desirous of avoiding. As Mr Sussex submitted, such an inherently unattractive conclusion should be one which the Tribunal and the Court should be extremely reluctant to reach (Terre Neuve SARL v Yewdale Ltd [2020] EWHC 772 (Comm)).

39.Even if it should be necessary to identify the “centre of gravity” of the claims which are the subject matter of the disputed jurisdiction, on the basis that there is overlap between Clause 35 and Clause 11, I would find that the Warranty is the contract out of which the claims in question most naturally arise, and that these claims should be governed by Clause 11. Under Clause 11, G is precluded from disputing that the Hong Kong Court has jurisdiction, and H is entitled to claim that the Tribunal lacks jurisdiction by virtue thereof. In my judgment, it makes no difference in the circumstances of this case that H has not brought proceedings against G in the Hong Kong Court.

Disposition

40.For all the above reasons, I accede to H’s application and determine that the Tribunal has no jurisdiction over the claims made under the Warranty. The Determination of the Tribunal is set aside.

41.The order nisi is that G is to pay the costs of the Originating Summons of 27 August 2021, including any costs reserved, with Certificate for Counsel.

Mr Charles Sussex, SC and Ms Jacqueline Law, instructed by DLA Piper Hong Kong, for the plaintiff

Mr James Niehorster, instructed by Bryan Cave Leighton Paisner LLP, for the defendant