Astel - Peiniger Joint Venture v. Argos Engineering & Heavy Industries Co. Ltd.
Read the full judgment text of HCCT 14/1994 on BabelCite. This HIGH COURT judgment was delivered on 18 August 1994 before The Hon. Mr. Justice Kaplan.
Arbitration - incorporation of arbitration clause by reference - construction of last sentence of Article 7(2) of the Model Law - applicability of Thomas v Portsea [1912] AC 1 - whether the term that contracts between parties should be 'back to back' and 'proportional' to the upstream contract is sufficient to incorporate the arbitration clause - approach to construction of incorporation terms. The High Court held that the reference to a document containing an arbitration clause under Article 7(2) does not require the document to be between the same parties, allowing incorporation by reference. The restrictive interpretation advocated by the Plaintiff was rejected as unworkable in commercial practice. English authorities on incorporation of arbitration clauses in negotiable instruments such as bills of lading were found distinguishable and do not dictate the result under Hong Kong's Model Law. The court found, based on the contractual language and factual matrix, that the parties intended to incorporate the upstream arbitration clause into the assembly sub-sub-contract with due modifications where necessary. Practical difficulties argued against incorporation were found irrelevant to the determination of parties’ intention. Accordingly, the court granted the Defendant's application to stay proceedings pending arbitration under the incorporated clause and made a costs order nisi in favour of the Defendant.
Legal issues: Proper construction of Article 7(2) of the Model Law · Incorporation of arbitration clause by reference in construction contracts · Effect of practical difficulties in incorporation of arbitration clauses
Outcome: Arbitration agreement incorporated; stay of proceedings granted
Cited by 12 cases
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HCCT000014/1994 THE JUDGE HAS AUTHORISED PUBLICATION OF THIS JUDGMENT Construction List No. 14 of 1994 IN THE SUPREME COURT OF HONG KONG HIGH COURT ____________
____________ Coram: The Hon. Mr. Justice Kaplan in Chambers Date of hearing: 28 July 1994 Date of handing down judgment: 18 August 1994 ____________ H E A D N O T E Arbitration - incorporation of arbitration clause by reference - construction of last sentence of Article 7(2) of Model law - applicabiliy of Thomas v Portsea [1912] AC 1 - whether term that contract between the parties should be "back to back" and should be "proportional" to the contract next up the chain was sufficient to incorporate the arbitration clause - proper approach to construction of terms allegedly incorporating arbitration clause. Result Arbitration agreement incorporated - stay granted. ______________ J U D G M E N T ______________ 1. I have before me an application taken out by the Defendant for a stay of these proceedings pursuant to Article 8 of the Model Law. This application raises two interesting questions. The first relates to the proper construction of the last sentence of Article 7(2) of the Model Law. The second relates to the principles relevant to the incorporation of an arbitration clause by reference. 2. As is well-known, one of the key features in the Airport Core Programme (ACP) for the new Airport at Chep Lap Kok is the Tsing Ma bridge which will carry both vehicular and rail traffic. It is an exciting and bold engineering project. It will be one of the longest suspension bridges in the world having a total span of 2.16 kms. There are, of course, many features to the construction of the bridge and not surprisingly, there is a long contractual chain, which I need to set out briefly. 3. The Hong Kong Government entered into a contract for the construction of the bridge with an Anglo-Japanese Joint Venture on ACP terms which involved 3 stages of dispute resolution namely, mediation, adjudication and, after substantial completion, arbitration. 4. The Anglo-Japanese Joint Venture sub-contracted the steel decking works to the Cleveland Mitsui Consortium. 5. Cleveland Mitsui Consortium entered into two Assembly Contracts for the suspension spans with Cleveland Structural Engineering Ltd. (CSEL) and with MES Joint Venture. 6. CSEL entered into an assembly sub-contract with the Defendant (Argos) who sub-sub-contracted the painting work to the Plaintiff. The Plaintiff in turn sub-contracted the labour element to Chun Wah. 7. A dispute has now arisen between the Plaintiff and Defendant as to which of them is responsible under the assembly sub-sub-contract for the supply and construction of mobile Paint Sheds. The Plaintiff considers that it is the responsibility of the Defendant and has issued a writ on 20th May 1994 claiming just under HK$10.5m. 8. The Defendant contends that the parties have agreed to arbitrate any disputes and seeks a stay under Article 8 of the Model Law to achieve that end. The arbitration clause relied on provides for Arbitration in England, under English Law and under the UNCITRAL Rules. Because the place of arbitration is outside Hong Kong, this arbitration agreement is covered by the Model Law, by reason of Article 1. 9. It is common ground that there is no express arbitration agreement in the assembly sub-sub-contract ("the contract"), but it is argued by the Defendant that there is an arbitration clause in the assembly sub-contract between the Defendant and CSEL which, by the terms of the contract, has been incorporated into the contract between these parties. 10. In order to appreciate how the argument runs, it is necessary to set out the recital and first two clauses of the contract between the Plaintiff and Defendant.
11. It is common ground that immediately before the signing of the contract, the Defendant entered into and signed on the same occasion and in the presence of the Plaintiff, the Assembly Sub-contract with CSEL and Mitsui. Further, the Plaintiff had been provided with a copy of the terms and conditions of the Assembly Sub-contract, which included the arbitration clause, well before the signing of the contract on 17th March 1993. 12. Further, the Plaintiff entered into a memorandum of understanding on the 19th January 1993 with the Defendant in which it was stated:
13. The arbitration clause in the sub-contract is Clause 31 which provides as follows:-
PROPER CONSTRUCTION OF ARTICLE 7(2) 14. Mr. Bailey of the Plaintiff has deposed to the fact that the assembly sub-contract works will not be completed until 31st December 1995 and that the sub-sub-contract works will not be completed until 31st October 1995. He states that if Clause 31 does bind the Plaintiff, then the Defendant will be able to deny the Plaintiff considerable sums of money, to which it maintains it is entitled, until late 1995. 15. Mr. Scott, who appeared for the Plaintiff, submitted that the incorporation by reference relied upon by Mr. Thomas Q.C., who appeared for the Defendant, did not work because of the terms of Article 7(2) of the Model Law, which provides as follows:
16. Mr. Scott pointed out that under Article 7(2) there were 4 ways in which the necessary form could be complied with: (1) A document signed by the parties. This, he submitted, meant the parties to the proposed arbitration and not other parties; or (2) An exchange of letters etc. which provide a record of the agreement. This, he submitted, meant an agreement of the parties and not of other parties; or (3) An exchange of statements etc. (which is not relevant here); or (4) Reference in a contract to a 'document containing an arbitration clause'. He submitted that this phrase must be a reference to an arbitration clause which otherwise satisfies 1, 2 or 3 above, in other words, it must be between the same parties. 17. I have no doubt that Mr. Scott's interpretation, however ingenious, is insupportable and I reject it. It would bring about some surprising results. Take two parties agreeing a charterparty who had agreed that they should be bound by the terms of a standard form of charterparty that did contain an arbitration clause. On Mr. Scott's interpretation, Article 7(2) would not avail them because the reference to a standard form of charterparty would not be a reference to another document signed by the same parties. Similarly, if parties agreed that they would be bound by the Model Arbitration Clauses of the Hong Kong International Arbitration Centre, Mr. Scott would say - on his construction of Article 7(2) - that as these Model Clauses were not a contract between these parties, again, this attempted incorporation would fail. 18. I think one only has to state the results that would flow from Mr. Scott's restrictive interpretation of Article 7(2) to see how unworkable it would be in commercial practice. One then has to ask whether the drafters of the Model Law could possibly have intended such a restrictive interpretation. Fortunately S.2(3) of the Arbitration Ordinance provides:
19. The first of the Sixth Schedule documents is a Report to the Secretary General dated 25th March 1985 and entitled "An Analytical Commentary on the Draft Text off the Model Law on International Commercial Arbitration", and the second of the Sixth Schedule documents is the report of the United Nations Commission on International Trade Law on the work of its 18th session (3-21 June 1985). A Commentary on Article 7(2) in the analytical Commentary can be found at p.747 in Hong Kong & China Arbitration published by Butterworths in May 1994. Para. 8 states:
20. I find nothing in that passage that suggests that the reference to the contract containing the arbitration clause is to be between the same parties. 21. Holtzmann and Neuhaus in their Guide to the UNCITRAL Model Law on International Commercial Arbitration comment on this point at p.263/4 where they state:
Aron Broches in his Commentary on the Model Law states at p.41:
22. It seems to me that there is much significance in the use of the word 'document' in the last sentence of Article 7(2). Had it meant a contract entered into between the self same parties then surely it would have so stated. There is nothing in the passages quoted above which support Mr. Scott's interpretation and, if he were right, it is inconceivable that this very restrictive interpretation would not have been commented upon by these eminent authorities and would not have been the subject of much debate during the UNCITRAL Working Sessions. 23. For these reasons, therefore, I am satisfied that it is possible under Article 7(2) to incorporate an arbitration clause into a written agreement between A and B, by reference to an arbitration clause contained in an agreement between B & C, or for that matter between X & Y or by reference to an unsigned standard form of contract. 24. I now turn to consider - on the facts of this case and on the law as I find it to be - whether there has, in fact, been a successful incorporation by reference. INCORPORATION BY REFERENCE 25. It is immediately obvious when one looks at the relevant authorities under English law that Article 7(2), as interpreted by me above, side steps many of them. The leading case on this subject is the House of Lord decision in Thomas v. Portsea Steamship Co. Ltd. [1912] AC 1. In that case, a bill of lading provided, inter alia, "all other terms and conditions and exceptions of charter to be as per charterparty, including negligence clause." The charterparty provided for arbitration. The House held that the arbitration clause was not incorporated in this bill of lading. 26. Lord Atkinson was obviously concerned about the negotiability of the bill of lading in the context of incorporation by reference because he said (p.6):
27. Lord Gorell was concerned about the jurisdiction of the Court being ousted by granting the stay sought and he said (p.9):
28. It seems to me that the House was troubled about ousting the jurisdiction of the Court and, indeed, one can find similar expressions by other judges. 29. I was also referred to The Annefield (1971) P.168 where, in the context of shipping cases, Brandon J. (as he then was), after referring to several cases including Thomas v. Portsea, set out the principles with clarity (p.173):
30. In The Federal Bulker (1989) 1 Lloyd's Rep. 103 at 105 Bingham L.J. (as he then was) succinctly explained why the more restricted approach had been taken in relation to charterparty/bill of lading cases:
31. In Aughton v. Kent 57 BLR 1 at p.18-19, Ralph Gibson L.J. said this:
32. However, at p.20 of the same case, Ralph Gibson L.J., whilst accepting that the propositions of Brandon J. stated above were "authoritative guides to construction in any case where the court is considering whether an arbitration clause has been incorporated by reference" went on to state:
33. In addition, I was referred to a recent decision of the Court of Appeal in Giffen v. Drake & Scull 33 Con. L.R. 84. where in the context of a construction contract, it was argued that on the true construction of the sub- sub-contract, the main contract arbitration clause was incorporated. The Court held that it was not incorporated and stated that the "fundamental question was whether the language of the clauses relied on pointed plainly to the intention of the parties to incorporate the main contract arbitration clause ..." 34. Further, at p.90 of Giffen v. Drake & Scull (supra) Sir Thomas Bingham M.R. emphasised that the task of the Court was one of construction. He said:
35. In that case, the arbitration clause was very limited and could only be invoked in very defined circumstances. Sir Thomas Bingham M.R. held that it was "entirely incompatible with a general incorporation of the main contract arbitration clause". 36. In my judgement, the real problem facing the House of Lords in Thomas v. Portsea was the question of negotiability of the bill of lading. Bills of lading are not signed by both parties to them and the owner of the goods and subsequent owners would have no knowledge of the terms of the charterparty between the shipper and the owner of the ship. It is easy to see why the House was reluctant to incorporate by reference on the facts of that case. 37. Nevertheless, as can be seen from some of the authorities cited above, there has been a sea change of opinion and attitude as exemplified by the 1979 Act in England, the 1982 and 1989 amendments in Hong Kong and the adoption of Model Law in Hong Kong and in other jurisdictions. It seems to me that Thomas v Portsea must be viewed in the context of dealing with a negotiable instrument, namely a bill of lading. Different considerations can be said to apply in those circumstances. It is also a case which must be considered in the light of the actual words relied upon to support the argument in favour of incorporation. The expressions of reservations about ousting the jurisdiction of the court in that case fall on unfertile ground in Hong Kong at the end of the twentieth century, a fortiori, when the legislature has enacted the Model Law which relegates the role of the court to basically one of support for the arbitral process and gives full effect to the principle of full party autonomy. 38. In the light of my construction of Article 7(2) of the Model Law discussed above, I am therefore quite satisfied that insofar as Thomas v Portsea is authority for the proposition that the arbitration clause must be specifically referred to before it can be satisfactorily incorporated, it has no application in Hong Kong. The task before the Court in determining whether or not there has been incorporation by reference is one of construction; namely, to ascertain the parties' intentions when they entered into the contract by reference to the words that they used. 39. Accordingly, I must now turn to the task of construing the relevant clauses in the contract before me. CONSTRUCTION OF THE RELEVANT CLAUSES 40. In support of his argument that the arbitration clause in the sub- contract had been incorporated into the contract, Mr. Thomas relied upon a number of factors: (1) The contract was negotiated against the background of the envisaged assembly sub-contract and was finally concluded by reference to the contractual structure already in place. It must therefore have been intended that all those involved in the project should be subject to the same elaborate scheme defined in the assembly sub-contract. (2) As from the date of the memorandum of understanding dated 19th January 1993, the Plaintiff knew that the contract would be on a back-to-back basis, upon the terms and conditions of the assembly sub-contract between the Defendant and Cleveland-Mitsui. (3) The Plaintiff was given a copy of the terms and conditions of the assembly sub-contract well before 17th March 1993. (4) The memorandum of understanding recites that the Plaintiff shall have the opportunity to read and note the provisions of the assembly sub-contract. Mr Thomas pointed out that Mr. Bailey's firm view and clear intention not to be bound by the arbitration clause had never been ventilated or communicated to the Defendants. If the Plaintiff had a clear intention not to have arbitration, it would not have signed a contract which, at least on its face, would incorporate back-to-back all the terms of the assembly sub-contract including the arbitration clause. (5) Both the contract and assembly sub-contract were specifically negotiated agreements at arm's length as opposed to standard form contracts. The terms were not inserted lightly nor without careful consideration and there is no reason why the Court should not give full effect to them. (6) The contract. stipulated that all the terms of the assembly sub- contract should be directly applicable on a back-to-back basis. Mr. Thomas submitted these were clear words to show that all such terms should apply as between the Plaintiff and Defendant mutatis mutandis. In addition, he pointed out that the recital stated that the assembly sub-contract "forms an integral part" of the sub-sub-contract. (7) In any event, it is common practice in construction works to provide for the settling of disputes by arbitration, see Keating on Building Contracts (5th edition) p.383, and Aughton v. Kent Services (supra) at p.26. Mr. Thomas submitted that this fact militated in favour of incorporation of the arbitration clause and made it appear odd that the Plaintiff should have failed to make it clear that there was to be no arbitration if indeed that was its intention at the time. (8) The Plaintiff itself relied upon and pleaded incorporation by reference of the terms and conditions of the assembly sub- contract as could be seen from para. 10 of the Statement of Claim. 41. It is, of course, plain that the arbitration clause in Clause 31 contemplates a dispute between the Defendant and the Cleveland-Mitsui Joint Venture. Mr. Thomas put his case on the basis that the parties must be taken to have intended that applicable necessary modifications were to be made to the terms of the assembly sub-contract when applied as between the Plaintiff and Defendant, such as substituting 'sub-sub-contractor' for 'assembly sub-contractor'. To make this good, Mr. Thomas placed before me a document showing the necessary modifications to the parties and contracts named in Clause 31. He submitted that, given appropriate changes, Clause 31(1) could be read as follows:
42. Mr. Thomas agreed that the language could be clearer. Nevertheless, he submitted that the language was clear enough to give rise to incorporation by reference. He submitted that the references to "proportionally" and "proportion" indicated that it may be necessary, in achieving a back-to-back incorporation, to carry out some scaling down. Some clauses in the assembly sub-contract might be quite inapplicable to the contract and, in those circumstances, Mr. Thomas submitted that they should be omitted. A good example of this was the clause which provided for a legal opinion from Denton Hall. Mr. Thomas further submitted that in making the abovementioned references, the parties had made it clear that some alterations would have to be made and that these could be done quite easily. 43. Mr. Scott, on the other hand, submitted that if the arbitration clause was incorporated in the way suggested, it would give rise to such serious problems of implementation that it would be "incapable of being performed", a phrase which he had taken from the end of Article 8 of the Model Law. On being pressed on this point, Mr. Scott, I think, realised that it really was not his best point and did not press it any further. 44. However, Mr. Scott further submitted that there had been no reported case where general words incorporating an arbitration clause which required modification had been upheld. The arbitration clause in this case would require substantial modification and this could not be sanctioned by mere general words. He then gave a number of examples which, he submitted, indicated how difficult it was going to be to work this clause in practice. These, he submitted, were a clear indication that the parties could not possibly have intended the arbitration clause to bite. 45. One of the examples given by Mr. Scott was that of timing; namely, when was the arbitration to commence? Was the arbitration to begin after the Plaintiff's works had been completed, or only after the Defendant's assembly sub-contract works had ended? Mr Scott submitted that no amount of tinkering with the clause could assist here. I reject this argument, because if I make appropriate modifications to Clause 31(5), one clearly arrives at a result that arbitration cannot commence until the completion or alleged completion of the sub-sub-contract works. 46. Mr. Scott also referred to the following potential problems; obedience to instructions, the provisions relating to claims support, the appointment of an arbitrator and the service of notices. 47. In response, Mr. Thomas retorted that Mr. Scott was putting the problem the wrong way round. Mr Scott's approach was to see what might happen if the arbitration clause was incorporated and, if this threw up any problems, to submit that those problems were a clear indication that the parties could not have intended to incorporate the said clause. 48. I agree that Mr. Scott was approaching the problem from the wrong end. I have to concentrate solely on the parties' intention, which must be gleaned from the words they have used. If I am satisfied that this arbitration clause has been incorporated, it is irrelevant to me that the parties may have thereby created some problems for themselves. It frequently happens that parties enter into arbitration clauses which are poorly drafted and which give rise to problems. I am not saying that this is what has necessarily happened in the present case but if Mr. Scott is right in identifying certain problems then, if I am satisfied that the parties clearly intended to incorporate the sub-contract arbitration clause, they are problems which will have to be dealt with by the parties themselves as and when they arise. 49. In construction cases, one has to approach the question of incorporation by reference from the standpoint of the intention of the parties with no preconceived notions. One is entitled to take into account all the surrounding facts - the factual matrix - but, at the end of the day, one ends up trying to give contractual and commercial effect to the actual words used by the parties. 50. I am quite satisfied that by the actual words used by the parties in their agreement, they did intend to incorporate Clause 31 of the assembly sub-contract. I have not forgotten that applying the clause mutatis mutandis does involve some rejection and modification but that, by itself, does not displace the parties' intention. In using the word "proportional", they must have recognised that some modifications would have to be made. If, as Mr Scott fears, there may be problems in putting this agreement into practice, this does not seem to me to be a reason for not incorporating the clause but is a reason for castigating the parties' bargain as ill-advised. Time alone will tell. Suffice it to say, for present purposes, I am not satisfied that the problems to which Mr Scott has averted are insurmountable. 51. In relation to this latter argument, namely that the parties could not have intended such a result, because some of the clauses in the assembly sub- contract are not apposite to the contract, I believe that the following dicta of Sir John Donaldson M.R. in Skips Nordheim v. Syrian Petroleum (1984) I Q.B. 599 at 616 is of some relevance:
CONCLUSION 52. In the light of the facts of this case and of the words used by the parties in their contractual documentation, I am quite satisfied that the parties to this contract had agreed to incorporate all the terms of the assembly sub- contract into the contract with appropriate modifications to be made wherever necessary. This, as I have already held, includes the rejection of clauses which have no relevance to the contract in question. I would find it to be a strange result if the parties had agreed to incorporate by the words they used only some of the terms of the assembly sub-contract but not others including the arbitration clause - particularly where other parties in the contractual chain had agreed on arbitration. 53. Further, the Plaintiff was given every opportunity to consider the terms of the assembly sub-contract and at no stage did it indicate its objection to the arbitration clause. Indeed, it is common ground that even if Mr. Bailey had had any reservations about arbitration, he did not communicate them to the Defendants. Such uncommunicated intention is therefore quite irrelevant and has to give way to the words which the parties actually used when making their contract. 54. The issue of whether or not there will be difficulties in operating the terms of Clause 31, as suitably modified, is not really a matter for me. Once I have decided that the arbitration clause, suitably modified, is capable of operation, then the mere fact that there might be some problems in its operation is irrelevant because they will have to be dealt with as and when they arise by the person charged with the responsibility for resolving such problems, be it the arbitrator or a judge in England. 55. For these reasons, therefore, I am quite satisfied that the arbitration clause in the assembly sub-contract has been incorporated into the contract between the parties before me and, in those circumstances, I have no discretion other than to grant a stay of these proceedings, pursuant to the terms of Article 8 of the Model Law. 56. As to costs, I propose to make a costs order nisi in favour of the Defendant, who has been successful in the application for a stay of proceedings. 57. I would like to express my thanks to Counsel for the interesting and helpful submissions which they provided to me, and for the economy with which they were all deployed.
Representation: Mr. Michael Thomas, Q.C. and Mr. Godfrey Lam inst'd by Kwok & Chu for the Defendant. Mr. John Scott inst'd by Bateson Starr for the Plaintiff. |
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