Introduction

In Chevalier (Construction) Co Ltd v. Universal Aluminium Industries Ltd HCA 2338/2013, the Court of First Instance ordered a stay of the court proceedings over a claim based upon the Employment Ordinance (Cap. 57) and held that the dispute should be resolved by way of arbitration.  

Background

In Chevalier (Construction) Co Ltd v. Universal Aluminium Industries Ltd HCA 2338/2013, the Plaintiff was the principal contractor and the Defendant was the sub-contractor for two projects in the New Territories, namely, “the Tuen Mun Project” and “the Tai Po Project”.

The Defendant completed its work under the sub-contract for the Tuen Mun Project and submitted a final account to the Plaintiff, in excess of around HK$10.5 million, but the Plaintiff refused to pay the Defendant.  

In May 2013, the Plaintiff formally terminated the Defendant’s sub-contract for the Tai Po Project. The Defendant claimed that the Plaintiff owed it about HK$20 million. Because of the Plaintiff’s failure to make such payments, the Defendant had been unable to pay the wages due to its employees and sub-contractors in respect of both projects.

Subsequently, the parties agreed that the Plaintiff would make direct payments to the Defendant’s employees and sub-contractors to satisfy its obligations under section 43C of the Employment Ordinance (Cap. 57) (the “Ordinance”). The payments would then set off any payments found to be due to the Defendant.

Both parties then served a Notice of Arbitration referring the dispute over the two projects to arbitration respectively. Meanwhile, the Plaintiff commenced court proceedings against the Defendant, claiming reimbursement of some HK$2 million, being the wages paid to the Defendant’s employees and sub-contractors under the Ordinance.

The Dispute Clause

The Defendant took out an application to stay the proceedings on the basis that the parties had agreed to refer the matters at dispute to arbitration.

The relevant dispute clause in the sub-contracts stated that “[the dispute] shall be referred to and resolved by arbitration in accordance with Part II of the Arbitration Ordinance of Hong Kong” (the “Clause”).

The Plaintiff alleged that the statutory claim under which the payments were made on behalf of the Defendant fell outside the scope of the Clause. It was further argued that even a liberal and broad construction of the Clause would not embrace a claim based upon the Ordinance.

The Court cited Lord Hoffmann’s decision in the UK case of Fiona Trust and Holding Corporation v. Privalov (2008) 2 Lloyds Reports, page 254. In Fiona Trust, the House of Lords held that the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered (or purported to enter) to be decided by the arbitral tribunal. The clause should be construed in accordance with this presumption, unless the language makes it clear that certain questions were intended to be excluded from arbitration.

Court’s Analysis

The Court noted that, the statutory claim was triggered by the Defendant’s inability as sub-contractor to pay wages, which was allegedly due to the Plaintiff’s failure to pay the Defendant in accordance with the sub-contracts. The payments made by the Plaintiff under the Ordinance were inextricably involved with the dispute between the parties arising out of the sub-contracts. Therefore, it was wholly artificial to compartmentalize the Plaintiff’s claim for reimbursement.

When Would a Stay Application be Granted?

The Court recounted and answered the following four questions when considering the application:

1.       Was there an arbitration agreement between the parties?

Answer: Yes.

2.       Was the Clause capable of being performed?

Answer: Yes, it was distinct, all-embracing and excluded no form or subject matter of dispute.

3.       Was there in reality a dispute or difference between the parties?

Answer: Decidedly so and its nature was quite clear.

4.       Was the dispute or difference between the parties within the ambit of the Clause?

Answer: It was and the payment under the Ordinance was one aspect of it. The amount was not disputed. It fell to be decided, ultimately according to the findings in respect of the core dispute between the parties. To exclude what had been described as a statutory claim from the ambit of arbitration would be an illiberal and constricting interpretation of the Clause.

Decision

To determine whether it is appropriate to stay the proceedings, the Court concentrated on the ambit of the Clause and paid due regard to the terminology as well as the parties’ intentions. Since the language of the Clause excluded no subject matter of dispute, the Court expressed that the Plaintiff should never have commenced proceedings to seek reimbursement, especially when both parties had triggered the reference to arbitration under the Clause by the Notice of Arbitration. Accordingly, a stay of proceedings was ordered in favour of arbitration.

Conclusion

Where the parties intend to exclude a certain subject matter of dispute from arbitration, this must be clearly reflected in the arbitration clause. If they fail to do so, any dispute arising out of the contract would have to be resolved by arbitration. The Court has jurisdiction to stay the proceedings for arbitration even after one party has initiated legal action against the other.