Introduction

In Kinli Civil Engineering Ltd v Geotech Engineering Ltd [2021] HKCFI 2503, the Hong Kong Court of First Instance (“CFI”) examined the implication of the existence of an arbitration clause in a contract.  Upon going through the relevant legal authorities and the established legal principles, the CFI confirmed that where arbitration clause exists, it will generally be construed as making arbitration mandatory instead of offering a choice between arbitration and litigation.

The facts

The Housing Authority employed Shui On Building Contractors Limited (“Main Contractor”) as the main contractor in relation to a public housing development project at Shek Kip Mei Estate Phase 6 (“Project”) pursuant to a main contract formed between them (“Main Contract”).  The Main Contractor sub-contracted certain works to be carried out for the Project’s site formation, drainage and pile cap works (“Works”) to the defendant company, Geotech Engineering Ltd (“Defendant”). The Defendant then sub-contracted the Works to the plaintiff company, Kinli Civil Engineering Ltd (“Plaintiff”) under a written contract dated 15 September 2016 (“Contract”).

On 31 August 2020, the Plaintiff completed the Works. However, the Defendant deducted a sum of over HK$3,160,199.15 from the sum payable to the Plaintiff under an interim payment certificate. Moreover, a further sum of HK$895,497.68 payable under another interim payment certificate was also due to the Plaintiff but remained unpaid. As a result, the Plaintiff commenced Court proceedings against the Defendant to claim for the sums due.

On 9 February 2021, the Defendant applied for the action to be stayed on the ground that the dispute should be submitted to arbitration in accordance with the arbitration clause contained in the Contract (“Clause”), which reads as follows:

“If in the course of executing the Contract, any disputes or controversies arise between [the Defendant] and [the Plaintiff] on any question and the parties are unable to reach agreement, both parties may in accordance with the relevant arbitration laws of Hong Kong submit the dispute or controversy to the relevant arbitral institution for resolution, and the arbitral award resulting from arbitration in the HKSAR shall be final and binding on both parties, and unless otherwise agreed by both parties, the aforesaid arbitration shall not be conducted before either the completion of the main contract or the determination of the subcontract.”

Issues

There are two issues before the CFI, namely:

1.        whether the Clause provides for permissive arbitration, or whether arbitration is mandatory; and

2.        whether the proviso to the Clause (“Proviso”) has the effect that arbitration cannot be conducted until completion of the Main Contract and termination of the Contract.

The CFI decision

Pursuant to section 20(1) of the Arbitration Ordinance, when an action is brought to a Court for a matter subject to an arbitration agreement, the Court shall refer the parties to arbitration if a party so requests, unless it finds that the agreement is null and void.

In the case of Tommy CP Sze & Co v Li & Fung (Trading) Ltd [2003] 1 HKC 418, the Court set out 4 questions to be considered when determining an application for stay of an action to arbitration:

1.        Is there an arbitration agreement between the parties?

2.        Is the clause in question capable of being performed?

3.        Is that in reality a dispute or difference between the parties?

4.        Is the dispute or difference between the parties within the ambit of the arbitration agreement?

In this regard, the CFI pointed out that the applicant for stay of action only has an onus to demonstrate a prima facie case that the parties were bound by an arbitration clause. Unless the point is clear, a court should refrain from attempting to resolve the issue and the matter should be stayed in favour of arbitration, as it is for the arbitration tribunal to first decide on its jurisdiction.

Applying the above guidelines, the CFI found that the dispute between the Plaintiff and the Defendant, namely whether there are sums due and payable to the Plaintiff under the Contract, falls squarely within the scope of the Clause. There is also clearly a dispute between the parties.

The Plaintiff argued that the word “may” in the Clause only means that the parties have an option to elect arbitration without taking away the right of either party to litigate the dispute in Court.  However, the CFI cited various legal authorities and held that an arbitration agreement can be held to exist so long as the intention to arbitrate is sufficiently clear. The modern approach to the construction of arbitration agreements is to presume in favour of arbitration and the “one-stop” adjudication approach as a starting point. Hence, the existence of an arbitration clause will generally not be construed as giving a choice to the parties between arbitration and litigation, unless there is very clear language providing for the same.

Regarding the Proviso, whilst the CFI saw no reason to depart from the position expressly stated in the Clause, i.e., for the dispute to be arbitrated upon completion of the Main Contract or termination of the Contract, the CFI held that the Defendant’s onus is not to prove that the Clause has the effect of requiring the parties to arbitrate their disputes. The Defendant has already discharged its duty to establish a prima facie case of the existence of an arbitration agreement. Accordingly, whether the parties should arbitrate upon completion of the Main Contract or termination of the Contract is a matter for the arbitration tribunal to decide and does not concern the CFI at this stage. Hence, the CFI granted the application for stay in favour of the Defendant.

Takeaway

Arbitration clauses are now increasingly common in all kinds of contracts. Parties to a contract should take heed of their obligation to arbitrate instead of pursuing litigation where an arbitration clause exists. If one does not prefer arbitration, he or she should refrain from including an arbitration agreement in the contract, or express with very clear wordings that arbitration is merely a choice instead of being mandatory.