Court upholds arbitration clause in deed of mutual covenant

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Authored by: Carmen Ng

In a recent water leakage case (Silver King China Ltd v Huy Yun Shiu & Ors, DCCJ 3960/2021), the court stayed the proceedings and referred the dispute to arbitration, based on an arbitration clause in a Deed of Mutual Covenant (DMC).

Background

The Plaintiff (P) was the owner of the G/F, 1/F and 2/F of premises (Building). The 1^st Defendant (D1) was the owner of the 3/F of the Building, the 2^nd Defendant (D2) was the incorporated owners of the Building and the 3^rd Defendant (D3) was the management company of the Building.

P commenced proceedings against the Defendants (Ds) for breaching the DMC of the Building, the Building Management Ordinance (BMO), negligence and nuisance.

P sought injunctive relief and damages against D1 (who P alleged had caused the water leakage problem). As against D2 and D3, P sought a declaration that they were in breach of the DMC for failing to take any action against D1.

Arbitration clause in DMC

The DMC contained an arbitration clause (Clause 16) providing that all disputes between the parties to the DMC shall be referred to arbitration. Ds therefore argued that the action should be stayed and P’s claim referred to arbitration. P, on the other hand, argued that given the nature of P’s claims (i.e. including nuisance, negligence and breach of the DMC and BMO) and the relief sought (i.e. including injunctive relief and damages), the court was the proper forum.

Ds’ position

Ds’ position was that the disputes between P and Ds prima facie fell within the ambit of Clause 16 of the DMC and therefore, in accordance with s.20 of the Arbitration Ordinance, Cap 609 (AO) the court must (i.e. it was mandatory) stay the proceedings and refer the matter to arbitration.

P’s Position

P argued that (i) D3 was not a party to the arbitration agreement in Clause 16; (ii) the nature of the claim against D2 and D3 did not fall within the ambit of Clause 16; (iii) Clause 16 was incapable of being performed; (iv) the mandatory stay provision in s.20 of the AO would deny the public’s right to information regarding the safety and management of the Building, and was therefore inoperative.

Was Clause 16 of the DMC prima facie an arbitration agreement between P and Ds?

As noted by the court, Ds only had to show a prima facie and not a conclusive case that the parties were bound by the arbitration agreement.

There was no dispute that Clause 16 was an arbitration agreement between P on the one hand and D1 and D2 on the other hand. The court held that it was plainly arguable that Clause 16 could also be regarded as an arbitration agreement governing the dispute between P and D3 because it was P’s pleaded case (such plea undisputed by D2 and D3) that D3 was the property management company of the Building acting in the course of its business as an agent of D2.

As pointed out by the court, s.18 (2) (c) of the BMO provides that incorporated owners have the power to retain a manager or other professional trade or business to carry out any duties or powers of the corporation under the BMO or the DMC.

Further, the court said that since D3 was the agent retained by D2 to carry out D2’s duties under the DMC, while there was a dispute between a co-owner and D3 as to whether D3 had failed to discharge such duties, it would certainly be arguable that (i) bearing in mind that D3 was D2’s agent, the dispute between the co-owner and D3 would also be a dispute between that co-owner and D2. The dispute between the co-owner and D3 would in substance be the same as the dispute between that co-owner and D2; (ii) there was no reason why the dispute between the co-owner and D2 would be resolved by arbitration in accordance with Clause 16, but the same subject matter between the co-owner and D3 would be resolved through litigation in the court.

The court said that what was important was that in its own pleading, P was saying that D3 was bound by the DMC, and that being the case, D3 would also be bound by Clause 16 of the DMC and would be entitled to take the benefit of that clause. P must be bound by its own pleaded case.

It was therefore plainly arguable, the court said, that Clause 16 of the DMC could be regarded as an arbitration clause governing the dispute between P and D3.

Did the matters in dispute fall within the ambit of Clause 16?

The court went on to consider whether the matters in dispute between P and Ds fell within the ambit of Clause 16 and it concluded that they did. Accordingly, unless P could show that Clause 16 was null and void, inoperative or incapable of being performed, it was mandatory for the court to stay the proceedings in favour of arbitration.

Was Clause 16 incapable of being performed?

P argued that Clause 16 was incapable of being performed because its mechanism for the appointment of arbitrators was incapable of being performed in a multiple party dispute. Clause 16 provided that disputes were to be referred to “a single arbitrator in case the parties agree upon one, otherwise to two arbitrators, one to be appointed by each party…”

The court disagreed with P. It said that in the event of the parties failing to appoint a single arbitrator, the parties could try to agree that they would appoint a single arbitrator selected by a neutral and reputable organisation such as the HKIAC and if the parties were acting reasonably, there should be no difficulty in pursuing that option. Alternatively, the parties could have a discussion to try to agree on an appointment procedure to cater for their current situation. The court said that in the event of the parties failing to agree on an appointment procedure, the mechanism laid down in sections 13 and 24 of the AO would apply and the HKIAC could take the necessary measure to secure the appointment of arbitrator(s).

Would the mandatory stay provision in s.20 of the AO deny the public’s right to information regarding the safety and management of the Building?

P argued that s.20 of the AO was inoperative in this case because the principle of open justice and the public’s right to seek and receive information would be infringed if the dispute was referred to arbitration. The court held that P’s argument had no valid legal basis upon which the court could refuse to enforce the mandatory stay provisions prescribed in s.20(1) of the AO. It said that each and every co-owner of the Building had acquired an interest in the Building subject to and with the benefit of the provisions in the DMC, including Clause 16. This was an informed choice made by each co-owner at the time of acquisition of his unit in the Building.

Court’s decision

The court concluded that P had failed to show that Clause 16 of the DMC was null and void or incapable of being performed and it therefore stayed the proceedings and referred the matters in dispute to arbitration.

Comments

This case demonstrates the importance of commencing legal proceedings in the appropriate forum. The Hong Kong Court adopts an “arbitration biased” approach. As can be seen from the judgment, indemnity costs in the total sum of HK$280,000 were awarded against P. Whilst the amount of P’s claim is not mentioned in the judgment, disputes of this nature in the District Court may not be substantial. It also took 7 months for P to have the case decided by the Court. In this case, the judge handed down his decision right after the hearing. For many other cases, it is not uncommon for the judge to reserve judgment which may result in further delay to the resolution of the disputes between the parties.

Key Contacts

Carmen Ng

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9502