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Authored by: KK Cheung
In the recent case of Employer v Consultant HCCT 39/2021, a construction dispute, the Employer sought consolidation of the arbitration between the Employer and Consultant (1st arbitration) with two other arbitrations that had already been consolidated by consent (namely an arbitration between the Employer and Contractors (2nd arbitration) and an arbitration between the Contractors and Subcontractor (3rd Arbitration). The application for consolidation was made under s.2 of Schedule 2 of the Arbitration Ordinance (Cap 609) (Ordinance). The main issue to be determined was whether s.2 of Schedule 2 applied to the relevant Agreement between the Employer and Consultant. The court held that it did, meaning that the court had the power to order the consolidation sought.
The Plaintiff was the Employer, the 1st Defendant was the Consultant, the 2nd – 5th Defendants were the Contractors and the 6th Defendant was the Subcontractor on a project for construction of a bridge.
After the bridge was substantially completed, defects were discovered. An external pre-stressing tendon of the Bridge was found to have ruptured (T3 Tendon). Emergency replacement and disruptions followed. Further investigations revealed widespread voids, corrosion and defects in other tendons of the bridge, as a result of which extensive protective, preservative and remedial works had to be carried out, including the replacement of over 70 tendons.
The disputes concerning the defects were submitted to arbitration pursuant to the arbitration clauses contained respectively in the Agreement between the Employer and Consultant, the Contract between the Employer and Contractors, and Subcontract between the Contractors and Subcontractor. A sole arbitrator was appointed in the three arbitrations. The arbitration between the Employer and Contractors under the Contract (2nd Arbitration) was by consent consolidated with the arbitration between the Contractors and Subcontractor (3rd Arbitration) (Consolidated Arbitration).
Employer’s application for consolidation
The Employer sought consolidation of the arbitration between the Employer and Consultant under the Agreement (1st Arbitration) with the Consolidated Arbitration, under s.2 (1) of Schedule 2 of the Ordinance, on the ground that there were common questions of law and fact in the arbitrations, that the rights to relief claimed were in respect of or arose out of the same transaction or series of transactions, and that it was desirable to make an order for consolidation. The Contractors and Subcontractor agreed to the consolidation, but the Consultant did not.
The issue in dispute was whether s.2 (1) of Schedule 2 of the Ordinance applied to the Agreement because, if it did not, then there was no basis for the application to consolidate.
Schedule 2 of the Arbitration Ordinance (Cap 609)
As the court explained, the Ordinance, which came into effect in 2011, introduced a unitary regime for arbitration agreements and arbitrations in Hong Kong, and removed the distinction between domestic and international arbitration agreements made in the previous Arbitration Ordinance, Cap 341. However, parties were given the option under the Ordinance to opt into provisions governing domestic arbitrations under Cap 341. These opt in provisions are contained in Schedule 2 of the Ordinance and include a provision for consolidation of arbitrations.
Schedule 2 automatically applies in cases provided for in s.100 of the Ordinance. S.100 provides that “All the provisions in Schedule 2 apply, subject to section 102, to- (a) an arbitration agreement entered into before the commencement of this Ordinance which has provided that arbitration under the agreement is a domestic arbitration; or (b) an arbitration agreement entered into at any time within a period of 6 years after the commencement of this Ordinance which provides that arbitration under the agreement is a domestic arbitration.”
The purpose of s.100 was to address concerns raised by the construction industry, that the term “domestic arbitration” was a common feature of standard forms of construction contracts used in Hong Kong, and that such users may continue to employ the term “domestic arbitration” in contracts before and for some time after commencement of the Ordinance. Accordingly, a six-year transitional period was provided for in s.100, to allow time to the construction industry to make the necessary preparations for the unified arbitration regime. After the transitional period, parties who wished to utilise the domestic arbitration regime were required to expressly opt in pursuant to s.99 of the Ordinance, and to adopt Schedule 2 in whole or in part.
The arbitration clause in the Agreement between Employer and Consultant
The key issue to be determined was whether the arbitration clause (Clause 44) in the Agreement (made in 2002) provided that the 1st Arbitration under the Agreement was a domestic arbitration.
Clause 44 provided for arbitration of any dispute or difference of any kind arising between the Employer and Consultant in connection with or arising out of the Agreement, to be in accordance with the Arbitration Ordinance or any statutory modification thereof for the time being in force, and stated that the HKIAC Domestic Arbitration Rules shall apply to any arbitration instituted in accordance with the clause, unless the parties agreed to the contrary.
The parties agreed that (i) the 1st Arbitration and Consolidated Arbitration were now governed by the Ordinance; (ii) s.2 of Schedule 2 applied to the Consolidated Arbitration; and (iii) at the time when the Agreement was made in 2002, the applicable arbitration rules referred to in Clause 44 were the 1993 HKIAC Domestic Arbitration Rules (1993 Rules).
The court noted that whereas s.100 (and the wholesale application of the Schedule) refers to the requirement of an arbitration agreement which “has provided” or “provides” that the arbitration under the agreement is a domestic arbitration, s.99 employs the words “provide expressly”, and s.100 is silent as to whether the provision has to be “express”. S.99 of the Ordinance states: “An arbitration agreement may provide expressly that any or all of the provisions (of the Schedule) are to apply…”
The Consultant’s position was that s.100 should not be interpreted to include “implication”, as that went against the natural and ordinary meaning of the words in the section and the legislative intent behind s.100. The court disagreed. It said that by omitting use of the word “expressly”, s.100 did not exclude an implied provision in the arbitration agreement, and the effect of such implied provision.
The court said that if the legislative intent was to permit the construction industry to retain the use and any benefit of the domestic arbitration regime, when they had agreed to use a common standard form of contract which refers to “domestic arbitrations”, with the intention to follow and adopt the domestic arbitration regime that brings about, then it was not against such legislative intent to construe s.100 to extend and apply to an agreement which makes implied provision for domestic arbitrations.
Accordingly, the court concluded that the “provision” in s.100 may be one implied into an agreement.
Did domestic arbitration apply expressly or by implication to the Agreement between Employer and Consultant?
The next issue for determination was whether Clause 44 provided for arbitration to be a domestic arbitration, expressly, or by implication. The court said it was clear that Clause 44 did not expressly provide for domestic arbitration.
The court accepted the Employer’s submissions that when one considered the Agreement at the time when it was made in 2002, there could be no dispute that Clause 44 was intended to be a domestic arbitration agreement under Cap 341 in force at the time. The adoption of the 1993 Rules reflected that intention – albeit the 1993 Rules themselves did not provide expressly for such.
The court said that at the time when the Agreement was made (which was the relevant time for objectively construing the parties’ intention as reflected in the Agreement), s.100 of the Ordinance was not in existence. At that point in time, when both parties to the Agreement were Hong Kong parties, their arbitration agreement was domestic by operation of the law, without the need for them to make any specification or provision for their agreement and arbitration to be domestic. It went without saying, in those circumstances and in the context of the Agreement, the court said, that their agreement provided for domestic arbitration, and there was no specification otherwise. Once made, the Agreement and Clause 44 became binding on the parties from 2002, and would not change in its substance, nature and meaning by the subsequent commencement of the Ordinance in 2011.
What s.100 requires, the court said, is that there must be an established intention of the parties in the arbitration agreement that they intended to have a domestic arbitration, which had been demonstrated in this case. By referring to and incorporating the 1993 Rules in their arbitration agreement under Clause 44, the agreement between the Employer and Consultant had by implication provided for domestic arbitration. This was not a case of the Employer merely relying on the arbitration agreement being domestic by operation of the law at the time of the Agreement, under Cap 341, to claim that the parties had “provided” for a domestic arbitration.
Order for consolidation
Having held that s.2 of Schedule 2 applied to the Agreement and 1st Arbitration, the Court had power to order the consolidation sought. The court found that there were clearly common questions of law and fact in the 1st Arbitration and Consolidated Arbitration. The rights to relief claimed undoubtedly arose out of the same transaction or series of transactions in the project, concerned the construction of the bridge, and whether the Consultant, Contractors and/or the Subcontractor should be liable in contract or in negligence for the defects discovered. There would be substantial savings in time and costs, the court said, if all relevant parties were included in the consolidated arbitrations, so that discovery and evidence could be exchanged for all parties, witnesses could be called at the same hearing, and the risks of inconsistent findings could be avoided.
The court noted that the entire dispute was complex, multilayered but intertwined, and it was necessary for the arbitrator to be able to manage the claims and the dispute under one ceiling or reference, in a consolidated arbitration. If there should indeed be parts of the case that, in the Consultant’s opinion, did not concern its liability, no doubt it would be open to the Consultant to inform the arbitrator of its stance, and the hearing could be managed for parts of the evidence to be taken without the attendance of the Consultant and its advisers, if the Consultant preferred this, in the interests of saving time and costs.
Accordingly, the court made an order for consolidation of the 1st Arbitration and the already Consolidated Arbitration.
Unlike litigation, the court has no power to consolidate different arbitrations in multi-party disputes, unless Schedule 2 of the Arbitration Ordinance is applicable, even though it may save costs and avoid inconsistent decisions on similar issues. S.100 of the Ordinance is only applicable where an arbitration agreement was entered into before 1 June 2011 or within a period of 6 years from 1 June 2011 which provided that arbitration under the agreement is a domestic arbitration. As time goes by, s.100 will fall into disuse.
Many arbitration rules, for example, the 2018 HKIAC Administered Arbitration Rules, now provide for the power of the HKIAC to order consolidation of arbitrations. However, it still has to satisfy one of the following requirements:-
It should be noted that many Hong Kong standard forms of building contract, including those used in the private and public sectors, adopt the HKIAC Domestic Arbitration Rules, which ironically do not provide for consolidation of arbitrations.
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