Arbitration Clauses – choose words carefully

23 September 2021, Construction, Newsletter, by Kwok Kit Cheung,

The recent judgment in Kinli Civil Engineering Ltd v Geotech Engineering Ltd, HCA 2141/2020, is a reminder of the importance of choosing words carefully when drafting an arbitration clause, to ensure that it reflects the parties’ intentions as to how any disputes that may arise are to be resolved.     

Background

The proceedings were instituted by the Plaintiff (K) against the Defendant (G) for sums, said to be due under a contract between them (Contract). K was G’s subcontractor for works to be carried out (Works) in relation to a public housing development (Project). The Housing Authority was the employer who entered into a contract with a main contractor (MC) under a contract for Project Works (Main Contract). G was MC’s sub-contractor for the Works, and another company was K’s sub-contractor, and G’s sub-sub-contractor.

 K claimed that the Works under the Contract had been completed, but that G had wrongfully deducted sums from the amount certified to be payable to K under interim payment certificates.

The arbitration clause

G applied for the action to be stayed on the ground that the dispute should be submitted to arbitration in accordance with the arbitration clause in the Contract (Clause), which translated, read: “If in the course of executing the Contract, any disputes or controversies arise between (G) and (K) 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.”

The dispute between the parties was (i) whether the Clause provided for permissive arbitration, or arbitration was mandatory; and (ii) whether the text of the proviso to the Clause (Proviso) had the effect that arbitration could not be conducted until the Main Contract had been completed andthe Contract had also been terminated or determined. Although “or” (“或”) was used in the Proviso, K contended that the use of “皆” (meaning “also”) meant that completion of the Main Contract and determination of the Contract both had to be satisfied, before there could be any arbitration.

How was the arbitration clause to be construed?

K contended that the Clause used “可” ,meaning “may” or “can”, as opposed to “須”, “shall” or “must”, meaning that the parties only had the option to elect arbitration, and the Clause did not take away K’s right to litigate the dispute in court.

The Court said that the arbitration clause was to be construed and interpreted in the context of the agreement made by the parties, and the exercise of construction was one of ascertaining objectively the parties’ intentions at the time the agreement was made - an arbitration agreement can be held to exist so long as the intention to arbitrate is sufficiently clear. 

The Court referred to the modern approach to the construction of arbitration agreements, namely that it starts 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, be decided by the same tribunal. Here, the relationship between K and G was one of contractor and subcontractor, confined to the execution of the Works on the Project. Disputes which arose between them were all related to this relationship and concerned the respective rights and obligations arising under the Contract, including K’s duty of execution of the Works and G’s obligation to pay for the Works. It would be unusual, the Court said, for the parties to a contract of this kind to establish separate and distinct procedures for resolving what were likely to be different aspects of the same dispute. 

The Court said that if there is an arbitration clause, bearing in mind the presumption in favour of one-stop adjudication by the same forum, it will not be construed as giving a choice to the parties between arbitration and litigation, unless there is very clear language providing for such. Reading the Clause as a whole, the Court did not accept K’s argument that it was clear that the parties could not have reasonably intended to have agreed on arbitration of their disputes arising in the course of the performance of the Contract. The Clause made no mention at all of litigation or the right or even option of the parties to litigate. If there were good reasons for resolving any type of dispute by litigation before completion of the Main Contract and/or the determination/termination of the Contract, that would normally and could easily have been spelt out and made clear, the Court said. There was no such provision in the Contract or the Clause.

What was the effect of the Proviso?

The Court referred to the fact that provision for arbitration to be commenced only after completion or substantial completion of works under a construction contract, or after determination of the contract for a contractor’s works, commonly appears in standard form construction contracts in use in Hong Kong. The objective of such a provision is to ensure that the contractor should continue to proceed with the works despite a dispute having arisen, and not bring progress of the works to a halt and cause delay in the performance of the contract in question, as well as the performance of other contracts/subcontracts in the entire construction project. Under such provision, arbitration shall not be commenced unless and until the contract is completed, or if there is agreement between the parties. It is of course open to the parties to expressly agree for specified disputes to be excluded from the relevant provision.

The Court said that the mere existence of the Proviso in the Clause could not mean that there was no commercial object which could be achieved, or render any arbitration agreement contained in the Clause to be “unworkable” as K contended. To the extent that K argued that it would be unfair for disputes on interim payments and extensions of time to be deferred until completion of Works and determination of the Contract, the Court said that it could not rewrite the Contract or the Clause for the parties. The parties could have agreed and provided for a carve out provision from the Proviso, if it was considered necessary and appropriate, for disputes as to the validity of instructions for Works, or for extensions of time, to be dealt with at such time and by such specific dispute resolution procedure, other than arbitration as may be stated in the Clause. However, the parties had failed to do this, and in the absence of such provision, there was no reason for the Court to depart from the position expressly stated in the Clause, namely, for disputes to be arbitrated upon completion of the Main Contract, or termination of the Contract. Needless to say, the Court said, it was of course also open to K to terminate the Contract on the ground of any breach on G’s part of any of its duties under the Contract, and thereafter to commence arbitration.

Court’s decision to stay proceedings

The Court said it was not necessary for G to go so far as to prove that the Clause had the effect of requiring the parties to arbitrate their disputes. It only had to establish a prima facie case of the existence of an arbitration agreement, which it had done. The Court said it was arguable, to the extent of having real prospects of success, that notwithstanding the use of “may” in the Clause, the effect of the Clause was that if any dispute arose in the course of the execution or performance of the Contract, and such dispute could not be agreed, the parties were bound to arbitrate such, if either party elected arbitration. The Court said that because “may” was used in the Clause, it was open to one party to the Contract to commence litigation, but the Clause gave the other party the option of submitting the dispute to binding arbitration, which option was exercisable by requiring the party which had commenced litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay of the litigation, as G had done in the present case.

The question as to when arbitration could be commenced, whether the parties had to wait until the Main Contract had been completed, or the Contract had been determined or terminated by performance or by breach, and whether those events had occurred, was a matter for the tribunal to decide and did not concern the Court at this stage, if it was satisfied that there was a prima facie case of the existence of an arbitration agreement.

Accordingly, the Court stayed the proceedings in favour of arbitration.