Court confirms modern approach to construing arbitration clauses

In Houtai Investment Holdings Ltd v Leung Yat Tung & Ors, HCA 1725/2019, the Plaintiff’s claims were made as owner of vessels, said to have been leased to CAE under oral agreements. CAE denied any oral agreements and claimed that the Plaintiff’s claims in respect of the vessels arose out of their relationship under a Sub-subcontract for works to be carried out by CAE as the Plaintiff’s subcontractor on a project, and that disputes in relation to such claims were governed by a dispute resolution clause contained in the sub-subcontract. The Court granted the Defendants’ application to stay the proceedings in favour of arbitration, finding that there was a prima facie case of the existence of an arbitration agreement between the Plaintiff and CAE, which was sufficiently wide in scope to cover the claims made by the Plaintiff in the proceedings, the dispute on which claims arose out of and were connected with the parties’ relationship and dealings under the Sub-subcontract. 

The Background

This was the Defendants’ application to stay the proceedings. The 4th Defendant (CAE) claimed that the action should be stayed in favour of arbitration, on the basis of an arbitration agreement made between the Plaintiff and CAE contained in a contract for works (Project). The 1st to 3rd Defendants and 5th to 8th Defendants claimed that if the stay was granted on CAE’s application, the Plaintiff’s action against them should likewise be stayed as a matter of the Court’s case management discretion, as the Plaintiff’s claims against them were contingent upon the Plaintiff’s success in its claims against CAE.

By Contract between the Hong Kong Government as Employer and Dragages-Bouygues Joint Venture (JV) as Main Contractor (Main Contract), the JV agreed to design and construct works on the Project. The JV then entered into a Subcontract with the Plaintiff, whereby the Plaintiff agreed as subcontractor to carry out Subcontract Works which formed part of the works under the Main Contract. Part of the Subcontract Works were then further subcontracted by the Plaintiff to CAE under a Sub‑subcontract.

Dispute Resolution Clause

The Subcontract and Sub-subcontract were both governed by the Articles of Agreement (Articles), clause 22 of which provided for resolution of disputes. Clause 22.1 stated: “A dispute is deemed to arise when one party serves on the other a notice in writing (a ‘Notice of Dispute’) stating the nature of the dispute…” Clause 22.2 stated: “If any dispute cannot be settled by agreement (or otherwise) then it will be referred to arbitration and the final decision of a single arbitrator…in accordance with and subject to the provisions of the Arbitration Rules….” Clause 22.6 of the Articles stated: “If a dispute arises under the Subcontract and there is a related dispute under the Sub-subcontract, then provided an arbitrator has not been agreed to or appointed for the Sub-subcontract dispute the Subcontractor may, by notice in writing to the Sub‑subcontractor, require that any dispute under this Sub‑subcontract be referred to the same arbitrator. Providing that the same arbitrator (“the common arbitrator”) is willing to accept the reference, the Sub-subcontract dispute will be determined by the common arbitrator.”

Court’s Decision

The main issue in dispute was whether the arbitration clause in the Articles covered the disputes between the Plaintiff and Defendants. The Court stayed the proceedings in favour of arbitration, holding: 

(1) 

The purpose of Clause 22.6 was to provide for the right of the Subcontractor to require a dispute arising “under” the Sub-subcontract to be determined by a common arbitrator, if there was a related dispute “under” the Subcontract. It sought to make a distinction between disputes which may arise under the Sub-subcontract which were related to disputes under the Subcontract, and those disputes which were not related. The test in this context was whether the disputes which had arisen were both under the Subcontract and under the Sub‑subcontract, and were related. Whether there may be a wider range of disputes which arise in connection with the Sub-subcontract was irrelevant, for the purpose of deciding whether they should be referred to the common arbitrator.

(2) 

It would not be useful to rely on decisions as to the meaning which the courts have attached to the use of “under”, “in connection with” or “in relation to” in arbitration agreements, and whether and how one is wider in scope than the other. The scope of an arbitration clause is to be construed and interpreted in the context of the agreement made by the parties in each particular case, and the exercise of construction is one of ascertaining objectively the intention of the parties at the time when the agreement was made. It may be artificial and futile to draw distinction between linguistic nuances.

(3) 

The modern approach to the construction of arbitration agreements is the presumption in favour of arbitrability and the “one‑stop” adjudication approach, at least as a useful starting point. The construction of an arbitration clause starts from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship in which they have entered or purported to enter to be decided by the same tribunal. The presumption may be rebutted and would not be applicable in particular cases, where the parties have entered into different interlinked agreements, relating to different aspects of an overall and often complex commercial transaction, and where there are differently expressed choices of jurisdiction and/or law in different agreements providing for different manners of dispute resolution. The presumption and principles are always subject to consideration of the presumed intention of the parties, and what is required in each case is a careful and commercially minded construction of the agreement in question.

(4) 

Where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution, the proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement “at the centre of gravity of the dispute” or at the “commercial centre of the transaction” in question).

(5) 

It is true that disputes as to the existence of the oral agreement and liability for payment of the rental charges for the vessels should have the closest connection with the oral lease agreement itself. However, the Plaintiff and CAE had a wider legal relationship, in respect of the Sub-subcontract Works, and such works and the parties’ rights and liabilities were governed by the Sub-subcontract. 

(6) 

Clause 22 did not qualify or define the “dispute” which was to be arbitrated. Clause 22.2 only provided for “any dispute” which cannot be settled by agreement to be referred to arbitration. That was extremely wide, and under clause 22.1, a “dispute” was deemed to arise when a party served a Notice of Dispute which stated the nature of the dispute, and that commences the proceedings for the dispute. As drafted, it was plainly arguable that Clause 22 was sufficiently broad to embrace all disputes which may arise between the Plaintiff and CAE in the course of those dealings under, or related to the Sub-subcontract.

(7) 

It was not necessary for CAE to establish that the claims included in its Notices of Dispute for arbitration in accordance with Clause 22 were identical or related to the claims made by the Plaintiff in this action in respect of the alleged oral lease agreements, for there to be a stay. So long as it could be established that there was a prima facie case of the existence of an arbitration agreement between the Plaintiff and CAE, and that the claims made by the Plaintiff in this action fell within the scope of the arbitration agreement contained in the Sub-subcontract, the Court would grant the stay. The Plaintiffs’ claims may be the subject matter of a new arbitration to be commenced, or they may be included in an arbitration already commenced. It is then for the arbitral tribunal to decide on its jurisdiction and on the merits of the claim.

(8) 

On the evidence adduced at this preliminary stage, it appeared that the oral lease agreements were not entirely different transactions between the Plaintiff and CAE, but were closely related to the performance of the Sub-subcontract.

(9) 

In all the circumstances, and having considered the factual matrix, the purpose of the Sub-subcontract, the connection between the lease of the vessels and execution of the Sub-subcontract Works, it would not be reasonable for the parties as rational businessmen to have intended that disputes arising under the oral leases and those under the Sub-subcontract should be resolved in different fora. The fact that the Plaintiff had throughout, issued invoices for the rental charges of the vessels under and by reference to the Sub-subcontract, was a reflection of the Plaintiff’s understanding and intention as to the scope of the arbitration agreement contained in the Sub-subcontract, and the close connection between the oral leases and the Sub-subcontract.

(10) 

There was a prima facie case of the existence of an arbitration agreement between the Plaintiff and CAE, as contained in Clause 22, which was sufficiently wide in scope to cover the claims made by the Plaintiff in these proceedings, the dispute on which claims arose out of and were connected with the parties’ relationship and dealings under the Sub-subcontract. There was no evidence or assertion that the arbitration agreement was null and void, inoperative or incapable of being performed. Under s. 20 of the Arbitration Ordinance, the Court “shall” refer the Plaintiff and CAE to arbitration.

(11) 

As for the other Defendants, the Court was satisfied on the evidence at this stage, that the Plaintiff’s claims against them were dependent and contingent upon the existence of a binding lease agreement between the Plaintiff and CAE, and the terms of such agreement as to the use of the vessels. Until such issues were determined, the liability of the 6th Defendant and directors of the 4th and 6th Defendants in relation to the use of the vessels could not be determined. On the evidence, CAE’s case was that the vessels had throughout been used for the Project. Unless the Plaintiff could establish that CAE was in breach of the lease and had no right to employ the vessels in the way it did, the other Defendants could not be held to be liable for assisting in the alleged conversion, detinue or any wrongdoing.

(12) 

There was an overlap in the factual issues which required determination in this action and those which arose in the arbitration between the Plaintiff and 4th Defendant. It would be a waste of costs and there was a risk of conflicting outcomes, if the action against the remaining Defendants was allowed to proceed when the action against CAE was stayed, and this would be contrary to the objectives of the Civil Justice Reform.