Court held that arbitration clause in head contract was not incorporated into sub-contract

06 November 2019, Construction, Newsletter, by Justin Yuen,

In Yun Kwan Construction Engineering Ltd v Shui Tai Construction Engineering Co Ltd, [2019] HKCFI 1841, the sole issue was whether the arbitration clause contained in the contracts between the Defendant (a construction company) and its own respective head contractors in two projects had been incorporated into the corresponding contracts between the Defendant and the Plaintiff (a steelworks construction company). The Court held that it had not.

The Plaintiff’s action against the Defendant was for alleged outstanding sums under sub-contracts relating to four different projects. The Defendant sought an order that further proceedings in the action in relation to Projects 1 and 3 be stayed to arbitration.

The Contracts

In Project 1, Konwall (the main contractor) had entered into a main contract with the employer, Handy (the Employer‑Konwall Contract). Konwall sub-contracted some of the works to the Defendant (the Konwall‑D Contract). Clause 7 of the contract stated that a number of documents, including in particular the General Conditions of Sub‑Contract (GCSC), formed part of the contract. GCSC contained an arbitration clause, stating that any disputes arising between Konwall and the Defendant in connection with the sub-contract would be referred to arbitration.

By contract between the Defendant and Plaintiff (D‑P Contract 1), the Defendant in turn sub‑sub‑contracted to the Plaintiff part of the works. Clause 10 of the D‑P Contract provided: “The Principal Contractor entered into a sub‑contract with Party A to sub‑contract the main works to Party A (Sub‑Contract). Party B understands clearly that the works of this sub‑contracting agreement were [all/part] of the Main Contract and Sub‑Contract, and both parties agreed to the following terms.”

The contractual chain in relation to Project 3 was similar to that in Project 1.

Legal Principles

The Court referred to the applicable legal principles:

  • Art 7(6) of the UNCITRAL Model Law prescribes how an arbitration clause in a separate document may be incorporated as part of the contract. For the purpose of Art 7(6), it is not essential for there to be an explicit reference to the arbitration clause itself. Reference to a document, which contains the arbitration clause relied upon, may be sufficient, provided “the reference is such as to make that clause part of the contract”.
  • The document referred to need not be a contract between the same two parties. It is possible under Art 7(6) to incorporate into a contract between A and B an arbitration clause, by reference to an agreement between B and C or even between X and Y or to an unsigned standard form of contract, which contains the arbitration clause.
  • The question of incorporation, in particular whether the reference is such as to make the arbitration clause part of the contract, is one of construction. The court’s task is to ascertain, with no preconceived notions, the parties’ intentions when they entered into the contract, by reference to the words that they used. This involves examining the wording of the documents against the relevant background to identify what a reasonable person would have understood the parties to be using the language in the contract to mean.

Court’s Ruling

The Court held that the arbitration provisions relied upon by the Defendant had not been incorporated into the contracts between the Plaintiff and Defendant because:

(1) 

In the relevant clause in D‑P Contract 1, it was clear that the “Sub‑Contract” (承判合約) meant the contract between the Defendant and its head contractor (i.e. the Konwall‑D Contract), and the “Main Contract” (總‍合約) meant the Employer‑Konwall Contract. The wording of the relevant sentence in the clause seemed to mean that the works under D‑P Contract 1 were the whole or part of the works under the Employer‑Konwall Contract and the Konwall‑D Contract.  The subject of that sentence seemed to be the works under D‑P Contract 1 (分判工程承判合約工程), not D‑P Contract 1 itself. It would not make sense for the parties to say that D‑P Contract 1 formed the whole or part of the Employer‑Konwall Contract and the Konwall‑D Contract, for that would be to suggest that the former (a sub‑sub‑contract) was incorporated into the latter (a main contract and a sub‑contract).

(2) 

It was also notable that the clause made no reference to the “terms and conditions” of the Employer‑Konwall Contract or Konwall‑D Contract, and did not in any way state that either of those contracts applied to the relationship between the Plaintiff and Defendant, or that D‑P Contract 1 was “back to back” with or was to be performed “in accordance with” the Konwall‑D Contract. Until disclosure in these proceedings, the Plaintiff had never been given a copy of the Konwall‑D Contract, let alone the Employer‑Konwall Contract.

(3) 

It was also hard to see, if the reference was sufficient for incorporation, why only the terms of the Konwall‑D Contract were incorporated (as the Plaintiff contended), and not also the terms of the Employer‑Konwall Contract, which was also referred to in that sentence. But equally it was difficult to see how it could have been the intention of the Plaintiff and Defendant to incorporate both sets of contracts, when the Plaintiff had not even disclosed in these proceedings the Employer‑Konwall Contract and it was not therefore known whether the two upstream contracts contained dispute resolution clauses that conflicted with each other.

(4) 

As such, the reference to the Employer‑Konwall Contract and Konwall‑D Contract in the relevant clause was intended to mean that the specifications, standards and requirements relating to the works as specified in those contracts should be followed by the Plaintiff in executing the works, being part of the works required under those contracts, and not to incorporate each and every clause, mutatis mutandis, including any arbitration clause, into the D‑P Contract 1. Indeed, the Defendant did not contend that any of the provisions in the Employer‑Konwall Contract (as opposed to the Konwall‑D Contract) were thereby incorporated. As pointed out in Hudson’s Building and Engineering Contracts (13th edition): “As a matter of first principle and in the light of the usual real‑life intentions of sub‑contracting parties, doubtful or ambiguous references to main contract documents or terms are much more likely to be aimed at the technical descriptions of the sub‑contract work to be found in the drawings, specifications or bills of quantities of the main contract rather than at the contractual or legal provisions in the main contract documentation, it is submitted.”

(5) 

The same applied in relation to D‑P Contract 3 in relation to Project 3.

Comments

The conclusion reached by the Court in this decision is clearly correct. As held in previous cases, had Clause 10 of the D-P Contract contained wording such as “back to back” or “proportional” to the terms and conditions of the Employer‑Konwall Contract or Konwall‑D Contract, the Court may well have held that the arbitration clause had been incorporated into the D-P Contract by virtue of Art 7(6) of the UNCITRAL Model Law. No precise provision in the D-P Contract for incorporating the arbitration clause is needed.