In Chevalier (Construction) Company Ltd v. Universal Aluminium Industries Limited, 18 June 2014, Hong Kong’s High Court (Court of First Instance) considered an application for a stay of proceedings in favour of arbitration.
The Plaintiff was the principal contractor and the Defendant the subcontractor, for two projects, namely the “Tuen Mun Project” and the “Tai Po Project”.
In May 2013, the Plaintiff formally terminated the Defendant’s subcontract for the Tai Po Project and the Defendant claimed that about HK$20 million was due to it from the Plaintiff and, that as a result, it had been unable to pay wages due to its employees and those of its subcontractors on both projects.
The Defendant completed its work under the Tuen Mun Project and in July 2013 submitted a final account to the Plaintiff, in excess of HK$10.577 million, which was not paid.
In July and August 2013, the parties agreed that the Plaintiff would make direct payments to the employees of the Defendant’s subcontractors, which would then be set off against any payments found to be due to the Defendant.
Subsequently, the Plaintiff served a Notice of Arbitration referring the dispute in relation to the Tai Po Project to arbitration and the Defendant served a Notice of Arbitration referring the dispute in relation to the Tuen Mun Project to arbitration. The Plaintiff and Defendant had been in contact with each other in respect of the appointment of arbitrators.
In the meantime, the Plaintiff commenced court proceedings claiming HK$2,272,025 million, which it had paid, at the Defendant’s request, to employees of the Defendant’s subcontractors, under the Employment Ordinance (Cap 57).
The Defendant applied to stay the court proceedings on the basis that the contracts and subcontracts relating to the projects contained arbitration clauses by which the Plaintiff and Defendant agreed to refer disputes in relation to the projects to arbitration. The Plaintiff argued that its claim for payments which it had made to the employees of the Defendant’s subcontractors fell outside the ambit of the arbitration clauses because they were “statutory claims”, and that such claims could not fall within the ambit of an arbitration clause unless specifically stated.
The arbitration clause
The arbitration clause stated that the dispute “…shall be referred to and resolved by arbitration in accordance with Part II of the Arbitration Ordinance of Hong Kong.”
The Court held that the payments made by the Plaintiff under the Employment Ordinance were inextricably involved with the dispute between the Plaintiff and Defendant arising out of both subcontracts. It was, the Court said, wholly artificial to seek to compartmentalise the Plaintiff’s claim for reimbursement. The Court said that it was quite inappropriate for the Plaintiff to have commenced court proceedings to recover the sum paid when the principal live issue remained between the parties and each party had not only triggered the reference to arbitration under the arbitration clause by a Notice of Arbitration, but had also been in contact concerning the appointment of arbitrators.
Questions considered by the court on a stay application
The Court set out and answered the four questions to be considered on the stay application as follows:-
Accordingly, the Court ordered that the court proceedings be stayed in favour of arbitration. The Court’s decision is at odds with previous cases involving similar issues. It is submitted that the Court could have given judgment in the Plaintiff’s favour and granted a stay of execution of the judgment, pending disposal of the arbitration of the Defendant’s defence and counterclaim because there was no dispute that the Plaintiff had paid the sum in question (at the Defendant’s request) to the employees of the Defendant’s subcontractors and there was therefore no dispute in respect of such to refer to arbitration. In one case handled by the writer, the defendant failed to commence arbitration within a reasonable time and the stay of execution of the judgment was uplifted as a result.