Hong Kong High Court, Court of First Instance stays litigation in favour of arbitration in dispute under construction contract

“If in the course of executing the Contract, any disputes or controversies arise between [Geotech] and [Kinli] 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.” (Emphasis added)  

The main issues in dispute were: (1) whether this clause provided for permissive arbitration, or whether arbitration was mandatory; and (2) whether the proviso at the end of the clause had the effect that arbitration could not be conducted until the main contract had been completed and the Contract had also be terminated or determined.

Section 20(1) of the Hong Kong Arbitration Ordinance gives effect to Article 8 of the UNCITRAL Model Law which requires the Court to refer the parties to arbitration unless the Court finds that the arbitration agreement is null and void, inoperative or incapable of being performed. In seeking a stay, Kinli was required only to demonstrate a prima facie case that there was a binding arbitration agreement and with the arbitral tribunal to determine its jurisdiction.

Judgment

Kinli contended that the wording that the parties “may” refer a dispute to arbitration meant that the parties only had the option to elect arbitration and that the clause did not take away Kinli’s right to bring a claim before the Court. It further argued that the parties did not intend that arbitration should be mandatory given that the clause contained two conditions precedent before a dispute could be referred to arbitration.

The Court referred to the decision of the Privy Council decision in Hermes One Ltd v Everbread Holdings Ltd [2016] 1 WLR 4098 which dealt with an agreement providing that any disputes “may” be referred to arbitration. The Privy Council held that this wording was permissive but that whilst one party may commence litigation, the other party had the option of submitting the dispute to binding arbitration with this option being exercisable by giving notice accordingly and/or by applying to stay the litigation.   

The Court also considered the judgment of Lord Hoffmann in Fili Shipping Co Ltd & others v Premium Nafta Products Ltd [2007] BUS LR 1719 in which he observed that in construing an arbitration clause a starting assumption was that the parties are likely to have intended that any disputes would be decided by the same tribunal, or, a “one-stop” adjudication approach.

In the present case, the Court accepted that in construing an arbitration agreement there was a presumption in favour of adjudication by the same forum and that the clause would not give a choice as between litigation and arbitration unless there was very clear language providing for such a choice.

Kinli had submitted that the proviso in the clause made the agreement unworkable and that disputes arising before completion of the main works contract could be litigated.  The Court disagreed. It held that clause did not mention litigation or any right or option to litigate. Clauses allowing arbitration to be commenced only after work under the main contract had been completed or after the determination of the contractor’s works were common in construction contracts in Hong Kong and it was not for the Court to re-write this clause. 

The Court concluded that following the approach in Hermes One, the effect of the clause was that if a dispute arose the parties were bound to arbitrate if either party elected arbitration. In light of the word “may” in the clause, one party may commence litigation, however the clause gave the other party the option of submitting the dispute to binding arbitration with this option being exercisable by requiring the party which commenced the litigation to submit the dispute to arbitration and/or by applying to stay the litigation.  The Court was satisfied that Geotech had established a prima facie case of the existence of an arbitration agreement and it granted a stay. It further found that the question as to whether the proviso in the clause had the effect that arbitration cannot be conducted until the main contract had been completed and the Contract had also be terminated or determined and whether these events had occurred were matters for the arbitral tribunal in the event that the tribunal.

Contracts frequently provide for mandatory arbitration, i.e., that disputes “shall” be referred to arbitration. It is perhaps less common for arbitration to be permissive with clauses providing that disputes “may” be referred to arbitration and this judgment is a helpful illustration of a court’s approach to construing such clauses.