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Legal News, Views, and Insights from LexisNexis Hong Kong

2 December 2019 | by LexisNexis Hong Kong

Introduction

The issue for the case of Yun Kwan Construction Engineering Ltd v Shui Tai Construction Engineering Co Ltd [2019] HKCFI 1841 was whether an arbitration clause in the head contracts between the Defendant and its own respective head contractors had been incorporated into the corresponding contracts between the Defendant and the Plaintiff. The court held that it had not.

The Plaintiff sued the Defendant for alleged outstanding sums under sub-contracts relating to 4 different projects. The Defendant asked the court for an order that further proceedings in the action in relation to 2 of the projects (“Project 1” and “Project 3”) be stayed for arbitration.

The Contracts

Project 1 concerned a proposed residential and commercial development in Kai Tak. The main contractor (“Konwall”) had entered into a main contract with the employer (“Handy”) for works on hoarding, basement excavation and lateral support, foundation and pile caps (the “Employer-Konwall Contract”).

Konwall then sub-contracted some of the works to the Defendant (the “Konwall-D Contract”) in a contract letter Clause 7 of the letter stated that several documents, including the General Conditions of Sub-Contract (“GCSC”) would form part of the contract GCSC contained an arbitration clause which provided that any disputes arise between Konwall and the Defendant in connection with the sub-contract would be referred to arbitration.

The Defendant in turn sub-sub-contracted part of the works to the Plaintiff (“D-P Contract 1”). Clause 10 of D-P Contract 1 provided that “[t]he 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.”

Project 3 had a similar contractual chain to Project 1. For simplicity of expression, the court only referred to Project 1 but the same reasoning applied to Project 3.

Judgment

The court held that the arbitration provisions relied upon by the Defendant was not incorporated into the contracts between the Plaintiff and the Defendant.

According to Art. 7(6) of the UNCITRAL Model Law, an arbitration clause referred to in a separate document may be incorporated as part of the contract, which is also referenced in sections 19(1) and 19(3) of the Arbitration Ordinance. It is not essential for there to be an explicit reference to the clause itself, reference to a document containing the arbitration clause relied upon may be sufficient provided “the reference is such as to make that clause part of the contract”. While the authorities in other jurisdictions suggest that for incorporation of an arbitration clause into a contract between A and B by reference to an agreement between B and C or X and Y, there must be a specific reference to the arbitration clause itself, they do not reflect the law of Hong Kong which is based on Art. 7(6) and which has been established since Astel-Peiniger for 25 years. 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 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 mean.

With regards to Clause 10 of D-P Contract 1, it was first found clear that the “Sub-Contract” meant the Konwall-D Contract and “Main Contract” meant the Employer-Konwall Contract. The wording of the relevant sentence in the clause meant that it was “the works” under D-P Contract 1 that were incorporated into the Main and Sub-Contracts and not the D-P Contract 1 itself.

Secondly, Clause 10 made no reference to the “terms and conditions” of the Employer-Konwall Contract or the Konwall-D Contract. It did not in any way state that either of those contracts apply to the relationship between the Plaintiff and the Defendant, or the D-P Contract 1 was “back to back” with or is to be performed “in accordance with” the Konwall-D Contract.

It was also difficult for the court to ascertain the intention of the parties in this case regarding whether the reference to the Main and Sub-Contracts was sufficient for incorporation. Reyes J in Sunbond Engineering Ltd v Konwall Construction & Engineering Co Ltd stated “…doubtful or ambiguous references to main contract documents or terms are 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…”. So,the court accepted the Plaintiff’s submission that the reference made to the Main and Sub-Contracts in the relevant clause was “intended to mean that the specifications, standards and requirements relating to the works” in which the Plaintiff should follow in executing thoseworks, and not every clause, including the arbitration clause, should be incorporated into D-P Contract 1.

For more information, please see:

Halsbury’s Laws of Hong Kong – Arbitration, Civil Procedure: High Court, Contract

Hong Kong Civil Court Practice

The Annotated Ordinances of Hong Kong – Arbitration Ordinance (Cap 609), Contracts (Rights of Third Parties) Ordinance (Cap 623), High Court Ordinance (Cap 4)

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