23 Oct 2021

Arbitration Law Update: Hong Kong Court Reaffirmed its Pro-Arbitration Stance

Introduction

On 26 August 2021, the Hong Kong Court of First Instance ordered a stay of litigation proceedings in favour of arbitration in Kinli Civil Engineering Ltd v Geotech Engineering Ltd [2021] HKCFI 2503 (“Kinli Civil Engineering Ltd”), which serves as a reminder of the Hong Kong Court’s pro-arbitration stance. This article will take a closer look at the judgment of Kinli Civil Engineering Ltd and its future implications.

Factual Background of Kinli Civil Engineering Ltd

The case centres around a dispute in a public housing development project between the plaintiff Kinli Civil Engineering Ltd (“Kinli”) and the defendant Geotech Engineering Limited (“Geotech”). Kinli commenced court proceedings against Geotech to claim for alleged unpaid sums under the subcontract (“Contract”).

The dispute resolution clause of the Contract (“DR Clause”) provides that: -

“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).

Based on the DR Clause, Geotech applied to stay the litigation proceedings pursuant to section 20(1) of the Arbitration Ordinance. Kinli challenged the stay application.

Issues before the Court

In its opposition, Klini raised three main submissions: -

1. The use of “may” instead of “shall” or “must” in the DR Clause meant that parties merely had the option to elect arbitration, and the arbitration was merely permissive instead of mandatory.

2. The subcontract would be rendered “unworkable” if the DR Clause is interpreted as requiring all the disputes to be arbitrated only upon the completion of the main contract or the determination of the subcontract.

3. Parties are not precluded from litigating their disputes because arbitration could only be conducted after the completion of the main contract or the determination of the subcontract.

Decision

1. In interpreting the use of “may” in the DR Clause, the Court adopted a modern approach and referred to the judgement of Fili Shipping Co Ltd and others v Premium Nafta Products Ltd [2007] BUS LR 1719, confirming that the starting point for the construction of an arbitration agreement is the presumption in favour of arbitrability and the “one-stop” adjudication approach. The Court also considered the UK decision in Hermes One Ltd v Everbread Holdings Ltd [2016] 1 WLR 4098, where the Privy Council held that even in case of a purely permissive arbitration clause, it becomes mandatory for both parties when one party chooses to invoke the arbitration clause. The Court then rejected Kinli’s argument, and held that an arbitration clause will not be construed as giving a choice between arbitration and litigation unless there was very clear language providing for such.

2. As to the second issue, the Court observed that it is common for parties to the construction contracts in Hong Kong to require arbitration to be commenced only after completion of construction works so that the works could be continued despite the parties’ disputes. Therefore, the Court disagreed with Kinli’s argument that the subcontract would be rendered “unworkable”.

3. In response to Kinli’s last submission, the Court noted that it would be unusual for the parties to establish separate and distinct procedures for resolving same disputes. Without any mention of litigation, the Court held that the parties were bound to arbitrate the disputes. In this regard, the Court also reaffirmed its decision in C v D [2021] HKCFI 1471 that it has no role in determining whether any preconditions to arbitration have been met. Such a question relates to admissibility of the claim, and is for the arbitral tribunal to decide.

In light of the above analysis, the Court held that Geotech has discharged the onus to establish a prima facie case of the existence of an arbitration agreement, and granted Geotech’s application to stay the litigation in favour of arbitration.

Observations and Comments

The judgement once again emphasizes the Hong Kong Court’s pro-arbitration stance. It is now clear from the judgment that the use of “may” in an arbitration clause does not by itself indicate that the arbitration agreement is permissive rather than mandatory. In absence of any unequivocal and clear language that the contracting parties have the option to resolve their disputes in court, the Hong Kong Court is more likely to uphold a binding obligation imposed on the contracting parties to arbitrate.

This article is co-authored by our Partner and Head of Litigation and Dispute Resolution Department, Ms. Heidi Chui, Associate, Mr. Calvin Huang, and Trainee Solicitor, Mr. Charles Luk. Please contact Ms. Heidi Chui [heidi.chui@sw-hk.com] for any further enquiries or information.

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