In Leung Kwok Hung trading as Kaiser (M&E) Decoration Engineering Company v. Johnson Controls Hong Kong Limited [HCCT 56/2017], the Hong Kong Court of First Instance granted the Defendant’s application under s.20 of the Arbitration Ordinance, staying Court proceedings in favour of arbitration. In doing so, Justice Mimmie Chan noted that the principles for granting such a stay were clear and had not been disputed by the parties.

In light of the termination of the parties’ subcontract containing the arbitration clause, the Court reiterated that the arbitration agreement is separable from the underlying contract and confirmed that the matters in dispute between the parties relating to alleged breach, termination of contract and payment fell within the scope of the clause.

Background

Leung Kwok Hung and Johnson Controls Hong Kong Ltd. entered into a subcontract; subsequently a dispute arose between the parties. The Defendant claimed that it was entitled to terminate the agreement because of the Plaintiff’s suspension of work and alleged breach of contract, while the Plaintiff contended there had been wrongful repudiation of the agreement and that it was accordingly entitled to damages, as well as payment for the work done.

As per the arbitration clause in the subcontract “any dispute whether arising during the execution or after the completion of the Subcontract works, in regard to any matter or thing of whatsoever nature arising out of” the subcontract was to be arbitrated. When the Plaintiff commenced court proceedings, the Defendant applied under s.20 of the Arbitration Ordinance (Cap. 609) for a stay of the proceedings in favour of arbitration.

Decision

The Court noted that the arbitration clause contained in the subcontract was “widely drafted” and could not be confined only to disputes arising from the execution of the Subcontract Works (as defined), or disputes about the performance of the subcontract, nor could it exclude disputes due to the Plaintiff’s abandonment and non-performance of the Subcontract Works. Accordingly, there was a prima facie case that the dispute between the parties was covered by the clause. Chan J was not satisfied that the clause was inoperable.

The judge held that claims and issues in dispute, namely whether the Defendant could rely on the terms and conditions to terminate the subcontract in light of the Plaintiff’s alleged breach, and whether the Plaintiff was entitled to payment for the works it had carried out, arose during the execution of the Plaintiff’s works and fell within the wide description of “any matter or thing of whatsoever nature arising out of” the subcontract. The Court rejected the argument that the arbitration agreement between the parties had been terminated owing to the termination of the subcontract, on the basis of the well-established principle that an arbitration agreement is separable from the underlying contract and, consequently, termination and discharge of the underlying agreement does not affect the validity and operation of the arbitration agreement.

Ultimately, Chan J did not find any merit in the argument that the arbitration agreement was inoperative and hence granted the stay under s.20 of the Arbitration Ordinance.

Discussion

The decision of the Court to defer to the arbitral tribunal, in light of a valid and applicable arbitration agreement, accords with both the letter and the spirit of the Arbitration Ordinance, and the Hong Kong courts’ consistent refusal to interfere in any dispute that is subject to an arbitration agreement.