Hong Kong court confirms pro-arbitration interpretation of mandatory stay provision

In Schindler Lifts (Hong Kong) Ltd v Sui Chong Construction and Engineering Co Ltd [2014] HKEC 1967, the Hong Kong District Court ordered stay of an action pending referral of the dispute to arbitration, despite the defendant having filed a defence in Hong Kong Small Claims Tribunal proceedings, which were later discontinued.

Background

The case concerned two payment disputes between the plaintiff, a sub-contractor, and the defendant, the main contractor. It was not disputed that the payment disputes fell within the scope of the arbitration clause in the sub-contract. The plaintiff commenced proceedings in the Hong Kong Small Claims Tribunal in respect of the first payment dispute (the "First SCT Proceedings") and the defendant filed a defence to the First SCT Proceedings. The plaintiff subsequently commenced proceedings in the Hong Kong Small Claims Tribunal in respect of the second payment dispute (the "Second SCT Proceedings") but the defendant did not file a defence to the Second SCT Proceedings. The plaintiff applied to have the First SCT Proceedings and the Second SCT Proceedings consolidated and transferred to the Hong Kong District Court and the Hong Kong Small Claims Tribunal ordered the First SCT Proceedings and the Second SCT Proceedings to be discontinued. The plaintiff discontinued both the First SCT Proceedings and the Second SCT Proceedings and commenced new proceedings in the Hong Kong District Court (the "DC Proceedings"). The defendant applied to stay the DC Proceedings.

Issues

• Whether the defendant's filing a defence to the First SCT Proceedings constituted a waiver of its right to arbitrate that precluded the Court from granting a mandatory stay of the DC Proceedings pursuant to section 20 of the Hong Kong Arbitration Ordinance (the "Arbitration Ordinance"); and
• If a mandatory stay were not granted, whether the Court should exercise its discretion to stay the DC Proceedings either in exercise of its inherent jurisdiction to compel parties to comply with their agreements, or pursuant to Order 1B, rule 1(2)(e) of the Rules of the District Court.

Issue 1

Section 20(1) of the Hong Kong Arbitration Ordinance adopts the wording of Article 8 UNCITRAL Model Law and provides that:

"[a] court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."

Section 20(5) Arbitration Ordinance further provides:

"[i]f the court refers the parties in an action to arbitration, it must make an order staying the legal proceedings in that action." 

The plaintiff advanced four arguments to oppose the defendant's application for stay:

• the defence filed by the defendant in the First SCT Proceedings constituted its "first statement on the substance on the dispute" (as per section 20(1) Arbitration Ordinance);
• "court" referred to the whole Hong Kong court system rather than a particular court;
• the arbitration clause in the sub-contract was inoperative because a condition precedent that a dispute should be referred to mediation before arbitration had not been fulfilled; and
• the defendant had waived its right to arbitrate by filing a defence in the First SCT Proceedings.

The Court rejected all four arguments.

In relation to the first argument, the Court held that "first statement" did not include a statement in another action before another court. The "first statement" must be a statement submitted in the action sought to be stayed and not in another action. The judge explained that to hold otherwise would be directly contrary to the legislative intent of Article 8 UNCITRAL Model Law.

In relation to the second argument, the Court rejected the interpretation that "court" referred to all courts within a particular court system, rather than to the particular court before which an action was brought.

In relation to the third argument, the Court held that the fact parties did not go through the steps in a "multi-tier dispute resolution mechanism" did not render the arbitration clause inoperative.

In relation to the fourth argument, the Court held that the defendant could not be said to have unilaterally waived its right to arbitrate because the right to arbitrate benefited both parties (since either party could refer a dispute to arbitration), therefore it could not be waived unilaterally.

The court ordered a mandatory stay of the DC Proceedings, in accordance with section 20 Arbitration Ordinance.

Issue 2

The judge stated that, even if the requirements for a mandatory stay had not been made out, he would have exercised his discretion to stay the DC Proceedings. When there is an arbitration agreement in place, a party has to show good reasons for departing from the arbitration agreement. In this case, the plaintiff failed to show any good reasons; if stay was not granted, the two payment disputes would have had to be resolved in two different forums. Moreover, it would be highly undesirable to have the first payment dispute heard by the court and the second payment dispute heard by an arbitrator.

Commentary

This case demonstrates that the Hong Kong courts will construe the requirements of section 20 Arbitration Ordinance broadly to order stay of court proceedings in favour of arbitration, in keeping with their generally pro-arbitration stance and the overall aim of the Arbitration Ordinance. Users of arbitration will also welcome the court's willingness to consider exercising its inherent jurisdiction to stay court proceedings in favour of arbitrations in appropriate circumstances, even where the requirements for a mandatory stay are not met.

For further information, please contact May Tai, Partner, Simon Chapman, Partner, or your usual Herbert Smith Freehills contact.