HK Court Finds Arbitration Clause In Head Contract Not Incorporated Into Sub-Contract

In Yun Kwan Construction Engineering Limited v Shui Tai Construction Engineering Company Limited [2019] HKCFI 1841, the plaintiff sub-contractor issued proceedings against the defendant head-contractor for sums due under various contracts. The defendant applied to have the court proceedings stayed to arbitration on the basis that the head contracts between it and the various employers) contained an arbitration clause.

The sole issue before the Hong Kong High Court was whether the arbitration clause contained in the contracts between the defendant and its own respective head contractors had been incorporated into the corresponding contracts between the defendant and the plaintiff.

On the facts, the Court found that the arbitration agreement had not been incorporated. In reaching that conclusion, the Court set out the relevant legal principles as follows [5]:

  • By Art 8(1) of the UNCITRAL Model Law, given effect by s 20(1) of the Arbitration Ordinance (Cap 609), this court must refer any matter which is the subject of an arbitration agreement and, therefore, stay further proceedings in the action to that extent.
  • Art 7 of the UNCITRAL Model Law (Option I), given effect by s 19(1) of the Arbitration Ordinance, makes provision as regards what constitutes an “arbitration agreement”.  In particular, Art 7(6) prescribes how an arbitration clause in a separate document may be incorporated as part of the contract “The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.” Section 19(3) of the Arbitration Ordinance likewise provides: “A reference in an agreement to a written form of arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.
  • For the purpose of Art 7(6), it is not essential for there to be an explicit reference to the arbitration clause itself.  Reference to a document, which contains the arbitration clause relied upon, may be sufficient, provided “the reference is such as to make that clause part of the contract”: Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300, 305-307; Gay Construction Pty Ltd & Another v Caledonian Techmore (Building) Ltd (Hanison Construction Co Ltd, Third Party) [1994] 2 HKC 562, 566D.
  • The document referred to need not be a contract between the same two parties.  It is possible under Art 7(6) to incorporate into a contract between A and B an arbitration clause, by reference to an agreement between B and C or even between X and Y or to an unsigned standard form of contract, which contains the arbitration clause: Astel‑Peiniger, p 307.
  • Insofar as 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. (Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL [2010] EWHC 29 (Comm) and Sea Trade Maritime Corp v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Athena) [2006] 2 CLC 710, which draw a distinction between the “single contract” cases and “two‑contract” cases).
  • The question of incorporation, in particular whether the reference is such as to make the arbitration clause part of the contract, is one of construction.  The task of the court is to ascertain, with no preconceived notions, the parties’ intentions when they entered into the contract by reference to the words that they used: Astel‑Peiniger, pp 311 & 313.
  • Like other questions of contractual construction, this involves examining the wording of the documents against the relevant background to identify what a reasonable person would have understood the parties to be using the language in the contract to mean: see eg Building Authority v Appeal Tribunal (Buildings) (ENM Holdings Ltd) (2018) 21 HKCFAR 194, §53.

See also the review of this case by Hogan Lovells, where the authors conclude as follows:

“The incorporation of a term by reference is a frequent occurrence in construction contracts as it is in other types of contracts such as reinsurance contracts, charterparties and bills of lading.”

“Particular care is required in cases involving multiple contracts (often forming a chain), as here, as the Courts will be asked to determine the intentions of the parties if the drafting is unclear, particularly where one of the parties is seeking to oust the jurisdiction of the court in favour of arbitration. This is particularly important in cross-border contracts, given the differences in approach taken by the English and Hong Kong courts.”

“The English Court of Appeal construction case Aughton Ltd (formerly Aughton Group Ltd) v MF Kent Services Ltd [1991] 57 BLR1, pointed to a difference of approach even within the English judiciary as to whether general words are sufficient for effective incorporation, with Sir John Megaw stating that the arbitration clause should be referred to expressly while Ralph Gibson LJ took the orthodox Hong Kong approach that reference to the contract or standard form document would suffice, an approach that is more in line with the provisions of the UNCITRAL Model Law.”

“The rationale of the courts in England as to why an express reference is needed has not always been clear, with some judges reasoning that there are some instances in which the stricter approach is called for. A bill of lading, for example, might incorporate the terms of a charterparty, but a person who had negotiated the bill in another jurisdiction might have no means of knowing what those terms were, and whether there was an arbitration clause.”

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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