What is Arbitration?

Arbitration must be based on a valid arbitration agreement, which is typically required to be in writing [see MECHTLER (FAR EAST) LTD V. ELEGANT INTERIORS CONTRACTING CO LTD - [2007] HKDC 293]. The agreement should specify the arbitration rules, seat, language, and other procedural elements. Arbitration is consensual, and parties must mutually agree to arbitrate disputes. Arbitrators have the power to rule on their jurisdiction, including objections to their authority [see MASS TRANSIT RAILWAY CORPORATION V. HOPEWELL CONSTRUCTION CO. LTD. - [1988] HKCFI 284]. Arbitration clauses are treated as independent agreements, even if the main contract is invalid. Arbitration proceedings are generally confidential, subject to applicable laws.

Arbitration proceedings commence upon the submission of a written request for arbitration, which must include details such as the nature of the dispute, arbitration agreement, and procedural proposals. Arbitrators are selected based on the agreement between parties or appointed by an institution or authority if parties fail to agree [see JOHN LOK & PARTNERS LTD V. WHARF PROPERTIES LTD - [1984] HKCFI 215]. Arbitrators have discretion to conduct proceedings in a manner ensuring fairness, efficiency, and finality. Hearings may involve oral arguments, witness testimonies, or be based solely on documents. Arbitrators may provide interim relief measures, subject to the applicable arbitration rules.

Arbitral awards are final and binding, enforceable under international conventions (for e.g. the New York Convention). Limited grounds exist for challenging arbitral awards, such as procedural irregularities or jurisdictional issues. Arbitration proceedings are conducted pursuant to specific arbitration rules, for e.g.: LCIA Rules, UNCITRAL Model Law) and local laws (e.g., Arbitration Ordinance Cap. 609).

Court Cases about arbitration:

(A) JOHN LOK & PARTNERS LTD V. WHARF PROPERTIES LTD 
[1984] HKCFI 215 / [1984] HKC 96

A dispute arose between the plaintiff owner of certain property and the defendant main contractors in a construction project which would possibly involve many other parties. In an earlier hearing, the court had ordered litigation to be stayed and the defendant had appealed. Before the appeal was heard, the plaintiff applied for the appointment of a judge arbitrator. The defendant opposed this on the ground that if an arbitrator was appointed, it might be difficult to remove him if subsequently the appeal was successful. It was also argued that the appointment would restrict or inhibit a future court which heard an application for consolidation under s 6B of the Arbitration Ordinance (Cap 341) (the Ordinance).

Courts held that the application to appoint an arbitrator was granted, on grounds that:

1. The court had power to control the arbitrator. The court had jurisdiction to restrain an arbitrator from deciding issues which were being litigated before the court. There should be no difficulty in the appeal of removing the arbitrator appointed in this application.
2. Under s 6B of the Ordinance, which dealt with consolidation proceedings, the parties could agree to the choice of an arbitrator or the court could decide one. The fact that an arbitrator had been appointed in the proceedings to be consolidated would not affect the application of this provision.
3. Although the order to stay the action was under appeal, it was the judge’s obligation to honour the order first and could not assume that the appeal was going to succeed.
4. The order for the stay of the action and the appointment of an arbitrator went hand in hand. If the appeal was allowed, the appointment could be altered as well.
5. It was held in the Derek Crouch case that a judge, unlike an arbitrator, had no power such as is expressly given by the material arbitration clause, to open up, review and revise any certificate of the architect. The case was decided on its particular circumstances in the United Kingdom and might not be applicable to Hong Kong. This issue would be determined in the appeal against the order to stay.

(B) MECHTLER (FAR EAST) LTD V. ELEGANT INTERIORS CONTRACTING CO LTD 
[2007] HKDC 293

The parties involved in this case are the Plaintiff, a subcontractor, and the Defendant, the main contractor, who entered into a contractual relationship for renovation works at the InterContinental Grand Stanford Hotel in Hong Kong. The Defendant had a main contract with Tak How Investment Limited as the employer. The Plaintiff accepted a purchase order from the Defendant, which was subject to the terms and conditions outlined in a Letter of Intent dated July 13, 2005. The main issue before the court is whether an arbitration clause exists in the contract between the Plaintiff and the Defendant. The Defendant claims that the Plaintiff's workmanship was defective and that there were delays in completion, leading to losses. The Plaintiff, however, denies these allegations and asserts that he was unaware of the terms of the nominated sub-contract, including the arbitration clause. The court noted that the Plaintiff had received the Letter of Intent and accepted the purchase order, which referenced the nominated sub-contract. The court examined whether the arbitration agreement was valid and applicable to the disputes at hand. It was determined that the arbitration clause in the nominated sub-contract was indeed valid and that the disputes fell within its scope. The court also referenced Section 2A of the Arbitration Ordinance, which requires arbitration agreements to be in writing, and Article 8 of the UNCITRAL Model Law, which mandates referral to arbitration when an arbitration agreement exists. Ultimately, the court ordered a stay of proceedings in favor of arbitration, concluding that the Plaintiff had accepted the terms of the contract, including the arbitration clause, despite his claims of ignorance.

Courts held that all further proceedings in this action shall be stayed pursuant to section 6 of the Arbitration Ordinance, Cap. 341, on grounds that:

1. The court examined whether an arbitration agreement existed between the parties. It found that Clause 22 of the nominated sub-contract contained a valid arbitration clause, which was applicable to the disputes arising from the contract.
2. The court referenced the case of Tommy C.P. Sze & Company v Li & Fung (Trading) Limited & Others, [2003] 1HKC 418, applying a four-question test to determine the validity of the arbitration clause.
3. The Plaintiff claimed ignorance of the terms of the nominated sub-contract, including the arbitration clause. However, the court noted that the Plaintiff had accepted the purchase order, which was subject to the terms of the Letter of Intent.
4. The court highlighted that it would be unreasonable to believe that a merchant entered into a contract without knowledge of its basic terms, including the standard of work and completion dates.
5. The court confirmed that there was a genuine dispute between the parties regarding the quality of workmanship and delays, which fell within the ambit of the arbitration agreement.
6. The court cited Section 6(1) of the Arbitration Ordinance, which mandates referral to arbitration when a valid arbitration agreement exists.
7. The court concluded that the proceedings should be stayed in favor of arbitration, as required by Article 8 of the UNCITRAL Model Law.
8. The court emphasized that the Plaintiff's acceptance of the purchase order included acceptance of the arbitration clause, thus binding him to arbitration.
9. The court applied the principles outlined in the Arbitration Ordinance and the UNCITRAL Model Law, which govern the enforcement of arbitration agreements.
10. The court reiterated that a court must refer parties to arbitration unless the agreement is found to be null and void, inoperative, or incapable of being performed.

(C) MASS TRANSIT RAILWAY CORPORATION V. HOPEWELL CONSTRUCTION CO. LTD.  [1988] HKCFI 284

In the High Court of Justice, Hong Kong, two originating summonses were presented concerning an arbitration between Hopewell Construction Co., Ltd. (Claimant) and the Mass Transit Railway Corporation (Respondent). The first summons (MP569 of 1988) sought a declaration that the arbitrator lacked jurisdiction to determine a counterclaim by MTR for $2,099,908.54. The second summons (MP634 of 1988) involved MTR's claim that Hopewell's claim for $149,184.75 could not be heard by the arbitrator. The disputes arose from a contract (No. 703) for the commercial development of Telford Gardens, which was completed in 1982. The contract involved Hopewell as the main contractor and MTR as the employer, with Palmer & Turner as architects. The arbitration clause (Clause 136) stipulated that disputes should first be referred to the architect for a decision, which could then be taken to arbitration if necessary. Hopewell had previously raised complaints regarding defects and certificates, and after dissatisfaction with the architect's decisions, they sought arbitration. MTR counterclaimed, asserting that payments made to Hopewell were over-certified. The court found that MTR was bound by the architect's decision, and thus the arbitrator had jurisdiction over the counterclaim. In the second summons, the court ruled that MTR was entitled to a declaration that the arbitrator had no jurisdiction over Hopewell's claim for defects due to defective designs, as the architect had not made a decision on this matter, which was a condition precedent for arbitration. The judgment was delivered by Hon. Jones J. on May 9, 1988, with costs ordered in respect of both summonses.

Court held that the first originating summons is dismissed, and MTR is entitled to a declaration that the arbitrator has no jurisdiction over Hopewell's claim for $149,184.75, on grounds that:

1. The court interpreted Clause 136 of the contract, which required disputes to be referred to the architect first.
2. The court found that MTR was bound by the architect's decision, and thus the arbitrator had jurisdiction over the counterclaim.
3. The court noted that no decision had been made by the architect regarding Hopewell's claim for $149,184.75.
4. As no decision was made, the arbitrator lacked jurisdiction to hear this claim.
5. The architect's decisions were deemed final and binding unless challenged through arbitration.
6. The court emphasized that the arbitrator could review the architect's decisions, but only if a dispute existed.
7. The court cited the Arbitration Ordinance Cap. 341, which governs arbitration procedures.
8. The court highlighted that the parties were not limited to the evidence presented to the architect during arbitration.
9. The court found insufficient evidence to show that the matters in question were subject to the architect's decision under Clause 136.
10. The absence of a decision by the architect meant that the claim was outside the arbitrator's jurisdiction.