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Carrier Hong Kong Limited v Dlckson Construction Company Limited
[7 October 2005]

Multi-tiered subcontracting is still prevalent in Hong Kong's construction industry. When tendering for a project, it is common, indeed often necessary, for a main contractor to put in place 'contractual arrangements' with an array of subcontractors in anticipation of being offered the job by the employer. Frequently, there are matters that remain unresolved between the main contractor and the subcontractor when the tender is submitted, which they then continue to negotiate over. Against this background, it is not unusual for disputes to arise (after the main contract has been awarded) as to whether a binding subcontract actually exists and whether they are bound by an arbitration agreement in the contract.

This recent, well-reasoned, decision of Burrell J. serves to highlight the approach of the Hong Kong Courts towards these issues.

The Background

In early 2002, Dickson was putting together a tender to the Architectural Services Department (ASD) which was the employer in a forthcoming project. The deadline for the submission of tenders to ASD was 3 May 2002.

Dickson had invited Carrier to be its nominated HVAC subcontractor (Carrier being on ASD's approved list of specialist subcontractors for heating, ventilating and air-conditioning systems) and the parties entered into negotiations.

It was common ground that, as at 3 May 2002, when Dickson's tender was submitted to ASD, Carrier knew:

  • it was being nominated by Dickson;
  • a price of HK$33 million had been entered in the tender;
  • the scope of the works to be carried out; and
  • Dickson was hoping to be appointed as main contractor and that, if successful, the terms of the subcontract would be back-to-back with the main contract.

However, it was also common ground that, as at 3 May 2002, there were certain matters that remained unresolved - not everything had been agreed.

Dickson's tender was accepted by ASD in August 2002 and around October 2002 Carrier was informed that the tender had been successful. Almost immediately, Carrier commenced work on site.

Carrier worked on site for about 6 months. Its first written indication that it did not consider itself bound by a subcontract was in March 2003. It formally wrote to Dickson to this effect in April 2003 and it withdrew from the site in May 2003.

The Arbitration Proceedings

Dickson commenced arbitration proceedings. Carrier challenged the legitimacy of those proceedings, contending that the parties were not bound by an arbitration agreement and that therefore the arbitrator lacked the jurisdiction to hear the dispute.

The parties agreed that the arbitrator should rule on a preliminary question, namely whether the parties were bound by a contract which contained an arbitration clause.

Having reviewed all of the documentary evidence and written testimony submitted by the parties on the question, the arbitrator ruled that a binding contract did exist, that it contained a written arbitration agreement and therefore, that she had jurisdiction to hear the dispute between the parties.

The Court Proceedings

Disputing the arbitrator's decision, Carrier applied to the Court seeking a declaration under RHC Order 73 rule 3(2) that the arbitrator's ruling that she had jurisdiction was wrong. (Under RHC Order 73 rule 3(2), the Court may re-hear the parties' arguments. The Court is permitted to receive evidence which was not put before the arbitrator. It is what is known as a hearing de novo in which the Court may confirm or reverse the arbitrator's findings).

The Legal Principles

The first legal principle to emerge from this case is that an agreement to carry out works may be complete and binding despite the fact that a number of details have yet to be agreed or finalized.

In support for this proposition of law, Burrell J. referred to Matsui Babcock Energy Ltd v John Brown Engineering Ltd [1996] 51 Con LR 129 (Court of First Instance, UK) and ACT Construction Ltd v E Clarks & Sons (Coaches) Ltd [2002] EWCA Civ 972 (Court of Appeal, UK). He also cited commentary from a leading text, Chitty on Contracts (29th edition):

"In all these cases, the Courts took the view that the parties intended to be bound at once in spite of the fact that further significant terms were to be agreed later, and that even their failure to reach such agreement would not invalidate the contract unless, without such agreement it was unworkable or too uncertain to be enforced......

Thus an agreement is not incomplete because it calls for some further agreement between the parties. Even the parties' later failure to agree on the matters left outstanding will vitiate the contract only if it makes it 'unworkable or void for uncertainty'..

Secondly, in terms of legal principle, for an arbitration agreement to bind the parties it must be clear that both parties so intended and the agreement must be in writing.

Burrell J. relied upon the principle and policy considerations spelt out in the English case Aughton Ltd v M.F. Kent Services [1991] 57 BLR (Court of Appeal, UK). In that case, the Court stated:

"It provides good reason for requiring that an alleged intention of the parties to exclude the ordinary right of access to the court by an arbitration agreement... be clearly demonstrated from the terms of the contract.

I also recognize the importance of the point that clear words should be required before a party is to be deprived, by an agreement imputed to him, of his ordinary right of access to the court in exchange for a right to arbitrate.

The object, or the effect... must be to emphasise, and seek to ensure, that one is not to be deprived of his right to have a dispute decided by a court of law, unless he had consciously and deliberately agreed that it should be so."

The judge also referred to section 2AC of the Arbitration Ordinance, which provides that an agreement is not an arbitration agreement for the purposes of that Ordinance unless it is in writing.

The Decision

In applying the above legal principles to the facts, Burrell J. found in favour of Dickson and dismissed Carrier's application. Dickson was correct in having initiated arbitration proceedings and the arbitrator had jurisdiction to hear the dispute.

The Court's reasons were as follows:

  • The terms which Carrier had agreed in early May 2002 were sufficient to bind them in contract to Dickson. Carrier's complaints concerning the absence of consensus on the valuation of variations and the absence of its bills of quantities "cannot be relied on as an escape route from being bound". Moreover, the absence of the bills of quantities was of Carrier's own choosing. The judge stated that "in short, the absence of agreement on this particular term and on other less significant terms, does not dilute in any way the binding nature of agreement on essential issues and therefore the existence of a contract".
  • The agreement incorporated the standard form domestic subcontract (also known as the "blue form"), which contained a written arbitration agreement at clause 18.2.
  • Carrier had contended that its offer to carry out the works was "subject to contract" and contained conditions under which the offer was made. The Court found there to be little or no merit in such assertions. The words only appeared on two of Carrier's letters dated early May 2002 and then disappeared. The judge remarked that the reality was that the "contract" which it was "subject to" was ASD's acceptance of Dickson's tender. In May 2002, everything was conditional on Dickson being appointed as main contractor, and between May and August 2002 (when Dickson was awarded the contract) Carrier remained its nominated subcontractor. The judge said further that once appointed, Carrier was required to carry out the subcontract works accordingly.
  • That Carrier carried out works under the subcontract for 6 months from October 2002 was strongly indicative of the fact that it regarded itself as being a party to the agreement and held itself out as such. Although the judge noted that the commencement of work does not necessarily prove the existence of a contract, he said that the length of time and circumstances in which the work is done can add weight to the proposition that a contract is in place.

Conclusion

To avoid disputes of the type addressed by the Court in this case, main contractors and subcontractors are well advised to ensure that comprehensive subcontracts are prepared and executed following the award of the main contract. This may sound trite, but the number of cases, like this one, that come before Hong Kong's Courts and tribunals suggests that there is room for improved contract discipline.

David Hall-Jones & Sacha Cheong
Heller Ehrman, Asia Practice Bulletin
December 2005

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