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Westco Airconditioning Ltd. v. Sui Chong Construction & Engineering Co. Ltd.

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High Court—Court of First Instance, Hong Kong, [1998] HKCFI 946
Brief Facts

Westco (the plaintiff) entered into a construction sub-contract with Sui Chong (the defendant) in August
1993. Westco later entered another contract with a third company.

Both contracts include an arbitration clause that provides that any dispute shall first be referred to an
architect and, if either party is unhappy with the architect’s decision, or the architect fails to make a
decision within 90 days, it may require the matter to be referred to arbitration.

Issues

Westco took judicial proceedings against Siu Chong in the High Court of Hong Kong and the hearing was
made before The Hon Mr Justice Findlay in January 1998. One of the disputes between the parties is
whether this contract has been replaced by another contract between the plaintiff and another
company.

Sui Chong argued that the High Court should stay the proceedings in favor of arbitration as that was,
according to Sui Chong, what the parties had agreed to in their contract. Sui Chong based its arguments
on Section 6 of the Hong Kong Arbitration Ordinance (Cap. 341) which states that when an action is
brought in a matter which is the subject of the arbitration agreement, a court shall refer the parties to
arbitration unless it finds the arbitration agreement null and void, inoperative or incapable of being
performed.

In response, Westco argued the arbitration is subject to a condition precedent, which requires (i) an
architect to decide on the dispute, or (ii) the time for the architect to decide has elapsed, and neither of
which had happened. Non-compliance with the condition precedent has rendered the agreement to
arbitrate “inoperative”. Consequently, the requirement that the court proceedings be stayed in favour
of arbitration was inapplicable.

Decisions

The High Court decided to stay the proceedings and refer the parties to arbitration, rejecting Westco’s
claim that the arbitration agreement was inoperative because a preliminary step had not been taken.
Judge J K Findlay saw a clear ‘agreement by the parties to submit to arbitration’. The arbitration
agreement is not ‘null and void, inoperative or incapable of being performed’.

Reasons:

The reasons put forward by Judge J K Findlay:

1. The reference to the architect was a preliminary procedure of the arbitration process that the
parties have agreed to undertake. A first instance procedure such as this is not inconsistent with
the concept of arbitration, or with the statutory definition of ‘arbitration agreement’
2. The arbitration clause provided the parties the right to refer the dispute to an arbitration,
whatever the outcome of the reference to the architect
3. The parties have a joint wish to avoid proceedings at law (hence the arbitration agreement). It
cannot possibly have been their intention, if one party issues a writ before a step is taken, to
frustrate that wish
4. He disagreed with the views of Lord Mustill that it would make no sense for a court to refer the
dispute to arbitration when a preliminary step was required to be taken first (in a UK case:
Channel Tunnel Group Ltd vs Balfour Beatty Construction Ltd [1992]), noting that the decisions
of the House of Lords would not be binding on the courts of Hong Kong after 30 June 1997.
Following the New York Convention, the duty to stay does not apply to a situation where the
reference to the arbitrators is to take place after some preliminary step.
5. Since the matter fell clearly within the scope of the arbitration agreement, the court had no
option but to refer the parties to arbitration and stay the court proceedings. If the process of
arbitration that the parties have agreed to undertake involves a preliminary step, the parties
concerned should follow that step.