Kat Yue Construction Engineering Ltd v Fai Lee Construction (HK) Ltd [2025] HKCFI 3298 involved a dispute between construction companies and the effect that a Settlement Agreement entered into between them had on an arbitration clause contained in their earlier Contract. The Defendant applied to stay the proceedings in favour of arbitration under s.20 of the Arbitration Ordinance, Cap 609 (AO), contending that the claim was based on the Contract and the dispute fell within the arbitration clause. The Plaintiff, on the other hand, argued that the claim was based on breach of the Settlement Agreement, meaning that the dispute was not covered by the arbitration clause. The court held that the dispute did not fall within the ambit of the arbitration agreement, because the arbitration agreement had been disapplied for such dispute. Accordingly, the application for a stay was dismissed.
The Contract
The parties entered into a Contract in June 2024, under which the Defendant was to supply sand to the Plaintiff. Clause 12.3 of the Contract provided for disputes arising out of or in connection with the Contract to be referred to arbitration.
In July 2024, the Defendant started to supply sand to the Plaintiff, but then notified the Plaintiff that it would have to suspend deliveries in September 2024, which it did. The Plaintiff’s lawyers claimed that this amounted to a repudiatory breach of the Contract and demanded rectification by resuming the supply of sand. They later demanded HK$16.3 million odd when the Defendant failed to rectify and accepted the breach as putting an end to the Contract.
The Settlement Agreement
In November 2024, the Plaintiff and Defendant entered into a Settlement Agreement, under which the Defendant agreed to resume supplying sand according to a revised schedule and if the Defendant failed to do so, the Plaintiff reserved its rights in relation to compensation claims arising from the suspension of the delivery of sand in September 2024 (Clause 1.5). Clause 1.6 of the Settlement Agreement provided that “Clause 12 of the original contract shall not apply to this settlement agreement” i.e. the dispute resolution clause. It was the effect of clause 1.6 in the Settlement Agreement which was the subject of the dispute between the parties
The Plaintiff and Defendant fell out as to whether the settlement they had negotiated had been complied with. The Plaintiff’s case was that the sand supplied by the Defendant did not meet the quality requirements of the Settlement Agreement. The Defendant denied such, its case being that the Plaintiff wrongfully failed and/or refused to collect the sand. Essentially, the question that arose was by what mechanism that issue was to be determined.
Applications for a stay – the Legal Principles
The court referred to the legal principles applicable to a stay application under s.20 of the AO, namely (1) the court will consider the following questions: (a) is there an arbitration agreement between the parties, (b) is the clause in question capable of being performed, (c) is there in reality a dispute or difference between the parties and (d) is the dispute or difference between the parties within the ambit of the arbitration agreement; (2) The onus is on the applicant for a stay to demonstrate only that there is a prima facie case that the parties are bound by an arbitration clause, and unless the point is clear, the court should not attempt to resolve the issue and the matter should be stayed in favour of arbitration, as it is for the tribunal to decide first on its jurisdiction.
Centre of Gravity Test
The court went on to consider the test to be applied where there are multiple related commercial agreements, each dealing with different aspects of the parties’ relationship and dealings, and each containing its own provision for expressed choices of jurisdiction, law and/or mode of dispute resolution. The proper test in ascertaining the parties’ intention on how the dispute should be dealt with is to identify the nature of the claim, and the agreement which has the closest connection with such dispute and claim (the agreement ‘at the centre of gravity of the dispute’).
Agreement followed by Settlement Agreement
The court also considered the situation where an agreement gives rise to a dispute and the parties subsequently enter into a settlement agreement and the dispute resolution provisions are different in the settlement agreement from those in the original contract. It said the principles as discussed in the English Commercial Court decision in Monde Petroleum SA v Westernzagros Ltd [2015] EWHC 67 point to the significance that can attach to a “second in time” settlement agreement, namely that where the settlement/termination agreement contains a dispute resolution provision which is different from, and incompatible with, a dispute resolution clause in the earlier agreement, the parties are likely to have intended that it is the settlement/termination agreement clause which is to govern all aspects of outstanding disputes, and to supersede the clause in the earlier agreement
The court said that what is required is a careful and commercially-minded construction of the agreements providing for the resolution of disputes. Here, Clause 1.6 of the Settlement Agreement provided that, “Clause 12 of the original contract shall not apply to this settlement agreement”. There was an issue, the court said, as to what clause 1.6 meant. It was not a jurisdiction clause. The Defendant submitted that it was a route for the parties to agree on a way to settle disputes, but did not commit the parties to litigation in the courts and, most importantly, Clause 1.6 did not exclude arbitration. However, the court said that there is a difference between construing the contractual terms so as not to exclude arbitration, and construing the terms so as to require the parties to arbitrate, which was the Defendant’s case.
The court said that, so far as claims arising under the Settlement Agreement were concerned, the arbitration route would require a fresh arbitration agreement between the parties because Clause 12 of the Contract which contained the arbitration clause had been expressly disapplied. It was therefore clear that the arbitration clause in the Contract did not apply to claims arising under the Settlement Agreement. The court said that the “centre of gravity” test applies where there are a number of dispute resolution clauses which might govern the dispute as a whole, and it was necessary to refer the dispute to one of them. Here, however, there was no question of Clause 1.6 and Clause 12 sitting in parallel, because the one expressly excluded the other. This raised the issues which were raised by the court in Monde, the court said.
Did the Plaintiff’s claims arise under the Contract or Settlement Agreement?
The court said that a starting point was to look at the Plaintiff’s Writ and Statement of Claim, with one caveat – in considering a claim, the court should look at the nature and substance of the claim and the issues to which it gives rise, rather than simply to the form in which it is formulated in a pleading. Looking at the Statement of Claim, it set out the terms of the Contract, the Defendant’s alleged breach and settlement discussions leading to the Settlement Agreement. It pleaded breach of the Settlement Agreement on the grounds of the alleged defective sand and the consequent inability of the Plaintiff to dispose of any sand and that “Pursuant to Clause 1.5 of the Settlement Agreement, the Plaintiff’s rights to seek loss and damage against the Defendant due to the Defendant’s wrongful repudiation of the Contract remains”.
The court said that in substance, the pleading followed and reflected the terms of the Settlement Agreement, which provided that if the sand was supplied by the Defendant in accordance with the revised schedule, the Plaintiff withdraws its claims arising under the Contract from the suspension of delivery in September 2024, but if the Defendant fails to do so, the Plaintiff reserves its rights to pursue those claims. So, if in case of breach by the Defendant, the Plaintiff chooses to pursue the claims arising under the Contract, the claims are assessed by the terms of the Contract, but brought under the Settlement Agreement. Clause 1.6 goes on to deal with dispute resolution: “Clause 12 of the original contract shall not apply to this settlement agreement.”
Following the approach in Monde, the court concluded that the Plaintiff’s claims were brought under the Settlement Agreement. This, the court said, was consistent with the terms of the Settlement Agreement. It said the fact that reference was made to the Contract in the Writ and Statement of Claim followed from the fact that under Clause 1.5 of the Settlement Agreement, the Plaintiff had reserved its rights under the Contract in case the Settlement Agreement was breached. Because of Clause 1.6, the Plaintiff was not bound to bring the claim in an arbitration, and could bring it in court. This, the court said, was the commercially-minded way in which to construe the terms in question.
Stay application dismissed
Accordingly, although there was an arbitration agreement between the parties which was capable of being performed, the dispute did not fall within the ambit of the arbitration agreement because it had been disapplied for such dispute. The point was clear, the court said and it followed that the Defendant was not entitled to a stay.
Comments
In this case, the parties had in the Settlement Agreement expressly dealt with the dispute resolution clause in the original contract. The court had no difficulty in dismissing the Defendant’s application for a stay. It is however more common that the parties to the settlement agreement forget that they have an arbitration clause in their original contract. The approach of the Court in such situation can be found in the judgment in Bond Tak (Holdings) Ltd v King Fame Trading Ltd, HCA 2129/2018.
For further information, please contact:
KK Cheung, Partner, Deacons
K.K.Cheung@deacons.com
