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Hong Kong Court Refuses Leave to Appeal on Question of Law and Clarifies the Application of Schedule 2 of the Arbitration Ordinance Cap 609

  • Hong Kong
  • Other

17-04-2019

This article has first been published on Lexology.

In Buda Pipe Rehab Eng Co Ltd v CPC Construction Hong Kong Ltd [2019] HKCFI 503, the Hong Kong Court of First Instance (the “Court”) continued its pro-arbitration approach and held that failure to comply with the procedural requirements for applications under the Arbitration Ordinance Cap 609 (the “Ordinance”) would lead to applications being struck out immediately and constitute an abuse of process. The Court also clarified the application of Schedule 2 of the Ordinance (which contains provisions that may be expressly opted for or automatically apply) and the circumstances in which it would grant leave to appeal on a question of law under section 6 of Schedule 2 of the Ordinance. Judgment was handed down by the Hon Mimmie Chan J on 22 February 2019.

Facts

In September 2009, the Water Services Department of Hong Kong (“WSD”) as employer and Lam Woo and Co Ltd (“LW”) as contractor entered into a contract for the replacement and rehabilitation of water mains in Kowloon (the “WSD Contract”). A group company of LW, CPC Construction Hong Kong Ltd (“CPC”), contracted with Buda Pipe Rehab Eng Co Ltd (“BP”) whereby the execution of the works under the WSD Contract was subcontracted to BP (the “BP Contract”). Oddly, there was no written subcontract between LW and CPC, but a finding of fact was made in the arbitration that there was a verbal subcontract between LW and CPC (as explained below). A dispute arose between CPC and BP under the BP Contract and an arbitration award on liability and partial quantum in the sum of HK$10 million was made in favour of CPC (the claimant in the arbitration) in Hong Kong on 25 June 2012 (the “Award”).

BP (the respondent in the arbitration) challenged the Award before the Court and sought: (1) leave to appeal on questions of law arising out of the Award pursuant to section 6(1)(b) of Schedule 2 of the Ordinance; and (2) to set aside the Award for serious irregularity pursuant to section 4 of Schedule 2.

Legal Analysis

The Court dismissed the application under section 4 of Schedule 2 at the return date itself because it did not set out the grounds of application to set aside and/or for remission for serious irregularity, contrary to the requirements of Order 73 rule 5(4) of the Rules of the High Court Cap 4A (“RHC”). The Court followed Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] HKEC 643 and held that applications which do not comply with Order 73 rule 5(4) are an abuse of process and liable to be struck out.

In relation to the application for leave to appeal on a question of law under section 6 of Schedule 2, CPC contended that Schedule 2 did not even apply to the arbitration. The arbitration clause in the BP Contract provided for arbitration of disputes “in accordance with Cap 341” (the predecessor of the Ordinance) which permitted both domestic and international arbitration. The Court noted that for Schedule 2 to apply, section 100 of the Ordinance requires the arbitration agreement to provide that arbitration is “a domestic arbitration”. Without this express stipulation, the BP Contract did not fall within the ambit of section 100 of the Ordinance for Schedule 2 to apply.

BP argued that Schedule 2 applied by virtue of section 101(1) of the Ordinance, pursuant to which the arbitration agreement contained in the main contract would apply to the subcontract, where the whole or part of the construction operations to be carried out under the main contract is subcontracted and there is an arbitration agreement in that subcontract.

The WSD Contract contained an arbitration agreement which expressly provided for “domestic arbitration”. However, the unusual feature of this case was that on the evidence the arbitrator had made a finding that there was a verbal contract between LW and CPC under which LW subcontracted the works under the WSD Contract to CPC (the “CPC Contract”), but the terms of this CPC Contract did not provide for and made no reference to the existence of an arbitration agreement. The Court held that the CPC Contract did not fall within section 101(1)(c) of the Ordinance for Schedule 2 to apply to the CPC Contract, and since this was the case, the Schedule could not apply to the BP Contract which was a further subcontract down the chain.

The Court held that even if Schedule 2 applied to the arbitration, it would decline to give leave to appeal to BP under section 6 of Schedule 2. In this regard, the Court noted that the application stated the grounds for seeking leave but failed to state the question of law to be decided, contrary to the requirements of section 6(2) of Schedule 2 (further emphasizing the importance of compliance with procedural requirements). Under section 6(4) of Schedule 2, leave to appeal is to be granted only if the Court is satisfied that: (a) the decision of the question will substantially affect the rights of one or more parties; (b) the question is one which the arbitral tribunal was asked to decide; and (c) on the basis of the findings of fact in the award, the decision of the tribunal on the question is “obviously wrong” or the question is one of “general importance” and the tribunal’s decision is at least open to serious doubt. The Court reaffirmed that there is no appeal on findings of fact, and that leave to appeal on a question of law which is not alleged to be one of general importance is only granted if the Court is satisfied that the decision of the tribunal on the question is obviously wrong. No argument was raised to persuade the Court that the question of law to be decided was of general importance. The Court applied the “obviously wrong” test and held that it could not be said that the arbitrator’s determination on the question of law relating to affirmation, waiver or estoppel was obviously wrong.

The Court dismissed BP’s application in its entirety and considered it appropriate for BP to pay costs on an indemnity basis.

Takeaways

(1) This case is a good reminder for litigants that for applications made under the Ordinance, the Court will expect express compliance with section 6 of Schedule 2 (if applicable), the requirements of Order 73 RHC as well as PD 6.1 (in particular Part E in relation to applications for leave to appeal), to avoid any waste of costs and Court time. The Court stated that “non-compliance carries the risk of applications being struck out immediately as abuse of process, since the aim of the Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and the Ordinance is based on the principles that parties should be bound by their agreement to resolve a dispute by arbitration and to be bound by an arbitral award as being final. Resolution of disputes relating to the binding effect of an arbitration agreement and the arbitral award should be resolved without undue delay and unnecessary costs” (paragraphs 5 and 11); and

(2) Where a main construction contract and subcontracts (concerning operations under the main contract) exist, parties must ensure that the subcontracts also include an arbitration agreement in any form referred to in section 19 of the Ordinance (which among other things requires arbitration agreements to be in writing), to ensure that the provisions in Schedule 2 apply to the arbitration.

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