N v. C

HCCT 3/2019

[2019] HKCFI 2292

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 3 OF 2019

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D E C I S I O N

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1.  By its Originating Summons issued on 14 January 2019, the Plaintiff seeks to set aside in part an arbitral award made on 5 December 2018 and corrected on 20 December 2018 (“Award”), in an arbitration in Hong Kong between the Plaintiff and the Defendant.

2.  The Plaintiff was the employer and the Defendant was the main contractor engaged for the construction of a residential development in Macau under a contract dated 28 March 2007 (“Contract”). Dispute arose concerning the Defendant’s claim for extensions of time and payment on the basis of the final account under the Contract. The final account showed an extension of time (“EOT”) of 269 days which had been granted by the Architect, and an entitlement to loss and expense or prolongation costs for 181 days of that EOT at MOP 100,000 per day, and for delay related fluctuation costs of MOP 12 million. The Architect did not allow loss and expense for 88 days of the EOT granted, on the basis that there was no entitlement to loss and expense under the Contract in relation to the matters for which that period of the EOT was granted.

3.  The Defendant challenged the Architect’s certification under the final account, and claimed in the Arbitration for loss and expense at MOP 100,000 per day, for the whole period of 360 days after the original completion date of 27 December 2008 to 22 December 2009, and for its delay related fluctuation in reinforcement costs of MOP 12 million.

4.  The dispute was referred to arbitration pursuant to the arbitration clause in the Contract. A sole arbitrator was appointed. The parties agreed that Hong Kong procedural law including the Arbitration Ordinance (“Ordinance”) and Schedule 2 of the Ordinance (“Schedule”) should apply to the Arbitration, which was to be conducted in accordance with the HKIAC Domestic Arbitration Rules (2014 edition), subject to amendments.

5.  The Arbitrator awarded to the Defendant delay related loss and expense (prolongation costs) of MOP 25,500,000, and delay related loss and expense (fluctuation costs) of MOP 12 million.

6.  The Plaintiff now seeks an order to set aside, or alternatively to remit, parts of the Award under section 4 (1) and (3) of the Schedule, on the ground that there was serious irregularity by reason of the fact that: (1) the Plaintiff was unable to present its case; (2) the tribunal had exceeded its powers; (3) the tribunal failed to conduct the proceedings in accordance with the procedure agreed by the parties, which was for the tribunal to decide on pleaded cases and agreed issues; and/or (4) the tribunal failed to deal with all the issues which were put to it.

7.  Alternatively, the Plaintiff seeks an order to set aside the Award under section 81 (1) of the Ordinance, on the same grounds that it was unable to present its case, that the Award contains decisions on matters beyond the scope of the submission to arbitration, and/or the arbitral procedure was not in accordance with the parties’ agreement, which was for the tribunal to decide on pleaded cases and agreed issues.

The relevant pleadings

8.  In the Arbitration, the Plaintiff as Respondent had denied the Defendant’s entitlement to recover any loss and expense. In paragraph 45 of its Defence, the Plaintiff admitted that the daily rate of MOP 100,000 for loss and expense was agreed for the period of EOT granted by the Architect up to 22 September 2009, but claimed that the Defendant had failed to make any timely application for loss in accordance with Clause 24 (1) of the Conditions of Contract (“Clause 24”). Clause 24 requires the Defendant to submit its detailed application for loss and expense, supported by evidence, within 2 months from the date of the event giving rise to the loss claimed. The Plaintiff pleaded that this was a condition precedent for any entitlement under the Contract. The Plaintiff pleaded (in paragraphs 45 and 46 of the Defence) that as the Defendant did not submit any application for its alleged loss and expense within the time prescribed under Clause 24, the Defendant was not entitled to any loss and expense incurred until 22 December 2009, nor to any fluctuations in the costs of labour and materials.

9.  In reply, the Defendant’s pleaded case was that the application period specified in Clause 24 did not give rise to a condition precedent to recovery. It further relied on waiver. The material part of paragraph 26 (1) to (5) of the Reply states:

“(1)  The Claimant specifically denies that the 2-month period is a condition precedent to any loss and expense claim under CC Clause 24(1) as alleged by the Respondent.

(2)  The Claimant avers that at the time when it submitted the loss and expense claims during and after the parties’ negotiation, the Respondent had not raised any alleged time-bar issue but focused on assessing the quantum of such claim.

(3)  In fact, the Respondent had assessed a sum for the Claimant’s loss and expense claim and included such sum in the proposed final account.

(4)  Even if, which is denied, the alleged 2-month period constitutes a condition precedent, the Claimant avers that the Respondent has by conduct waived any such condition precedent and proceeded to assess the Claimant’s loss and expense claim.

(5)  In paragraph 45 the Respondent now seeks to resile from an admission that the daily rate for loss and expense is MOP 100,000 by seeking to limit the scope of the acceptance to a particular period of the extension of time granted by the Architect up to 22 September 2009. Given the long-standing nature of the Respondent’s admission, and the lack of proportionality and prejudice to the Claimant in it now having to address loss and expense on a different basis, the Respondent ought not to be permitted to resile from the admission made (which was not limited to the period of extension of time granted by the Architect). Moreover, it would be wholly artificial for time-related costs to be MOP100,000 per day for a sustained period, and then to be calculated on a different basis from 23 September 2009.

10.  The Arbitrator found that loss and expense under Clause 24 should be granted for 181 days as certified by the Architect in his final certificate, but he allowed a further 74 days of EOT for delays in the period between 9 October 2009 and 22 December 2009 (arising out of licence of use (“LoU”) and land grant modification delays). The Plaintiff’s complaint is that although the Arbitrator found that the Defendant had no contractual entitlement to loss and expense under Clause 24 for this EOT (paragraph 423 of the Award), he nevertheless allowed the Defendant’s claim on the basis of an agreement having been reached between the parties, that the EOTs which were awarded would give rise to an entitlement to loss and expense (“Agreement on Entitlement”). The Plaintiff argued that this was contradictory to the Arbitrator’s own summary of the parties’ agreed position (in paragraph 413 of the Award), that any agreement was “subject to matters on entitlement”. The Plaintiff also claims that the Arbitrator’s allowance of the Defendant’s claim, on the basis that there was a separate agreement, whereby the Defendant could recover loss and expense of MOP 100,000 per day, was on a basis which had not been advanced by either party. The Plaintiff argued that as the Agreement on Entitlement was never pleaded, nor identified as an issue, neither party had sought to adduce evidence on this issue. In making the Award on the Defendant’s entitlement in this manner, the Plaintiff claims that it had been deprived of the opportunity to present its case, and the Arbitrator had exceeded its powers and failed to conduct the proceedings in accordance with the parties’ agreement.

11.  The Plaintiff further contends that the Arbitrator had failed to deal with an essential issue raised in the pleadings, that the Defendant had failed to submit any application for its loss and expense within the time prescribed under Clause 24, such that its claims should be time-barred.

Legal principles

12.  The decision in Maeda Kensetsu Kogyo Kabushiki Kaisha v China State Construction Engineering (Hong Kong) Limited [2019] HKCFI 1006 sets out the authorities and legal principles applicable to the setting aside of arbitral awards on grounds of serious irregularity (in paragraphs 4 to 10 of the Judgment).  Neither party disputes the application of these principles, and they will not be repeated here.

Was the Plaintiff able to present its case?

13.  The parties’ respective case on: (1) the submission of applications for loss and expense pursuant to Clause 24; (2) whether the Defendant’s claim was time-barred for non-compliance with Clause 24; and (3) waiver; are set out in paragraphs 45 and 46 of the Defence, and 26 of the Reply filed in the Arbitration.

14.  As a matter of construction, I cannot agree with the Plaintiff that the Agreement on Entitlement, or more specifically, the parties’ agreement relating to the daily rate of MOP 100,000 (and its effect) was not raised in the pleadings.

15.  In paragraph 45 of the Defence, the Plaintiff admitted that a “daily rate of MOP 100,000 for loss and expense was agreed for the period of EOT granted by the Architect up to 22 September 2009”. In reply, the Defendant denied that the two-month period under Clause 24 was a condition precedent to any loss and expense claim, and averred (in paragraph 26 (2)) that at the time when it submitted its claims for loss and expense during and after the parties’ negotiation, the Plaintiff had not raised any time-bar issue, but had focused on the quantum of the claim. The Defendant accordingly claimed in paragraph 26 (4) and (5) of the Reply that the Plaintiff had waived any condition precedent, and further, that it should not be permitted to resile from its admission that the daily rate was limited to any particular period of EOT. Paragraph 26 sets out the Defendant’s position on what it claimed to be the effect of the agreement on the daily rate.

16.  The Plaintiff has referred to the agreed List of Issues submitted to the Arbitrator. In relation to the Defendant’s claim for loss and expense, the identified issues were:

“5.  Whether Chevaller has any entitlement to loss and expense under the Main Contract and, if so, whether such entitlement is for any part of the period from 28^th December 2008 to 22^nd December 2009 and, if so, which part and in what sum?

6.  Whether the daily rate of MOP100,000 applies to any part of the period to which chevaller is entitled to loss and expense up to 22^nd December 2009 and if so, which part?

7.  Whether Chevalier has any entitlement to fluctuations regarding the ordering of reinforcement bars in this period up to 22^nd December 2009 as pleaded end if so, for how much?”

17.  The Arbitrator was concise in his findings. In relation to the claims for loss and expense, the Arbitrator referred to the daily rate of MOP 100,000, and stated in paragraph 406 of the Award:

“The basis for the daily rate is said to be an agreement reached during final account discussions. It is not disputed by the Respondent [ie Plaintiff] that there was an agreement to pay such loss and expense at a daily rate. However, the Respondent contends that the agreement extended only to the extensions of time which had already been granted at the date on which the agreement was made.”

18.  At paragraph 413 of the Award, the Arbitrator identified the factual dispute between the parties as to the daily rate, observing thus:

“There is a factual dispute between the parties as to precisely what was agreed. Subject to matters on entitlement, the quantum of loss and expense, calculated at the rate of MOP 100,000 per day for the period of extension of time granted by the Architect (i.e. up to 22 September 2009) is not disputed by the Respondent. The agreement was recorded in RLB’s email dated 28 August 2013. However, in respect of any entitlement beyond 22 September 2009, then the Respondent says that no agreement as to rate has been made, and the Claimant must prove the extent of loss and expense incurred during the additional period.”

19.  The Arbitrator then set out the Defendant’s case on the daily rate, which was that the parties had agreed on an average daily rate which was to be for the EOTs already granted at the time, as well as for further EOTs to be granted later. He then referred to the evidence on the agreement. The Arbitrator referred to the fact that the rate had been calculated as an average, to represent a form of shortcut way of assessing the actual loss, and stated that he accepted the evidence that the parties’ representatives had sought to achieve an agreement which would cover the various scenarios of extensions of time. He referred to “sound potential reasons” why such approach may have been adopted, referring to the evidence adduced.

20.  At paragraph 422 of the Award, the Arbitrator states:

“422. Whether all of this complication was the motivation for agreeing a “set” daily rate for compensation for extensions of time, or not, is on one view, beside the point. There was in fact an agreement for such a daily rate, seemingly averaged across the extensions of time that had been given. The question is whether the parties intended that agreement to apply to any future of time.

423. As referred to above, it is not axiomatic that an award of an extension of time results in an award of loss and expense. There are grounds for the grant of additional time for which such loss and expense is payable, and others where it is not. (Clause 24) makes provision for loss and expense to be payable (inter alia) in respect of delay caused by contractors executing work which does not form part of the Contract. That may perhaps apply to the delays associated with the external drainage work, but would not, in my judgment, bear on the delays arising out of the LoU and the land grant modifications. There is no contractual basis for loss and expense associated with a delay of that type.

424. (Clause 24) provides for loss and expense to be recoverable in circumstances which are more restricted than the circumstances which provide an entitlement to an extension of time. This means that there may be circumstances which caused delay to the project, for which an extension of time may be obtained but which do not give rise to an entitlement to loss and expenses.

425. In agreeing the daily rate for loss and expense, this distinction appears to have been, in effect, disregarded in that the daily rate that has been arrived at has the effect not only of estimating the average amount of loss and expense, but also averaging out that daily rate across delays that give rise to an entitlement to loss and expense, and those that do not.

426. Moreover, it seems to me that the agreement between the parties (more accurately, between the Claimant, and RLB on behalf of the Respondent) extended to future grants of extension of time.”

21.  At paragraph 430, the Arbitrator stated his conclusion on his finding on the existence of the Agreement on Entitlement, as follows:

“In light of the above I conclude that the agreement between the parties was a practical and pragmatic attempt to derive an assessment of loss and expense that would avoid the necessity for detailed forensic investigation of courses and costs. It was furthermore intended to apply, if necessary, to any further extensions of time and, as such is the rate to be applied to the additional extension of time to which I have found the Claimant to be entitled.”

22.  The Arbitrator’s conclusion on the Agreement on Entitlement is his finding on the meaning and effect of the parties’ agreement on the use of the daily rate of MOP 100,000, upon the evidence and facts put before the tribunal. The issue of the parties’ agreement on the use of the daily rate, and the meaning and effect of such agreement, was in fact put in issue, and/or must have been envisaged, by the pleading in paragraph 26 of the Reply.

23.  The parties had the opportunity and the Plaintiff did take the opportunity to address the Arbitrator in the course of the Arbitration on the meaning and effect of the RLB email dated 26 September 2013, which was referred to in the Award. The parties had adduced extensive factual evidence on the scope and effect of the agreed daily rate in respect of the Defendant’s entitlement to loss and expense. Witnesses were called and cross-examined on the application of the agreed daily rate, and what the parties had meant when they referred to the daily rate being subject to the comments from the Architect, and/or the Architect’s assessment of the EOT. Factual and expert witnesses were also called by the parties, and cross-examined, on the negotiations and whether there were conditions to the agreement, and whether the agreement as to the daily rate was on a without prejudice basis, etc. As Counsel for the Defendant pointed out and I accept, the Defendant’s case on agreed entitlement on the basis of the agreed daily rate had been fairly put to the Plaintiff, and argued before the Arbitrator, and the Plaintiff had been given the full opportunity to respond to the Defendant’s evidence and arguments.

24.  The opening submissions of the Defendant made it clear to the Plaintiff that the daily rate was agreed “across-the-board”, not by reference to only the EOT which the Architect granted, but the EOT which was eventually due, and that the agreed daily rate was to compensate the Defendant for its loss and expense for any EOT granted.

25.  As the Defendant highlighted, the Plaintiff in its closing submissions of counsel had in fact acknowledged the Defendant’s primary case, that “there was an agreement … that in effect, whatever further EOT might be granted in the Arbitration, it is entitled to recover for that at the daily rate of MOP 100,000”. In making its submissions on the application of the daily rate, and the EOT to which the agreed rate extended, the Plaintiff had the opportunity to present its case on whether there was an Agreement on Entitlement, what the parties had in fact meant when they agreed to adopt the daily rate, and the effect of what was contended to have been agreed.

26.  What the Plaintiff is entitled to under section 46 (3) (b) of the Ordinance is a “reasonable opportunity” to present its case and to deal with the case of its opponent. In Reliance Industries Ltd v Union of India [2018] EWHC 822, Popplewell J had aptly observed:

“It is always important to keep in mind the distinction between a lack of opportunity to deal with a case and a failure to recognize or take such opportunity. It is commonplace in judicial decisions on points of construction that a judge may fashion his or her reasoning and analysis from the material upon which argument has been addressed without it necessarily being in terms which reflect those fully expressed by the winning party. There is not perceived to be, and is not, anything which is unfair in taking such a course. It is enough if the point is “in play” or “in the arena” in the proceedings, even if it is not precisely articulated. To use the language of Tomlinson J, as he then was, in ABB AG v Hochtief Airport [2006] 2 Lloyd’s Rep 1 at 72, a party will usually have had a sufficient opportunity if the “essential building blocks” of the Tribunal’s analysis and reasoning were in play in relation to an issue, even when the argument was not articulated in the way adopted by the tribunal. Ultimately the question which arises under s 33 (a), whether there has been a reasonable opportunity to present or meet a case, is one of fairness and will always be one of fact and degree which is sensitive to the specific circumstances of each individual case. That applies to points of construction as much as to other points in dispute.” (emphases added)

27.  On my reading of the pleaded case, the substance of the submissions made before the tribunal, and the analysis made and reasons given in the Award, I am not satisfied that the Agreement on Entitlement was not pleaded, or could not reasonably have been envisaged by the Plaintiff as an issue arising in the Arbitration, such that the Plaintiff was not given the reasonable opportunity to present its case. The issue was in the arena, and the opportunity had been made available to the Plaintiff, to present and argue its case on the Agreement on Entitlement.

28.  As Popplewell J also explained in the case of Terna Bahrain Holding Company WLL v Bin Kamil Shamsi and Others [2012] EWHC 3283 (Comm):

“… whilst s 33 requires a party to be given a reasonable opportunity of addressing his opponent’s case, that does not mean that the tribunal is acting unfairly in deciding a case on a point to which the party raising it does not give any great emphasis, or which is not the subject matter of any great exposition. If the point is raised only briefly, that is in accordance with the ideal of speedy resolution which is an objective of the arbitral procedure (whether or not in a given case the objective is achieved). It is nonetheless so if a host of what turned out to be bad points are also raised and it is on those other points that the party raising the issues concentrates his exposition. Provided that the issue is raised, however briefly, the opposing party has an opportunity to address it at whatever length and in whatever detail he chooses.”

29.  In any event, on the case as pleaded, I am not satisfied that the Arbitrator’s dealing with and deciding on the Agreement on Entitlement is so far removed from what could reasonably be expected from the Arbitration, that justice calls out for it to be corrected as a serious irregularity (Grindrod Shipping Pte Ltd v Hundai Merchant Marine Co Ltd [2018] EWHC 1284 (Comm)), or as an egregious denial of due process.

Did the Arbitrator fail to deal with all the issues?

30.  The Plaintiff relies on issues 5 to 7 of the agreed List of Issues, to argue that the Arbitrator had failed to deal with the issue of time bar raised in the pleadings.

31.  Issues 5 to 7 are framed as to the Defendant’s “entitlement to loss and expense under the Contract”, the period it relates to, the amount of entitlement, and whether the agreed daily rate applies to any part of the period of its entitlement.

32.  The Arbitrator dealt with and decided on these specified issues in the Award.

33.  The Plaintiff’s complaint is that in the Award, the Arbitrator did not deal with the time bar defence at all.

34.  It is clear from reading the Award that the Arbitrator decided the issues referred to him on the Defendant’s entitlement to loss and expense, on the basis of the parties’ Agreement on Entitlement. On the Arbitrator’s analysis and findings, the time limit prescribed under Clause 24 would not apply, as the Defendant’s claims were allowed by virtue of the Arbitrator’s findings on the existence and effect of the Agreement on Entitlement.

35.  It may be that the Arbitrator had not given adequate reasons for his Award, or sufficiently clarified that the claim of time bar fell away because of his findings on the existence, meaning and effect of the Agreement on Entitlement. However, as the court made it clear in Secretary of State for the Home Department v Raytheon Systems Ltd [2014] EWHC 4375 (TCC) at paragraph 33 (g):

“If the tribunal has dealt with the issue in any way, Section 68 (2) (d) is inapplicable and that is the end of the inquiry (Primera at paragraph 40-1); it does not matter for the purposes of Section 68 (2) (d) that the tribunal has dealt with it well, badly or indifferently.

…

A failure to provide any or any sufficient reasons for the decision is not the same as failing to deal with an issue (Fidelity Management v Myriad International [2005] 2 Lloyd’s Rep 508, paragraph 10, World Trade Corporation, paragraph 19). A failure by a tribunal to set out each step by which they reach its conclusion or deal with each point made by a party is not a failure to deal with an issue that was put to it (Hussman v Al Ameen [2000] 2 Lloyd’s Rep 83).

…

A tribunal does not fail to deal with issues if it does not answer every question that qualifies as an “issue”. It can “deal with” an issue where that issue does not arise in view of its decisions on the facts or its legal conclusions. A tribunal may deal with an issue by so deciding a logically anterior point such that the other issue does not arise (Petrochemical Industries at paragraph 27). If the tribunal decides all those issues put to it that were essential to be dealt with for the tribunal to come fairly to its decision on the dispute or disputes between the parties, it will have dealt with all the issues (Buyuk Camlica Shipping Trading & Industry Co Inc v Progress Bulk Carriers Ltd [2010] EWHC 442 (Comm), paragraph 30).”

36.  The courts have also emphasized that a failure to deal with an issue (under section 4 (2) of the Schedule) is not equivalent to failure to deal with an argument that had been advanced at the hearing and therefore to have omitted the reasons for rejecting it. In Weldon Plant Ltd v The Commission for the New Towns [2000] BLR 496, the court explained that section 68 (2) (d) of the English Arbitration Act (the equivalent of section 4 (2) of the Schedule) is not to be used “as a means of launching a detailed inquiry into the manner in which the tribunal considered the various issues”. Rather:

“It is concerned with a failure, that is to say where the arbitral tribunal has not dealt at all with the case of a party so that a substantial injustice has resulted, eg where a claim has been overlooked, or where the decision cannot be justified as a particular key issue has not been decided which is crucial to the result.” (emphases added)

37.  In this case, the argument that the Defendant’s claim for loss and expense was not made in time under Clause 24 did not have significant or crucial effect on the Arbitrator’s decision and findings on the basis of the separate Agreement on Entitlement. The observations made by the court in Secretary of State for the Home Department v Raytheon Systems Ltd (paragraph 35 above) aptly apply.

38.  Whether the Arbitrator is right on his findings of facts and law, whether his decision is supported by evidence, whether he has given sufficient reasons for his finding, and the quality of the Arbitrator’s reasoning, are not matters of consideration in an application to set aside for serious irregularity, or under section 81 of the Ordinance. As the court has explained in Warborough Investments Limited v S Robinson & Sons (Holdings) Limited [2002] EWHC 2502 (Ch), at paragraph 64 of the judgment, for an application under section 4 of the Schedule:

“The issue is not whether the arbitrator came to the right conclusion. The sole issue is whether he committed a serious irregularity in coming to the conclusion that he did.”

The findings on fluctuation costs

39.  The same arguments are made by the Plaintiff, in relation to the Arbitrator’s findings on the Defendant’s fluctuations claims: that his decision was on the basis of an “Ex-Contract Agreement”, which was not pleaded or put to the tribunal for decision, and that he failed to deal with the time bar defence.

40.  The Defendant’s claim for loss and expense of MOP 12 million for delay related fluctuation costs was pleaded in paragraph 29 of the Statement of Claim, on the basis of there being no dispute on these figures, as evidenced in the final accounts. This was denied by the Plaintiff, on the basis that such claim was time-barred under Clause 24 of the Contract. This was put in issue in the Reply.

41.  Factual and expert evidence was adduced by the parties in the Arbitration, on the disputed agreement as to the fluctuation costs, whether there had been any commitment to pay, on an admission of liability basis. The existence of the disputed agreement was dealt with in submissions made by both parties, the Plaintiff in its closing submissions acknowledging the Defendant’s reliance on the assessment in the final account.

42.  On the basis of the evidence adduced and arguments made before the tribunal, the Arbitrator concluded, at paragraph 462 of the Award:

“The delay related fluctuations were, however, part of the agreement reached via the EOT Workshops, which agreements included the daily rate for loss and expense referred to above. That agreement, and the fluctuations agreement appears to have been what is sometimes called “ex-contract”, that is, a “pure” compromise, not rooted in contractual entitlement. I do not think there is any basis on which such an agreement, having been performed, should or could be disturbed at this stage.”

43.  The Arbitrator’s allowance of the Defendant’s claims for fluctuations was clearly stated to be on the basis of the “ex-contract” compromise. Not being based on the Contract, the condition precedent in Clause 24 and the time bar defence to the contractual claim would not arise as an issue essential to the Arbitrator’s decision on the matters identified in the agreed List of Issues.

44.  For the same reasons given under the previous 2 headings, I reject the Plaintiff’s arguments that it had not been able to present its case on the Ex-contract Agreement, that the Arbitrator had exceeded its powers, or that he had failed to either conduct the proceedings in accordance with the agreed procedure, or to deal with all the issues.

Disposition

45.  It follows from my findings and conclusions that there is no ground to either set aside or remit the Award, whether for serious irregularity, or under section 81 of the Ordinance. The Plaintiff’s application is dismissed, with costs to the Defendant on indemnity basis, with certificate for 2 counsel.