C.Y. TSUN INVESTMENT CO LTD v. THE INCORPORATED OWNERS OF HOI TO COURT

HCSA 16/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 16 OF 2003

(ON APPEAL FROM SMALL CLAIMS TRIBUNAL CLAIM
NO. SCTC 30184/2002)

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J U D G M E N T

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1. In the tribunal below, the Claimant, a co-owner in a multi-storey building known as Hoi To Court in Gloucester Road, Hong Kong, sued the incorporated owners of the building for loss and damage arising from water damage to the Claimant's ground floor shop premises. The Claimant alleged that the incorporated owners were negligent in maintaining the common passage and corridor on the 1st floor of the building from where allegedly leaking water flowed downward into the ground floor shop premises of the Claimant.

2. The claim was commenced in the Small Claims Tribunal on 22 May 2002. The Claimant claimed damages in the total sum of $41,660.00.

3. In response to the claim, a statement of defence, setting out the reasons of opposition to the claim, was filed by the incorporated owners. Although the statement was not dated, it was filed for the purpose of a hearing on 17 July 2002. One can therefore safely assume that the statement was filed on or before 17 July 2002. In the statement, the incorporated owners set out a number of reasons based on which the incorporated owners denied liability and put the Claimant to proof as to quantum.

4. Thereafter both sides put in witness statements and documents in support of their respective cases.

5. Eventually, the case came up for trial before the tribunal on 5 December 2002. The Presiding Officer pointed out for the first time to both parties that the deed of mutual covenant ("DMC") governing the building contains an arbitration clause (clause 16) which reads:

"16. All disputes and questions which shall hereafter arise between the parties hereto touching these presents or the construction or adjudication hereof or whether these presents are still subsisting or not or touching any account or calculation to be made hereunder or as to any act deed or omission by any of the parties hereto or as to any other matter in any way relating to these presents or the rights duties or liabilities of any person hereunder shall be referred to a single arbitrator in case the parties agree upon one otherwise to two arbitrator one to be appointed by each party to the difference and their umpire in accordance with and subject to the provisions of the (Supreme Court Rules) Order XXV and the decision of the arbitrator or umpire as the case may be one any of the matters and things aforesaid shall be final and absolutely binding upon all the parties hereto."

6. That notwithstanding, the trial proceeded, and evidence was heard. The hearing was however adjourned part-heard to accommodate the parties' wish to negotiate, if possible, for a settlement.

7. However, no settlement could be reached, and the parties appeared before the Presiding Officer again on 11 December 2002. The tribunal directed the Defendant's representative to produce a written resolution of the incorporated owners to the effect that they would waive their right to arbitration provided under clause 16 of the DMC. At that time, the impression given by the Defendant's representative to the tribunal and to the Claimant was that such a resolution would be forthcoming.

8. However, that was not to be. On or about 18 January 2003, the Defendant by a letter to the tribunal asked for the reference of the case to arbitration.

9. The adjourned hearing resumed on 21 January 2003. The question of referring the dispute to arbitration occupied the tribunal's as well as the parties' attention. The following is the relevant extract from the transcript of the hearing on that day (pp. 5I - 6O):

「申索人代表：就以而家呢個case咁樣情形，你閣下可唔可以判？

官:	嗯？
申索人代表：即係可唔可以照番原底咁判？
官:	呢度就會牽涉到一個好複雜嘅法律問題，一般嚟講，就係話若果有一個仲裁條款，而雙方是但有一方面唔肯放棄嘅話，法庭就冇一個權，除非一啲好特別嘅情況，有例外，但係嗰個例外唔適用嘅話，法庭就冇一個權限去處理呢件事，呢個亦都係有法例去講咗，香港有一個仲裁條例（Arbitration Ordinance）。呢個就即係仲裁條款嘅一個效力，即係個合約你哋雙方同意咗之後，法庭個觀點就係法庭要尊重你哋雙方個合約精神，公契當係一個合約嘅話。
	?面亦都有例外，有一啲例外，就係話若果雙方已經喺一個- - 當然，所謂放棄個仲裁嘅權利可以係明文放棄，亦都可以話係做一個行為法律上面視為已經放棄咗嘅仲裁權利。一般嚟講，若果一個訴訟雙方開始咗，亦都做到某一個階段，咁法庭就會比較傾向覺得已經開始咗做到 - - 甚至話已經審緊，咁就好難去視作任何一方已經放棄嗰個仲裁。任何一方仲可以堅持嗰個仲裁嘅權利。
	但係呢個案就比較特別，好坦白講，呢個案若果喺地方法院或者高院上面審嘅話，去到呢個階段，任何一方已經係做咗咁多嘢，法庭可能覺得任何一方都已經喺行為上面放棄咗嗰個仲裁嘅權利。但係呢個比較特別，就係咩嘢呢？就特別在幾樣嘢，第一樣嘢就係被告人係一個法團，代表緊全部嘅業主，佢有冇權代表業主，冇經一個手續，譬如一個決議案去放棄個權利呢？呢度有一個好深嘅法律問題。
	譬如話個別嘅業主走 - - 若果話放棄嘅，個別嘅業主走出嚟反對，法團點樣處理呢？因為法團代表業主行使權利係要通過決議，所以我一路要追朱先生攞個決議，雖然朱先生一路畀我個訊息 - - 呢度我有啲失望，因為朱先生一路畀我訊息就冇問題，我可以處嚟件案，若果唔係有呢個訊息，我喺上一堂或者再上一堂我唔會聽咁多證供。朱先生一路畀我個感覺就話冇問題，呢一個手續嚟嘅者，咁樣，但係而家我睇咗呢一份咁嘅文件，我都有啲意外，即係法團話要堅持佢嗰個仲裁嘅權利，咁變咗我感覺就係朱先生雖然喺呢度係話佢代表法團做緊呢樣嘢，佢可能冇一個適當嘅授權都唔定，因為睇番個決議就係話，呢度牽涉到好複雜嘅問題，你睇到，呢個第一樣嘢。
	咁變咗我就覺得若果係想息事嘅話，當然你可以考慮，我就覺得喺呢個階段若果你係斟酌落去嘅話，牽涉落嚟嗰個法律觀點仲更複雜，愈搞可能愈複雜。因為譬如話我勉强畀咗個判決出嚟，個理由惟有我就係 - - 若果我話法團已經做咗咁多嘢，已經視為放棄咗個權利，勉强畀個判決出嚟，法團可能有個意見，因為佢出咗個決議，佢亦都係係代表一個團體去做嘢，佢呢度要澄清嘅話，可能要上高院做個澄清。又或協成幢大廈任何一位業主唔滿意呢個做法，認為佢有個仲裁權利，佢亦都可以透過上高院去解決呢件事。對你嚟講可能好麻煩，因為成座一廈，你難保有任何一位業主唔滿意，你明唔明白？
	所以 - - 即係我講緊你，即係若果你話你以為即刻勉强做個判決出嚟會解決呢件事，我就話未心，因為法團或者任何一位業主有質疑嘅話，都會上 - - 呢個法律問題上高院去解決，係咪法團可以堅持佢仲裁嘅權利。所以就係雖然係走咗啲冤枉路，但係我覺得不如你自己諗下，就係話有啲嘢都唔好走捷徑，都係諗下不如話仲裁，上去做仲裁，係咪？有冇好大嘅意見？
申索人代表：冇問題，冇。
官:	若果冇，我跟審頭先個講法，即係你明白個難處？
申索人代表：係。
官:	明白個難處。咁我就喺 - - 當係雙方同意喇，喺雙方同意下面，我將呢個案件無限期押後，你哋會收到我個命令個蓋印副本。個仲裁嘅情況就我建議申請人你書面即刻做封信，就畀 - - 建議 咋，即係呢個絕對唔係指令，就畀被告人法團嗰度，就要求雙方 - - 你就直情可以畀個建議，你話建議個仲裁跟番呢個條款，同埋佢哋個決議案，你有副本喇，咁你話就呢個仲裁嘅程序，你建議委任幾多位嘅仲裁員，同埋可以委任邊一啲仲裁員，直情書面寫個建議出去，同埋就希望佢哋幾多日之內畀個答覆你咁樣。你亦都可以直情即刻過去Hong Kong I.A.C.度，同佢哋去諮詢下個程序，佢哋會有啲表格，直情有啲樣本嘅信件畀你參考。就係咁，兩位走得。好有浪費，朱先生，我知道你都唔想。」

10. It was thus that by a "consent order", the hearing of the claim was adjourned sine die with liberty to restore.

11. From that consent order, the Claimant now appeals to this Court. In short, the Claimant argues that the arbitration clause has no application to the dispute between the parties, the Defendant's request for reference to arbitration does not fall within the provisions of section 6 of the Arbitration Ordinance (Cap. 341) and article 8 of the UNCITRAL Model Law on International Commercial Arbitration ("Model Law"), and in any event the Defendant has waived the right to arbitration. In those circumstances, the Claimant argues that the so-called consent order was agreed to by the Claimant and made by the tribunal under a mistake.

12. It is quite unnecessary to deal with all the arguments relied on by the Claimant in this appeal. For it is quite plain to me that in the present case, there is no question of the Defendant being entitled to ask the tribunal to stay the Claimant's claim before the tribunal in favour of arbitration.

13. Section 6 of the Ordinance and article 8 of the Model Law read as follows respectively:

"6. Court to refer matter to arbitration in certain cases

(1) Subject to subsections (2) and (3), article 8 of the UNCITRAL Model Law (Arbitration agreement and substantive claim before court) applies to a matter that is the subject of a domestic arbitration agreement in the same way as it applies to a matter that is the subject of an international arbitration agreement.

(2) Subject to subsection (3), if a party to an arbitration agreement that provides for the arbitration of a dispute involving a claim or other matter that is within the jurisdiction of the Labour Tribunal or a person claiming through or under such a party, commences legal proceedings in any court against any other party to the agreement or any person claiming through or under that other party, in respect of any matter agreed to be referred, and any party to those legal proceedings applies to that court after appearance and before delivering any pleadings or taking any other step in the proceedings, to stay the proceedings, the court or a judge of that court may make an order staying the proceedings, if satisfied that ―

(a)	there is no sufficient reason why the matter should not be referred in accordance with the agreement; and
(b)	the applicant was ready and willing at the time the proceedings were commenced to do all things necessary for the proper conduct of the arbitration, and remains so.

(3) Subsections (1) and (2) have effect subject to section 15 of the Control of Exemption Clauses Ordinance (Cap. 71)."

"Article 8. Arbitration agreement and substantive claim before court

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court."

14. As has been outlined above, the claim was commenced in the tribunal on 22 May 2002, and the incorporated owners put in a statement of defence setting out the various grounds that they relied on in defence of the claim on or before 17 July 2002. Further documents and witness statements were filed with the tribunal thereafter. The Defendant's request to the tribunal for referring the case to arbitration came much later on or about 18 January 2003.

15. In other words, the request to the tribunal to refer the parties to arbitration was made later than the Defendant's submission of its first statement on the substance of dispute.

16. In those circumstances, the provisions in article 8(1) have not been complied with by the Defendant, and there is therefore no question of the tribunal being entitled to refer the parties to arbitration pursuant to the Defendant's request.

17. Miss Po, doing her best as counsel on behalf of the Defendant, argues that the application of article 8(1) of the Model Law in the context of the Small Claims Tribunal must take into account the informal nature of proceedings in the tribunal (section 16(1) of the Small Claims Tribunal Ordinance, Cap. 338), the tribunal's duty of inquiry (section 16(3)) and the lack of legal representation at hearings before the tribunal (section 19). In short, Miss Po asks this Court to adopt a construction to the effect that where a dispute is before the Small Claims Tribunal, nothing submitted by a party should be regard as a "statement on the substance of the dispute" for the purpose of article 8(1) unless and until his right to arbitration has been pointed out and explained by the tribunal to the parties.

18. I do not accept the argument. The matter is essentially a matter of construction. As a matter of principle, there cannot be one law or construction of article 8(1) for disputes pending before the ordinary courts and tribunals save and accept the Small Claims Tribunal, and another law or construction of article 8(1) for disputes pending before the Small Claims Tribunal.

19. Moreover, it must be remembered that the Small Claims Tribunal has been set up to deal with claims involving a relatively small amount of money (the present jurisdictional limit is $50,000.00), in an informal, expeditious and inexpensive manner. Based on that rationale, we have provisions like sections 16 and 19 of the Ordinance, which Miss Po has referred this Court to.

20. It must also be remembered that arbitrations can be expensive. For one, the parties will have to pay for the arbitrator, whereas subject to minor exceptions, they need not pay for the service of the court or the tribunal. The contrast is even greater when one is talking about the Small Claims Tribunal here. The procedure of the tribunal is informal and is designed to deal with disputes expeditiously and inexpensively.

21. Another non-monetary consideration is the fact that whereas hearings before the tribunal do not permit legal representation, there is no such restriction as regards arbitrations.

22. For all these reasons, even if one should, as Miss Po has submitted, take into account the peculiar nature or context of a dispute pending before the Small Claims Tribunal, the underlying rationale for the establishment of the tribunal would go against the construction put forward by Miss Po, for the simple reason that arbitration does not really stand well with the rationale that cases involving small amounts in dispute should be proceeded with and adjudicated upon in an informal and inexpensive manner.

23. Thus analysed, I fail to see why any special treatment should be meted out to a party to a case before the tribunal who wants to insist on arbitration. Nor do I see any justification for a special construction of article 8(1) to cater for cases pending before the tribunal.

24. As to the knowledge of the parties of their right to arbitration, the reference to section 19 of the Ordinance prohibiting legal representation at hearings before the tribunal is misplaced. The prohibition relates to hearings before the tribunal. It does not prevent either party from seeking legal advice on the subject matter of dispute. In those circumstances, I fail to see how it can be said that a party to a case before the tribunal, who wishes to rely on an arbitration clause, is in a more disadvantageous position when compared with all other litigants with a similar intention, who are parties to cases before the ordinary courts and other tribunals in Hong Kong. I do not see this as justification for a special construction of article 8(1).

25. In passing, I should note that section 6(2) of the Arbitration Ordinance makes special provisions for cases pending before the Labour Tribunal or falling within its exclusive jurisdiction. The very existence of subsection (2) in section 6 supports my view that if the legislature had wished to make any special provisions or create any exception regarding cases pending before the Small Claims Tribunal, it would have done so, like in the case of the Labour Tribunal.

26. Furthermore, I note that section 6(2) gives the Labour Tribunal (or the court in which proceedings were commenced) a discretion not to refer the parties to arbitration even if article 8(1) has been fully complied with. Given the background and rationale behind the establishment of the Labour Tribunal, it is not difficult to understand why. The tribunal has been established to deal with labour cases informally, inexpensively and expeditiously. It sits as a specialist tribunal. The case against an unqualified right to an automatic stay in favour of arbitration is apparent, and thus section 6(2).

27. As I have tried to explain above, broadly similar considerations apply to the Small Claims Tribunal, and that is why no special treatment should be given or special construction of the relevant provisions (in favour of arbitration) adopted for cases pending before the Small Claims Tribunal.

28. In conclusion, in my view, the tribunal was in error when it thought and thus explained to the parties at the hearing on 21 January 2003 that the arbitration clause in question would require the claim to be stayed in favour of arbitration, or put at the lowest, that there was such a real possibility. In my judgment, there was no such possibility at all. There was no question of the tribunal, on a correct application of the law, referring the subject claim to arbitration.

29. And apart from arbitration, there was no legitimate reason whatsoever for the tribunal not to proceed with completing the hearing of the case (which had been partly heard). There was no basis whatsoever for adjourning the hearing sine die, notwithstanding the general powers given to the tribunal under section 26 regarding adjournments and under section 37 regarding procedure generally. The powers conferred under those sections must be exercised judicially.

30. All this brings me to the last hurdle facing the Claimant in this appeal. The order under appeal is a so-called consent order made with the agreement of both parties. Consent orders, generally speaking, may be divided into two types, namely those that embody or evidence a contract between the parties, and those which were made by the parties without objection, in order to save time and costs. See generally The Supreme Court Practice 1999, vol. 2, para. 17A-24; Siebe Gorman and Co. Ltd v. Pneupac Ltd [1982] 1 WLR 185; Wing Han Trading Co. Ltd v Tang Yan-kit [1991] 1 HKLR 494, 495F to H; c.f. Tsang Iu Hung v. Tsang Tak Wah [1993] 2 HKC 471.

31. In relation to the first type of consent orders, since the order embodies or evidences a contract made by the parties to settle or compromise their dispute in a case or on a particular point, it can only be disturbed (whether on appeal or otherwise) if there exists one or more of the recognised vitiating factors that would allow a party to disturb a contract, such as fraud, illegality, mistake or misrepresentation.

32. On the other hand, in relation to the second type of consent orders, despite the label "consent", it is merely an order of the court, which can be disturbed (whether on appeal or otherwise) according to normal principles.

33. In the present case, judging from the development of the case at the various hearings before the tribunal, and judging from the transcript as a whole, I am of the view that the eventual order made by the tribunal was merely an order not objected to by the parties, so as to save time and costs, rather than an order which embodied or evidenced any genuine contract between the parties. The parties, as well as the tribunal, simply thought that it was a good way out, in the light of the view of the law genuinely held by the tribunal and represented by the tribunal to the parties (who no doubt believed in the correctness of the tribunal's view) at the hearing.

34. For that reason, I see no obstacle to my allowing the appeal and setting aside the so-called consent order on the ground that there was no justification whatsoever for adjourning the hearing of the case.

35. But if I am wrong with my view and the consent order in question really embodies or evidences a contract between the parties, I would still be of the view that the contract is liable to be disturbed given the most basic and fundamental mistake of all concerned that the arbitration clause in question was still applicable or arguably applicable at the time of the hearing - when it was totally not.

36. In this regard, I am not daunted by the fact that a mistake of law, as opposed to a mistake of fact, was involved at the hearing below. As has been pointed out by the learned editors of Chitty on Contract (29th ed.) vol. 1, para. 5-042, both common law and equity have been developing away from the previous distinction between mistakes as to law and those as to fact, as has been demonstrated by the House of Lords decision in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, a restitution case. See also Foskett, The Law and Practice of Compromise (5th ed.) para. 4-23¹.

37. In Brennan v Bolt Burdon [2003] EWHC 2493 (QB), a case on setting aside a consent order based on a mistake of law, Morland J, relying on relevant English and Commonwealth authorities, concluded that a fundamental mistake of law common to both parties can vitiate a compromise and the consent order that evidences it (see paras 35 to 50).

38. Insofar as may be necessary, I am prepared to hold that a mistake of law notwithstanding, the contract evidenced by the consent order (assuming that it is a "true" consent order) is vitiated by the fundamental mistake of law in question. In those circumstances, there is no bar to this Court allowing the appeal and setting aside the consent order.

39. For the above reasons, I order that the appeal be allowed, the order below be set aside, and the case be remitted to the tribunal for a re-trial before another Presiding Officer. Although the claim has been partly heard, given the long lapse of time, there is no advantage to be gained by remitting the case to the same Presiding Officer for continuation of the trial. In my view, it would be best to start everything afresh.

40. As regards costs, having heard counsel's submissions (on a provisional basis), I am of the view that costs should follow the event - particularly bearing in my mind that this appeal, which arose to a significant extent as a result of the Defendant's misplaced reliance on the arbitration clause at the hearing below, was strenuously opposed by the Defendant. In those circumstances, I order that the costs of this appeal be paid by the Defendant to the Claimant; such costs are to be taxed if not agreed.

1 "It is suggested that a mistake of law may now, if sufficiently fundamental to the compromise, operate to invalidate the agreement."