SWIRE PROPERTIES LTD. AND OTHERS v. THE SECRETARY FOR JUSTICE ON BEHALF OF THE GOVERNMENT OF THE HKSAR

CACV 1058/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1058 OF 2001

(ON APPEAL FROM HCCT NO. 11 OF 2001)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal against the decision and order of Burrell J given on 7 May 2001 whereby he refused an application for leave to appeal to the Court of First Instance from an arbitral award dated 15 January 2001. At the conclusion of the hearing of this appeal this court said it would give its decision in writing which we now do.

2. This judgment is, perhaps, a little longer than might be expected in respect of an application of this nature. This stems in part from the need to explain why the appellants are unable to challenge the fact that a situation has arisen whereby they started, prior to December 1975, with land with development potential restricted only by the provisions of the Buildings Ordinance and now have a liability that has been estimated to be in the region of HK$4.5 billion in respect of use, which they have made of their land, which was well within the limitations of that Ordinance.

Background

3. Bearing in mind the nature of the proceedings, which stem from an application to appeal on a point of law from an arbitral award, the facts are taken from the award itself.

4. In the first half of the last century four leases in respect of land at Taikoo Shing were acquired by the predecessors in title to some of the applicants. The important feature of those leases, apart from the fact that they were for 999 years, was that they contained no limitations as to the size of residential or commercial areas that could be developed. For the purposes of this appeal, and it would seem for the arbitration generally, the appellants have been treated as a single collective unit. They are also referred to below as Swire.

5. By four Deeds of Variation dated 12 December 1975, the terms of the leases were varied. For present purposes it is sufficient to say that restrictions were imposed on the development of the sites. There was to be a maximum of 8,972,400 square feet (sf) of gross floor area (gfa) for residential purposes and 3,642,912 (referred to below as 3.6m) sf gfa for non-industrial and non-residential purposes, effectively, therefore, for commercial purposes.

6. By the mid-1980's, the applicants had built a larger area of residential premises than was permitted under the Deeds of Variation. There was no difficulty with respect to plot ratio in this respect, but they required an increase of the restriction imposed by the Deeds of Variation from 8,972,400 sf gfa to 10,288,400 sf gfa.

7. The Government indicated by a letter of 6 November 1985 that it would be prepared to allow the increase of 1,316,000 sf gfa on condition that there would be a decrease in the commercial gfa. The Government's position was further clarified in a letter of 23 June 1986 in which it was indicated that a premium of $178 million would be demanded for the giving of consent for the increase in the residential gfa and that it would also be a condition of the consent that there would be a simultaneous reduction of 1,974,000 sf gfa in respect of the non-industrial (other than residential) i.e. commercial area.

8. That offer was rejected by Swire in a letter dated 25 June 1986. However, the 1st appellant entered a Deed and Undertaking, which, although undated, is taken to have been made on or shortly before 26 September 1986. That Deed and Undertaking referred, first of all, to the four Deeds of Variation. It may be noted that it referred to the limit in respect of residential development but did not refer to the limit in respect of commercial development. It recited in brief the reasons why Swire needed the increase in the residential gfa. It referred to the three letters of 6 November 1985 and 23 & 25 June 1986. In paragraph 9 of the recital it is stated:

"The Director has agreed to give such consent in writing in consideration of Swire Properties Limited ('Swire'), the parent company of TSDL, ... giving this Undertaking to inter alia pay the premium of $178 million or such other sum which is finally determined to be payable for such consent and Swire has agreed to give this Undertaking in manner hereinafter appearing."

The Undertaking read as follows:

"In consideration of the Director of Buildings and Lands giving consent in writing under the said four Deeds of Variation to increase the total Gross Floor Area of the buildings designed and intended for residential purposes on the Taikoo Shing Estate Lands, from 8,972,400 square feet to 10,288,400 square feet, we undertake to pay the premium of $178 million or such other sum as is agreed between Swire and Government and to procure a modification of the said Deeds of Variation to stipulate the new residential and the commercial Gross Floor Area in so far as they apply to those part of the Taikoo Shing Estate Lands still in our ownership and which could still be developed, by the erection of residential and commercial units."

On 26 September 1986, the Director of Buildings and Lands wrote to the 1st applicant stating:

"You have requested my consent to an increase in the residential gross floor area permitted under the Crown leases as varied by four deeds of variation in respect of the above mentioned development.

I confirm that the condition imposed by me on the giving of such consent having been satisfied, I consent to an increase in the residential gross floor area from 8,972,400 square feet to 10,288,400 square feet which increase comprises the nine blocks of residential flats known as 'Horizon Gardens'."

9. It is evident that the satisfaction of the condition, which was referred to in the letter, was constituted by the execution of the Deed and Undertaking. At the foot of the letter, it is stated that the original of the Deed and Undertaking was retained in the writer's safe.

10. No sum, whether of $178 million or otherwise, was paid nor had there been any application for modification, still less actual modification, of the Deeds of Variation. Development, in particular of new commercial areas, continued at Taikoo Shing. By 1992 a total of approximately 2.65m sf gfa of commercial space had been built.

The arbitration

The deed of submission

11. The parties eventually agreed to submit their differences to arbitration. Great stress was put on the fact that Sir Christopher Staughton, a distinguished retired English Court of Appeal Judge, took up the appointment as arbitrator. We have been referred to the Deed of Submission to Arbitration. The disputes between the parties were defined in Part (B) of Schedule 4. As the arbitrator observed that contained a long list of issues. They included:

"(1) whether

(i) by reason of any Development of the Sites any of the Companies committed or is liable in respect of any breach of any obligation, including any term of the Government Leases or the Deeds of Variation;

(ii) any sum is due to the Government by any of the Companies under or pursuant to the Deed and Undertaking;

(iii) any of the Companies is liable to pay any Premium or Premium Interest to the Government pursuant to the provisions of Clause 6;

(2) what the rights and obligations of the parties are with respect to any Further Development of the Sites;

(3) the issues and matters identified and set out in Part (C) of this Schedule 4;"

12. Clause 6 of the Deed of Submission to Arbitration referred to premium which was payable in the event that any commercial gfa restriction had been broken. Clause 6(A)(ii) specified that there would be an obligation to pay premium and premium interest in the event that the commercial gfa which had been created exceeded any restriction which had been in force and effect immediately prior to the development which exceeded that restriction.

13. In this connection it may be observed that the issues in Part (C) of Schedule 4 included questions as to the proper construction of the Deeds of Variation in respect of the restriction of the amount of permitted commercial development and whether Swire was entitled to rectification of the Deeds of Variation with regard to the restriction on commercial development or whether by reason of the existence of some collateral contract or estoppel, Swire could develop commercial premises up to the gfa prescribed by the Buildings Ordinance.

14. It is, perhaps, also noteworthy that clause 6(B) precluded any defence being run upon lines such as that no loss had been occasioned to the Government by reason of a breach of any commercial gfa restriction or that no premium would have been charged by the Government to waive or relax any of the restrictions in respect of the commercial gfa.

The pleadings

15. The pleadings in the arbitration showed that the Government based its case upon the footing that by developing a total commercial gfa of 3,271,795 sf Swire had breached the restriction on the commercial gfa contained in the Deeds of Variation as varied by the Deed and Undertaking: see the statement of claim para. 17. It is evident from that pleading, and in particular paragraphs 15 to 22, that it was the Government's case that the original commercial gfa following the Deeds of Variation had been 3.6m sf and that had been reduced to 1,668,912 sf under the Deed and Undertaking: see in particular paragraph 16(2). The pleading even went on to acknowledge that Swire had claimed to be entitled to build up to 7,731,110 sf or 7,818,416 sf gfa of commercial development. Because of the arguments which had been raised in this court, at peril of repetition and of stating the obvious, the Government's case was thus based upon two propositions. First that the permitted gfa had since December 1975 been 3.6m sf and second that because of the Deed and Undertaking the reduction of permitted commercial development had to be taken to be reduced by 1.9m sf at least to the extent that when a figure of 1.6m sf were exceeded Swire would be in breach.

16. The Government's figures as to the commercial development which had been achieved by the date of the arbitration were confirmed in the amended statement of defence: see para. 63 and the table in paragraph 60 thereof. Swire's case on the pleadings in respect of the Deeds of Variation was that they did not restrict the commercial gfa to 3.6m sf or that, if they did, Swire were entitled to rectification or that there was a collateral contract that the permitted commercial gfa was 7.6m sf or that the Government was bound by some estoppel or waiver to the same effect. In respect of the Deed and Undertaking it was Swire's case that it did not refer to any commercial gfa whether reduced or otherwise and did not impose any contractual limitation on the amount of commercial gfa.

The issues argued at the arbitration

17. The Reasons for the award show that a somewhat narrower range of issues were argued at the arbitration than were contained in the Deed of Submission. The arbitrator set them out as follows:

"Commercial development

(a) Did the Deeds of Variation impose a limit on commercial development unless approved by the Director of Public Works only in his capacity as Building Authority?

(b) If not, should they be rectified to have that effect?

(c) Is there a collateral contract to that effect?

(d) Or an estoppel by convention or representation?

(e) Was there breach of clause 1(3), 1(4) or 1(7) of the Deeds of Variation?

(f) If so, did the Government waive or acquiesce in the breach?

Residential development

(vii) What was the effect of the Deed and Undertaking?

(viii) Was there an agreement that premium due under the Deed and Undertaking could be offset by further relinquishment of commercial gross floor area which was permitted but not otherwise used?

(ix) Alternatively is there an estoppel by convention or representation to that effect?"

The findings of the arbitrator

18. The arbitrator found that there was an excess of commercial development and that the Swire companies were thus in breach of their obligations under the Deeds of Variation. He held that $151 million was due under the Deed and Undertaking, in relation to dispute (1)(ii). He also held that the limits of both the residential and commercial gfa had been reached and exceeded and that premium and premium interest was due to the Government in respect of the breach of the commercial gfa restriction.

19. Attention has been focused upon paragraphs 90 to 95 of the Reasons for the award. That section of the Reasons is headed "Residential Development - What was the effect of the Deed and Undertaking?" The learned arbitrator started that section by indicating that he found it the most difficult issue in the case. The question which he asked himself was whether the Deed and Undertaking incorporated the term that 1,974,000 (1.9m) sf of commercial development should be used to reduce the premium for the excessive residential development.

20. Highly important to this consideration was the fact, recorded in paragraph 91, that Mr Nissim who had been the District Lands Officer for Hong Kong North and had been the person who had signed the letter of 26 September 1986, had given evidence as a witness for Swire. Nevertheless, his evidence was that the original premium which Government had intended to charge had been $400 million and that it had been agreed between the parties that there would be an offset by use of commercial development to lower that premium to $178 million.

21. In the next paragraph the arbitrator observed two matters. First, that despite Swire's rejection of the Government's proposal contained in the letter of 23 June 1986, the Deed and Undertaking referred to the reduced premium of $178 million or such other sum as would be agreed. The second point noted by the arbitrator was that there was no explicit reference to a reduction in the permitted commercial development by 1.9m sf. The arbitrator speculated as to possible reasons as to why there had been no reference to a reduction in the permitted commercial development and at paragraph 95, he said:

"After anxious consideration I conclude that the 1,974,000 square feet reduction in commercial development was to be made under the Deed and Undertaking. I read the obligation of Swire Properties Ltd. as one to procure the residential limit to be increased to 10,288,400 square feet, and the commercial limit to be changed to (whatever it was before - (meaning 'minus') 1,974,000) square feet."

22. He reached that conclusion on the basis that there had been no reference to the specific permitted area of commercial development because that remained a matter in dispute which did not need to be resolved then and there whereas the extension of the permitted area of residential development had, by the date of the signing of the Deed and Undertaking, become a matter of urgent concern.

The application for leave to appeal before Burrell J

23. Swire applied before Burrell J for leave to appeal the arbitral award under the provisions of section 23(3)(b) of the Arbitration Ordinance, Cap. 341. Again, because of the way in which the argument has been put in this court, it is pertinent to draw attention to the terms of the notice of originating motion. In that document the error of law is said to have been that the arbitrator was wrong in holding that:

(a) under the Deed and Undertaking Swire was "contractually bound to suffer a reduction of 1,974,000 square feet in the gross floor area of" the commercial developments permitted under the leases and Deeds of Variation;

(b) the Government was entitled to enforce such reduction by reason of the Deed and Undertaking; and

(c) the applicants were in breach of the limit on construction of the commercial area as so reduced.

24. Specifically Swire did not seek to disturb the arbitrator's finding that the permitted commercial development was 3.6m sf under the Deeds of Variation and not 7.7m sf, as had been argued on behalf of Swire during the arbitration. The kernel of the application was that the Deed and Undertaking should have been given its natural and ordinary meaning and that, on its face, excluded the notion that Swire had bound itself to surrender any commercial gfa. In essence, the argument was that Swire was not obliged to surrender the 1.9m sf gfa or any commercial development area under the terms of the Deed and Undertaking but that they could have satisfied the premium requirement in respect of the increased residential gfa by exercising what, in effect, would have been a cash option, namely to pay for the increased gfa fully in cash.

25. Burrell J recognised that this was a new argument which had been raised for the first time on the leave to appeal. He referred to the decision of the Court of Appeal in Lee Chang Yung Chemical Industry Corp v PT Dover Chemical Co [1990] 1 HKC 132 and in particular to Hunter JA's judgment (at 140-141), which articulated the requirement that the applicant for leave had to show that the arbitrator had been plainly wrong. He also referred to Lord Donaldson's speech in the Seaworld Oceanline Co. SA v Catseye Maritime Co. Ltd. (the Kelaniya) [1989] Lloyds Rep 30 at p. 32 to the same effect. Finally, in relation to the court's approach to the question of granting of leave he had regard to what Lord Donaldson had said in Ipswich B.C. v Fisons Plc [1990] Ch 709 at 724H, that the seriousness of the consequences of the error might have a bearing on the rigour with which the court scrutinised the alleged error.

26. The judge therefore had well in mind the presumption of finality in relation to arbitration proceedings and the concept that the court should not interfere with an arbitral award, specifically in a one off case, unless it was clear that there had been an error of law. The judge also appreciated that there was perhaps some leeway for mitigating the full rigour of that doctrine where the seriousness of the result of the arbitration to the parties made it right to do so.

27. The judge rightly, in my view, was clear that the point sought to be argued had not been advanced in the arbitration. He held that the cash option had never been an offer advanced by the Government and that the construction of the Deed and Undertaking did not give Swire an option to pay $400 million and suffer no surrender of commercial gfa. In short, the judge's conclusion was not merely that Swire had failed to show that the arbitrator was obviously wrong but that the point which they sought to argue was a bad one.

This appeal

The appellant's argument in this court

28. On this appeal, Mr Michael Thomas SC appeared on behalf of Swire. He did not seek to put the arguments which appeared in the appellant's skeleton arguments in the court below and were dealt with by the judge. In this court the argument that was put was that Swire had an obligation to procure modifications of the Deeds of Variation namely to sacrifice 1.9m sf gfa of commercial development but that there was no immediate obligation on Swire to surrender the 1.9m sf gfa, such obligation would only arise once there was settlement of the dispute between Swire and the Government as to whether Swire were entitled to 7.7m sf gfa of commercial development or only 3.6m sf gfa.

The first part of the argument on appeal

29. As to the first part, it is quite clear that this was contrary to the stand taken both in the arbitration and in the court below. What is more, it contradicted paragraph 1(1)(a) of the notice of originating motion seeking leave to appeal the arbitral award; that was summarised at paragraph 23(a) above. When asked by the court as to why the appellant's case was presented on the basis that there was an obligation to sacrifice 1.9m sf gfa of commercial development, it was said that that had been the only basis upon which the Government would have given its consent to the increase in the area for residential development and as Swire had taken that consent, it could not go back on having to yield 1.9m sf of commercial gfa.

The second part of the argument on appeal

(a) New argument

30. As to the second part of the argument, namely, that the obligation to surrender the 1.9m sf gfa of commercial development only arose once the dispute between the parties had been settled, again, it does not appear to have been an argument taken below. On the strength of the statement in the penultimate paragraph of Burrell J's judgment that not all points raised had been specifically addressed but that the judge had omitted peripheral arguments, Mr Thomas, who had the advantage of not being constrained by having appeared in the court below or in the arbitration, asserted, without demonstrating support from any documentation, that that argument had been put. On the basis of the facts shown to this court, this court cannot proceed on any basis other than that the cash option point alone was argued and that the point sought to be raised is a new argument.

(b) The criticisms of paragraph 95 of the Reasons for the award

31. Issue was taken by Mr Thomas in respect of two aspects of paragraph 95 of the Reasons for the award. In the first place, it was said that the arbitrator was wrong to have said that the 1.9m sf reduction "was to be made under the Deed and Undertaking". In the end, that criticism amounted to little more than that clause should have read "was to be made as a result of the letter of 26 September 1986 or the Deed and Undertaking". It was, in any event, a minor quibble which in view of the first part of the argument did not advance the appellant's case.

32. The second point taken in relation to paragraph 95 was in respect of the clause "the commercial limit to be changed to (whatever it was before -1,974,000) square feet". It was said that Swire had never committed themselves to reduce the commercial development to 1.6m sf.

33. This was a misinterpretation of what the arbitrator said in paragraph 95. In interpreting the Deed and Undertaking, the arbitrator was careful to refer, in relation to "the commercial limit", to "whatever it was before", because that is how he saw it. The limitation to 1.6m sf came about because it was his finding, now accepted to be correct, that the construction of the Deeds of Variation entailed, and always had entailed, the limitation of 3.6m sf on commercial development.

(c) Whether the outcome of the meeting of 11 August supported the second part of the argument.

34. The argument that the obligation to surrender the 1.9m sf only arose upon the determination of the dispute between Swire and the Government as to the extent of permissible commercial development under the Deeds of Variation was based primarily upon an interpretation of Swire's notes of a meeting of 11 August 1986 between Swire and the Government and in particular the penultimate paragraph which read:

"In conclusion, FAF (a Swire's representative) accepted that the next step was for Swire to have their architects Wong Tung & Partners produce a notional scheme showing how the permissible commercial potential of 7.6m square feet could practicably be provided in Taikoo Shing as now developed, and to seek a further meeting with RAN (Mr Nissim) when this was ready. In the meantime Swire would endeavour to resolve the two issues concerning the calculation of the HK$178m premium with RAN. The intention of both Swire and the Government was to try and resolve the outstanding issues as soon as possible."

35. This note, which, of course, was Swire's note of the meeting, was said to be the genesis of the Deed and Undertaking. Be that as it may, it is a long step from what is stated there to conclude that the Deed and Undertaking meant that any dispute between Swire and the Government in relation to the commercial development had to be concluded before Swire's commitment to surrender 1.9m sf gfa of commercial development would take effect.

36. That meeting of 11 August 1968 was the subject of extensive assessment by the arbitrator: see for example paragraphs 11 and 64 to 71 of the Reasons. The arbitrator considered Swire's notes of the meeting but he also had the important advantage of having the written and oral testimony of the witnesses who were, of course, subject to cross-examination. At paragraph 64 the arbitrator observed:

"If indeed the Government expressly agreed at the meeting that the limit for commercial development in clause 1(1)(b)(i.e. of the Deeds of Variation) was not a binding condition, I find it astonishing that this was not stated in the Companies' version of the minutes. Instead it is to be implied from the requirement that the Companies should submit a scheme showing how the permissible (in the Building Ordinance sense) commercial potential of 7.6m. Square feet could be provided at Taikoo Shing."

37. At paragraph 68 the arbitrator cited from Mr Nissim's evidence to the effect that the commercial development under the leases was 3.6m sf gfa but that the Government had a discretion to raise that figure, although Swire had no right to demand an increase. At paragraph 71 the arbitrator said that he was entirely convinced that there was no agreement at the meeting along the lines alleged by Swire, namely that there was no limit on commercial development under the leases following the Deeds of Variation. This was in the context of Swire's position that there was a limit of 7.6m sf under the Buildings Ordinance. He then went on to say:

"At best it can be said that the government were not hostile to the Companies' proposals, and might even be willing to agree to them"

38. This reference to the companies' proposals was a reference to the proposal to submit a scheme showing how the commercial potential in the Buildings Ordinance sense could be accommodated: see paragraph 64 of the award quoted in paragraph 35 above.

(d) Other matters in relation to the second part of the appellant's argument.

39. Furthermore, Swire's argument at the arbitration that the Deeds of Variation meant anything other than that there was a legally binding limit of commercial development of 3.6m sf gfa was optimistic to put the most favourable gloss on it. In reality it was doomed from the beginning. It is thus perhaps not surprising that much of the argument at the arbitration was placed upon the other issues namely such matters as estoppel, waiver and collateral contract.

40. The basis of Swire's argument in this court, that they had committed themselves to surrender 1.9m sf gfa of commercial development, entailed that they were bound to surrender that amount from either what they were entitled to under the Deeds of Variation or what they might have been entitled to had they persuaded the Government to alter its rights under the Deeds of Variation.

41. If Swire's argument was taken to its logical conclusion it would mean that, in view of the fact that on the Government's case Swire had only built 3.2m sf gfa of commercial premises, there could have been no breach of any restriction of a commercial gfa, which was 3.6m sf before taking account of the deduction of 1.9m sf, prior to the decision in the arbitration, or other resolution of their dispute with the Government. Likewise it would have followed that there could have been no creation of excess commercial gfa by reason of any breach. The carefully worded provisions of clause 6 of the Deed of Submission to Arbitration relating to premium and premium interest demonstrate that if Swire had wished to take that point at the arbitration they should have pleaded it and supported it by evidence. This point does not appear from the Deed of Submission to Arbitration, does not appear to have arisen on the pleadings in the arbitration, is not listed in the list of issues cited by the arbitrator and, if anything, appears to be at variance with the evidence of at least one of the witnesses called on behalf of Swire, not to mention the Government's witnesses.

The result of this appeal

42. In my view, this appeal must fail. Sight should not be lost of the fact that this is an appeal against the exercise of a discretion by the judge below. The judge below correctly set out the law and applied it correctly. In this respect Mr Thomas reserved, for possible argument in another court, the argument that the test that should be applied in Hong Kong was not that set out in PT Dover case but was one to be gleaned from the decision in Gold and Resource Development (NZ) Limited v Doug Hood Limited [2000] 3 NZLR 318. The test applied in that case appears to have been one as to whether the argument was "very strongly arguable". The subtlety of the distinction between the two tests would be entirely lost whether on the arguments in the court below or in this court. The arguments would have failed in both courts on either test. There is, in my view, no basis for disturbing the exercise of Burrell J's discretion.

43. Despite Mr Thomas's valiant attempt I consider that the point argued was not taken in the arbitration and, if it had been taken before Burrell J, it was so obfuscated by the primary point taken that it was unrecognisable.

44. In the circumstances of proceedings such as this where the application is one for leave to appeal on the basis either that the arbitrator was obviously wrong or that there is a very strongly arguable case, it is difficult to resist mentioning the prejudicial point that if there was a "plain and obvious" or "good arguable legal point" that the arbitrator had erred, it is a little surprising, to say the least, that the point was not taken in the arbitration, that it was not taken before the judge below, or if it was, it was so obfuscated by the primary point that it was unrecognisable and finally, in order to make the point the first part of the argument is the direct opposite of paragraph 1 of the notice of originating motion.

45. When giving the judgment with which the other members of the Court of Appeal concurred in Petraco (Bermuda) Limited v Petromed International S.A. and Another [1988] 1 WLR 896, Staughton LJ considered the question of how a judge should regard the introduction of a new point of law when exercising his discretion under the provisions of the Arbitration Act 1979. He set out the guidelines at page 901 C-F. It is unnecessary to set out those propositions here other than to say that if the court considers that there is a sound basis for saying that the arbitrator has erred in law it will no doubt strive to remedy the legal wrong. Difficulties arise where the legal point involves facts which have not been found or considered by the arbitrator. In those circumstances the Court of Appeal considered that it was a powerful factor against granting leave. In this case, Mr Thomas attempted to circumvent any difficulty which might arise from the fact that facts had not been found because the legal point had not be raised, by saying the matter would have to be remitted to the arbitrator to find further facts. That would be a wholly unsatisfactory situation undermining the principle of finality in arbitrations. Again, I would consider that to be a powerful factor against granting leave.

46. In my view, in any event, to say that the ground upon which leave is sought is not clear and obvious or not very strongly arguable is to put the point in the wrong category. In my view it is wrong. The argument is premised on the footing that Swire had an obligation to sacrifice 1.9m sf gfa of commercial development. Whether or not that had to be "immediately" surrendered matters not. It had to be surrendered at some stage. Swire would never have a right to use that 1.9m sf gfa. The arbitrator held on the construction of the Deeds of Variation that ever since 1975 Swire had been limited to 3.6m sf gfa commercial development. Although Mr Thomas is correct that Swire did not limit themselves explicitly under the Deed and Undertaking to commercial development 1.6m sf gfa, the arbitrator was, in my view, absolutely correct when he said that they limited themselves to the amount of commercial gfa to which they were entitled minus the 1.9m sf. Whereas they might have persuaded the Government to increase the permitted commercial development gfa, as it transpires, they did not.

47. In my view, this appeal should be dismissed with an order nisi of costs in favour of the respondent.

Hon Le Pichon JA:

48. I agree with the judgment of the Vice President.

Hon Yeung JA:

49. When the matter went before Burrell J, it was Swire's contention that the Deed and Undertaking did not oblige it to suffer a reduction of 1.9m sf of commercial development as demonstrated in paragraph 1(1) of the Notice of Originating Motion:

"The arbitrator erred in law in making declaration (a) of the Award in holding that: -

(a) On the true construction of the Deed and Undertaking executed on or about 26 September 1986 ("the Deed and Undertaking") referred to in paragraph (1)(b) of the Award the applicants were contractually bound to suffer a reduction of 1,974,000 square feet in the gross floor area of non-industrial (other than residential) accommodation which they were permitted to construct under the leases and Deeds of Variation referred to in paragraph 3 of the reasons; and...."

50. It was Swire's suggestion that it had the option to pay a premium (cash option) and not to surrender 1.9m sf of commercial development.

51. Before us, the "cash option" argument was no longer pursued. Mr. Michael Thomas SC also conceded that one of the conditions for getting the consent to cover the excessive residential area was the reduction of 1.9m sf of commercial development, which condition was accepted by Swire.

52. Mr. Thomas SC, however argued that the obligation to surrender 1.9 m sf only arose after the dispute with the Government on the limit of the commercial development was settled. In the meantime, the development of the 3,271,795 sf of commercial gfa was not a breach of the 1975 Deeds of Variation.

53. In my view, the point raised by Mr. Thomas SC not only was a completely new point; it was clearly unarguable.

54. When the Deed and Undertaking was executed in 1986, completed residential floor area had already exceeded the restriction by more than 1.3m sf and unless the situation was rectified, good title could not be passed to prospective purchasers.

55. The amount of premium payable and the commercial area to be surrendered in exchange for the consent to cover the excessive residential development had been calculated in accordance with clearly set out formula.

56. The premium was originally set at $400 million but was reduced to $178 million to take into account the surrender of 1.9m sf of commercial floor area.

57. Swire had agreed to pay a premium and to surrender 1.9m sf of commercial development in exchange for the consent. The premium tentatively agreed at $178 million was open to further adjustment to be agreed with the Government.

58. What the parties could not agree was the limit for commercial development under the 1975 Deeds of Variation. The Government contended that the limit was 3.6m sf, whereas Swire contended that it should be 7.6m sf or more.

59. If the limit was 7.6m sf, with the surrender of 1.9m sf in 1986, Swire could still develop 5.6m sf. But if the limit was 3.6m sf, Swire could only develop 1.6m sf.

60. The original limit was set in 1975. With the reduction of 1.9m sf in 1986, the reduced limit, be it 5.6m sf or 1.6m sf must take effect as soon as the agreement to surrender was made. That was simple logic and elementary calculation.

61. The arbitrator had found that the 1975 Deeds of Variation limited the development rights of Swire to 3.6m sf which finding had been accepted as final and binding. When Swire agreed to surrender 1.9m sf in 1986, the limit was reduced to 1.6m sf.

62. The reduced limit must take effect as soon as the agreement to surrender 1.9m sf was made, namely in 1986.

63. When Swire extended its commercial development to 3.2m sf oblivious to the possibility that the 1975 Deeds of Variation did limit its commercial development to 3.6m sf, it was taking a gamble. Swire lost and must take the consequences.

64. The arbitrator was fully justified in concluding as he did that Swire was in breach of the 1975 Deeds of Variation by extending its commercial development beyond 1.6m sf.

65. Swire was nowhere near the threshold required for leave to appeal against the award of an arbitrator laid down in Lee Chang Yung Chemical Industry Cop. V PT Dover Chemical Co. [1990] 1 HKC 132, The Kelaniya [1989] Lloyd's Rep p 32 or Gold and Resource Development (NZ) Limited v Doug Hood Limited [2000] 3 NZLR 318.

66. I too would dismiss the appeal and make an order nisi of costs against Swire.

Hon Rogers VP:

67. There will therefore be an order as set out in paragraph 47 above.

Remarks: