P v. M

HCCT 30/2018

[2018] HKCFI 2280

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 30 OF 2018

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D E C I S I O N

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1.  This is an application made by P to challenge parts of an Interim Award dated 11 April 2018 (“Award”) made by an arbitrator, on the ground of serious irregularity, under section 4 (2) (b) and/or 4 (2) (c) and 4 (3) (c) of Schedule 2 of the Arbitration Ordinance Cap 609 (“Ordinance”). P seeks an order to set aside the challenged parts of the Award, or declaring that the said parts of the Award to be of no effect. The grounds relied upon are that the arbitral tribunal had exceeded its powers, or alternatively had failed to conduct the arbitral proceedings in accordance with the procedure agreed by the parties. P seeks in the alternative an order to set aside the Award under Article 34 (2) (ii) of the Model Law, on the ground that it had been denied a reasonable opportunity to present its case in the arbitration.

2.  P had engaged M as its main contractor to carry out construction works.  The parties entered into a construction contract (“Contract”). The Contract incorporates an arbitration agreement which provides for domestic arbitration. Accordingly, Schedule 2 of the Ordinance (“Schedule 2”) applies to the arbitration agreement.

3.  Disputes arose under the Contract, and M as claimant commenced 2 arbitrations against P as respondent, which were consolidated (“Arbitration”). The claims made by M were for its financial entitlements under the Contract, including claims for loss and expense. After a hearing in November 2017, the Award was published, whereby the tribunal ordered P to pay to M a total sum of HK$6,246,535.16 for loss and expense, plus interest. This amount has been paid into court.

4.  The disputed parts of the Award relate to a sum of HK4,002,919.58 representing M’s site expenses and overheads for the period from 1 October 2013 to 8 March 2014, and a sum of HK$1,628,926.38 representing M’s extended CAR and EC insurance costs for the period from 1 October 2013 to 8 March 2014, making a total sum of HK$5,631,845.96 (“Disputed Amount”).

Whether there was serious irregularity

5.  P claims that the tribunal exceeded its powers and/or failed to conduct the arbitration in accordance with the procedure agreed by the parties, by finding in the Award that M’s letter of 30 September 2013 (“September Letter”) and its email dated 20 November 2013 attaching a breakdown of costs (“November Breakdown”) constituted notification of M’s claims for site overheads and insurance costs, pursuant to and as required by GCC clauses 27 and 28 of the Contract (“GCC 27 and 28”), so as to entitle M to claim for and recover the Disputed Amount. P claims that the tribunal made such finding, notwithstanding the fact that M had never claimed in the Arbitration that any notice of claim had ever been given, or was relied upon by M.

6.  In its Statement of Defence and Counterclaim served in the Arbitration, P had pleaded that M had failed to give any notice of its loss and expense claim, as required under GCC  27 and 28, that such notice was a condition precedent under the Contract, and that M’s claim for its loss and expense was deemed to be waived under the express provisions of GCC 27 and 28. This pleading was denied in M’s Statement of Reply and Defence to Counterclaim, with the following averment:

“Save to the extent that it consists of admissions paragraph 39 is denied, (M) avers that (P) has waived and/or is estopped from relying upon any notice provisions in respect of its entitlements for direct loss and expense because of the delay and disruption to the Works.”

7.  Senior Counsel for P highlighted the fact that in the course of making opening submissions, M had been asked by P and the tribunal to explain its case on notice. In answer, M had confirmed that “there was no need for a notice” in respect of its claim, but that if there was a need for notice, then there was waiver or estoppel (pages 21 - 26 of the transcript of the hearing). This was confirmed in M’s Supplemental Opening submissions, served at the request of the tribunal to amplify its case. On the issue of notices of the loss and expense claims, M again asserted that M is not required, pursuant to GCC 28.1(2), to give notices either for its claims for the cost of extended insurance, or for the site and head office overheads, as these were instructed as a variation. M only asserted, in the alternative, that P had waived any requirement to give notices under GCC 28, or is estopped from asserting M’s failure to give such notices. It referred to various facts and matters on which it relied, to support the claim of waiver and estoppel.

8.  In its Closing Submissions, M maintained its claim (in paragraph 334) that it was not required to give notices for claims for an additional payment for the cost of extended insurance, site overheads and head office overheads, relying on GCC 28 (2). This provides that no notice was required from the contractor, in the case of an architect’s instruction in so far as that instruction is subject to a valuation. It claims in the alternative (paragraph 337) that P had waived the requirement for notices under GCC 28.

9.  In P’s Closing Submissions, it referred to a schedule of list of issues, in which P highlighted that M had not given any notice pursuant to GCC 28, and emphasized that M did not allege that it had done so. This was neither corrected nor addressed by M in its Reply Closing Submissions.

10.  It is pertinent that in the Award, the tribunal made it clear that it rejected M’s claim of waiver and estoppel, in the absence of any satisfactory evidence of representation by P and reliance by M. Nor did the tribunal accept M’s claim that the contractual machinery for claims submission and certification had broken down, so that it was not possible for M to give notification of its claims. Further, the tribunal did not accept that M’s loss and expense claim was a valuation of a variation claim, to fall within GCC 28 (2). The tribunal found that GCC 27 clearly applies to M’s claim for loss and expense arising from the prolongation of the project. The tribunal in fact rejected M’s claim for head office overheads and profit, for lack of proper notification pursuant to GCC 27 and 28.

11.  Nevertheless, the tribunal allowed the Disputed Amount representing M’s costs of insurance and its site overheads and expenses for the extended period of work, by finding that the September Letter and November Breakdown constituted M’s notification of claim under GCC 27 and 28.

12.  M argued before this Court that the it was open to the tribunal to do so, notwithstanding the state of M’s pleading and submissions on its case: that no notice was relied upon, as notice was not necessary and/or had been waived. M’s submission is that the tribunal should be entitled to decide an issue on a basis not advanced by the parties, so long as the parties had been given the opportunity to address all the “essential building blocks” leading to the tribunal’s conclusion. M argued that P had been given the opportunity to address the tribunal on the notice requirements under GCC 27 and 28, and that P did make submissions and cross-examined the witnesses on the documents, so P should not be permitted to retract from its decision not to make further submissions or to elaborate on its case in the Arbitration.

13.  From my review of the relevant extracts of the pleadings, Opening Submissions, and Closing Submissions served in the Arbitration, the submissions made on behalf of P were on the content and effect of GCC 28, the necessity for notice to be served thereunder in relation to the claims made by M, and whether representations had been made for waiver or estoppel to be applicable. As M had unequivocally pleaded in its Statement of Reply, and maintained in its Opening and Closing submissions, that no notice was either required or served, P did not address the tribunal on whether the September Letter, the November Breakdown, or any document relied upon by M constituted adequate and sufficient notice as required under GCC 28.

14.  M argued that its Reply and Defence to Counterclaim contains a denial to P’s claim of lack of compliance with the notice provisions of GCC 27 and 28, and that this was sufficient, since there is no need for strict pleading requirements in arbitrations, and no need for any averment of a positive case (that M had given notice). I do not accept that this is an adequate answer to P’s complaint.

15.  The parties had agreed, and it is recorded in the tribunal’s Order for Directions No 1 dated 12 October 2016, that the Domestic Arbitration Rules (2014 Edition) of the HKIAC (“Rules”) applied to and governed the Arbitration. Article 6 of the Rules states that within 35 days of receipt of the Statement of Claim, a respondent has to send to the arbitrator a Statement of Defence “setting out a full description in narrative form of the factual matters and contentions of law in the Statement of Claim which he admits or denies, on what grounds, and specifying any other factual matters”. If M should rely on any fact which supports its denial of the lack of compliance with GCC 28 as claimed by P, or any fact which supports its denial of the absence of any notice of claim, it should state such facts, and the grounds of its denial, in the Statement of Defence. It did not do so, making no mention of the fact that notice had been given by the September Letter and November Breakdown or any other document, and P was entitled to conduct the Arbitration on the basis that M did not seek to rely on the September Letter, the November Breakdown or any other document for the purpose of pursuing its claim for loss and expense. It is obvious from the transcript and from M’s Supplemental Opening Submissions that it did not claim that any notice was in fact served.

16.  If it had been made clear to P, either by M in the course of the hearing of the Arbitration, or by the tribunal prior to its publication of the Award, that the September Letter and/or the November Breakdown was to be relied upon or considered to be a notification of claim as required under GCC 27 and 28, P would have addressed the tribunal as to whether these letters were compliant with the contractual provisions and could be relied upon. In the absence of such notice, I consider that P had been deprived of the fair opportunity to present its case and to make submissions to the tribunal on the effect and adequacy of the September Letters and November Breakdown as proper notices under the Contract. It is in my view possible that the tribunal might have reached a different decision on M’s claim for the Disputed Amount, after hearing submissions from P.

17.  On behalf of M, it was submitted that the test of a serious irregularity giving rise to substantial injustice involves a high threshold to be met. M relies on Grindrod Shipping PTE Ltd v Hyundai Merchant Marine Ltd [2018] EWHC 1284 (Comm), and the English court’s references therein to the judgments in Terna Bahrain Holding Co WLL v Bin Kamel Al Shamzi [2013] 1 Lloyd’s Rep 86 and Reliance Industries Ltd v The Union of India [2018] EWHC 822 (Comm). I am happy to accept that this involves a balance to be drawn between the need for finality of the award and the need to protect parties against the unfair conduct of the arbitration, and that only an extreme case should justify the court’s intervention.

18.  On the facts of this case, there is in my view a serious error which affects due process and the structural integrity of the arbitral proceedings. Parties should be treated fairly, and with equality, and it is a fundamental rule of natural justice that each party should be given the fair and reasonable opportunity to present its case and to deal with the case of its opponent. This is recognized by section 46 (3) of the Ordinance, and Article 5.1 of the Rules adopted by the parties in the Arbitration.  Parties to an arbitration have the right to expect that it will be conducted fairly, in accordance with the procedure they had agreed under the rules to which they had submitted as governing the arbitration, the conduct of the arbitration, and the rules of pleading of their case. If either M, or the tribunal at its own initiative, seeks to treat the September Letter and/or November Breakdown as a notice of claim under GCC 27 and 28 of the Contract, for the purposes of advancing and allowing M’s claims for expenses and overheads, and notwithstanding the lack of prior reference in the pleadings and submissions to the September Letter and November Breakdown, P should be given adequate notice and warning, and a fair opportunity to deal with the matter and to make submissions to meet such a claim and case. It was not so given, and this resulted in substantial injustice to P, with an Award against it for payment of the Disputed Amount.

19.  By reason of the matters set out in the preceding paragraph, there is failure by the tribunal to comply with section 46 (3) (b) of the Ordinance, and failure to conduct the proceedings in accordance with the procedure agreed by the parties, to constitute serious irregularity within the meaning of section 4 (2) of Schedule 2.

Whether the Award should be remitted/set aside

20.  In the Originating Summons, the primary relief sought by P is for an order under section 4 of Schedule 2, declaring parts of the Award to be of no effect, or setting aside parts of the Award, on the ground of serious irregularity. The order to set aside the Award under section 81 (1) of the Ordinance is sought in the alternative.

21.  Section 4 (5) of Schedule 2 expressly states that the Court “must not” exercise its power to set aside an award, or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be “inappropriate” to remit the matters in question to the arbitral tribunal for reconsideration.

22.  There is no allegation made by P that the arbitrator was biased in any way, or not fit to determine the issues initially raised in the Arbitration.  No misconduct is alleged against the arbitrator.  The complaint is that P had been deprived of a fair opportunity to make submissions to the tribunal on whether the September Letter and November Breakdown can constitute (as found) valid notification of claims under the relevant provisions of GCC 27 and 28.  Based on the findings already made in the Award, and the challenge being confined to the issue of whether notification of claim had been given of the Disputed Amount, I cannot see how and why it would not be appropriate to remit the matter to the tribunal, for the purpose only of enabling directions to be given by the tribunal for P to make proper submissions to the tribunal on the meaning and effect of the September Letter and November Breakdown, and whether they may constitute valid notification of claims as required under the Contract, on the case of the parties as pleaded in the Statement of Claim, Statement of Defence and Counterclaim, and Statement of Reply and Defence to Counterclaim, already served in the Arbitration. Submissions in reply can then be made by M.

23.  There is express power of the Court, under s 4(3)(a) of Schedule 2, to remit the award to the tribunal for reconsideration.  In the light of such provision, there is no question of the tribunal being unable to consider the matter upon a remission by reason of its being functus officio.  Even in the absence of an express power to remit, there is authority that an award which is either set aside or declared to be of no effect is a nullity, and that the arbitration can revive or carry on as necessary (Hussmann (Europe) Ltd v Ahmed Pharaon (formerly trading as Al Ameen Development and Trade Establishment) [2002] EWCA Civ 266).

24.  In the light of my decision, paragraphs 169, 170, 172, 174 and 175 of the Award are declared to be of no effect pending and until further order of the tribunal, after hearing and considering the submissions from the parties.

25.  The costs of and occasioned by the application are to be paid by M to P, with certificate for Counsel.