XCHRX FONG ON CONSTRUCTION AND ENGINEERING CO. LTD. v. ABERCAN LTD.

HCCT118/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.118 OF 1999

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J U D G M E N T

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1. By this application the applicant, "Fong On" (who was the respondent in the arbitration) seeks leave to appeal on a question of law pursuant to section 23(3)(b) of the Arbitration Ordinance, Cap.341. If granted and if successful on the point of law, the applicant seeks a variation or setting aside of the interim award and a remission of the matter back to the arbitrator for him to apply the law as determined by this court. In practical terms, the effect would be a reversal of his decision.

The issue

2. The point concerns the construction of clause 25 of the Hong Kong Standard Form of Building Contract. The clause provides as follows :-

"25. Determination by Employer

(1) If the Main Contractor shall make default in any one or more of the following respects, that is to say:-

(a) if he without reasonable cause wholly suspends the carrying out of the Works before completion thereof, or

(b) if he fails to proceed regularly and diligently with the Works ...

then the Architect may give him a notice by registered post or recorded delivery specifying the default, and if the Main Contractor either shall continue such default for fourteen days after receipt of such notice or shall at any time thereafter repeat such default (whether previously repeated or not), then the Employer without prejudice to any other rights or remedies, may within ten days after such continuance or repetition by notice by registered post or recorded delivery forthwith determine the employment of the Main Contractor under this Contract, provided that such notice shall not be given unreasonably or vexatiously."

3. A serious dispute arose between the parties resulting in the works coming to a standstill. Each side blamed the other for the standstill. Fong On maintained that the job was more complex than originally thought and wanted to renegotiate the terms before proceeding. Abercan were insisting that Fong On should proceed on the original terms. Abercan purported to determine the contract by invoking clause 25.

4. The arbitration was heard by an experienced Hong Kong arbitrator, Mr Anthony Houghton. Relevant extracts from his carefully considered interim award are as follows :-

"The Respondent alleges that the termination of its employment was wrongful, and that therefore it is entitled to damages as a result of that repudiation by Abercan. ... It is important to note that Fong On's counterclaims proceed on the basis that Abercan's purported determination was wrongful, and that therefore Abercan were in repudiatory breach. Abercan's claims are of course premised on exactly the converse, that it was Fong On who were in default. This it seems to me is therefore the primary issue to be resolved."

On the facts he found the clause 25 notice to be invalid :-

"In the circumstances I take the view that the Clause 25 notice was served unreasonably or vexatiously and was therefore invalid. I may say however, (and this features below) that given Fong On's conduct in particular in not replying to important contractual letters, and in not setting up on site at all, it is a conclusion I would not have reached but for the circumstances revealed by the meeting held immediately after the notice was given."

On the facts he found Fong On did repudiate the contract by conduct :-

"Applying therefore the test 'whether the actions of the party in default are such as to lead a reasonable person to conclude that he [the other party] no longer intends to be bound by its provisions' I conclude that a reasonable person would have been led by Fong On to conclude exactly that. As far as Abercan were concerned, it appears to me that they too were led to believe Fong On did not intend to honour their contractual obligations."

On the facts he concluded that, although invalid for the purposes of clause 25, the notice could nonetheless be an effective acceptance of Fong On's repudiation :-

"I do not accept that Abercan's conduct, for example the issue of the letters calling on Fong On to mobilise, or the issue of the Notice of Determination itself amount to an affirmation of the contract precluding Abercan from then accepting the repudiation by Fong On. So far as the former are concerned, they were overtaken by events, or in Fong On's case most particulary the lack of any mobilisation. So far as the latter, on its construction, I find the Notice of Determination to be effective as an acceptance of Fong On's repudiation."

5. Mr Barrie Barlow for Fong On seeks leave to appeal that the arbitrator was wrong in law in concluding that where a notice was served under clause 25 which was invalid, it could not also be relied on as a valid acceptance of repudiation outside clause 25, namely at common law.

6. Thus far the submissions from Mr Barlow and Mr John Scott SC for Abercan have been largely confined to the issue of leave. The issues that would be argued on the substantive appeal have been outlined as it is necessary to understand them and consider their importance as part of the decision whether or not to grant leave.

7. A summary of the questions which would have to be answered on appeal as set out in the Notice of Motion are these :-

(a) whether or not the 10 June 1997 letter (hereafter referred to as "the 10 June 1997 Notice") constituted a valid acceptance by Abercan that the contract had been discharged;

(b) whether that Notice as a matter of fact constituted a valid acceptance that the contract had been discharged;

(c) the effect of the arbitrator's finding that the Notice had been served unreasonably and vexatiously; and

(d) whether Abercan had waived any breach and affirmed the contract by serving the Notice.

8. I have come to the conclusion that leave to appeal should not be granted in this case. I will therefore deal with the test to be applied when granting leave or not, in a little detail.

The leave test

9. For a complete statement of the test to be applied in Hong Kong, one needs go no further than the judgment of Hunter JA in In re P.T. Dover Chemical Company v. Lee Chang Yung Chemical Industry Corporation [1990] 2 HKLR 257. It was held that where leave to appeal to the court was sought only by the party aggrieved by the award of the arbitrator there is a presumption in favour of finality and against granting leave.

10. As to the presumption of finality he elaborated as follows :-

" At the top of the scale or spectrum the presumption of finality is strongest in the 'one-off' case or 'one-off' event. Typically this will concern a specially drawn contract giving rise to no point of construction: peculiar or special facts: a question of law 'in which the general market and the commercial fraternity has no interest (it merely affects the rights of the particular parties) per Lord Donaldson, M.R. in The Kelaniya [1989] 1 Lloyd's Rep 30, 32: and a question of law decided by an arbitrator chosen for his legal qualifications and arising in an international context. Then leave should be granted only if the arbitrator is, in Lord Diplock's reformulation in The Antaios p.206:

'So obviously wrong as to preclude the possibility that he might be right.'

In the simpler and more homely language of Lord Donaldson in The Kelaniya 32:

'... there is a strong presumption that they have also accepted him for better or for worse in relation to questions of law. This is not however to say that, even in a one-off case, an arbitrator is to be allowed to cavort about the market carrying a small palm tree and doing what he thinks appropriate by way of settling the dispute. What it does amount to is that the Courts will normally leave him to his own devices and leave the parties to the consequences of their choice. They will only intervene if it can be demonstrated quickly and easily that the arbitrator was plainly wrong.'

At the bottom end of the scale the presumption is weakest where the dispute arises between Hong Kong parties out of a standard form of contract in regular use in Hong Kong; turns upon the construction of that contract in the context of events which are commonplace or likely to recur; and has given rise to a question of law decided by a non-legal arbitrator, e.g. an architect or engineer. This is the classic standard case envisaged by Lord Diplock in The Nema where he said at p.743D:

'Rather less strict criteria are in my view appropriate where questions of construction of contracts in standard terms are concerned. That there should be as high a degree of legal certainty as it is practical to obtain as to how such terms apply upon the occurrence of events of a kind that it is not unlikely may reproduce themselves in similar transactions between other parties engaged in the same trade, is a public interest that is recognised by the Act particularly in s.4. So if the decision of the question of construction in the circumstances of the particular case would add significantly to the clarity and certainty of English commercial law it would be proper to give leave.'

I have cited this passage in full because to my mind it shows the true ambit of the phrase 'clarity and certainty'. It is not being used in the general sense of the resolution of some interesting point of law, or of the filling of some lacuna in the books, for the benefit of the public and lawyers generally. I would be minded to regard it as questionable whether leave should ever be given for that purpose. This phrase and 'public benefit' relate I think to a particular class of the public, to those participating in the particular group or trade that uses the common form of contract in question. In those circumstances both the parties and other participants in that trade may have both a present and a future interest in the true construction and effect of the particular clause. The courts can still on occasion play a useful role in fostering uniformity of approach. But this desirable result can only be achieved widely if arbitrators and parties can openly be informed of their colleague's decisions by the parties consenting to the publication of awards with all necessary safeguard as to identity cp Arbitration (Amendment)(No.2) Ordinance 1989 s.2E. Even in such circumstances as these leave should only be granted if a strong prima facie case of error is made out."

11. The first question to be addressed therefore is, is this a case towards the "one-off" end of the scale in which case the applicant must demonstrate the arbitrator was so obviously wrong as to preclude the possibility that he might be right, or is it towards the "standard form" end in which case a strong prima facie case that an error was made must be made out?

12. If the applicant contends that this is not a "one-off" point, and thereby be at the less stringent end of the scale, he must first comply with clause 6.2(4) of the Hong Kong Practice Directions which states :-

"4. Where the applicant contends that any question of law arising out of an award concerns a term of contract or an event which is not a one-off clause or event, he shall serve on the respondent with his notice of motion and lodge with the Court an affidavit setting out the facts relied on in support of his contention. A respondent who challenges that contention shall provide to the applicant and to the Court, not later than two clear days before the application is listed for argument, an affidavit setting out the facts upon which he relies."

13. Mr Scott makes the valid point that although the applicant has served affidavits setting out his case on appeal, the affidavits do not address the question of why the subject matter of the appeal is not a one-off situation. To be at the less stringent end of the presumption of finality, the court must be satisfied by evidence, that the appeal point is in the nature of a "hot-topic" which requires resolution for the benefit of the industry and practitioners.

14. Failure to comply with a practice direction will not be automatically fatal to an application for leave. However, the fact remains that when deciding whether this case is a one-off case or a standard form case, there is no evidence to show that the point has ever been argued before, there are no conflicting decisions and there is no averment that the alleged uncertainty in the interpretation of clause 25 is a recurring problem for those who sign the standard form contracts.

15. I will not automatically place this case at the one-off end simply because there is no evidence to say it is not a one-off case. However, an analysis of the issue itself leads me to the same conclusion. In this particular case, as found by the arbitrator, the employment of clause 25 to terminate the contract was invalid. Such a situation could only arise after an arbitrator had made such a finding. I doubt that the industry is agog waiting to hear the legal consequences of a purported clause 25 notice being ruled, as a matter of fact, to be invalid.

16. In short, it seems that, both because of a lack of evidence to the contrary and because of the particular issue, this is a "one-off" situation which has arisen because of the unusual events that occurred between these parties. As found by the arbitrator on the facts - the parties found themselves in an impasse, a purported clause 25 notice was served which was later ruled to be invalid but which was nonetheless detailed and, according to the award "the letter as a whole runs wider than a determination under clause 25 alone need do".

The application of the "one-off" test

17. In this situation, the presumption of finality is at its most difficult for the applicant to rebut. There is good reason why an applicant is faced with such a difficult task in these circumstances. The parties agreed to arbitrate their differences before a single arbitrator, and further agreed that award should be final and binding upon them. The award has been made, and the mutual interest in speedy finality in the resolution of disputes would be defeated if an appeal through the courts were too readily permitted.

18. The learned arbitrator in this case was an experienced and respected lawyer and a specialist in this field. The parties chose him and no doubt had these qualities in mind when they did so. Now the applicant seeks to demonstrate that his ruling was so obviously wrong as to preclude the possibility that he was right. Leonard J in The Garden Co. Ltd v. On Lee Construction [1995] 2 HKC 96 put it as follows :-

"If it cannot be demonstrated quickly and easily that the arbitrator is wrong, elaborate arguments are unlikely to succeed."

19. The judge on appeal is invited to make a "mere perusal" of the award to see if the arbitrator was obviously wrong. In this case, the arbitrator determined that this particular notice, framed under clause 25, but described as "running wider than a clause 25 notice need do "was an effective acceptance of Fong On's repudiation at common law in spite of it having been ruled invalid as a clause 25 notice under the contract because of the motives behind its service. Far from saying to oneself "Oh dear that cannot be right", it is more likely to be right than wrong. The core of Mr Barlow's argument is that the use of the word "other" in the phrase "without prejudice to any other rights or remedies" means that whatever other rights or remedies are preserved exclude the right to terminate at common law. The fact that the author of Keating on Building Contracts, 6th Edition, seems to take a contrary view makes it difficult for this court to conclude that the ruling was obviously wrong :-

"It is clear that this express reservation to the Employer of any other rights or remedy preserves his normal rights at common law against the Contractor. If the Contractor's conduct can properly be interpreted as amounting to repudiation of the Contract, the Employer is entitled to treat the Contract as at an end."

20. The applicant's arguments fall significantly short of the high threshold required in one-off cases and so further analysis is academic. Further analysis is also undesirable because some authority suggests that a judge ought not give reasons when granting or refusing leave (Lord Diplock on "The Antaios" [1985] AC 205). It seems preferable however, in some cases, to give brief reasons when leave is being refused.

21. My order nisi on costs is that the costs of resisting this application for leave to appeal shall be to the respondent to the appeal, to be taxed if not agreed.