HA HAU KWAN FONG MARY v. THE INCORPORATED OWNERS OF GOLDEN PLAZA

HCCT9/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.9 OF 2002

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REASONS FOR JUDGMENT

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Background

1. By an originating motion dated 25 January 2002, the applicant applied under section 23(2) of the Arbitration Ordinance, Cap.341 ("the Ordinance") to set aside an arbitration award made on 4 January 2002 by Mr Stephen Foo. The first step in this process was of course seeking leave to appeal, which is required under section 23(3) of the Ordinance.

2. At the hearing of the application for leave to appeal on 16 May 2002, I refused leave to appeal and therefore dismissed the originating motion with costs. I indicated that I would hand down the reasons for my judgment at a later date.

3. It is first necessary to go into the background of the matter.

4. The relevant arbitration concerned the premises known as Flats 6E, 6F, 6G and 6H of Golden Plaza, 745-747 Nathan Road, Kowloon ("the Flats"). The applicant was at the material time the registered owner of these premises. The respondent comprised the incorporated owners of Golden Plaza.

5. As one would expect, the rights and obligations of the building were governed by a Deed of Mutual Covenant, in this case one dated 30 January 1981 ("the DMC"). One of the restrictive covenants in the DMC was Clause 10(c) which contained in part the following prohibition :

"(c) Not to use his part of the said Building for any illegal or immoral purposes nor do or permit anything therein or thereupon which may create unnecessary noise or may be a nuisance or annoyance to or may cause damage or inconvenience to the other occupiers of the said Building ...."

6. Under Clause 19 of the DMC, the parties thereto covenanted to refer disputes thereunder to arbitration.

7. The arbitration before Mr Foo arose from the respondent's claim that, essentially, the applicant had been using the Flats or permitting them to be used as brothels or vice-establishments. The terms of reference of the arbitration were as follows :

"Whether Madam Ha Hau Kwan Fong, Mary [the applicant], the registered owner of Flats E, F, G, and H on the 6th Floor, Golden Plaza ('the said Flats') by herself, her agents, or servants or otherwise, has been using or operating or permitting or allowing to be used or operated as a brothel or brothels or as a vice-establishment or vice-establishments, the said Flats or one or more of them, and/or whether she has been using or permitting or allowing to be used the said Flats or any one or more of them for prostitution or the arrangement of prostitution, thereby breaching clause 10(c) of the Deed of Mutual Covenant."

8. Both parties agreed that the arbitration was to be by way of written submissions and evidence only. In other words, it was to be a "paper hearing". I shall later deal with the significance of this.

9. The parties accordingly placed before the arbitrator affirmation evidence and written submissions. Neither side asked for leave to cross-examine on the other's affirmations nor was an oral hearing requested. One of the defences put up by the applicant was that she was unaware of any immoral or illegal activities in Flats F, G or H since she had leased these flats to various tenants.

10. On 4 January 2002, after considering the materials before him, the Arbitrator published an "Interim Award Final Except As to Costs". His conclusion was that the applicant was in breach of Clause 10(c) of the DMC. One of his express findings of fact was that the tenancies alleged by the applicant were not genuine. Accordingly, the Arbitrator granted an injunction against the applicant in the following terms :

"IT IS ORDERED AND DIRECTED that the Respondent [that is, the applicant in the present proceedings] whether by herself, her servants or agents or howsoever otherwise, be restrained, and an injunction is hereby granted restraining her, from using or operating or permitting or allowing to be used or operated as a brothel or brothels or a vice-establishment or vice-establishments, the premises known as Flat E, Flat F, Flat G and Flat H, the 6th Floor, Golden Plaza, 745-747 Nathan Road, Mongkok, Kowloon, Hong Kong, or any one or more of those Flats, and from using or permitting or allowing to be used, any one or more of those Flats for the purpose of prostitution or the arrangement of prostitution."

11. It is from this Award that the applicant sought leave to appeal. The notice of motion was issued on 25 January 2002 containing four grounds of appeal. These grounds were amended on 5 March 2002.

The grounds of appeal

12. There were, as I have already said, originally four grounds of appeal on the basis of which the applicant sought leave to appeal. At the hearing, however, Mr Oliver Davies (for the applicant) pressed only two of these grounds :

(1) The Arbitrator erred in rejecting the applicant's evidence that she had taken steps to recover possession of the relevant flats after finding out that they were being used for immoral or illegal activities and, instead, found that the applicant had permitted the use of the premises as brothels or vice-establishments. It was argued that in the absence of any cross-examination, the Arbitrator could not reject the applicant's affirmation evidence. (Ground One)

(2) The Arbitrator also erred in making a finding that the tenancies produced by the applicant were not genuine. It was said here that the genuineness of the tenancies was not an issue before the Arbitrator, not having been disputed by the respondent. Thus, for the Arbitrator to deal with this issue was tantamount to misconduct and was not fair as the genuineness of the tenancies was not a point that the applicant had come to meet in the arbitration. It was also asserted that since the said tenancies concerned third parties not before the tribunal (i.e. the alleged tenants), it was not right for the Arbitrator to make adverse findings as to the genuineness of the tenancies and, indeed, he had no jurisdiction to make any findings against third parties not before him. (Ground Two)

13. Before dealing with these grounds, I should first set out the law applicable to applications for leave to appeal from arbitration awards.

Principles governing applications for leave to appeal from arbitration awards

14. There is no automatic right of appeal from an arbitration award. Unless the other side consents, leave is required : see section 23(3) of the Ordinance. Where the parties have entered into an exclusion agreement within the meaning of section 23B, subject to the provisions contained in that section, there is no right of appeal at all. At one stage, the applicant was invited to enter into an exclusion agreement but this was declined.

15. The courts in Hong Kong apply a stringent test in considering whether or not leave to appeal should be granted. The decision of the House of Lords in Pioneer Shipping Limited v. BTP Tioxide Limited (more commonly known as The Nema) [1982] AC 724, has consistently been applied in Hong Kong. For the applicable general principles, one really needs to look no further than that case, Antaios Compania Naviera SA v. Salen Rederierna AB (The Antaios) [1985] AC 191 and In re P.T. Dover Chemical Company and Lee Chang Yung Chemical Industry Corporation [1990] 2 HKLR 257.

16. The fundamental theme of these cases (amongst many) is that there is a presumption of finality in arbitrations. The courts have long taken the view that where arbitrations are concerned, the parties should be left to the bargain they have made (namely, the agreement to refer disputes to arbitration) for better or worse and that the court should only interfere as a last resort and as little as possible. This culture is now embodied in statute, for section 2AA of the Ordinance provides :

"2AA. Objective and principles of Ordinance

(1) The object of this Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense.

(2) This Ordinance is based on the principles that-

(a) subject to the observance of such safeguards as are necessary in the public interest, the parties to a dispute should be free to agree how the dispute should be resolved; and

(b) the Court should interfere in the arbitration of a dispute only as expressly provided by this Ordinance."

17. In Downer & Company Limited v. The Airport Authority [2000] 1 HKLRD 556, at 560, Rogers JA said, "I would only add to this that it also emerges that the notion of finality in respect of arbitration stems from the fact that arbitration is an alternative to court proceedings chosen by the parties and that the court should interfere as little as possible." Echoing the same sentiments is the passage in the judgment of Lord Donaldson of Lymington in Ipswich Borough Council v. Fisons Plc [1990] Ch.709, at 722G-H.

18. An agreement to arbitrate can be found in many different forms. Commonly, one sees it in building or shipping contracts. The present case provides perhaps an unusual example in that the arbitration agreement is found in a deed of mutual covenant. In my view, however, the principles to be applied are the same.

19. As the authorities make clear, the court's approach is first to determine just which end of the relevant scale or spectrum the application before it can be placed. The applicable scale or spectrum referred to here is whether the question before the court for which leave to apply is sought involves a "one-off" event or term of contract, or whether it is one that involves a common place event or term or otherwise has important repercussions beyond the parties to the arbitration.

20. Where the event or clause is "one-off", the court's approach is best summarised in the words of Lord Donaldson of Lymington in The Kelaniya [1989] 1 Lloyds Rep. 30, at 32, quoted in full in Hunter JA's judgment in P.T. Dover at 264 :

"... 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."

21. Where the event or clause is not "one-off" or the case has important repercussions beyond the parties, the court is more relaxed and more inclined to grant leave if it can be shown that there exists a reasonable argument.

22. In practical terms, in my view, a useful albeit somewhat crude guide to the two extremes of the spectrum can be put thus. Where a "one-off" event or clause is involved, the applicant for leave must demonstrate quickly and easily that the arbitrator was plainly or obviously wrong. Where, on the other hand, the event or clause is not one off or that the case has important repercussions, all that needs to be demonstrated is that the arbitrator was arguably wrong or that the point on appeal is capable of a serious argument.

23. The present case raises in addition the question of the extent to which appeals from findings of fact are permitted. Here, the starting point is to bear firmly in mind that as a matter of jurisdiction, the court's power of review under section 23(2) of the Ordinance is merely in relation to questions of law arising out of an award. The view has been expressed that such appeals are simply not permitted. In Mustill & Boyd : Commercial Arbitration (2nd Edition) at 596, the authors say this :

"5 Finding of fact made without evidence

There remains one question to be considered : namely, whether it is still permissible, as it was under the old system, to invoke the processes of appeal in a case where it is said that a finding of primary or secondary fact was arrived at without any evidence. If the analysis set out above is correct, we suggest that this jurisdiction should no longer be recognised. But, in any event, the courts will be likely to stifle such appeals at the stage of the application for leave, on the ground that they are out of accord both with the general principle that the arbitrator is master of the facts, and with the specific commercial aims of the new system."

24. In Universal Petroleum Limited v. Handels und Transport GmbH [1987] 1 WLR 1178, at 1187, this passage was approved by Kerr LJ, although it was said that the second sentence may have gone too far. Even under the old system, appeals on the question of fact were discouraged and severely curtailed; this is all the more so under the present system : see Mondial Trading Company GmbH v. Gill & Duffus Zuckershandelsgesellschaft mbH [1980] 2 LLR 376, at 379(1). In my view, while it is possible to classify as a question of law arising out of an award, an argument that the arbitrator has made a finding without any evidence to support it (and therefore no reasonable arbitrator could have made such a finding : cf. Edwards v. Bairstow [1956] AC 14), the following must firmly be borne in mind :

(1) Such an appeal would invariably be a "one-off" type of situation, since a question of fact is ultimately involved.

(2) In most, if not in all, such cases, it will simply not be sufficient for the applicant merely to demonstrate that on the preponderance of the evidence, the arbitrator should or should not have made the relevant finding. The finding must really be so bizarre that no reasonable arbitrator could have made it, such as, for example, where there was simply no evidence or reason for the finding of fact to be made. But for this scenario, it will not in my view be possible to obtain leave to appeal based merely on findings of fact made by an arbitrator, whether primary or secondary.

25. With these principles in mind, I now turn to the two grounds of appeal submitted by the applicant.

Ground One

26. Mr Davies submitted that the question whether the Arbitrator was entitled to reject the applicant's affirmation evidence in the absence of cross-examination, was a question of some importance which made the case not a "one-off" situation.

27. Attractively though this was presented, I cannot accept it as a matter of principle :

(1) Where affirmation or affidavit evidence is used in an arbitration, it is entirely open to an arbitrator whether or not to accept such evidence. Evidence contained in affidavit or affirmation form may be rejected even in the absence of cross-examination if it is, for example, internally inconsistent, inherently improbable, inconsistent with other evidence, contrary to common sense or simply unbelievable. Here, a useful analogy can be drawn with the court's approach in applications for summary judgment under RHC, Order 14 : see Hong Kong Civil Procedure 2002, at paragraph 14/4/9.

(2) This approach becomes all the more applicable where, as in the present case, the parties have agreed to have a paper hearing in the arbitration. At no stage did either party ask to change that even though it was open to them to do so : see Mustill & Boyd, at 301 n.13.

28. Thus, this ground of appeal, when properly analysed, amounts to no more than an attempt to disturb the Arbitrator's findings of fact. The court is therefore faced with a "one-off" situation.

29. Seen in this context, there is in my view no basis whatsoever to grant leave to appeal :

(1) As I understood Mr Davies' submissions, it was not really suggested that the Arbitrator made any findings of fact without any evidence to support them. There is accordingly in any event no question of law involved in the present appeal.

(2) Even if it had been submitted that the Arbitrator had made findings of fact without any evidence, such a submission would be plainly wrong. As shown in the Award itself, there was ample evidence for the Arbitrator to make findings of fact enabling him to conclude that the applicant was in breach of the DMC. It is unnecessary for me to set out all those facts and matters which enabled the Arbitrator to reach the conclusion he did. For example, he found the evidence of the applicant unreliable, being at times contradictory. He was of the view that it was too much of a coincidence that for two years, Flats F, G and H had been used as brothels or vice-establishments without the applicant's consent, particularly when during at least part of the period in question, on her own evidence, she lived in Flat E which was adjacent to the flats in question. He also found too much of a coincidence the fact that after the applicant had purportedly terminated the tenancies of Flats F, G and H, by reason of the immoral or illegal user, not only did she pay a $30,000 compensation to the tenant, she apparently leased all three flats on the same day to different persons who also happened, as it turned out, to operate brothels or vice-establishments. This is not to mention the fact that the applicant herself had admitted operating Flat H as a brothel between November 1996 and September 2000.

(3) As I have said, I do not set out all the facts that impressed the Arbitrator. It is enough for me to say that there was sufficient evidence before him to make the findings he did.

(4) I should perhaps finally add, in relation to this ground, that even if somehow the case was not a "one-off" case, I would not have granted leave to appeal either. No reasonable argument can be made out that the Arbitrator erred in his findings of fact.

Ground Two

30. In my judgment, there is no substance in this ground either.

31. Again, Mr Davies submitted that this ground raised matters which made the case not a "one-off" one. Specifically, it was argued that the Arbitrator was wrong to make a finding as to the genuineness of the tenancy agreements of Flats F, G and H when this was not an issue raised before him and when third parties not before him were involved as well.

32. I accept where an arbitrator has made adverse findings on matters that were not in fact controversial, an award may be set aside under section 25 of the Ordinance since there may be misconduct (see The Vimeira [1984] 2 Lloyds Rep. 66). However, this principle is inapplicable in the present case. The applicant's main (if not only) defence was that she had no knowledge of or any part in the activities that took place in Flats F, G and H. In support of this, she produced tenancy agreements ostensibly showing that she had genuinely let these flats to tenants. It was therefore for the applicant to prove to the Arbitrator that the tenancy agreements were genuine and this was accordingly very much a live issue for the Arbitrator to determine. At no stage did the respondent, for its part, accept that the tenancy agreements were genuine. Not only is this apparent from the written submissions made by the respondent but it was also the crux of the respondent's case that the applicant was herself involved in the activities that took place in these flats. It was therefore implicit in the respondent's case that the genuineness of the tenancy agreements was in issue.

33. As for the point regarding third parties (meaning the tenants of the relevant flats), I do not understand the objection made by the applicant here. Arbitrators (and the courts) frequently make decisions on documents or agreements that may concern parties not before them but whatever the decision, this would only bind those parties actually before the tribunal. In other words, the decision of an arbitrator does not bind third parties not before him.

Final matters

34. In the present case, as I have said, the applicant applied for leave to appeal by means of an originating motion. This was the correct procedure under RHC, Order 73, rule 2(1)(d). Under this procedure, the hearing of the application takes place in open court unless an application is made under section 2D of the Ordinance for the matter to be heard in chambers.

35. This provision is to be contrasted with Order 73, rule 3(2)(a) which states that applications for leave to appeal should be made either by summons in an existing action or by an originating summons in expedited form, and in any event to be heard by a judge in chambers.

36. This anomaly was pointed out by Leonard J in Carl International (HK) Ltd v. Ernest Komrowski & Co. [1996] 2 HKC 490, at 492-494. The learned judge concluded that Order 73, rule 3(2)(a) was an oversight. He further stated by way of guidance to the profession that a party wishing to apply for leave to appeal should do so using the Order 72, rule 2 procedure. Indeed, Practice Direction No.6.2 relating to applications for leave to appeal from arbitration awards, refers only to notices of motion.

37. With respect, I agree that the continued existence of Order 73, rule 3(2)(a) is an oversight and that, as a matter of practice, the procedure set out in Order 73, rule 2(1)(d) should be followed. This would enable, as Leonard J pointed out in Carl International, two documents to be combined into one : both the notice of appeal from the relevant award and the application for leave to appeal (see Order 73, rule 2(2)).

38. On the other hand, if the procedure in Order 73, rule 3(2)(a) were to be used, then two documents will have to be issued, namely, the notice of motion giving notice of an appeal (Order 73, rule 2(2)) and the originating summons asking for leave to appeal (Order 73, rule 3(2)(a)). This is not only cumbersome but potentially a trap for the unwary. In the latter regard, I refer to Order 73, rule 5(2) which imposes a time limit of 21 days from the date of the relevant award within which the notice of an appeal (required under Order 73, rule 2(2)) must be served and the appeal entered. It is a trap for the unwary because, as happens from time to time, applications for leave to appeal are served within the 21 day limit (when ironically no time limit exists for the service of this application) but not the notice of an appeal as required by Order 73, rule 2(2). Yet it is the notice of motion giving notice of an appeal that must be served within the 21 day limit.

39. Though its existence may be an oversight, Order 73, rule 3(2)(a) remains and cannot be ignored. It is hoped that eventually the Rules will be amended to get rid of the anomaly I have pointed out.