CHAN MAN YIU AND ANOTHER v. KIU NAM INVESTMENT CORPORATION LTD. AND ANOTHER

HCCT 110/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.110 OF 2000

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J U D G M E N T

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1. On 13 October 1999, these parties agreed to refer a dispute which existed between them to arbitration. The preliminary stages of the arbitration took their normal course, including the appointment of the arbitrator, Mr Hubert Woo ("Mr Woo").

2. It later transpired that Mr Woo was a very close friend of Mr B.W. Choy ("Mr Choy") who was the authorized representative and expert witness for the respondents. Mr Choy had been the person responsible for the works which were the subject matter of the dispute, on behalf of the respondents. The closeness of the relationship is illustrated by the facts, (not challenged) that Mr Woo, a barrister, had represented Mr Choy in litigation on a number of occasions in the last eight years, they had known each other for 25 years and had lunched together on a very regular basis. These facts were not known to the applicants at the time of Mr Woo's appointment.

3. Mr Woo had been formally appointed on 26 January 2000. The facts which caused the applicants concern only came to light in August and September 2000. After an exchange of correspondence, the applicants found it necessary to take out this originating motion on 16 October 2000. The motion seeks the following relief :

"(1) An Order that Mr. Hubert Woo ('the Arbitrator'), the sole arbitrator appointed in reference to the arbitration between the Applicants and the Respondents under the arbitration agreement contained in Clause 20 in a Deed of Grant of Mutual Rights and Covenants dated 11 December 1968 registered in the Land Registry by Memorial No.657002, be removed on the ground that he has misconducted himself and/or the arbitration proceedings.

(2) An Order that the said arbitration agreement shall cease to have effect with respect to the dispute existing between the Applicants and the Respondents and that they be at liberty to resolve the said dispute by court proceedings.

(3) An Order that the costs arising out of and incidental to the said arbitration proceedings incurred by the Applicants be paid by the Respondents on an indemnity basis.

(4) An Order that the costs of and incidental to this application of the Applicants be paid by the Respondents on an indemnity basis."

4. At the beginning of the hearing, all matters, except costs, were settled on the following terms :

(1) The appointment of Mr Hubert Woo on the terms of the appointment dated 26 January 2000 and exhibited to the affirmation of Lee Hung Sang filed herein on 16 October 2000 as exhibit "LHS-4" be terminated forthwith.

(2) Another sole arbitrator to take the place of Mr Hubert Woo be appointed from the ranks of senior practising members of the Hong Kong Bar by consent between the parties within 28 days from the date of this Order; failing such appointment, the chairman of the Hong Kong Bar Association shall be asked to nominate a senior practising member of the Hong Kong Bar for appointment.

(3) Subject to any direction of the new arbitrator to be appointed, all the pleadings and documents filed and all the procedural steps taken in the arbitration proceedings conducted before Mr Hubert Woo shall be adopted for use in the arbitration proceedings conducted before the new arbitrator.

(4) The parties do have liberty to apply for further directions until the appointment of the new arbitrator as provided for in paragraph (2) above.

5. As a result, the arbitration will continue with a new arbitrator to be agreed by both parties.

6. On the unresolved question of costs, there are two issues :

i) Who should pay the arbitration costs thrown away as a result of a change of arbitrator?

ii) Who should pay the costs of the originating motion?

Costs thrown away in the arbitration

7. I have no doubt the respondents should bear these costs. However, I do not expect they will be particularly high. The parties have very sensibly agreed that pleadings etc. already prepared should stand in the new arbitration. The only costs "thrown away", therefore, will be those incurred in the appointment of Mr Woo and the ensuing correspondence concerning the appropriateness of his role as the arbitrator. Should any disagreements arise as to whether an item of costs falls under this heading or not, it will be for the newly appointed arbitrator to resolve in the arbitration. In principle, my order as to costs in the arbitration is that - those costs thrown away be to the applicants.

Costs of the originating motion

8. Mr Simon Yip, counsel for the respondents, relies on the letter from the arbitrator dated 20 October in which he said :

"If both parties has lost confidence in me as their arbitrator and both parties wish me to step down, I am willing to do so."

9. This is clearly an offer by the arbitrator to step down. Mr Yip's submission is that it should have been accepted and the applicants should have abandoned their claim that the arbitration agreement shall cease to have effect. If this had been done, it may have been unnecessary to come to court. The settlement on the day of the hearing is, effectively in such terms.

10. Mr Patrick Fung SC, for the applicants, makes three points :

i) The offer to stand down only came from the arbitrator, not from the respondents and it was only an offer made if both parties had lost confidence in him and if both parties wished him to stand down.

ii) Even if the offer had been accepted, there was no agreement concerning the costs incurred up to then, whether they be the costs of the arbitration or the costs of the originating motion. A failure to agree costs has made the hearing unavoidable.

iii) The respondents' stance, both in correspondence and by affirmation was uncompromising. They stated specifically that they did not concede any irregularity. This is a position which is still maintained for the purposes of this costs argument.

11. I have no doubt that Mr Woo should have declined the appointment from the outset. Had the applicants known of the relationship between him and Mr Choy, they would obviously not have agreed to his appointment. Any suggestion that Mr Woo could have remained as the arbitrator is unrealistic. Even if there had been no actual bias, the perception of possible bias is overwhelming.

12. On 16 October, the only option open to the applicants was to take out the motion. For the reasons relied on above ((i)-(iii)), I will make an order for costs in the applicants' favour, but for the two reasons which follow, I will not allow them all their costs -

(i) paragraph (2) of the motion was unrealistic and should not have been pursued. In the settlement at the door of the court, it was very sensibly abandoned. There is no basis on which a court could declare that an arbitration agreement shall cease to have effect simply because one particular arbitrator failed to declare an interest and had to be replaced; and

(ii) by not following up Mr Woo's conditional offer to stand down on 20 October, an opportunity to save costs was lost. It cannot be said with certainty that costs would have been saved, however, the opportunity was lost. If, for example, the settlement had been reached before coming to court, except for the issue of costs, only a one hour appointment would have been necessary and not a one day appointment.

13. My costs order in the originating motion is as follows :

i) costs up to 20 October 2000 be the applicants; and

ii) from 20 October 2000, the respondents shall bear their own costs and 50% of the applicants' costs.