CHUN WO FOUNDATIONS LTD v. BPL (HK) PRIVATE LTD

HCCT 59/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS
NO. 59 OF 2002

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J U D G M E N T

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1. By a re-amended Notice of Originating Motion dated 6 June 2002 the Applicant applied under section 23(2) of the Arbitration Ordinance, Cap. 341 ("the Ordinance") to set aside an arbitration award made on 17 May 2002 by Mr. Anthony Houghton. The Applicant sought leave to appeal under section 23(3)(b) of the Ordinance.

2. The arbitration concerned a contract between the Applicant and the Respondent to build foundation work ("the Contract").

3. The Kowloon-Canton Railway Corporation engaged the Chun Wo-Fujita-Henryvicy Joint Venture ("the Joint Venture") to construct Tin Shui Wai Station. The Applicant was a sub-contractor to the Joint Venture, having been engaged to construct foundation works for the project.

4. The Applicant then engaged the Respondent as its sub-contractor (i.e. sub-sub-contractor to the Joint Venture) to undertake part of those foundation works by the Contract in December 1999. The Contract was based substantially upon the Applicant's standard form of contract but was varied in several respects by agreement, of which particulars are set out under 8 below.

5. Disputes arose between the Applicant and the Respondent as to inter alia the quantity and quality of work done by the Respondent. The Respondent left the site on 29 September 2000 before completion of the work. The Respondent alleged that the Applicant had repudiated the Contract and accepted the repudiation. The Applicant alleged that the Respondent had wrongfully terminated the Contract. The dispute was referred to arbitration as provided for in the Contract.

6. By agreement between the parties, Mr Anthony Houghton, a barrister and chartered quantity surveyor, was appointed to arbitrate the dispute ("the Arbitrator").

7. The Interim Award and Reasons for Award were issued on 17 May 2002.

8. The Contract contained specific terms as to payment by the Applicant to the Respondent of the contract sums. Those terms, some of which, were supplemental to those appearing in the Applicant's standard form of contract, were set out in the following parts of the Contract:-

(a) Clause 11.3 of the Contract

"The quantities certified to the Sub-contractor shall be in no way greater than that certified by the Engineer in the respective period. Payment shall be made to the Sub-contractor within 14 days after the Contractor receives the same from the Employer. The receipt of payment from the Employer is the condition precedent for payment to the Sub-contractor."

(b) Clause 9 of the Letter of Acceptance dated 28 July 1999

"Payment terms: Payment shall be made to the Sub-contractor within 14 days after receipt of payment from the Employer. The receipt of payment from the Employer by the Contractor is a condition precedent for payment to the Sub-contractor."

(c) Clause 9 of the Minutes of a meeting between the parties on 16 August 1999

"Payment: The progress claim would be on a monthly basis. Payment would be made within 30 days after submission of progress claim or invoice. (The calculation of 30 days is 15 days for payment made by the Employer to CW and 15 days for CW to make payment to BPG and the payment by the Employer to CW is condition precedent of the payment by CW to BPG)."

(d) Sixth Schedule to the Contract

"Time for payment to Sub-contractor
Within 14 days after the Contractor has received from the Employer payment for the works of the Sub-contractor as certified by the Engineer."

9. The Applicant claimed these to be standard terms known as "pay when paid" provisions in the industry. The Respondent claimed that they were not and that they differ in substantial respects from such standard clauses.

10. It is apparent from:

(a) Paragraphs 1(1) and (2) of the re-amended Notice of Originating Motion;

(b) Paragraphs 11-17 of the affidavit of Pong Chung Bon Brian; and

(c) the submissions of leading counsel for the Applicant; that the main thrust of the application for leave is that:

(i) the validity of the conclusion of the Arbitrator in respect of the "pay when paid" provisions of the Contract were erroneous; and

(ii) the payment provisions in the Contract are of such significant and general importance; that leave to appeal should be granted.

11. The Arbitrator found in favour of the Respondent on the "pay when paid" issues and found the Applicant to have been in repudiatory breach of the Contract.

12. On those issues, the Applicant's grounds of appeal are that:-

(a) On a true construction of all the terms of the Contract the Respondent's right to interim payments should not correspond to payment of such amounts as were actually received by the Applicant i.e. "pay when paid" relates to time and not amount; and

(b) The Applicant was entitled under the Contract to set-off amounts due to it from the Respondent; and/or

(c) The Respondent had repudiated the Contract.

13. It was submitted on behalf of the Applicant that although the matters raised by Paragraph 1(3) - (11) of the re-amended Notice of Originating Motion may fall outside the ambit of matters of general and public importance, leave should nevertheless be granted to pursue such grounds in the appeal.

14. Leave is required to appeal against an arbitration award - section 23(3) of the Ordinance. The test of whether leave should be granted is stringent. Where parties decide to submit to arbitration, they must bear the consequences of that choice and any intervention by the courts should only be in exceptional and minimal circumstances. The presumption that the parties desire finality by arbitration should be upheld.

Pioneer Shipping Limited v. BTP Tioxide Limited ("The Nema") 1982 AC 724

Antaios Compania Narvera SA v. Salen Rederierna AB ("The Antaios") 1985 AC 191

Lee Chang Yung Chemical Industry Corp v. PT Dover Chemical Co. ("PT Dover") 1990 1 HKC 132

Section 2AA of the Ordinance

15. The presumption of finality in arbitration is measured on a spectrum or sliding scale, the high point being one-off situations and the lowest point being situations that are commonplace or are of general public importance.

16. The test is much higher for cases falling within the one-off situation. In The Nema (supra) Diplock LJ said at 742H - 743A:

"Where ....... a question of law involved is the construction of a "one-off" clause the application of which to the particular facts of the case is an issue in the arbitration, leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the tribunal that they had chosen to decide the matter in the first instance."

This was re-affirmed in the Hong Kong case of PT Dover (supra) at 140 A-E 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 MR in The Kelaniya 1989 1 Lloyd's Reg 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 at 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 at p. 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."

17. In cases falling within the lower end of the spectrum, the presumption is far less and the court takes a more lenient view. In The Nema (supra) it was said at 743D that:

"rather less strict criteria are ....... appropriate where questions of construction of contracts in standard terms are concerned"

and at 743F:

"But leave should not be given even in such a case, unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction; and when the events to which the standard clause fell to be applied in the particular arbitration were themselves "one-off" events, stricter criteria should be applied on the same lines as those that I have suggested as appropriate to "one-off" clauses."

This was confirmed in The Antaios (supra) at 203G-H and dealt with at some length in PT Dover (supra) at 140F:

"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, eg. an architect or an engineer."

But the Court was careful to caution that there are clear limitations to this exercise at 140I:

"It (should) not be 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."

The Applicant's submission that a definitive judgment on "pay when paid" clauses in construction contracts is important for the industry generally and has long been called for in cases before the courts, must be seen against that warning by Hunter JA.

18. Paragraphs 1(1) and (2) of the re-amended Notice of Originating Motion are relevant to the application for leave to appeal. They deal with the "pay when paid" provisions of the Contract and, in my judgment, are the only grounds of appeal that fall for proper consideration in a leave application. The other grounds deal with factual issues arising out of the first two grounds e.g. paragraphs 1(3) and (4) depend upon whether the Applicant succeeds on its "pay when paid" argument, and paragraphs 1(4A) and (4B) depend upon whether the Applicant fails on that argument.

19. The Applicant contends that:-

(a) The Arbitrator erred in his interpretation of the payment terms of the Contract.

(b) The Arbitrator erred in finding that the Applicant was in breach of the Contract entitling the Respondent to repudiate it.

(c) The issue falls within the lowest threshold relevant to the grant of leave to appeal i.e. it concerns the construction of a standard form provision upon which the Arbitrator was plainly and obviously wrong.

(d) The matters in dispute did not involve "one-off" issues.

20. It was not in dispute that the Applicant had received payment from the Joint Venture in respect of work done by the Respondent. The Applicant set-off from that sum amounts which it claimed represented loss caused by the Respondent's failure to fulfill its obligations under the Contract. The Applicant then paid the balance to the Respondent.

21. The Respondent claimed that:

(a) the Contract fell within the "one-off" category; and

(b) the Applicant was obliged to pay the total amount that it had received from the Joint Venture without deductions and to do so upon receipt of the same i.e. the "pay when paid" provisions related to both time and amount.

The Applicant claimed that it was entitled to make relevant deductions and that the "pay when paid" provisions related to time but not amount. The Arbitrator found in favour of the Respondent.

22. The Respondent produced at the hearing of the leave application the industry's printed standard form of building contract for Hong Kong between contractors and sub-contractors. Clause 11(b) deals with interim payments to sub-contractors. Whilst the language is not identical to the terms in 8 above, the terms are very similar (but not identical to) the terms of Clause 11.3 and the Sixth Schedule of the Contract. But the Applicant's contention that the terms of the Contract entitled it to make the deductions that it did, in my judgment, clearly extended the ambit of interpretation of the terms to include the right of set-off. In so doing it seeks to upset the Arbitrator's findings of law and fact. In my judgment this brings the issues squarely within the "one-off" situation and therefore puts them at the higher end of the spectrum.

23. Applying the principles on that basis in The Nema (supra) and PT Dover (supra), I am not satisfied:

(a) "that the meaning ascribed to the clause by the arbitrator is obviously wrong" - The Nema at 742H;

(b) that the Arbitrator's findings were "so obviously wrong as to preclude the possibility that he might be right" - PT Dover at 140C;

(c) that the Applicant has "demonstrated quickly and easily that the arbitrator was plainly wrong" - PT Dover at 140E.

In my judgment, the Applicant, therefore, fails to meet the threshold requirements for leave to appeal.

24. Even if I were satisfied that the matter fell purely within the ambit of construction of a standard term contract where less strict criteria apply to lower spectrum situations, "leave should only be granted if a strong prima facie case of error is made out" - PT Dover at 141C.

25. It was submitted on behalf of the Respondent that the Arbitrator had open to him four potential interpretations of the relevant provisions of the Contract (paragraph 8 of the Skeleton Submission on behalf of the Respondent). I agree and I am unable to conclude for the purposes of this application that these are without merit i.e. "leave should not be given ...... unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction" - The Nema (supra) at 743F.

26. In low spectrum cases involving standard form contracts and/or commonplace disputes the expertise of the arbitrator may be relevant to considerations of the applicable scale level for consideration. In this case, the Arbitrator was a barrister and chartered quantity surveyor with extensive arbitration experience who was chosen and agreed upon by the parties.

27. In my view there is no basis upon which to grant leave to appeal and the application is therefore refused.

28. I make an order nisi for the costs of the application to the Respondent.