UDL CONTRACTING LTD v. WATER SUPPLIES DEPARTMENT OF THE GOVERNMENT OF THE HKSAR

HCCT 28/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO. 28 OF 2008

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J U D G M E N T

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I.   Introduction

1.  UDL seeks leave to appeal against the Interim Award dated 9 May 2008 of Mr. Anthony Houghton SC (the Arbitrator).  By the Award the Arbitrator determined the following:

(1) The Government’s Water Supplies Department (WSD) owed a principal sum of $6,109,544.54 to UDL under a Contract 1/WSD/94(3).

(2) WSD also owed UDL interest of $639,690.71 on the principal sum.

(3) Subject to matters of set-off arising by reason of a Scheme of Arrangement, the principal sum and interest remained due and owing to UDL.

2.  UDL says that the Arbitrator erred in actually assessing interest as opposed to merely determining an applicable rate.  This being a one-off matter, to obtain leave to appeal, UDL must show that the Award appears to be obviously wrong on interest.

II.  Background

3.  The Contract was entered into in 1994 for the provision of certain water works in Hong Kong.  Differences having arisen with WSD, UDL issued a Notice of Arbitration in September 1999.

4.  But, before the arbitration could get far, due to financial difficulty, a Scheme of Arrangement was implemented in relation to UDL with the sanction of the High Court on 18 April 2000.  The Scheme became effective on 28 April 2000.

5.  Clause 37 of the Scheme provides that mutual credits or debts arising between UDL and any creditor before the Effective Date are to be set-off against each other.  This would have the consequence that “only the balance, if any, of the account shall be provable as a Claim if such balance is payable by [UDL] ... or, as the case may be, shall be paid by the Proving Creditor to [UDL]...”

6.  Pursuant to the Scheme, WSD lodged a claim for some $168 million said to be due to it from UDL.

7.  The Arbitrator awarded interest of $639,690.71 based on a calculation over a period up to the Scheme’s Effective Date. 

III.  DISCUSSION

8.  UDL says that the Arbitrator was wrong to have regarded UDL as not being entitled to interest beyond the Effective Date. According to UDL, such conclusion on interest was outside the scope of the Arbitrator’s jurisdiction.  The conclusion (UDL submits) confused the wholly separate roles of the Scheme Administrator with that of the Arbitrator.

9.  During the Arbitration WSD did not dispute that it owed a principal sum of $6,109,544.54 to UDL.  WSD instead argued that it was entitled to set-off such amounts as were assessed due to it under the Scheme against that principal sum.  WSD’s position was that, given the amounts due to it under the Scheme would be in the order of at least $70 million, nothing was due from WSD to UDL.  On the contrary, there was a significant net balance due from UDL to WSD. 

10.  On interest, WSD contended that none could be accruing due to UDL on the principal sum as at the Effective Date.  This was because (WSD pointed out), by clause 37 of the Scheme, there would be a mutual setting-off of the $70 million or so due from UDL to WSD against the principal and interest (up to the Effective Date) due from WSD to UDL.  By any reckoning the former (WSD suggested) would more than extinguish the latter.  There would then be (WSD concluded) no balance after the Effective Date upon which interest could accrue in UDL’s favour.

11.  The Arbitrator essentially accepted WSD’s reasoning. 

12.  In an earlier Decision on Jurisdiction dated 8 January 2008, the Arbitrator had held as follows:

“23.   What is also clear however is that until such time as the actual balance is known, there can be no final determination of the amount that may be due from [WSD] to [UDL], if anything at all.  But this does not relate to my jurisdiction, this relates to the merits (and perhaps quantification) of the proposed set off defence.  The actual balance of account, both parties agree, is a matter that lies within the province of the Scheme Administrators.  To make out a set-off defence [WSD] must be able to establish something less onerous, namely that a balance lies in favour of [WSD].  Its amount need not necessarily be completely ascertained. As matters stand, and indeed until the Scheme Administrators make a decision as to the balance position, I am able to say, it appears, that there is a sum of $6,109,544.64 due from [WSD] to [UDL] under this contract, subject to the question of the set off, and at some stage it will become clear whether (and if so, when) that has been extinguished by the set off. The determination as to whether the claims and cross claims in the Scheme of Arrangement cancel each other out or result in a balance one way or the other is to be made by the Scheme Administrators of course.

24.    The set off issue also appears to have an impact on the question of interest, a topic which has been touched on in the submissions of the parties.  On the fact of things there will have been an entitlement to interest from the date at which payment ought to have been made by [WSD].  But, again, prima facie, this will have ended at such time as the set off relied on became operative.  As referred to above, it is [WSD’s] position that this pre-dates the Notice of Arbitration, but of course there is the possibility that the set off may not, at the end of the day, extinguish the sums due to [UDL].”

13.  Although they are not entirely clear, I understand by the passages quoted that the Arbitrator was of the view that he had jurisdiction to adjudicate (that is, he was “able to say”) in a general way on the set-off being asserted by WSD. 

14.  The precise dollars and cents of any particular balance would (the Arbitrator accepted) be for the Scheme Administrator to determine in accordance with the Scheme.  But the Arbitrator thought that he could undertake the “less onerous” task of determining what principal and interest were due from WSD to UDL and when such principal and interest might be extinguished (if at all) by any set-off.

15.  There was no appeal against the Arbitrator’s ruling on jurisdiction.

16.  In the Award, the Arbitrator amplified the jurisdictional parameters that he had already demarcated in his January 2008 Decision.

17.  He first referred to evidence in the form of a letter dated 24 September 2007 from the Scheme Administrator.  That letter stated that, of WSD’s claims of over $168 million, the Scheme Administrator had “assessed” a net sum of $71,730,135.41 as being due from UDL to WSD (taking account of the principal sum of $6,109,544.64).

18.  From this the Arbitrator concluded (at §30) that:

“no conceivable sum of interest added to the [principal] sum which is admitted [by WSD] to be due [to UDL] under this contract could expunge the balance [of over $70 million] in favour of [WSD].  In other words, on any sensible view [WSD] has a set off that exceeds the value of the claim.”

19.  The Arbitrator then continued:

“31.   I do not accept that I can disregard the Scheme of Arrangement in light of the way the case has been pleaded.  The entitlement to payment of the relevant sum is plainly an issue between the parties, albeit a slightly different issue to that described in the Notice of Arbitration.  It would be wholly artificial to pronounce the sum claimed as being now due and payable in terms that envisaged a payment being made, and to purport to give directions for payment of that sum without having regard to the position under the Scheme of Arrangement.

32.    The Scheme of Arrangement, as with such schemes generally is a mechanism introduced pursuant to statute and orders of the court for the regulation of the affairs of insolvent companies. [WSD] in submissions asserts that the arrangement has ‘statutory force’ and, as a matter of law, overrides what would have been the position as between the parties but for the Scheme.  [UDL’s] position of course is in effect that the arbitration should be treated as being confined to the contractual arrangements between the parties.  My role, on such a view is to determine whether the relevant sums are payable under the contract.  it would be for the Scheme Administrator to then consider the disposition of the monies once paid.

33.    [UDL] also submits that accepting the proposition that clause 37 of the Scheme is to be given effect in the arbitration would be to preclude arguments from being made to the Scheme Administrator as to the meaning of clause 37 and its application.  I do not see that to be the case.  Whether the sums in question are physically paid or not does not seem to me to be relevant to any argument as to their disposition or accounting in the context of the Scheme.  That however is not a matter for me.

34.    It seems to me however to be clear that the fact that [WSD’s] set-off arises from a Scheme of Arrangement makes it no less of a defence than would be the case were it a common law or a contractual set off. It might arise out of a separate (but otherwise connected) contract or, as here out of an insolvency arrangement. In either case the contract or the scheme would be under the jurisdiction of others.  But if the existence of the set off is established to the appropriate standard then the defence will have been made out.

35.    To me it is clear that [WSD] has done so in this case.  As of the date of the Scheme of Arrangement [WSD] had available to it the set off on which it now relies.  This is not a matter of usurping the role of the Scheme Administrator who, I accept, has determined the liabilities as between the parties with the exception of this matter.  In doing so he has found that [UDL] owes substantial sums to [WSD].”

20.  The Arbitrator concluded (at §39) that:

“prior to 28th April 2000 the principal sum of $6,109,554.64 was due from [WSD] to [UDL]....  After that date the Scheme took effect resulting in the position ... whereby [UDL’s] claim became expunged.”

21.  This had the consequence (at Award §40) that, immediately before UDL’s claim on the principal sum became expunged, “there was a period up to 28th April 2000 when ... the sum due to [UDL] was eligible for interest”.

22.  Ms. Roxanne Ismail (appearing for UDL) criticises the Arbitrator for concluding that UDL’s claim had been expunged.  This in effect meant that the Arbitrator determined the balance after set off as well as the interest payable by reference to such determination of a balance.

23.  Ms. Ismail suggests that this is wrong because WSD’s claims under the Scheme are challenged by UDL.  Those claims may yet be found to be nil or negligible.  In that case, there would be no expunging of the principal sum owing to UDL by WSD.  Interest would then accrue to UDL on any net balance in its favour.

24.  To the extent that the Arbitrator relied on an “assessment” by the Scheme Administrator as evidenced in the letter of 24 September 2007, Ms. Ismail says that the Arbitrator acted upon a wrong basis of fact.

25.  Following publication of the Award, UDL’s solicitors wrote to the Scheme Administrator’s solicitors on 22 May 2008.  They received the following response on 28 May 2008:

“In your letter of 22 May 2008 you made two specific requests of the Scheme Administrator:-

(1) To clarify whether ‘the Scheme Administrator has determined the liabilities as between the parties ....’

Under Clause 33 of the Schemes, the Scheme Administrator is required to await the arbitrator’s decision or, if applicable, the ultimate and final decision of the relevant appellate body before making a final determination of the relevant Proving Creditor’s Claim.

....

In relation to the final paragraph of your letter, having regard to our response to (1) above, we should be obliged if you would keep us informed as to any appeal against the Interim Award.”

26.  The Arbitrator (Ms. Ismail says) should not have taken account of any “assessment” mentioned in the September 2007 letter. In any event, in acting upon the “evidence” of such letter, the Arbitrator (Ms. Ismail submits) made an “egregious error of fact” (namely, that there had been a “final determination” of what was due to the WSD from UDL). It would offend against a sense of justice (Ms. Ismail suggests) if leave were not given to appeal against such egregious error.

27.  I am not persuaded by Ms. Ismail’s submissions.  I do not see an obvious error on the part of the Arbitrator.

28.  First, it seems to me that the parties are bound by the Arbitrator’s January 2008 Decision on jurisdiction. 

29.  In that Decision the Arbitrator rejected the suggestion that he should ignore any set-off under the Scheme.  The Arbitrator held that he had jurisdiction to consider, at least impressionistically, without condescending to the level of dollars and cents, the nature and extent of any likely set-off available to WSD under the Scheme.

30.  There has been no appeal against that Decision.  Accordingly, I doubt that UDL can now say that the Arbitrator should have ignored any likely set-off available to WSD under the Scheme, including the probable expunging at the Effective Date of the principal sum due to UDL.

31.  Second, the Arbitrator took the approach which he sketched out in his January 2008 Decision and amplified in his Interim Award, on practical and commonsense grounds. 

32.  He stressed that it would be “wholly artificial” to hold that UDL was owed the principal sum and interest in a vacuum ignoring any likely consequences arising out of the Scheme.  It would be wrong (the Arbitrator held) “to purport to give directions for payment” of any principal sum and interest to UDL, when the reality in all likelihood was that WSD was owed a far greater sum by UDL.

33.  The Scheme was something which the Arbitrator had to take into account, much like a statute which “overrides what would have been the position between the parties but for the Scheme”.  This could not be encroaching upon the jurisdiction of the Scheme Administrator, because (according to the Arbitrator) he was not determining any final actual balance (in dollar and cent terms) standing due from one party to another.

34.  I find the Arbitrator’s logic summarised above difficult to fault.  I do not think that I can characterise his reasoning as obviously wrong.  Nor do I think that it can be said that the Arbitrator plainly encroached upon the Scheme Administrator’s jurisdiction and exceeded his own.

35.  Third, the Arbitrator took his cue as to the likelihood of an enormous balance in WSD’s favour from the Scheme Administrator’s September 2007 letter.  That letter speaks of an “assessment” as opposed to a “final determination” having been made.

36.  Obviously, the Scheme Administrator’s “assessment” which proceeded on the assumption that the principal sum due from WSD to UDL was $6,109,544.54 could not be final until the Arbitrator had definitively ruled on the principal sum and the interest flowing from that.

37.  But that is far from saying that the Arbitrator could not rely on the “assessment” as strongly indicative of the likely result of any “final determination”.  Especially in light of his January 2008 Decision, I do not think that I can say that the Arbitrator was obviously wrong in taking notice of the “assessment” in the September 2007 letter.

38.  Evidence, obtained after publication of the Interim Award, has been adduced before me to support the suggestion that no “final determination” has been made by the Scheme Administrator. It is unclear why similar evidence (for instance, a letter from the Scheme Administrator clarifying the September 2007 letter) was not previously put before the Arbitrator.  If the lack of a “final determination” was an important consideration, one would have expected that the evidence now being adduced, would earlier have been introduced before the Arbitrator.

39.  Let me assume that an “egregious error of fact” giving rise to a grave sense of injustice may point to the grant of leave.  Without a fuller explanation for the late introduction of this evidence, I am unable to conclude that there has been a blatant misapprehension of the factual evidence by the Arbitrator justifying leave here.

IV.  CONCLUSION

40.  Leave to appeal is refused. UDL’s application is dismissed.  I shall now hear the parties on costs.