GINGERBREAD INVESTMENTS LTD v. WING HONG INTERIOR CONTRACTING LTD

HCCT75/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.75 OF 2007

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J U D G M E N T

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1. This is an application under section 25 of the Arbitration Ordinance, Cap. 341 (“the Ordinance”), which provides that the court may remove an arbitrator for misconduct (r. 25(1)) and/or set aside an arbitrator’s award when he has misconducted himself (section 25(2)). 

2. In the present application the arbitrator made a ruling following a contested discovery application at an interlocutory stage of the arbitration.  The respondent in arbitration (“Gingerbread”) was ordered to discover a number of documents and was further ordered to demand the said documents from its parent company Cheung Kong (Holdings) Ltd (“Cheung Kong”) and from another of Cheung Kong’s subsidiaries, “Citybase”. 

3. The discovery hearing lasted two days and the arbitrator wrote a lengthy and comprehensive decision described as “Order for Directions No 6—Reasons”.  The arbitrator decided that he was entitled to order Gingerbread to demand documents from Cheung Kong and Citybase because he found that Cheung Kong and Citybase were agents of Gingerbread in the Banyan Garden Development, a construction project in which Gingerbread was the employer and in which the claimant in arbitration (“Wing Hong”) had been engaged to carry out defect repair work.  Gingerbread’s complaint is that the reasoning whereby the arbitrator concluded that the necessary agency existed amounted to misconduct by the arbitrator.  It is agreed by all parties that if there was no agency then the arbitrator could not have made the directions that he did. 

4. Gingerbread seeks two orders.  Firstly that the directions for discovery be set aside (under section 25(2)) and secondly that the arbitrator be removed for misconduct (under section 25(1)).  

Setting aside the directions under section 25(2)

5. This court can only set aside an arbitrator’s “award” (and only then when there has been misconduct).  If there is no award the issue of misconduct (in relation to the power to set aside) does not arise. 

6. Wing Hong’s first contention is that the “Order for Directions No 6—Reasons” is not an award.  I agree. 

7. The Ordinance does not define “award”.  However, a line must be drawn between procedural matters, which are not reviewable by this court and non-procedural issues which are reviewable under section 25.  Russell on Arbitration, 22^nd Edition, states : “Questions determining the timetable for the reference or the extent of disclosure of documents are procedural in nature and are determined by the issue of an order or direction and not by an award”. 

8. Mr Patrick Fung SC leading Ms Jessica Ng for Gingerbread submitted inter alia that because the arbitrator had written a lengthy and detailed “reasons” for his decision it should be treated as an award.  I do not think that the fact that the arbitrator chose to provide written reasons is the test for an “award”.  He might give written reasons for adjourning a case.  The written reasons would hardly convert the adjournment from a procedural matter into an award. 

9. The better test is to consider the subject matter.  The arbitrator headed his reasons “Order for Directions”; it concerned discovery of documents; it was a pre-hearing interlocutory application; it was not a determination of a substantive issue.  All these factors lead me to agree with Mr David Tsang’s submission on behalf of Wing Hong that it was not an “award”. 

10. I am further enforced in this view by the general principle that the court’s supervisory jurisdiction over arbitration should be less rather than more.  The power to intervene is defined by statute and a non-interventionist philosophy is encouraged in issues concerning when such a power arises. 

11. This not being an award, there is no power to set it aside. 

12. The remaining issue, therefore, is whether Gingerbread has been able to demonstrate that the arbitrator misconducted himself when finding that Cheung Kong and Citybase were acting as agents for Gingerbread. 

Misconduct

13. In Asia Construction v. Crown Pacific (1988) 44 BLR 135 a test to be applied for the removal of an arbitrator was formulated as follows :

“Do there exist grounds from which a reasonable person would think there was a real likelihood that the arbitrator could not, or, would not, fairly determine the issue in question on the evidence or arguments to be adduced before him?” 

14. Mr Fung acknowledges that it is a stringent test.  

15. The argument against the arbitrator is mounted on the footing that he made findings that he could not and should not have made when concluding that an agency existed. 

16. Although lengthy, I consider it necessary in this case to set out the applicant’s grounds almost in full.  The key grounds are as follows :

“1.   the Arbitrator has misconducted the proceedings by relying on ‘secret evidence’ as the basis for his findings that Cheung Kong and Citybase were agents of the Respondent:—

(1)	he made wrong assumptions of facts and/or generated/supplied the following evidence which was not presented by the parties in the Claimant’s application for specific discovery or at all:—
	(a)	that the sale of flats in Banyan Garden was through the sales outlet of Cheung Kong (Paragraph 27 of the Reasons); and
	(b)	individual flat owners of Banyan Garden would make their complaints directly to Cheung Kong for any defects found (Paragraph 27 of the Reasons);
(2)	he failed to disclose the assumptions of facts and/or the evidence which he had generated/supplied referred to in Paragraph 1(1) above of the Grounds of this Notice and as a result, the Respondent was deprived of the reasonable opportunity to present its case to the Arbitrator at the hearing of the Claimant’s application for specific discovery or at all;

2.    the Arbitrator wrongly, and without notice to the parties, assumed that the burden of proof was on the Respondent to prove that Cheung Kong and Citybase were not acting as agents for the Respondent (Paragraphs 28 and 33 of the Reasons).  As a result, the Respondent was deprived of the reasonable opportunity to present its case on this erroneous assumption;

3.    the Arbitrator failed to provide the Respondent with the opportunity to make submissions to clarify the detailed arrangements between the Respondent and Cheung Kong/Citybase under works orders, to which the Arbitrator considered were unknown (Paragraph 26 of the Reasons);

4.    had the opportunity been provided to the Respondent to deal with the ‘secret evidence’ relied upon by the Arbitrator, which the Respondent contends is its entitlement, the Arbitrator in properly discharging his function ought not to have made the findings and conclusions that were actually made;

5.    the Arbitrator failed to give any or any proper consideration on the issue of whether Cheung Kong/Citybase were acting as agents of the Respondent in that: —

(1)	he wrongly considered that the burden of proof was on the Respondent to prove that Cheung Kong/Citybase were not acting as agents of the Respondent (Paragraphs 28 and 33 of the Reasons);
(2)	he rejected the Respondent’s arguments that Citybase did not act as agent for the Respondent even when the Respondent had adduced evidence in the Claimant’s application for specific discovery namely, the Deed of Mutual Covenant of Banyan Garden dated 26th September 2003 which provided in: —
	(a)	Clause 1 of Section 1 that Citybase is appointed Manager of Banyan Garden; and
	(b)	Clause B.1.(38) of Section VI that Citybase shall be responsible ‘to assist the Owner to take over his Unit from the Registered Owner.’;”

17. Mr Fung conceded that the reference to “receiving secret evidence” was, in truth, a somewhat colourful expression meaning no more than, in this case, the drawing of inferences which could not and should not have been made based on the available evidence.  The arbitrator’s integrity was not in issue. 

18. The objectionable part of the arbitrator’s written decision (relating both to the “secret evidence” ground and the “reversal of the burden of proof” ground) can be found in paragraphs 27 and 28.  It is necessary to set out some earlier paragraphs also to put the matter in context. 

19. Paragraphs 24-28 contain the following passages :

“24.  There is no dispute that Citybase and the Respondent are wholly owned subsidiary companies of Cheung Kong.

  25.  Like many other major developers in Hong Kong, Cheung Kong developed the project of Banyan Garden through the Respondent Citybase was appointed as the Estate Manager of Banyan Garden.

  26.  The detailed arrangements between the Respondent and Citybase/Cheung Kong in arranging for the defects rectification work carried out by the Claimant under works orders are not know.  However, it seems to me that as the development of Phase II of Banyan Garden (considering of Towers 5 and 8) were being undergone by the Respondent who sold individual flats to various owners, it would be logical and legitimate that if any defects were found in the units handed over to these owners, they should lodge complaints directly to the Respondent who bore the prime responsibility to ensure that these defects were made good.  Since the original main contractor quitted the site, the Claimant was then engaged by the Respondent to carry out the defects rectification work.

  27.  It seems to me that the parties are not in serious dispute that the sale of flats was through the sales outlet of Cheung Kong.  Naturally individual flats owners would make their complaints directly to Cheung Kong for any defects found.  Upon identification of defects on site, the Claimant would then be instructed to carry out rectification works and works orders would be issued to the Claimant to cover these rectification works.  Further, as Citybase was taking over the management of the buildings upon its completion and occupation by individual owners, it would also be natural that Citybase was also involved in arrangement the inspection of individual units and the carrying out of rectification work by the Claimant.

  28.  In doing the aforesaid works, Cheung Kong and Citybase were, unless contradicted by evidence to the contrary, acting as the agent of the Respondent.  At the moment, there is no evidence under what capacity Cheung Kong and Citybase were engaged in collating the complaints, arranging for defects rectification work by the Claimant and hand-over of completed units back to individual flat owners on behalf of the Respondent. …”

20. It is said by Gingerbread that these passages take “a leap of logic” that complaints about defects would have gone directly to Cheung Kong (and that therefore an agency existed).  It is said also that there was no evidence that the sales of the flats was through Cheung Kong or that Gingerbread had any enforceable rights over Cheung Kong and Citybase.

21. Mr Tsang responds to these grounds in two ways.  In both respects I agree with him.

22. Firstly, a mere error of law does not constitute misconduct.  If, which is not conceded, the arbitrator did no more than make an erroneous finding of law (or fact) he cannot be removed.

23. In Bill Biakh and others v. Hyundai Corporation [1988] 1 Lloyds Reports at page 189, Steyn J said :

“… In relation to post award remedies, the decision of the Court of Appeal in Moran v. Lloyd’s, [1983] Q.B. 542 is the clearest authority for the proposition that an error of law or fact cannot by itself amount to misconduct.  If that is the case in relation to errors of law or fact as to substantive rights, it would be surprising if a different rule applied to errors regarding admissibility of evidence.  That does not, of course, mean that the admission of, for example, utterly irrelevant evidence and reliance on it in the reasons for the award might not afford evidential material for a broader attack on the award itself alleging misconduct on the part of an arbitrator, but a mere error in relation to the admissibility of evidence does not by itself amount to misconduct, and I so rule.”

24. In other words “a mere error” could not be misconduct but relying on utterly irrelevant evidence might provide evidence of misconduct. 

25. In the present case, I agree that even if the arbitrator was wrong in his conclusion, the “error” falls well short of being sufficiently serious as to warrant removal. 

26. However, the matter does not stop there because I further accept that Gingerbread has not established that an error of law or fact was made. 

27. Firstly, Mr Tsang has been able to identify evidence upon which the remarks in paragraph 27 of the decision could have been based.  Moreover, the opening sentence in paragraph 27 can hardly be criticized as being based on “secret evidence”.  It is not a finding of fact, which is relevant to the issue of agency in relation to the rectification works, which is at the heart of the dispute. 

28. In short, the identification of evidence in support of the inference drawn is sufficient.  Whether or not the drawing of the inference was an error is a question of weight. 

29. Gingerbread’s second complaint, namely that the arbitrator, in paragraph 28, reversed the burden of proof, is answered by a similar approach.  It is plainly arguable that the choice of words in paragraph 28 are in fact describing the drawing of an inference which he was entitled to do.  To construe it as a reversal of the burden of proof amounting to misconduct is simply untenable. 

30. If Gingerbread’s first two complaints are unsustainable, which I find they are, no purpose is served in dealing specifically with the remaining ones.  They add nothing and can be disposed of by precisely the same approach. 

31. In short, Gingerbread has not been able to identify errors which could merit the arbitrator’s removal.  The originating motion is dismissed with costs nisi to Wing Hong to be taxed forthwith.