BUDA PIPE REHAB ENG CO LTD v. CPC CONSTRUCTION HONG KONG LTD

HCCT 69/2018

[2019] HKCFI 503

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 69 OF 2018

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D E C I S I O N

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Background

1.  By an Originating Summons issued on 11 October 2018, the Plaintiff in these proceedings (“BP”) applied to challenge an award (the “Amended Interim Award on Liability and Partial Quantum” dated 14 September 2018 “Award”) of an arbitrator.  The Award was made in arbitration proceedings which had been commenced by the Defendant (“CPC”) against BP in Hong Kong on 25 June 2012 (“Arbitration”).

2.  The Originating Summons seeks:

(1)  leave to appeal on questions of law arising out of the Award, pursuant to section 6 (1) (b) of Schedule 2 of the Arbitration Ordinance Cap 609 (“Ordinance”);

(2)  specific paragraphs of the Award to be set aside for serious irregularity pursuant to section 4, and/or section 5 of Schedule 2 of the Ordinance (which section refers to appeal on a question of law);

(3)  remission of the Award for further consideration by the arbitrator, pursuant to section 4 (3) (a) and/or section 5 (5) (c); and

(4)  leave for appeal out of time.

3.  There are various defects in the Originating Summons.

4.  Under Order 73 rule 5 (2) RHC, an application for leave to appeal on a question of law under section 6 of Schedule 2 to the Ordinance (“Schedule”) has to be made within 30 days after the award is delivered and, if there is a correction of the award, the period runs from the date on which the award with the correction is delivered.  The Award was amended and published on 14 September 2018.  The 30 days do not expire until 14 October 2018.  No leave to appeal out of time is required, when the Originating Summons was issued on 11 October 2018.

5.  Order 73 rule 5 (4) RHC requires that for an application to challenge an award on the ground of serious irregularity under section 4 of the Schedule, and for an application for leave to appeal on a question of law under section 6 of the Schedule, the originating summons or summons “must” state the grounds of the application, and if the application is founded on evidence by affidavit, a copy of every affidavit intended to be used “must” be served with the originating summons or summons.  It has been held by the arbitration judge in various cases that applications which do not comply with Order 73 rule 5 (4) are abuse of process, liable to be struck out (see eg Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] HKEC 643, Po Fat Construction Co Ltd v Incorporated Owners of Kin Sang Estate, unreported, HCCT 15 & 23/2013, [2013] HKEC 1875). 

6.  On the return day of the Originating Summons, I dismissed the application made under section 4 of the Schedule, since the Originating Summons does not set out the ground for the application to set aside and/or for remission for serious irregularity.  The Originating Summons only gave notice of the grounds of the application “for leave to appeal”, as set out in paragraphs (i) to (viii) of the Originating Summons.

7.  As for the application for leave to appeal under section 5 of the Schedule, section 6 (3) of the Schedule states that for an appeal under section 5 on a question of law, the Court “must” determine the application for leave to appeal without a hearing, unless it appears to the Court that a hearing is required.  Section 6 (2) of the Schedule further requires an application for leave to appeal to identify the question of law to be decided, and to state the grounds on which it is said that leave to appeal should be granted. 

8.  The Originating Summons (which includes the application for leave to appeal) was set down for hearing on 7 November 2018, with the affirmation of Wong King (“King”) in support.  The application does not state the question (or questions) of law to be decided, for which leave to appeal is sought.  Nor did the submissions filed by Counsel for BP for the scheduled hearing deal with the questions of law, or the matters which should be established for leave to appeal to be granted.  Under section 6 (4) of the Schedule, leave to appeal is to be granted only if the Court is satisfied: (a) that the decision of the question will substantially affect the rights of one or more of the parties; (b) that the question is one which the arbitral tribunal was asked to decide; and (c) that, on the basis of the findings of fact in the award, the decision of the tribunal on the question is obviously wrong, or the question is one of general importance and the decision of the tribunal is at least open to serious doubt.

9.  BP appeared to assume that there will be a further hearing to argue the application for leave to appeal, and sought directions in that regard.

10.  At the hearing on 7 November 2018, I made it clear that no hearing is required, and gave leave only for further legal submissions to be made in relation to the application for leave to appeal, such submissions to be confined to no more than 3 pages for each party. 

11.  Parties are reminded that for all applications made under the Ordinance, there must be compliance with the express provisions of section 6 of the Schedule (if applicable), and with the requirements of Order 73 RHC as well as PD 6.1, and in particular Part E thereof (for applications for leave to appeal), to avoid any waste of costs and the Court’s time.  Non-compliance carries the risk of the applications being struck out immediately as abuse of process, since the aim of the Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and the Ordinance is based on the principles that parties should be bound by their agreement to resolve a dispute by arbitration and to be bound by an arbitral award as being final.  Resolution of disputes relating to the binding effect of an arbitration agreement and the arbitral award should be resolved without undue delay and unnecessary costs.

The relevant agreements

12.  The facts of the case are rather unusual in so far as the working relationship of the parties is concerned, and as decided in the Award.

13.  In September 2009, the Water Services Department of the Government (“WSD”) invited tenders for the replacement and rehabilitation of water mains in East Kowloon (“Works”).

14.  CPC is a company within the Chevalier Group in Hong Kong (“Group”). Lam Woo & Co Ltd (“LW”) is another company within the Group, which held a licence to tender for waterworks of the Government at the material time. Pursuant to a Pre-Bid Agreement and discussions between the representatives of BP and CPC, it was agreed that CPC and BP would co-operate in procuring contracts for the Works, and that LW would be used to submit tenders to the Government for the Works.  If LW was awarded the contract, it was agreed that CPC and BP would co-operate to take up the Works under the contract. 

15.  LW did submit a tender to the Government and the contract was awarded to LW.  On 23 September 2009, the Main Contract was signed by LW on the one part as Main Contractor, and WSD on the other part as Employer, for the Works to be executed by LW.  As agreed, CPC entered into a Sub-Contract with BP on 23 September 2009 (“BP Contract”), whereby the execution of the Works was sub-contracted to BP.

16.  It was in the course of execution of the Works under the BP Contract that dispute arose between CPC and BP, the former alleging that there was poor and slow progress of work and other breaches, which entitled CPC to terminate the BP Contract on 5 January 2011.  Such disputes led to the commencement of the Arbitration, with CPC claiming damages in respect of BP’s alleged breach, and BP counter-claiming for the value of its work done, and damages sustained as a result of CPC’s unlawful termination.

Application of the Schedule

17.  BP’s application for leave to appeal is made under sections 5 and 6 of the Schedule.  The preliminary objection raised on behalf of CPC is that the Schedule does not even apply to the Arbitration.

18.  Under section 100 of the Ordinance, the Schedule applies to an arbitration agreement entered into at any time within a period of 6 years after the commencement of the Ordinance on 1 June 2011, which provides that arbitration under the agreement is a domestic arbitration. 

19.  The BP Contract contains an arbitration clause in clause 23.1, but it only provides for arbitration of disputes “in accordance with Cap 341”.  For the opt-in provisions of the Schedule to apply, section 100 of the Ordinance requires the relevant arbitration agreement to provide that arbitration is “a domestic arbitration”.  Cap 341 permitted domestic as well as international arbitration.  Without expressly providing for resolution of disputes by domestic arbitration, clause 23.1 of the BP Contract relied upon by BP does not fall within the ambit of section 100 (b) of the Ordinance, for the Schedule to apply.

20.  BP further relies on the fact that the Main Contract between WSD and LW contains an arbitration agreement which expressly provides for domestic arbitration (Special Conditions 89 (2) and (6)).  It also relies on the fact that in the BP Contract, the Main Contract is referred to and incorporated as part of the terms and conditions of the BP Contract.

21.  Section 101 (1) of the Ordinance states:

“If –

(a) all the provisions in Schedule 2 apply under section 100 (a) or (b) to an arbitration agreement, in any form referred to in section 19, included in a construction contract;

(b) the whole or any part of the construction operations to be carried out under the construction contract (‘relevant operation’) is subcontracted to another person under another construction contract (‘subcontract’); and

(c) that subcontract also includes an arbitration agreement (‘subcontracting parties’ arbitration agreement’) in any form referred to in section 19,

then all the provisions in Schedule 2 also apply, subject to section 102, to the subcontracting parties’ arbitration agreement.”

22.  Section 101 (2) is not relevant for the purposes of this case, but Section 101 (3) goes on to state:

“If –

(a) all the provisions in Schedule 2 apply to a subcontracting parties’ arbitration agreement under subsection (1);

(b) the whole or any part of the relevant operation that is subcontracted under the subcontract is further subcontracted to another person under a further construction contract (‘further subcontract’); and

(c) that further subcontract also includes an arbitration agreement in any form referred to in section 19,

subsection (1) has effect subject to subsection (2), and all the provisions in Schedule 2 apply, subject to section 102, to the arbitration agreement so included in that further subcontract as if that further subcontract were a subcontract under subsection (1).”

23.  Section 102 of the Ordinance is not applicable to the present case.

24.  Section 19 of the Ordinance refers to the definition and form of an arbitration agreement, and provides that an arbitration agreement may be in the form of an arbitration clause in the contract, or in the form of a separate agreement, but that the arbitration agreement shall be in writing.  An arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means.  The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract. 

25.  On first reading of section 101 (1) (b), it may appear to be wide enough to extend the application of the Schedule to any case where the main construction contract (the Main Contract between WSD and LW in this case) provides for domestic arbitration of disputes, and the whole or any part of the “construction operations to be carried out” under the main contract is subcontracted out, by any party, in circumstances when the subcontract also includes an arbitration agreement (whether or not it provides for domestic arbitration).  The language of section 101 (1) (b) does not provide for or require the construction operation to be subcontracted by the main contractor.

26.  On this view, since the Main Contract between WSD and LW contains an arbitration agreement which provides for domestic arbitration, and the Works have been subcontracted down the line to BP by CPC, and since the BP Contract contains an arbitration agreement, the provisions in the Schedule apply to the BP Contract. 

27.  However, such a construction will render section 101 (3) of the Ordinance defunct as being unnecessary.  Section 101 must be read as a whole.  Section 101 (3) provides for the situation where the Schedule applies to a subcontract under section 101 (1), and the relevant operation is further subcontracted to another party under a “further subcontract”, in which situation section 101 (3) states that the provisions in the Schedule will likewise apply to the further subcontract. 

28.  Considered as a whole, section 101 (1) (b) must be referring to the situation where the construction operation is subcontracted by the main contractor to another person under a subcontract, and in such situation, the Schedule applies if the subcontract includes an arbitration agreement in a form referred to in section 19.  If the work under the subcontract is then further contracted out, section 101 (3) comes under consideration.

29.  The unusual feature in this case is that despite the BP Contract being referred to and signed as a “Sub-Contract” for the Works, and it recited a main contract signed by CPC for execution of the Works, it has not been disputed that the Main Contract was in fact made between WSD and LW - not CPC. 

30.  As found by the arbitrator, there is a Main Contract between WSD and LW, and a BP Contract between CPC and BP, whereby the Works were subcontracted by CPC to BP.  The arbitrator referred to it as “a wholly subletting contract”.  There was no written agreement between LW and CPC, but the arbitrator found, on the evidence of the witnesses called by CPC, that there was a contract in existence between LW and CPC, whereby LW subcontracted the Works to CPC (referred to in the Award as the “CPC Contract”).  The finding of the existence of the CPC Contract was on the basis of the conduct of the parties and what had been verbally agreed (on the evidence of Ko Snr).  The terms of the verbal agreement do not provide for and made no reference to arbitration of disputes.

31.  As Counsel for CPC highlighted, therefore, there is no written subcontract between LW and CPC, and no evidence of any arbitration agreement between LW and CPC, whether in writing, or recorded in any form referred to in section 19 of the Ordinance. 

32.  On my finding, the CPC Contract does not fall within section 101 (1) (c) of the Ordinance, for the Schedule to apply to the CPC Contract.  Since the Schedule does not apply to the CPC Contract, the Schedule cannot apply to the BP Contract between CPC and BP by operation of section 101 (3).

Whether leave to appeal should be granted

33.  Even if I were wrong on the interpretation of section 101, and should the Schedule apply to the Arbitration, I decline to give leave to appeal.

34.  Section 6 of the Schedule requires an applicant to identify the question of law to be decided, and to state the grounds on which it is said that leave to appeal should be granted.  It is not for the Court or the respondent to speculate on the applicant’s case, and to consider or frame the question of law on the evidence, submissions or grounds stated for the application.

35.  In the stated grounds of the application for leave to appeal, BP claims that the arbitrator “erred in law in ruling that (CPC) has not affirmed the Sub-Contract and/or has not waived the said breaches and/or is not estopped from relying on the said breaches by wrongfully determining the disputes ultimately on a basis that was erroneously premised, namely that the (BP Contract) was for wholly subletting to BP.”

36.  The gist of BP’s argument is that the arbitrator had erred in law in finding that CPC had not waived BP’s breaches of the BP Contract, and that there was no estoppel, on the basis that CPC had “wholly sublet” the Works to BP.

37.  The Award is not the easiest to follow or understand, despite its length. However, on a careful review, it can be seen that the arbitrator made findings of fact on the evidence before him, and came to conclusions on the law as to the existence and effect of the CPC Contract, the BP Contract, the alleged and disputed settlement agreement between CPC and BP on 5 January 2011 (“Settlement Agreement”), BP’s breaches of the BP Contract, that there was no waiver by CPC of such breaches, and finally, made an interim award on liability and “partial quantum” of a designated sum of HK$10 million to be paid by BP to CPC.

38.  It is trite, that there is no appeal on findings of fact, and on a question which is not alleged to be one of general importance, leave to appeal is only to be granted if the Court is satisfied that the decision of the tribunal on the question of law is “obviously wrong”.  In this case, whilst I can accept that the decision of a question of law in this case will substantially affect the rights of one or more of the parties, in view of the substantial amount of the Award, no argument has ever been raised to persuade me that the question of law to be decided on the facts of this case is one of general importance.  The “obviously wrong” test must be applicable.

39.  I do not fully understand the references to “subletting” as  made in the Award.  The terms of the BP Contract refer to the Works being subcontracted by CPC to BP, and the general terms and conditions usually found in a subcontract are found in the BP Contract.  The evidence of one witness, referred to in the Award, is of the Works under the BP Contract being “wholly contracted out” (“成單判”), but I fail to see any unique feature which distinguishes the BP Contract from other subcontracting arrangements between contractors.

40.  Nevertheless, whatever the label attached to the BP Contract by either the arbitrator or the parties, it is the substance of the agreement and the relationship which counts.

41.  The arbitrator’s analysis of the evidence and his reasoning therefrom is that, according to the witnesses who gave evidence before him, King (BP’s witness) was the person who was in control of the entire project and the execution of the Works from 23 September 2009 to the termination on 5 January 2011, all pursuant to the mode of co-operation agreed between CPC, LW and BP at the time of the Pre-Bid Agreement.  King was tasked by CPC and BP to employ management staff and site personnel for the Works, he interviewed the key staff, made the subcontracting arrangements on behalf of LW, and represented not only BP, but also CPC and LW, when instructions were received from the Employer’s representatives and when instructions and orders were issued to site staff, such that all the staff seconded by CPC and LW to work on the Project took instructions from King. 

42.  In the light of such evidence, the arbitrator found that waiver and estoppel was not “applicable”.  At paragraph 135 of the Award, the arbitrator stated:

“I find that, in this wholly subletting arrangement under the (BP Contract), King was ‘wearing the hat’ of LW … as Project Director representing LW. In the subsequent meetings, all staff employed by King holding positions in the Project were all ‘wearing the hat’ of (LW). I find that the Work Orders would have been passed to the staff ‘wearing the hat’ of (LW) but work for (BP) in the Project which was wholly sublet to (BP). Upon receiving the Work Orders by the staff ‘wearing the hat’ of (LW), they would have acted without the necessity to receive instructions from Tang and/or Ko Jnr. All Works Orders delivered to (LW) were received by (BP) at the same instant and (BP) worked accordingly, with King giving instruction to all staff in the Project. Hence, I find that the defence of waiver and estoppel would not be applicable.”

43.  At paragraph 141, the arbitrator further explained and repeated his findings:

“On Issue (iii) - Whether (CPC) has affirmed the (BP Contract) and/or has waived the said breaches and/or is estopped from relying on the said breaches, I find that (BP) may be successful in this defence in other cases of ordinary subletting but not in the present case where (CPC) wholly sublet to (BP). In the present case, it was not necessary for (CPC) to request (BP) to carry on with the Project at all once the (BP Contract) was awarded to (BP). As aforesaid, King was ‘wearing the hat’ of LW as recorded in Monthly Progress Meeting No 1 as Project Director representing LW. In the subsequent meetings, all staff employed by King holding positions in the Project were all ‘wearing the hat’ of (LW) but work for (BP) in the Project which was wholly sublet to (BP). Upon receiving the Work Orders by the staff ‘wearing the hat’ of LW, they would have acted without the necessity to receive instructions from Tang and/or Ko Jnr [of CPC]. All Work Orders delivered to (LW) were received by (BP) at the same instant and (BP) worked accordingly, with King giving instructions to all staff in the Project. Hence, I find that the defence of waiver and estoppel would not be applicable. King and the staff would have automatically started preparation work etc upon receiving Works Order. (BP) may argue that the Work Orders were issued by ACL to (LW), then by (LW) to CPC and then from CPC to (BP), hence it was a repeated request from (CPC) to (BP) to carry on with the Project. However, this argument may be successful in other ordinary subletting practice but not in the present case of wholly subletting in which (BP) was “wearing the hat” of (CPC) and or (LW) to respond to all instructions from ACL. In fact, King was in substance controlling the whole project and it was not necessary for anyone from (CPC) to request King to do anything. There is no evidence before me that it was necessary for (CPC) to request (BP) to carry on with the Project at all. Hence, I find that the defence under this heading does not assist (BP) so that there was no waiver as such and (CPC) is not estopped from relying on the said breaches.”

44.  What the arbitrator meant and found, on the evidence, was that King was, at all material times during the execution of the Works, acting for and on behalf of LW and CPC, as well as on behalf of BP.  There was no evidence of any other direct involvement of LW or CPC, and it was not necessary, according to their agreed mode of performance and co-operation, for CPC to give instructions or consent to the acts of King or BP.  King was on the evidence doing all the work and giving all the instructions in place of CPC.  On that basis, the arbitrator concluded that there was no evidence of any consent or unequivocal representation from CPC, to constitute either waiver or estoppel.  It has to be borne in mind that what BP contended in the Arbitration was that by virtue of its having given instructions to BP to continue to work on the Project, and by adopting the stance of BP as against the Employer’s representatives (ie ACL) that there was no breach in the execution and progress of the Works, CPC should be estopped, or had affirmed any breach alleged by the Employer.

45.  In any event, on the findings of fact made by the arbitrator, it cannot be readily seen from the Award that his determination on the questions of law relating to affirmation, waiver or estoppel are “obviously wrong”.

46.  The grounds of appeal in the Originating Summons also state that the arbitrator had erred in law in failing to consider or take into account, when making the interim award of HK$10 million: (1) the amount which BP was entitled to; and (2) the fact that CPC intended to claim against WSD for the Works undertaken, and that this will reduce or affect the damages sought by CPC against BP.

47.  The above 2 grounds were not dealt with in the submissions made by Counsel for BP.  I will deal with them shortly. 

48.  In the Arbitration, CPC claimed expenses incurred in carrying out the outstanding Works under the BP Contract which CPC took over from 5 January 2011. By way of defence, BP claimed that there was a Settlement Agreement whereby the parties had agreed to settle the amounts in dispute.  Apparently by counterclaim, BP also sought payment of the value of the items provided by BP under the BP Contract as at 4 January 2011. 

49.  In Closing Submissions, Counsel for CPC emphasized to the arbitrator that BP had not made any assessment on the quantum of the damages sought by CPC, if CPC should succeed in its claim that BP was in breach of the BP Contract, and there was no Settlement Agreement as alleged.  Counsel for CPC also emphasized that BP did not advocate any case of its own on quantum, if it should be found to be in breach.  On the submissions made by CPC, the arbitrator found that there were breaches, that there was no Settlement Agreement, and accepted that on the quantum of damages submitted by CPC, CPC’s damages for breach of contract were $87,351,016.54. 

50.  CPC accepted in the Arbitration that the final account between WSD and LW had not been issued, and submitted that the arbitrator should make an interim award on liability and for partial quantum.  Submissions were made and authorities were cited to support CPC’s contention, that the tribunal has jurisdiction to make an interim award for a minimum sum that he decides to be due and owing, and to make a final award in the future when the final account is closed.  Submissions were made on the minimum amount to which CPC was entitled.  It was emphasized in CPC’s Closing Submissions that on BP’s own evidence, there was no prospect that the final accounts to be concluded would entail an upward adjustment in the certification which would exceed CPC’s claim, and that $10 million was a useful reference for the minimum sum to be partially awarded.  These submissions were accepted by the arbitrator when he made the Award, expressed to be an interim award on liability and on “partial quantum” of $10 million.

51.  Against such a background, I cannot find the decision on quantum to be “obviously wrong”.

Disposition

52.  BP’s application by the Originating Summons is dismissed, for all the above reasons, with costs to be paid by BP on an indemnity basis.