CHINNEY CONSTRUCTION CO LTD v. PO KWONG MARBLE FACTORY LTD

HCCT92/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.92 OF 2002

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D E C I S I O N

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1. This is an application for leave to appeal an arbitrator's award. The applicant ("Chinney") was the unsuccessful party in an arbitration brought by the respondent ("Po Kwong").

2. he principles applicable to such applications are well settled. There is a presumption of finality of arbitration awards. The test which determines whether or not the presumption is rebutted varies depending on the nature of the issues upon which leave is being sought. The presumption is at its strongest if the issue is described as a "one-off case" or a "one-off event". At the other end of the scale the presumption is at its 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, e.g. an architect or engineer."

3. The test in the former situation is whether the arbitrator was so obviously wrong as to preclude the possibility that he might be right. In the latter situation it must be shown that there is a strong prima facie case that the arbitrator erred and the point in issue would add significantly to the clarity and certainty of commercial law in Hong Kong. The above situations are the extremes on the scale, known as the "P.T. Dover" scale¹. Most cases will fall somewhere between the two.

4. In the present case there is no agreement between counsel on either where the case falls within the scale or what the issues on appeal are.

Background

5. Chinney was a main contractor on a residential and commercial development. Po Kwong was a sub-contractor installing marble. Under the 29th and final interim certificate Chinney paid Po Kwong nothing. Po Kwong took them to arbitration.

6. The 29th Certificate certified, on 20 September 1999, that the value of work done and material supplied by nominated sub-contractors was $165,617,729.

7. In relation to Po Kwong's work, the figures on the certificate were :

Estimated value of work done	$32,789,022
Retention	$1,650,000
Previous payments	$31,139,022
Net sum due for payment to Po Kwong	$0

8. Chinney had argued in the arbitration that Po Kwong were entitled to nothing. They pointed to Clause 11(b) of the standard form of contract which reads :

"Within fourteen days of the receipt of the Main Contractor of payment from the Employer against any certificate from the Architect the Main Contractor shall notify and pay to the Sub-Contractor the total value certified therein in respect of the Sub-Contract Works and in respect of any authorized variations thereof and in respect of any amounts ascertained under clause 8(c) hereof less :-

(i) Retention Money, that is to say the proportion attribution to the Sub-Contract Works of the amount retained by the Employer in accordance with the Main Contract; and

(ii) The amounts previously paid."

Accordingly they submitted that Po Kwong's entitlement under Certificate 29 should have been calculated as follows :

Amount received by Chinney from employer	$31,139,022
Less payments already made to Po Kwong	- $29,390,473
	$1,748,549
Less retention money	- $1,650,000
	$98,549

The sum of $98,549 would then be extinguished by the agreed amount of the counterclaim.

9. However, this was not how the arbitrator resolved the matter. The arbitrator dealt with the issue. The followings are the key extracts from the award (at page 9) :

"It is clear from examination of Certificate for Payment No 29 dated 20th September 1999 that the Architect certified that the sum of HK$434,853,351.95 had previously been certified by the Architect and had been paid by the Employer to the Respondent. It is also clear that this sum included both a previous certification and previous payment of the sum of HK$31,139,022.00 after deduction of retention money in respect of the Sub-Contract works.

In the Respondent's Reply on Points of law to the Claimant's Closing Submission the Respondent asserts that the Architect's certificate is not a strong evidentiary basis in support of payment having been made. It is however evidence and no evidence has been adduced by the Respondent to refute the veracity of the certificate. I do not need to refer to previous certificates to be satisfied that payment has been certified by the Architect and made by the Employer to the Respondent.

I find that the Respondent has received payment of HK$31,139,022.00 in respect of the Sub-Contract works. Furthermore, I find that such payment was made pursuant to a certificate or certificates of the Architect.

I am also satisfied that, pursuant to clause 11(b), the Respondent was obliged to make payment of HK$31,139,022.00 (less any permissible deductions or set-offs) within 14 days of receipt. I have no evidence of the actual date of receipt of the sum of HK$31,139,022.00 or as to whether a single payment or a series of payments was made. However, on the basis of Certificate for Payment No 29, I am satisfied that payment was made to the Respondent by the Employer before the issue of Certificate for Payment No 29 on 20th September [sic] 1999."

At page 11 :

"... Certificate for Payment No 29 certifies the Estimated Value of work done by the Claimant. It also certifies the amount which has been paid to the Respondent by the Claimant in Respect of the Sub-Contract Works. Clause 11(b) requires payment within 14 days of payment against any certificate. Certificate for Payment No 29 certifies that payment has been made to the Respondent and the payment which has been made was against certificates. It is not necessary to consider any other certificate to be satisfied of the Respondent's non-payment.

The payment was made pursuant to a certificate and Certificate for Payment No 29 evidences both the certification and the payment. I am satisfied that all of the requirements of Clause 11(b) have been met."

At page 12 :

"I am also satisfied that my jurisdiction is not limited by the references to Certificate for Payment No 29 in the Statement of Claim as submitted by the Respondent. I find that the pay-when-paid provisions have no application as payment has been made.

I am satisfied that the difference between the Architect's estimated value of work done under the Sub-Contract by the Claimant under Certificate for Payment No 29 and the amount paid to the Claimant by the Respondent is HK$3,398,549.00. From this sum is to be deducted HK$1,650,000.00 retention money. Thus, I find that the Respondent must pay to the Claimant HK$1,748,549.00 less any sum which may properly be deducted in respect of counterclaims. ...

I am satisfied that the sum of HK$1,748,549.00 was due and payable by the Respondent to the Claimant not later than 18th October 1999 as pleaded by the Claimant. The evidence suggests that payment should in fact have been made earlier but the Claimant has claimed payment was due on 18th October 1999 and I accept that date."

10. Arising out of these findings Mr John Scott, SC, for Chinney submits that the issue for the purposes of the leave application is "what is the proper construction of Clause 11(b) of the sub-contract?".

11. This, he submits, is an issue at the weakest end of the P.T. Dover scale.

12. Mr Peter Clayton for Po Kwong submits the issue is :

"Whether on the basis of the Notice of Arbitration dated 14th September 2002 ('the Notice of Arbitration') it was within the jurisdiction of the Arbitrator to find and rule accordingly that the amount claimed by Po Kwong was certified and paid to Chinney under certificates prior to Certificate No.29?"

13. This, he argues, is a one-off issue at the strongest end of the scale which, in any event, the arbitrator got right. The arbitrator found that payment ($31,139,022) had been made by the employer to Chinney under previous certificates. Therefore Po Kwong was entitled to receive payment against those earlier certificates, not that Po Kwong was entitled to receive payments under Certificate 29. Thus, $31 million odd was due to Po Kwong hitherto. The arbitrator found that Certificate 29 provided the evidence for those earlier certificates and the earlier payments that had been made. That being the case there was an obligation on Chinney to pay the total amount of work certified less retention money and previous payments. That was the basis of his calculation, which was :

Value of work done (in Certificate 29)	$32,789,022
Less payments from Chinney to Po Kwong	- $29,390,473
	$3,398,549
Less retention	- $1,650,000
	$1,748,549

14. Thus, as Certificate 29 provided evidence that Chinney had received $31 million odd under earlier certificates, Po Kwong was entitled to a payment for work done as certified in Certificate 29 net of retention and previous payments. The decision was based on a finding that, based on the evidence contained in Certificate 29, Po Kwong had not been paid enough. They had done $32 odd million's worth, they had been paid $29 odd million and Chinney had received $31 odd million.

What is the issue?

15. As already stated, counsel disagree as to what the real issue is. In order to answer that question we must, firstly, look at the grounds of appeal in the applicant's notice of motion. Grounds 1-4 may be grouped together. They arise out of the arbitrator's reliance on earlier certificates (of which No.29 was the sole evidence) to trigger an obligation to pay Po Kwong under Certificate 29. Ground 5 may be summarized as follows :

"... the Arbitrator took as the starting point for his calculation the estimated value of the work done by Po Kwong, as certified by the Architect under Certificate 29 (page 12 line 8). Consequently he misdirected himself as to the proper basis in law for the calculation of the amount to be paid by Chinney to Po Kwong."

16. The next stage is to ask, can these grounds, taken together, amount to the issue as framed by Mr Scott, namely "what is the proper construction of Clause 11(b) of the sub-contract?". It is obviously tempting for an applicant to frame an issue in terms that will place his leave application at the bottom of the "P.T. Dover" scale. But, it must be justified. In my judgment, an analysis of what the arbitrator actually did in this case does not merit the issue being framed in such wide terms. The "proper construction" of Clause 11(b) could give rise to many issues, some of which are moot points. One example being the meaning of "paid" in the expression "pay when paid". That particular moot point is not the one in the present application. It seems to me that in the present case once the arbitrator found that payments made under earlier certificates triggered the obligation to pay everything that followed was simple arithmetic, as follows, $31,139,022 had been paid to Chinney (that being $32,789,022 less the retention money of $1,650,000), $29,390,473 had been paid by Chinney to Po Kwong, therefore they owed them $1,748,549. It does not give rise to whether or not the monies actually received by Chinney fall within the definition of "paid". He simply found as a fact that Certificate 29 provided sufficient reliable information to show that the employer had in fact paid them that amount.

17. Accordingly I take the view that Mr Clayton's assessment of what issues actually flow from the grounds of appeal are nearer the mark.

18. The next question is where does that issue fall in the "P.T. Dover" scale? In my judgment it is much closer to the presumption of finality at the top of the scale than at the bottom. It is not at the top because the arbitrator was a non-legal arbitrator. It should not go unnoted however that he is a respected Hong Kong arbitrator of considerable experience. As the issue is in the top half of the scale an appropriate test must be formulated for this particular case. The test I will adopt is - is it clear that an obvious error of law was made?

19. Mr Clayton submits that far from being a obvious error the decision was plainly right. Taking Clause 11(b) line by line, he says lines 1 and 2 equals $31,139,022, lines 3 and 4 equals $32,789,022, sub-clause (i) equals $1,650,000 and sub-section (ii) equals $29,390,473. Once the arbitrator decided that Certificate 29 evidenced the earlier payments to Chinney and the valuation of work done up to that point, the starting point for the arithmetic had to be $32,789,022, not the $31,139,022 as submitted by Mr Scott because in effect he found that Chinney should have paid Po Kwong more than the $29 odd million that they had paid up to then. In my judgment, submissions contrary to Mr Clayton's analysis fall far short of the threshold to be reached before leave to appeal will be granted.

Retention money

20. A brief analysis of what happened to the retention money adds fuel to Mr Clayton's argument. In order to get the figure of $31,139,022 the employer had already deducted retention money of $1,650,000. By Mr Scott's method the retention money is deducted by the main contractor again, after it has already been deducted by the employer. Only the amount retained by the employer can be deducted by the main contractor. Clause 11(b)(i) says "retained by the employer". If the starting point is net of retention money, it cannot be subtracted again.

21. Again, it would be bold to say this was a clear and obvious error.

22. For these reason, I refuse leave to appeal. I make a costs order nisi that the costs of and arising out the application be paid by the applicant.

1. Lee Chung Chemical Industry Corp. v. P.T. Dover Chemical Co. [1990] 1 HKC 132