W v. Contractor

HCCT 103/2023

[2024] HKCFI 1452

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 103 OF 2023

____________________

____________________

____________________

_____________

D E C I S I O N

_____________

Background

1.This is an application made by the Plaintiff (“Employer”) for leave to appeal against the “Award and Reasons In Respect of Applications For Interim Measures” dated 29 November 2023 (“Award”) issued by the arbitrator, in an arbitration commenced in Hong Kong by the Defendant as Main Contractor (“Main Contractor”) against the Plaintiff as Employer of a project (“Arbitration”). In the Originating Summons issued by the Plaintiff (which was the Respondent in the Arbitration), orders are sought for leave to appeal on questions of law pursuant to section 6 of Schedule 2 (“Schedule”) to the Arbitration Ordinance (“Ordinance”), to vary, set aside or remit the Award.

2.The grounds of the application and appeal are that the arbitrator erred in law in granting an application for interim measures sought by the Defendant as Claimant in the Arbitration, and restrained the Employer from making any application, demand or call to a specified bank for payment under or related to a Bond issued by the bank under the underlying construction contract between the Employer and the Main Contractor (“Contract”), under which Bond the Employer was entitled to demand payment from the bank (up to a maximum aggregate liability of HK $112.1 million) upon the Employer’s certification that there had been a breach of the Contract and of the amount of damages in consequence of such breach, without proof of the breach or amount demanded.

3.The questions of law identified in the Originating Summons, said to have far-reaching impact on the construction, arbitration and banking communities, are:

(1)  What is the “claim” under Article 17A(1)(b) of the UNCITRAL Model Law on International Commercial Arbitration for the purpose of determining whether an arbitral tribunal has jurisdiction to grant an interim measure (“First Question”)?

(2)  What is the proper “status quo” under Article 17(2)(a) of the Model Law in the context of a valid demand for payment under an on-demand bond bearing in mind the Award’s factual basis that the Plaintiff’s demand for payment under the Bond was valid (“Second Question”)?

(3)  What is the proper approach to an arbitral tribunal’s exercise of discretion under Article 17A of the Model Law? In particular, what is the applicable merits test in restraining a valid demand on an on‑demand bond (“Third Question”)?

4.Under section 6(1) of the Schedule, an appeal to the Court on a question of law arising out of an award may not be brought by a party to arbitral proceedings except with the leave of the Court. Leave to appeal is to be granted only if the Court is satisfied that the decision of the question will substantially affect the rights of one or more of the parties, that the question is one which the tribunal was asked to decide, and 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 (section 6(4)).

5.The tests for the grant of leave by the Court are as set out in section 6(4)(c)(i) and (ii) of the Schedule. The meaning of “obviously wrong” and “open to serious doubt” is clear, on their face. In Chun Wo Construction & Engineering Co Ltd v Hong Kong Macau (Asia) Engineering Co Ltd [2019] HKCA 369, the Court of Appeal confirmed in no uncertain terms the tests which are applicable.

6.The Plaintiff claims in this case that the Bond which was the subject matter of the application for interim measure and dealt with by the arbitrator in the Award was a typical on-demand bond commonly used in the construction and banking industries, and that the questions of law in this case have wide impact such that they are of general importance to warrant the applicable test for the grant of leave to appeal to be “at least open to serious doubt”.

7.As held in Maeda Kensetsu Kogyo Kabushiki Kaisha and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited [2020] HKCFI 2979, at paragraph 10), whether the criteria of “obviously wrong” or that of “open to serious doubt”, is applicable, the threshold is high. It has to be demonstrated to the Court, quickly and easily, without meticulous argument on the application for leave to appeal, that the decision of the tribunal cannot be right, or that there are serious doubts as to its correctness. It has to be borne in mind that under section 6(3) of the Schedule, the Court “must” normally determine an application for leave to appeal without a hearing, and hence, decision on these questions must be based on what is readily apparent on the face of the award and the limited papers filed.

8.In A and others v The Hong Kong Housing Authority [2018] HKCFI 147, at paras 12 and 13, this Court also made the following observations:

“12. Whether the appropriate test to be applied is “obviously wrong”, or “open to serious doubt”, the threshold is high. It is not sufficient for it to be shown that the decision of the tribunal is arguably wrong, or that it is arguable that the decision is open to some doubt. The decision has to be clearly seen to be obviously, or demonstrably, wrong, or that the correctness of the decision is seriously in doubt. Leave to appeal would only be granted in exceptional cases, where it can be demonstrated that the arbitrator was plainly wrong. As Lam VP indicated in Maeda Kensetsu Kogyo Kabushiki Kaisha (also known as Maeda Corporation) and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited HCMP 1342/2017, 4 September 2017, the assessment of whether the decision of the tribunal is at least open to serious doubt can be subjective, and different judges can reasonably come to different views. In a matter concerning the construction of a contractual document, the Court dealing with the application for leave to appeal may have a different view as to the possible meaning of a provision, but it does not follow from that, that the meaning ascribed by the tribunal to that provision was “obviously wrong”.

13. What has to be demonstrated to the Court, quickly and easily, without meticulous legal argument, is that the decision of the tribunal simply cannot be right, or that there are serious doubts as to the correctness or reasoning of the Award.”

Whether any award to appeal against

9.Before the Court can, under section 6 of the Schedule, grant leave to a party to appeal “on a question of law arising out of an award made in the arbitral proceedings” pursuant to section 5 of the Schedule, there must be an “award”.

10.On the facts of this case, I am not satisfied that the Award in question, made by the arbitrator on 29 November 2023, amounts to an “award” for which leave to appeal can be sought. The essential reasons for my so finding are in fact already set out in my Decision in G v N [2024] HKCFI 721, handed down on 11 March 2024. Having carefully considered the arguments made by Counsel in these proceedings, and the facts and circumstances of the present case, I am not persuaded that I should depart from my view on what constitutes an award, and I do not consider that the Award in this case can be made subject to any appeal.

11.In G v N, the Court granted leave under section 61 of the Ordinance to enforce an interim order made by the tribunal whereby G was restrained from pursuing proceedings on the Mainland in breach of an arbitration agreement, and was further ordered to take all necessary steps to dismiss the Mainland proceedings. N sought to set aside the enforcement order under sections 45 (relating to interim measures) and 61 of the Ordinance, on the grounds set out in section 81 of the Ordinance (the award dealing with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or being contrary to public policy). I found that the tribunal’s order, which was expressed as an Interim Order on Discontinuance of Proceedings, was not an award and that the grounds for setting aside an arbitral award as provided for in section 81 of the Ordinance and Article 34 of the Model Law were not applicable.

12.In this case, the same point is made for the Main Contractor resisting the application for leave to appeal, that the Award, in form and substance, is an interlocutory decision, and not an “award” within the meaning of the Ordinance.

13.On behalf of the Employer, reliance was placed on the fact that the arbitrator had himself decided to record his decision in the form of “an award”. Counsel contended that as Article 17(2) of the Model Law expressly empowers the tribunal to order interim measures “in the form of an award or in another form”, questions of form are within the discretion of the tribunal, and according to Counsel, the starting point is that the relevant order for interim measure should be accepted and regarded as an award.

14.ZCCM Investments Holdings PLC v Kansanshi Holdings plc [2020] 1 All ER (Comm) 132 was cited by Counsel for the Employer in his submissions that the Award constitutes an award. ZCCM was also cited and relied upon in G v N (see paragraph 21 of the Reasons for Decision), as paragraph 40 of Cockerill J’s judgment in ZCCM sets out a useful summary of the relevant factors for consideration, in the classification of an order as either an award, or an interim order:

“A consideration of these authorities ... suggests the following points:

(a) The court will certainly give real weight to the question of substance and not merely to form ...

(b) Thus, one factor in favour of the conclusion that a decision is an award is if the decision is final in the sense that it disposes of the matters submitted to arbitration so as to render the tribunal functus officio, either entirely or in relation to that issue or claim ...

(c) The nature of the issues with which the decision deals is significant. The substantive rights and liabilities of parties are likely to be dealt with in the form of an award whereas a decision relating purely to procedural issues is more likely not to be an award ...

(d) There is a role however for form. The arbitral tribunal’s own description of the decision is relevant, although it will not be conclusive-in determining its status ...

(e) It may also be relevant to consider how a reasonable recipient of the tribunal’s decision would have viewed it ...

(f) A reasonable recipient is likely to consider the objective attributes of the decision relevant. These include the description of the decision by the tribunal, the formality of the language used, the level of detail in which the tribunal has expressed its reasoning ...

(g) While the authorities do not expressly say so I also form the view that:

(i) A reasonable recipient would also consider such matters as whether the decision complies with the formal requirements for an award under any applicable rules.

(ii) The focus must be on a reasonable recipient with all the information that would have been available to the parties and to the tribunal when the decision was made. It follows that the background or context in the proceedings in which the decision was made is also likely to be relevant. This may include whether the arbitral tribunal intended to make an award ...” (citations omitted)

15.As explained in Cockerill J’s judgment, whilst the arbitrator’s own description of the decision is a relevant factor, it is certainly not conclusive when the Court seeks to determine the status of the order made. Courts are concerned with substance and not with the form, or any name or label which may be given to a document. The substance of the order and the matters dealt with are more significant in terms of construction and weight.

16.I have given consideration to the fact that there had been arguments made before the arbitrator as to how the order should be expressed and the format it should take, and the arbitrator had himself raised the issue and possibility of appeal being sought on the merits if there should be “an award” made. However, the arbitrator’s own view of the nature of the order ultimately made, and the effect of such an order, cannot be final or conclusive.

17.The fact that the tribunal may, under Article 17(2), order interim measures “in the form of an award or in another form” only extends or refers to the form of the order which can be made. It does not dispense with the need to properly consider whether in substance, the form can constitute an “award” to be enforced, or challenged, as such under the Ordinance.

18.As to how the relevant decision of the tribunal could be reasonably viewed by the parties, this is the very dispute between the Main Contractor and the Employer. The former considers the interim measure order made by the arbitrator as interlocutory in nature, an interim order made pending the final resolution of the issues in dispute in the Arbitration, to preserve the status quo. On the part of the Employer, it views the order made by the arbitrator as a determination on substantive issues of law and on the substantive rights and liabilities of the parties under the Bond, in effect depriving the Employer of its contractual right to payment under the Bond pending the conclusion of the Arbitration.

19.The nature of the issues dealt with by the arbitrator, and the background and context of the proceedings, are important.

20.The application made to the tribunal and which led to the Award was an application made by the Main Contractor for an interim measure to be granted by the tribunal, under Articles 17 and 17A of the Model Law. Interim measures were sought to maintain or restore the status quo between the parties pending the tribunal’s determination of the substantive dispute in the Arbitration, or until further orders from the tribunal. The dispute in the underlying Arbitration concerns claims of amounts due for work done under the Contract and issues of whether there had been breaches of the Contract. The Bond was issued by the bank and provided by the Main Contractor pursuant to the conditions of the Main Contract, as a condition precedent under the Contract. It is governed by Hong Kong law and has an exclusive jurisdiction clause in favor of the Hong Kong Court for determination of disputes arising under the Bond.

21.After commencement of the Arbitration, the Employer made two demands on the bank for payment under the Bond. The 1^st demand was rejected by the bank, and was not pursued. The Main Contractor applied to the tribunal for an order that the Employer should withdraw the 2^nd demand and be restrained from making any further application, demand or call on the bank for payment, as an interim measure, pursuant to section 37 of the Ordinance (and Article 17B of the Model Law) which relates to “preliminary orders”. After hearing submissions and arguments from the parties on the Main Contractor’s application, the arbitrator acceded to the request and granted the injunction sought as an interim measure pursuant to Article 17 and Article 17A (as stated at paragraph 82 of the Award). This was after the arbitrator accepted that he had jurisdiction to grant the interim relief, despite submissions made by the Employer that the “claim” referred to in Article 17A(1)(b) is the claim made by the Main Contractor that the Employer is not entitled to demand payment on the Bond pending resolution of the Arbitration. The arbitrator pointed out that he was not determining any dispute as to the validity of a demand made on the Bond, which dispute would be covered by the exclusive jurisdiction clause in the Bond and should be referred to the Hong Kong Court. Instead, the arbitrator explained that what he was asked to decide was the request for interim measures to maintain or restore the status quo until the disputes in the Arbitration have been determined. In the arbitrator’s view, where the tribunal has undoubted jurisdiction to decide the underlying disputes and the Arbitration, Article 17 presupposes that the tribunal has jurisdiction to grant or refuse interim measures (paragraph 44 of the Award).

22.The intended appeal or challenge by the Employer now is not made in relation to the jurisdiction of the tribunal to determine the application for interim measure. Such a decision on jurisdiction may fall within Article 16 (3) (which has effect under section 34 of the Ordinance) as a determination of a preliminary question on jurisdiction, and may be referred to the Court for review or decision. The present application is made pursuant to sections 5 and 6 of the Schedule, for appeal on a question of law arising out of an award.

23.Hence, the issue or matter dealt with in the Award and for which leave to appeal is now sought is the grant of an interim measure, pending the determination of the substantive issues in the Arbitration. Such an order can be varied, and is subject to any other or further order which can be made by the arbitrator, and is not final in relation to the matters considered and decided in the Award. Clearly and obviously, the arbitrator did not in substance decide any of the parties’ rights or liabilities under the Contract, and the arbitrator has not been rendered functus officio.

24.Objectively considered, the interim injunction granted by the arbitrator, pending the determination of the issues in the Arbitration on the Contract, and on the basis of there being a reasonable possibility that the party seeking the interim measure will succeed on the merits of the claim, will not be viewed as a final award on the merits of the issues for decision in the Arbitration, to constitute a final Award.

25.As considered and explained in G v N, an injunction granted as an interim measure is recognized and enforceable by the Court under section 61 of the Ordinance, which governs enforcement of “orders and directions” made by an arbitral tribunal. Separately, enforcement of “awards” is governed by sections 84, 87 and 92 of the Ordinance. “Award” is not defined in the Ordinance, but in principle, it is a “final determination” of the claim or particular issue in the arbitration (Russell on Arbitration, 24^th ed para 6-002), in that it determines all the issues, or all the outstanding issues, in the arbitration, in the sense of being a complete decision without leaving matters to be dealt with subsequently, or by a third party. Distinctions made by other writers include whether an award contains decisions finally disposing of disputed substantive matters between the parties, and whether the award is only interim, as opposed to being final.

26.Having carefully considered: the nature and substance of the issues decided in the Award; the form of the Award; the fact that the injunction granted in the Award is interim in nature, pending the conclusion of the resolution of the substantive dispute in the Arbitration, or until any further order from the tribunal, I do not consider that it is an “award” within the meaning of the section 5 of the Schedule, from which the Employer can seek leave to appeal to the Court. It is an order which can be enforced with leave granted by the Court under section 61 of our Ordinance. (This deals with Counsel’s submission that the “better view” propounded in Born, International Commercial Arbitration Vol 2, advocating the enforcement of provisional orders by the courts, should be accepted.) However, the decision of the Court to grant, or refuse to grant leave to enforce the order of the tribunal is not subject to an appeal, and the grounds of setting aside an “award” contained in section 81, and of refusing enforcement of the “award” under sections 86, 89 and 95, of the Ordinance do not apply to such orders and directions of the tribunal.

27.The finding that an interim injunction is not an award is consistent with decisions made in Singapore (CXG v CXH [2023] SGHC 244) and in Australia (Resort Condominiums International Inc v Bolwell (1993) ALR 655). In Resort, it was held by the Court that the reference “arbitral award” did not include an interlocutory order made by an arbitrator, but only an award which finally determined all or some of the matters in issue between the parties which were referred to the arbitral tribunal for determination in the arbitration. The Court pointed out in Resort that an interlocutory order which may be rescinded, suspended, varied or reopened by the tribunal which pronounced it is not “final”, to be an award which may be enforced.

28.As emphasized at paragraph 36 of G v N, the restriction of the right of appeal, and the exclusion of the grounds to refuse enforcement of interim measures provided for in Article 17I (which does not have effect in Hong Kong), are all consistent with and can be explained by the principle and object stated in section 3 of the Ordinance. Arbitrations would inevitably be delayed, if parties were able to challenge interim orders and directions as and when they are applied for and made in the course of the arbitral process, the conduct and progress of the arbitration would be unnecessarily hampered, and the issue of the final award would inevitably be delayed, by challenges to the Court. There is accordingly good reason to restrict challenges to the tribunal’s grant or refusal of interim measures.

Disposition

29.For the above reasons, the application for leave to appeal against the Award is dismissed. The costs of the application for leave (including all costs reserved) are to be paid by the Employer to the Main Contractor, on indemnity basis.

Mr Anthony Chan SC and Mr James Niehorster, instructed by King & Wood Mallesons, for the plaintiff

Dr Dean Lewis, of Pinsent Masons, for the defendant