Hong Kong Institute of Education v. Aoki Corporation

HCCT 109/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 109 OF 2003

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HCCT 110/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 110 OF 2003

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HCCT 7/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 7 OF 2004

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Coram: Hon Reyes J in Court

Dates of Hearing: 16 and 17 February 2004

Date of Judgment: 12 March 2004

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J U D G M E N T

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I. Introduction

1.There are 3 applications before the Court:-

(1) A Notice of Motion dated 23 December 2003 taken out by the Hong Kong Institute of Education ("HKIE") in HCCT No. 109 of 2003 ("HCCT 109") for an Order that the 2nd Interim Award ("the Award") dated 11 December 2003 of Mr John Blackburn QC ("the Arbitrator") be remitted to the Arbitrator for reconsideration pursuant to Arbitration Ordinance (Cap. 341) ("AO") s. 24.

(2) A Notice of Motion dated 27 December 2003 taken out by Aoki Corporation ("Aoki") in HCCT No. 110 of 2003 ("HCCT 110") for leave to appeal against the Award and for the remission or setting aside of the same pursuant to AO ss. 23, 24 and 25.

(3) An Originating Summons dated 21 January 2004 taken out by HKIE in HCCT No. 7 of 2004 ("HCCT 7") for an Order that HKIE be at liberty to enforce the Award against Aoki in the same manner as a judgment of the Court, subject to an undertaking to enforce the Award only for the sum of HK$53,650,810.97 and interest thereon, pursuant to AO s. 2GG.

II. Background

2.The 3 application arise out of 4 arbitrations concerning Packages B, C and D of HKIE's Tai Po Campus Development at its Main Campus Site in Shuen Wan, Tai Po Area 34, Hong Kong. HKIE was the Employer for the development and Aoki the Main Contractor under 2 building contracts: an Agreement dated 15 March 1996 for Package B and an Agreement dated 12 February 1998 for Packages C and D (respectively, "the 1st Agreement" and "the 2nd Agreement" and collectively, "the Agreements").

3.Package B essentially comprised the construction of an Amenities Building for HKIE's campus, including a multi-purpose hall, squash courts, indoor and outdoor swimming pools, external sports facilities, a Director's Lodge, a staff lounge and canteen, and part of student canteen facilities.

4.Packages C and D were combined. Package C covered 3 hostel blocks for students, the Operational Staff Quarters and some external works. Package D covered the Senior Staff Quarters and certain landscape and road works.

5.Originally Kwan Lee Construction Limited ("Kwan Lee") had won the tender for Packages C and D. But Kwan Lee having failed to proceed with the works diligently, HKIE terminated Kwan Lee's involvement and re-entered the site. Packages C and D were put up for re-tender which Aoki eventually won.

6.The Agreements follow the Standard Form of Building Contract (Private Edition) ("the Standard Form") with Quantities but with amendments. The Agreements are broadly identical, with the notable difference that completion of Packages C and D was divided into 3 phases (respectively, Phases C1, C2 and C3) with liquidated damages stipulated for each phase.

7.The parties had disputes over their rights and liabilities under the Agreements. Those disputes were referred to the Arbitrator at a hearing which lasted from 15 September to 15 October 2003. The outcome of the hearing was the Award.

8.The Award adjudged that the sum of $36,367,311 was due from Aoki to HKIE as the balance of HKIE's entitlement to liquidated damages for delay in respect of Package B. In relation to Packages C and D the Arbitrator held that HKIE was entitled to $51,061,816 from Aoki as the balance of HKIE's entitlement to liquidated damages for delay. The total amount awarded to HKIE by the Arbitrator was accordingly $87,429,127 ("Sum X").

9.Sum X was in fact erroneous. On the basis of facts not in dispute between the parties, the Arbitrator ought to have deducted certain further amounts from his awards in respect of Packages B, C and D. Thus the sum awarded to HKIE under Package B ought to have been $24,774,505.85 while that under Packages B and C ought to have been $32,069,972.12. Pursuant to AO s. 19, on 27 January 2004 the Arbitrator issued a correction ("the Correction") to the Award taking account of the deductions which he had initially overlooked and revising the sums awarded to those just mentioned. Sum X was accordingly reduced to $56,844,477.97 ("Sum Y"). If one sets-off the sum of $3,193,596 (which the Award gives Aoki) against Sum Y, one arrives at $53,650,881.97 ("Sum Z"). This is a little over the net figure of $53,650,810.97 (which may be a typing error) mentioned in the HCCT 7 Summons.

III. Discussion

A. The HCCT 109 Motion

10.This Motion was taken as a precaution. Its purpose was to correct Sum X to Sum Y. At the time it was taken out, HKIE did not know whether Aoki would agree to a revision of the Award to correct the Arbitrator's oversight or whether the Arbitrator would refuse to correct the Award. The Motion had to be taken out, due to the time limit prescribed by RHC Order 73 Rule 5 for an application under AO s. 24, before the situation could be clarified. The issue of the Correction has meant that this Motion has been superseded. The question of costs apart, mo Order is now required on the application.

B. The HCCT 110 Motion

B. 1 The discretion to grant leave to appeal

11.AO s. 23 provides:-

"(1) Without prejudice to the right of appeal conferred by subsection (2) the Court shall not have jurisdiction to set aside or remit an award on an arbitration agreement on the ground of errors of fact or law on the face of the award.

(2) Subject to subsection (3) an appeal shall lie to the Court on any question of law arising out of an award made on an arbitration agreement; and on the determination of such an appeal the Court may by order:-

(a) confirm, vary or set aside the award; or

(b) remit the award to the reconsideration of the arbitrator or umpire together with the Court's opinion on the question of law which was the subject of the appeal;

and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make his award within 3 months after the date of the order.

(3) An appeal under this section may be brought by any of the parties to the reference:-

(a) with the consent of all the other parties to the reference; or

(b) subject to section 23B, with the leave of the Court.

(4) The Court shall not grant leave under subsection 3(b) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement; and the Court may make any leave which it gives conditional upon the applicant complying with such conditions as it considers appropriate.

...."

12.In Swire Properties Ltd and others v Secretary for Justice [2003] 2 HKLRD 986 the Court of Final Appeal observed that, although free from any express fetter, the Court's discretion under AO s. 23 to grant leave to appeal an arbitral award had to be exercised in conformity with the AO's purpose. That purpose "involves a strong inclination to hold people to their choice of arbitration" (at §43). Accordingly, the Court of Final Appeal stated the following principles on the exercise of discretion (at §§43, 46 and 47):-

(1) "Where a question of law of general public importance or the construction of a standard clause is involved, ... our courts should normally grant leave to appeal from an arbitral award when, but only when, there is at least a serious doubt as to its correctness."

(2) "Where the construction of a 'one-off' clause is involved, ... our courts should normally grant leave to appeal from an arbitral award when, but only when, the arbitral tribunal's construction appears to be obviously wrong."

(3) "[E]ach case -- whether it concerns a question of law of general public importance, the construction of a standard clause or the construction of a 'one-off' clause -- will have its own particular features bearing upon the discretion to grant or refuse leave to appeal from an arbitral award."

13.There is no dispute between Mr Scott SC (appearing for HKIE) and Mr Yu SC (appearing for Aoki) that the foregoing principles apply in the determination of the HCCT 110 Motion. I now consider the several grounds on which Mr Yu contends Aoki should be given leave to appeal against the Award.

B. 2 Liquidated damages

14.Mr Yu says that the Arbitrator wrongly concluded that the liquidated damages provisions in the Agreements were enforceable. The Arbitrator (Mr Yu submits) ought to have accepted Aoki's argument that the liquidated damages stipulated in the Agreements were penal in nature and thus unenforceable.

15.The Agreements stipulated the following liquidated damages in relation to each Package:-

(1) Package B: $139,000 per day.

(2) Packages C and D:-

(a) Phase C1: $7,000 per day.

(b) Phase C2: $173,000 per day.

(c) Phase C3: $128,000 per day.

16.The liquidated damages were calculated by reference to a formula. The formula was early on set out in Public Works Department Technical Circular No. 9/80 ("TC 9/80") dated 28 March 1980. The formula was refined over time. TC 9/80 was superseded on 4 November 1996 by Works Branch Technical Circular No. 21/96 ("TC 21/96"). TC 21/96 was in turn superseded by Works Branch Technical Circular No. 7/2001 and the latter was in turn revised by Environment, Transport and Works Bureau Technical Circular (Works) No. 4/2003 ("TC 4/2003"). All the foregoing Technical Circulars propose formulas for calculating liquidated damages to be specified in Government contracts. The formulas have been based on the Government's long experience in the construction field. All the Technical Circulars warn of the need for liquidated damages to constitute "a genuine pre-estimate, judged at the time the contract is entered into, of the loss likely to arise from the anticipated breach" of contract (see, for example, TC 4/2003 §4). All Technical Circulars warn against the mechanical application of the formulas suggested. TC 9/80 §10, for instance, points out that "[i]f circumstances are such that neither the formula in paragraph 5 nor the cost-benefit analysis referred to in paragraph 6 is considered appropriate, Departmental Heads are hereby authorised to approve suitable alternatives."

17.The Arbitrator dealt with Aoki's submissions that the liquidated damages provisions in the Agreements constituted penalties in Award §§37-55. I summarise those paragraphs below.

18.Award §37:-

The Arbitrator refers to TC 9/80. He notes that Ms Lam of Levett and Bailey used the formula in TC 9/80 to calculate the $139,000 liquidated damages for Package B.

19.Award §38:-

The Arbitrator refers to Lord Dunedin's famous dictum on liquidated damages in Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Company Ltd [1915] AC 79, at 86. The Arbitrator states that the label used by the parties to describe a sum payable on breach is not determinative. The question is "essentially one of construction" which "has to be decided as at the date of making the contract".

20.Award §39-40:-

The Arbitrator describes the facilities provided as part of Package B:-

"The scale of the facilities available in the Amenities Building is most impressive. The quality of the facilities provided is very high. The fully equipped sports hall was also intended to be used for examinations and, no doubt, for numerous performances. The gymnasium, squash courts and indoor swimming pool have already been mentioned. There are other equipped rooms for activities like dance. The Amenities Building provides the catering for the students and catering for the staff.

Sports and games are, or should be, an essential part of student life. For those students undertaking course concerned with physical education, sport is more than recreation: it is part of the curriculum. Film and television apart, I have never seen a more magnificent swimming pool than that at the Institute's Tai Po campus and the other outside sports' facilities are, no doubt, much used."

21.Award §41:-

Having described Package B's facilities, the Arbitrator continues:-

"It is, of course, true that the sums already deducted and now sought in the arbitration as liquidated damages for delay in completing the Package B Contract are very large. But, in my opinion, that is a function of the length of the alleged culpable delay and not a consequence of an excessive daily rate. In my opinion, it is quite impossible to conclude that the figure of HK$139,000 per day is an extravagant or unconscionable sum."

22.Award §§42-3:-

The Arbitrator rejects the suggestion of Mr Tackaberry QC (who acted for Aoki at the arbitration) that it was wrong to have used a formula when it was possible and preferable to arrive at a better pre-estimate. The Arbitrator holds that "[a]ny estimate of the likely actual loss would clearly have been very difficult to make".

23.Award §44:-

The Arbitrator considers Aoki's contention that, applying the TC 9/80 formula, the liquidated damages formula wrongly incorporated interest and cost fluctuation elements (among others). Funds for HKIE's Tai Po campus were allocated by LegCo and paid through the University Grants Committee. The project was thus funded by way of a straight subvention from Government. Further, the formula made an allowance for cost fluctuations even though the Agreements provided that there would be no adjustment for rises or falls in the price of labour or materials. Aoki therefore argued that the formula included losses (reflected by the interest, fluctuation and other elements) which HKIE would never suffer.

24.Award §§45-7:-

The Arbitrator reasons:-

"I do not accept that the assessment failed adequately to consider the loss of the 'economic benefit generated by the project': there was no such benefit. Nor do I accept that the formula as used included a factor for amortization notwithstanding the language used in paragraph 3 of the Circular. Furthermore, the use of a percentage to cover supervision costs was, in my view, wholly reasonable.

I have found that he sum of HK$139,000 per day was not extravagant or unconscionable and held that it was arrived at in just the sort of circumstances where the parties would be expected to liquidate damages. While not forgetting that the issue is one of law, it is legitimate to recall that the figure was freely agreed by Aoki and was never questioned by any of the tenderers. Mr Tackaberry submits that because the HK$139,000 per day figure has been calculated by reference to losses which the Institute would never suffer, it must be declared to be an unenforceable penalty. Mr Marrin [QC (who represented HKIE at the arbitration)] answers it is not a case of assessing a liquidated sum by reference to a loss suffered by a third party -- i.e. the Government as funders -- or to a loss not suffered at all but to use interest on capital invested as a means of arriving at an agreed value of the damage suffered by th Institute by reason of the loss of the sue of the Package B Works. Mr Marrin says that, in a situation, in which it is in both parties' interests to liquidate damages for delay, it was not only reasonable to do so, largely by reference to interest on capital costs but also that there was no other obvious means of doing so.

Unless constrained by authority otherwise, I accept Mr Marrin's submission. Moreover, where figures put forward as liquidated damages for delay are not excessive, where those figures have been accepted and where it would be difficult to estimate the recoverable loss likely to result from the breach, it seems to me wrong to allow those figure to be subject to detailed scrutiny and to be attacked successfully as constituting an unenforceable penalty merely on the ground of errors in calculation."

25.Award §48:-

The Arbitrator refers to Dunlop and Phillips (Hong Kong) Ltd v AG of Hong Kong (19930 61 BLR 41. He adopts Dickson J's dictum in Elsey v J G Collins Insurance Agencies Ltd (1978) 83 DLR (3d) 1 (SCC) (at 15) (cited by Lord Woolf in Phillips at 58):-

"It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression."

26.Award §§49-51:-

The Arbitrator turns to liquidated damages in respect of Packages C and D. He notes that the latter were calculated in accordance with the formula in TC 21/96. He draws attention to Note 3 of TC 21/96 which "warned against including building cost inflation (or price fluctuation) where the contract did not allow recovery for these costs" and to another note about the percentage to be used for supervisory costs. He also describes the works comprised in Packages C and D, including the senior staff quarters which he calls "a most attractive development ... strongly reminiscent of the photographs one sees (indeed, cannot escape) of holiday or retirement homes on or near the Mediterranean coast of France and Spain".

27.Award §52:-

The Arbitrator disagrees with Aoki's submission that the formula in TC 21/96 cannot be applied to capital and supervision costs of different sections or phases under an agreement.

28.Award §§53-55:-

The Arbitrator states:-

"In my opinion, it is not possible to conclude that the sums liquidated on damages for delay in completing Phases C1, C2 and C3 were extravagant or unreasonable. On the contrary, I consider that the sums are reasonable in themselves and were, at contract, freely accepted. This was not a project where it was possible to assess or consider the economic benefit which it generated. It follows that the argument on which the attack on the liquidated damages depend in the case of Package C and D Contract are the same as those considered above in the consideration of Package B. There are two arguments.

As to the use of interest on capital expenditure where the Institute did not borrow and the contract was funded by subvention by Government, there is nothing that I need, or can, do to expand the discussion of the point in the context of Package B. It was, in my opinion, very difficult to arrive at any sort of accurate pre-estimate of the actual loss which the Institute would suffer if either the Student Hostels (and Operational Staff accommodation) or the Senior Staff Quarters, or both were late. The actual losses would be -- and, no doubt, were -- very substantial.

Secondly, there were errors in the application of the formula. Miss Lam used a contract period of 285 days for Phase C2 and 300 days for Phase C3 whereas the actual stipulated period was, in both instances, 360 days. She did so because, at the time of calculation, the scheme periods were those favoured by Miss Chow. On reflection, the periods for the works stated in the contract were lengthened. Miss Lam also took HK$207,670,000 as the Phase C3 contract sum. This was an error: the actual Contract Sum for Phase C3 was HK$207,060,000. Despite Note 3 in the revised Circular, Miss Lam included the element covering fluctuations in the calculation, even though the proposed contract for the completion of packages C and D, like the Package B contract, did not provide for the recovery of increases in labour and material costs. Miss Lam was aware of the Note but included the element covering fluctuations to be consistent with her earlier calculations. She is also accused by Aoki of having wrongly used a percentage for supervision costs, when actual anticipated costs were available, and of using a percentage (13%) which did not reflect additional costs of supervision caused by delay. In my view, these last accusations are misplaced. But even if I were wrong, I would nevertheless hold that where, as here, the sums stipulated as liquidated damages are reasonable, and not excessive, and were accepted by the contractor, the contract provisions cannot be attacked as constituting a penalty merely because of errors in the application of a formula."

29.Mr Yu's specific criticisms of the Arbitrators' conclusions on liquidated damages may be summarised as follows:-

(1) The Arbitrator merely asserts without analysis that the sum stipulated in the Agreements for liquidated damages were not extravagant or unconscionable.

(2) Given his acceptance that:-

(a) the liquidated damages for Packages B, C and D incorporated interest and cost fluctuation elements in accordance with the relevant Technical Circular formulas; and,

(b) HKIE would not suffer loss of interest (because the projects were funded by direct Government subvention) or cost fluctuations (because the Agreements so provided),

the Arbitrator ought to have held that the liquidated damages were penal in nature. The liquidated damages compensated HKIE for losses which it could never incur and could not constitute any genuine pre-estimate of damages.

(3) The Arbitrator wrongly took into account the fact that the liquidated damages figures were agreed between HKIE and Aoki.

30.Mr Yu points out that, insofar as AO s. 23(4) is concerned, the Arbitrator's decision on liquidated damages substantial affects Aoki's rights under the Agreements:-

(1) On Package B, the interest element of $89,302 amounted to roughly 64% of the daily liquidated damages sum of $139,000; while the fluctuations element of $27,185 amounted to about 19% of the same. The interest and fluctuations elements between them constituted 83% of the liquidated damages provision for Package B.

(2) On Phases C1, C2 and C, interest elements of $1,714.30, $59,536.12 and $45,064.39 respectively represented 24%, 34% and 35% of the applicable daily liquidated damages provisions. The fluctuation elements of the 3 Phases were $1,058.60, $36,764.24 and $77,013.33 respectively or 15%, 21% and 22% of the applicable liquidated damages provisions. Thus, interest and fluctuation elements constituted between 39% and 57% of the liquidated damages figures for Phases C1, C2 and C3.

31.Mr Yu reasoned that, in light of his criticisms, the Arbitrator was seriously (even obviously) wrong in upholding the liquidated damages. Since the principles pertaining to the striking down of liquidated damages provisions as penalties and the question of the application of a formula in the calculation of liquidated damages are not one-off matters but are legal questions of general public importance, Mr Yu submitted that leave to appeal should be granted on the basis of Swire Properties.

32.I am not persuaded by Mr Yu's arguments.

33.There is no doubt about the principles applicable to the striking down of liquidated damages clauses as penalties. They are well-known and were famously summarised by Lord Dunedin in Dunlop Pneumatic Tyre at 86-8. The difficulty arises in the application of Lord Dunedin's guidelines to the specific facts of a case.

34.In the present matter no one suggests that a formula should be mechanically applied in all situations to arrive at liquidated damages. The Technical Circulars stress that their formulas should only be used in suitable circumstances. The overriding consideration according to the circulars must be the use of a method which constitutes a genuine attempt to pre-estimate damages. This case does not, therefore, give rise to a general question as to the appropriateness of using formulas (such as those found in the Technical Circular) in the derivation of liquidated damages figures. It concerns more the application of a formula in particular circumstances.

35.The real question before the Arbitrator was thus whether Ms Lam applied the formula in a proper manner in light of the peculiar features of HKIE's development. The Arbitrator had to assess whether in light of one or more of the following features (among others) the liquidated damages figures reached by Ms Lam were penal in nature and hence unconscionable overall:-

(1) The fact that the project was directly funded by a Government subvention and HKIE did not have to pay funds out of its own pocket.

(2) The fact that the Agreements included an express term that there was to be no adjustment for rises or falls in the price of labour or materials.

(3) The fact that Ms Lam made errors in the application of the formulas:-

(a) she used a wrong contract period; and,

(b) she used the wrong contract sum for Phase C3.

(4) The possibility that Ms Lam wrongly used a percentage for supervision costs when anticipated costs were available and the 13% which she used did not reflect additional costs of supervision caused by delay.

36.In my judgment, as far as questions of law are concerned, the foregoing features situate this case more towards the one-off side of the scale identified in Swire Properties. Certainly Ms Lam's clerical errors or erroneous assumptions must be unique to this project. It may be suggested that the use of interest and cost fluctuations elements in the calculation of liquidated damages arises in projects of a similar nature but before me there was no cogent evidence to that effect or the degree to which such phenomenon is prevalent. In light of the warning in the Technical Circulars against the blind application of the formulas therein, I am not prepared to accept on the evidence before me that the phenomenon is so common as to generate a legal question of general public importance. This being more a one-off issue, following Swire Properties, I should strictly assess whether the Arbitrator went obviously wrong.

37.I think that it is unfair to say that the Arbitrator did not articulate reasons for his conclusion that the liquidated damages figures for Package B and Phases C1, C2 and C3 were not unconscionable and extravagant. It will be apparent from Award §§39, 40, 50, 51 and 52 that the Arbitrator prefaced his conclusion that the liquidated damages provisions for Package B and Phases C1-C3 did not strike him as unconscionable, with a description of the Tai Po campus project and his impression of the magnitude and grandeur of the same. It seems to me that what the Arbitrator was effectively saying was that, given the size and nature of the project (as seen by him), he was of the view that the liquidated damages provisions stipulated in the Agreements could in no way be regarded as disproportionate. Delay on the project would mean that the time when HKIE could enjoy or make use of its facilities would have to be put back. Given the "magnificence" of the facilities involved, the liquidated damages figures could not be held to be extravagant as an approximate measure of the loss of enjoyment or use stemming from such delay. I do not see how I can fault the Arbitrator on his view, based on his sense impressions and personal experience, and hold that he was seriously or, for that matter, obviously wrong.

38.I agree with Mr Scott's submission that, in assessing whether the liquidated damages were unconscionable or extravagant on the basis of his impressions of the project, the Arbitrator seems simply to have practised the modern approach advocated in Hudson's Building and Engineering Contracts (11th ed.), II, §10-020 to 10-021:-

"The above cases show that principles of penalty invalidation apply equally to provisions which involve taking possession of plan, or regulating the state of accounts following a determination. In the tenth edition it was suggested that provisions for forfeiture of retention moneys (which of course increase progressively in amount as the work is carried out) would be offensive, since in principle there should if anything be a reduction in potential damage as the work nears completion, thus militating against a 'genuine pre-estimate of damage.' The contrary view that such provision can be reasonable is, however persuasively argued and explained in the judgments in the Krratzmann case [[1982] Qd R 682] in the Full Court of Queensland... Coupled with an undoubted increasing judicial tendency, most certainly in England, to view with approval any agreed procedures or remedies which offer savings in judicial time and administrative expense, and given the fact that producer pressures, again particularly in England, are resulting in progressively smaller retention percentages and limits on retention, invalidation of these types of clause as penalties seems today mush less likely. Indeed, provided the sums stipulated are neither excessive nor oppressive, the modern tendency seems to be not to subject them to too close analysis.

Regular weekly or monthly figures for delay are even less open to attack on principle, since they correspond to the essentially reasonable concept of a running loss to the owner while out of occupation, and hence are only likely to be invalidated if they are wholly unreasonable in amount relative to the value of the completed project to the owner. Even here, their administrative convenience makes it increasingly difficult to attack successfully on this ground, except in the most obvious cases of excess. They are particularly suitable for projects which are not directly commercial in character, such as private houses, libraries, schools, subsidised housing and other public buildings and engineering works, where it may not be possible to prove any loss in the direct commercial sense if completion is delayed. It may be a consequence of producer influence, but there would appear in fact to be virtually no reported cases in the United Kingdom where periodical liquidated damages for delay in building contracts have been held excessive so as to constitute a penalty. Liquidated damages clauses in general are not looked on with the same disfavour at the present day, and modern disallowances seem to arise almost entirely in the field of hire-purchase, where Lord Dunedin's principle 4(c) above¹ has frequently been violated."

My view is reinforced by the Arbitrator's citation of Dickson J's dictum in Elsey noted above.

39.As for the employment of an interest element in the liquidated damages provision, far from being obviously or even seriously wrong, I think that the Arbitrator was most probably correct in his reasoning. By its nature (as the Arbitrator expressly found) the Tai Po campus project was one "where it would be difficult to estimate the recoverable loss likely to result from the breach" (Award §47). In effect the Arbitrator held that interest on capital cost was a reasonable surrogate measure for estimating damages in such a situation. The fact that HKIE did not actually suffer interest loss was neither here nor there. The interest element was simply a means of measuring the loss of use and enjoyment sustained by HKIE through delay to the interest lost on capital. As the Arbitrator comments (at Award §46), there appears to be no other obvious alternative to such a measure.

40.As for the fluctuations element, the Arbitrator fell back on his impression that, given the scope of the Tai Po campus project, the liquidated damages provision for Packages B, C and D was not excessive. In consequence of that impression, he did not think that the incorporation of a costs fluctuation element (despite provisions in the Agreements disallowing Aoki from recovering increases in labour and material costs) pushed the liquidated damages provisions into unreasonable bounds. See, for instance, Award §55. In my judgment, in so reasoning the Arbitrator cannot be said to have adopted an approach which was seriously (or obviously) flawed.

41.I accept Mr Yu's submission that a Court may strike down a liquidated damages provision as a penalty even though on the evidence a party's agreement to the same was not due to any coercion. But I do not read the Arbitrator as contending otherwise. It is true that the Arbitrator attaches weight to the fact that liquidated damages were "freely agreed by Aoki and was never questioned by any of the tenderers". But he appears to be relying on this fact in support of his opinion that the figures stipulated were reasonable and not excessive. The tacit premise must be that, if the liquidated damages provisions were outrageous, Aoki and the other tenderers would have complained about them at the time of tender. In such case Aoki would presumably not have agreed the figures. The fact that Aoki agreed the liquidated damages, while not conclusive on the matter, suggests that the provision was thought at the time of contracting to be reasonable. Following Dickson J's dictum in Elsey, in the absence of obvious oppression, the Arbitrator felt that he should give effect to the parties' agreement. Once again I do not think that such logic can be criticised as seriously (or even obviously) flawed.

42.Accordingly, I reject the liquidated damages/penalty ground as a basis for granting Aoki leave to appeal. I should add that, had I found that the Arbitrator was seriously or obviously wrong on this issue, I would have held that the requirement in AO s. 23(4) had been met. It seems to me that the interest and fluctuation elements together comprise a large portion of the liquidated damages figures stipulated in the Agreement. Therefore, if the Arbitrator was in error in dismissing Aoki's penalty argument, the error could substantially affect Aoki's rights under the Agreements.

B. 3 Time at large for Phases C1 and C2

43.Clause 23 of the 2nd Agreement was heavily revised from the Standard Form. It provided as follows:-

"(1) Upon it becoming reasonably apparent that the progress of the Works is delayed , or is likely to be delayed, the Main Contractor shall forthwith give written notice to the Architect of the material circumstances including the cause or causes of the delay. The Main Contractor shall, if practicable in such notice or otherwise in writing as soon as possible after such notice, give particulars of the expected effects of the delay, or potential delay, and shall estimate the extent, if any, of the expected delay to the completion the Works beyond the Date for Completion stated in the appendix to these Conditions or beyond any extended time previously fixed under either this clause or clause 33(1)(c) of these Conditions. The Main Contractor shall give such further notices as may be reasonably necessary or as the Architect may reasonably require for keeping up-to-date the particulars and estimate of the expected delay to the completion of the Works.

Any notification or claim for extension of time which is not:-

(i) made within 14 days of the event giving rise to the claim or notification; and

(ii) accompanied by detailed reasons and supporting documentation within 30 days of the event giving rise to the claim or notification,

shall have no validity under the Contract to the effect that the Main Contractor shall not pursue such a claim for extension of time in any arbitration and/or litigation. Where the Main Contractor has failed to comply strictly with the provisions of this clause he shall thereafter in respect to events giving rise to the invalidated claim make no claim based upon any alleged duty of the Architect or other consultant employed by the Employer to independently assess the consequence of events giving rise to delay and/or any alleged duty of the Architect or other consultant to independently award extensions of time.

(2) If, in the opinion of the Architect, upon receipt of any notice, particulars and estimate given by the Main Contractor under sub-clause (1) of this Condition, the completion of the Works is likely to be or has been delayed beyond the Date for Completion of the Works or the Dates for Completion of the parts of the Works stated in the Appendix to these Conditions or beyond any extended time previously fixed under either this clause or clause 33(1)(c) of these Conditions,

[(a) - (k) listing various causes for delay (such as "(a) by force majeure," "(b) by reason of inclement weather," "(e) by reason of Architect's instructions," "(f) by reason of the Main Contractor not receiving in due time necessary instructions," etc.]

then the Architect shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair and reasonable extension of time for completion of the Works.

(3) Provided always that the Main Contractor shall use constantly his best endeavours to prevent delay and shall do all that may reasonably be required to the satisfaction of the Architect to proceed with the Works."

44.Liquidated damages for each of the Package C Phases were stipulated in the 2nd Agreement. Times for completion for each Phase were provided for in the Appendix to the 2nd Agreement as follows:-

(1) Phase C1: 150 days after date of possession of site ("the possession date") (17 January 1998).

(2) Phase C2: 360 days after the possession date (15 August 1998).

(3) Phase C3: 360 days after the possession date (15 August 1998).

45.Mr Yu argues that 2nd Agreement cl. 23(2) only refers to extending time for completion of "the Works" with no express power to extend time for completion of each Phase of Package C. Extension of time ("EOT") provisions are inserted into a construction contract for an Employer's benefit to permit re-fixing of a completion period where delay has been occasioned by him. Accordingly, the EOT provision in cl. 23(2) must be read "contra proferentem" with any ambiguities construed in Aoki's favour against HKIE. It follows (Mr Yu reasons) that the Architect did not have power under cl. 23(2) to grant EOTs separately for completion of Phases C1 and C2².

46.Chitty on Contracts (28th ed.), II, §37-109 states:-

"Time at large. Where the work is delayed by the employer and an appropriate extension of time is not granted, time is said to be 'at large' i.e. the contractual date is no longer binding. The contractual obligation is then replaced by an obligation to complete within a reasonable time. Time will be 'at large' where delay is caused by the employer and no machinery exists under the contract allowing the completion date to be re-fixed. In McAlpine Humberoak v McDermot International [(1992) 58 BLR 1], the contract provided for an extension of time but contained no machinery whereby it was to be granted. The Court of Appeal held that this did not prevent time being re-fixed, if necessary, by the court, so as to permit the recovery of general (not liquidated) damages by the employer. Where the contract contains an arbitration clause, time may similarly be re-fixed by the arbitrator's award, provided that the contract allows for an extension of the appropriate grounds."

47.Mr Yu points out that the JCT Standard Form of Building Contract has a Sectional Completion Supplement (1980 Edition revised July 1994) ("the Supplement") which the parties can adopt to cater for the situation where completion dates are stipulated for phases of a project. When adopted, the Supplement essentially results (among other things) in the words "Sections of the Works" being inserted into the Standard Form wherever the expression "the Works" appears. On the use of the Supplement, Keating on Building Contracts ((7th ed.) §18-192 comments:-

"Sectional completion. It is well settled that this clause [JCT Standard Form of Building Contract (1998 Edition) cl. 18] does not provide for sectional completion. This remains so, it is submitted, even if provisions in the Contract Bills set out that the work is to be completed and handed over in sections. The basis of this submission is the words of clause 2.2.1, 'Nothing contained in the Contract Bills shall override or modify ...' Clearly, sectional completion amounts to a substantial modification of the Condition.

If a contract providing for sectional completion is required, the Form itself must be amended. A Sectional Completion Supplement is published by the Joint Contracts Tribunal for this purpose. An alternative, but much less desirable, course is to state the parts of the Works, the dates when they are to be completed and the amount of liquidated damages for each part and to use general words indicating that the Contract must be read as if the necessary consequential amendments had been made. If the latter course is adopted, the likelihood of unintended complications of construction is great."

48.The Standard Form has no equivalent to the Supplement. No Supplement or similar standard contractual provisions were adopted for the Tai Po campus project. The consequence (Mr Yu concludes) was to render time for completion of Phases C1 and C2 at large and the liquidated damages provisions in respect of those 2 Phases cannot be relied on by HKIE. Mr Yu criticises the Arbitrator for completely failing to deal with this submission of Aoki's in the Award.

49.Award §§10-11 refer to the scope of Phases C1, C2 and C3 and their respective completion dates. Awards §50 mentions the liquidated damages for each Phase. In Award §172 the Arbitrator held that Aoki was entitled to a total of 63 days extension of time for Phase C1. That he said meant an extended date for completion of Phase C1 of 20 March 1998. The date of practical completion having been certified as 20 May 1998, the Arbitrator found that Aoki was liable for 61 days' delay and hence liquidated damages (at $7,000 per day) of $427,000. In Award §200 the Arbitrator held that the outcome of Aoki's challenge to the Architects awards of EOT was "to reduce the period of culpable delay from the 276 days pleaded ... to 245 days". Total liquidated damages for Phase C2 (at $173,000 per day) were thus $42,355,000.

50.Although the Arbitrator did not specifically deal in his Award with the question of sectional completion under 2nd Agreement cl. 23(2), it is implicit from his awarding of liquidated damages in respect of Phases C1 and C2 that he must have accepted HKIE's submissions and rejected Aoki's. In particular, I note that in HKIE's oral closing submissions, Mr Marrin referred to an effort to amend clauses 22, 23 and the Appendix of the 2nd Agreement to provide the machinery for completion of Phases C1 and C2. Thus, for example, 2nd Agreement cl. 16 (heavily amended from the Standard Form) provides:-

"Sectional Completion

The Works are scheduled for completion in stages. When the Employer takes possession of part or parts of the Works stated in the Appendix to these Conditions (any such part being hereinafter in this clause referred to as 'the relevant part or parts' before Practical Completion of the whole of the Works, then notwithstanding anything expressed or implied elsewhere in this Contract:-

....

For the avoidance of doubt, the Contract shall always be read and construed as if all necessary amendment had been made to the documents to allow for completion of the Works in parts."

Although adoption of the Supplement might have produced a neater result, the revisions to cl. 16 follow the alternative course referred to by Keating in the passage quoted above.

51.Given 2nd Agreement cl. 16, I do not think that it can be said that the Arbitrator was obviously (or even seriously) wrong in proceeding as he did and awarding liquidated damages for Phases C1 and C2 based on his assessments of the EOTs which ought to have been granted on each section. Clause 16 has a similar effect to that which would have resulted had the Supplement or similar document been adopted. As far as I can judge, cl. 16 does provide for sectional completion contrary to Mr Yu's submission.

52.I therefore reject this ground as a basis for leave to appeal against the Award. I am invited in the alternative to remit this question to the Arbitrator under AO s. 24. For the same reasons which I have discussed, I decline so to do. For completeness, I add that I agree with Mr Scott that the specific sectional mechanism adopted here suggests that this is a one-off situation rather than a matter raising a legal question of general importance.

B. 4 The Director's Lodge

53.HKIE's letter ("the Acceptance Letter") dated 11 December 1995 accepting Aoki's tender for Package B stated the following:-

"The following issues have been agreed and shall form pat of the Contract:

1.0 DATE FOR POSSESSION OF SITE AND COMPLETION

1.1 The date for possession of Site shall be confirmed by the Architect with seven days' prior notice.

1.2 Please note that the commencement of the Substructure and Superstructure Works of the Director's Lodge may be delayed. The commencement of these Works will be instructed by the Architect as and when appropriate but within 60 days after the Date for Possession of Site.

1.3 The Date for Completion including the Substructure and Superstructure Works of the Director's Lodge if instructed within 60 days as aforementioned, shall be 450 days after the Date for Possession of Site."

54.The Director's Lodge formed part of Package B. Instructions for the Director's Lodge were not given with 60 days after as stipulated in the Acceptance Letter. Mr Yu says that on the plain reading of the Acceptance Letter (which by its own terms must be treated as part of the 1st Agreement) time is at large. In other words, Mr Yu contends that the running of the 450 days' completion period provided in Acceptance Letter §1.3 was conditional on an instruction for the Director's Lodge having been given within the 60 days period mentioned in Acceptance Letter §1.2. No instruction having been given within 60 days, the completion date was inoperative.

55.Mr Yu takes the Arbitrator to task for not dealing with this point in the Award. But I disagree with this. On my reading of the Award, the Arbitrator squarely rejected Aoki's argument.

56.Award §§88-9 state:-

"The documents show that, when it became clear that instructions would not be issued within the 60 day period, the Architects opened negotiations with Aoki to vary the terms of the Contract so as to provide for completion of Package B in two Sections, being (a) the Lodge and (b) the rest. [HKIE's] opening statement stated that discussions with a view to introducing conventional sectional completion came to nothing. The contemporary documents plainly bear that out. Miss Chow explained why. She said that, once Aoki had been granted an extension of time for the sheet piling (see further below), Aoki were well able, having been issued with instructions, following the Building Department's consent, for the Lodge, to complete within the extended Date for Completion.

Mr Marrin makes two points. He contends that both parties' experts, Mr Battersby and Mr Adams, are agreed that the fact that the instructions were not given with the 60 day period did not cause critical delay. Second, he says that, if there was critical delay, then an extension of time would be available under Clause 23(1)(f). Mr Tackaberry argued that the 60 day period stipulated for the issue of the necessary drawings and instructions formed a separate code and that a failure to comply with the code set at time at large. It is only necessary to say that I agree with Mr Marrin."

57.The Arbitrator's reference to Mr Tackaberry's submission that "the 60 day period stipulated for the issue of the necessary drawings and instructions formed a separate code" so that "failure to comply with the code set time at large," appears to relate to the argument which Mr Yu now advances. The Acceptance Letter thus constitutes the "separate code" and failure to comply with its §1.3 as construed by Aoki leads (it is said) to time being at large. It follows that the Arbitrator dealt specifically (albeit succinctly) with Mr Yu's contention by saying that he agreed with Mr Marrin.

58.In essence Mr Marrin submitted that the contract documents (including the 1st Agreement and the Acceptance Letter) should be read as a whole and regarded as mutually explanatory. He suggested that there was nothing in the documents which actually expressed an intention for the completion date in Package B to fall away in the event that there was no instruction within 60 days. A later instruction for the Director's Lodge would simply give rise on a natural reading of the contract documents as a whole to an EOT.

59.The reading of Acceptance Letter §1.3 for which Mr Yu advocates seems to me a strained one. A more natural reading of §1.3 would be that the completion date for Package B, including the Director's Lodge which it was envisaged would be instructed within 60 days as mentioned in §1.2, was to be 450 days from date of possession. I cannot say that the Arbitrator was obviously or seriously wrong in deciding the point against Aoki. Indeed, he seems to have read §1.3 in a commonsense manner.

60.I therefore reject this ground as a basis for appeal against the Award or for remitting the same back to the Arbitrator. Should it be relevant, I record that I regard this question, involving the construction of the Acceptance Letter in the context of the 1st Agreement, as a one-off issue.

B. 5 Omission of work and the prevention principle

61.An issue before the Arbitrator concerned HKIE's instruction to omit work in relation to:-

(1) the supply of artificial turf for the football pitch ("the turf") from Package B; and,

(2) signage ("the signage") from Packages C and D.

62.The prevention principle operates so that a party cannot profit from his own wrong. The principle is that, as against Party B to a contract, Party A cannot assert rights or claims arising in consequence of Party A's breach of his contractual obligations. Party A is prevented by law from rasing such rights or claims against Party B.

63.In construction contracts the prevention principle can operate in the context of omissions. For example, consider an instruction from an Employer that a Main Contractor omit certain agreed work from an ongoing development. Assume that the Employer gives such instruction because he fears that otherwise there will be delay for which the Main Contractor would be entitled to an EOT. Assume further that the Employer acts because, the specific work having been omitted and the Main Contractor having been so deprived of the basis for an EOT claim, the Main Contractor will be unable to complete the rest of the works within the stipulated time and would thus become liable for liquidated damages. In such case, by omitting the work for an illegitimate purpose (namely, ensuring that the Main Contractor becomes liable for liquidated damages), the Employer would be acting in breach of contract. Given the prevention principle, the question would be whether the Employer can benefit from his breach in such situation and claim liquidated damages from the Main Contractor.

64.On the turf the Arbitrator found as follows (at Award §§74-8):-

"The supply of the artificial turf for the football pitch, which runs parallel to the lower emergency vehicle access at right angles to the basket ball court, was covered by a provisional quantity (or PC rate item) in the Package B Bills of Quantities. This gave the Institute control over the price and quality of the material but the installation would be carried out by the main contractor. The main contractor was also to be responsible for the drainage and the sub-base.

On 23rd April 1997, the Architect's received a quotation for the supply of the material from the Parks Supply. The quotation stipulated a period of 3 months from the order confirmation and the receipt of the deposit. It seems that the delivery period quoted caused a measure of consternation amongst Mr Burns and his assistants. Enquiries made of the suppliers achieved only a modest reduction in the delivery times with the result that the artificial turf could not be laid before mid-August. Miss Esther Chow conceded that the quotation had 'programme implications' since the turf could not be delivered to site before what was then the date for completion of the Package B Works, namely 19th June. She said, however, that this did not mean that delivery in August would cause delay to completion since Aoki's progress was such that they would not complete by the end of the extended date for completion. I am, however, quite satisfied that the motivation for the succeeding relevant events was apprehension that the delivery of the turf in August would jeopardize or nullify the Institute's right to liquidated damages for delay. Mr Hiraoka sensed that this was so (see, for example, the Transcript for Day 9, pp. 80-81) and I think he was right to do so. That this was the motivation is confirmed by the exchange between the Institute and ASD [the Architectural Services Department of the Hong Kong Government] in the hearing bundle at J Vol. 10, pp. 93 and 135.

After the enquiries of the supplier had failed to establish a much more immediate delivery date, Miss Chow's assistant on Package B, Miss Justina Kwok made a telephone call to Mr Hiraoka on 1st May. Miss Kwok very fairly says, in her witness statement, that she has no recollection of the conversation beyond what is stated in or to be inferred from the contemporary documents. There is no doubt that the conversation took place. The debate is whether, in it, Mr Hiraoka agreed that the artificial turf would be omitted from the scope of the Work and that no claim would be made by Aoki for loss of profit on the work of laying the material. After speaking with Mr Hiraoka, Miss Kwok reported the outcome to Miss Chow. The latter then sent to Mr Hiraoka a letter drafted by Miss Kowk in these terms:-

'We refer to CI-077 regarding the deletion of the top surfacing of artificial turf for the mini-soccer pitch. We write to record your agreement to waive any loss of profit claim as a result of this decision. (The telephone discussion between yourself and our Mr J Kwok to-day refers).'

The Instruction CI 077 is dated 2nd May. On 2nd May, Miss Chow wrote to Parks Supply about arrangements for the supply and installation of the Desso turf by Parks Supply under a direct contract. That letter was also sent, in copy, to Aoki. On 5th May, Mr Hiraoka signed a letter, drafted by Mr Moore. This says:-

'It may be your intention to have this [i.e laying the turf] carried out by others as a direct contract since there programme implications. We do not however consider that his is contractually the proper procedure and will be pleased to discuss this with you.'

Mr Hiraoka, in cross-examination, freely gave some important answers. He confirmed that he was sure that Miss Kwok had mentioned loss of profit in their discussion. He agreed that she must have been asking him to confirm that the omission of the turf would not lead to a claim for loss of profit. He accepted that the Aoki letter dated 5th May does not say there had been no agreement to waive a claim nor that there had been no agreement to the deletion of the laying of the artificial turf, although the letter refers both to Miss Chow's letter o Aoki and her letter to Parks Supply. At p. 75 of the Transcript for Day 9, this exchange is recorded:-

'Q.	Do you accept that she was asking you to agree that you would not claim your profit?
A.	She might ask, yes.
Q.	And do you accept that you told her that you would agree to that?
A.	I do not think that I have made clear agreement. "Yes, I agree." No, not such a way. But the way I probably respond to her may lead her to interpret in such a way, I am giving her a sort of agrement. I must admit probably.'

I am satisfied that there was a consensual agreement to omit the turf and no question of the abuse by the Architects of their power under the Contract to issue instructions for a variation arises. In my opinion, the submission that the Institute was in breach of contract over the omission of the artificial turf fails.

However, even if I were wrong on the facts, as found above, I would still hold that the omission of the artificial turf did not make time at large. In my opinion, as already stated, it is necessary for the party advancing such an argument, with the result that liquidated damages do not apply, to establish that the default of the building owner was both outside the scope of the extension of time clause and causative of critical delay. On the latter point, it is conceded and I find as a fact that the omission of the artificial turf did not cause delay to the completion of Package B."

65.Mr Yu complains that, having found that the omission of the turf was motivated by apprehension that HKIE's right to liquidated damages would be jeopardised otherwise, the Arbitrator then wrongly allowed HKIE to benefit from its wrongful instruction to omit the turf and claim liquidated damages. This offends (Mr Yu says) against the prevention principle.

66.Insofar as the Arbitrator held that there was no breach by HKIE because Aoki consented to the omission of the turf, Mr Yu contends that the Arbitrator was plainly in error. At best the evidence cited by the Arbitrator in his Award established that Aoki (through Mr Hiraoka) agreed to waive its claim for loss of profit arising from the omission. But that is all. Aoki merely agreed to waive any claim for loss to it occasioned by the fact that it could not charge for the omitted work. The evidence quoted in the Award does not show that Aoki agreed that HKIE could charge liquidated damages in respect of that period for which, if the turf had not been omitted, Aoki would have been entitled to an EOT.

67.The Arbitrator (Mr Yu says) made an unjustified leap of logic in analysing the evidence. The Arbitrator's conclusion that Aoki effectively consented to the charging of liquidated damages by HKIE contrary to the prevention principle, is unwarranted. No reasonable arbitrator applying the law could have come to that conclusion and the parties in coming to arbitration cannot be taken to have agreed to an arbitrator arriving at an irrational conclusion wholly unsupported by the evidence. Mr Yu characterises the Arbitrator's finding of fact as "plainly perverse in the Edwards v Bairstow [[1956] AC 14] sense". Mr Yu submits that such an egregious error constitutes a question of law capable of founding an application for leave to appeal against an arbitration award.

68.Finally, Mr Yu criticises the Arbitrator's imposition of a condition that HKIE's default in omitting the turf must be causative of critical delay before time becomes at large.

69.Mr Yu suggests that there is a contradiction inherent in the Arbitrator's conclusion. An omission may sometimes cause delay. For example, if in a project for a tall building it is decided to omit the construction of lifts, that may have programme implications since workers would presumably have to use the staircase to get to higher floors. Usually, however, the omission of a works item should not occasion delay. On the contrary, if a specific work is omitted, there is one item less to worry about and one can devote more of one's time and resources to the remainder of the project with consequent timetabling benefits.

70.Award §78 records a finding that "the omission of the artificial turf did not cause delay to the completion of Package B". How could it (Mr Yu asks) when according to the Arbitrator the whole purpose of the omission was to forestall a claim for EOT and safeguard a lurking claim by HKIE for liquidated damages? On the other hand, if what the Arbitrator meant was that even if the turf had not been omitted there would have been no critical delay on Package B, such a proposition was never conceded by Aoki or its counsel during the arbitration, contrary to what Award §78 suggests. Aoki's counsel only accepted that the omission of the turf did not cause delay in the present case.

71.The Arbitrator (Mr Yu continues) then must be taken to have meant literally that the omission of the turf did not cause delay. However, since that was precisely the outcome which HKIE wanted (namely, not to cause delay warranting an EOT by retaining the turf as a works item) and that motivation (the Arbitrator suggests in Award §75) was wrongful, how does the criterion of "critical delay" in Award §78 serve as an extra reason for holding against Aoki on the turf issue "if [the Arbitrator] were wrong on the facts"? The question of critical delay does not enter into the picture in the premises.

72.I disagree with Mr Yu's contentions. In particular, I am not persuaded that the Arbitrator has obviously (or seriously) misapprehended the evidence in concluding (at Award §77) that Aoki consented to omit the turf. I make 3 comments.

73.First, the fact that in Award §76 the Arbitrator recited evidence leading to his conclusion in Award §77 and that such evidence refers to Aoki's agreement to forego loss of profit, does not mean that the evidence specifically mentioned constituted the only material on which the Arbitrator came to his finding of fact that Aoki consented to the omission of the turf.

74.It would be unrealistic to expect an arbitrator exhaustively to record in an award all matters leading him to conclude as he does on a question of fact. It is sufficient for an arbitrator to record some salient evidence, most likely the evidence which weighed heavily on him in forming a view.

75.The present arbitration ran for about a month. The Arbitrator heard days of evidence and submissions. The Award runs to over 155 pages. By it the Arbitrator has only conveyed the gist of the evidence on the key points before him. I do not think that one can reasonably expect more. The Arbitrator heard relevant witnesses cross-examined. Based on what he perceived and on his own experience, he formed a view as to the nuances of what they did or did not do, say or agree on particular issues. I cannot conclude on the basis of the mere summary of evidence in the Award that the Arbitrator conducted himself irrationally in holding that Aoki did not just agree to waive loss of profit, but agreed unreservedly to the omission of the turf from Package B.

76.Second, I doubt that "perverse" findings of fact in an Edwards v Bairstow sense are capable without more of forming a ground for leave to appeal against an arbitration award. My concern is that almost any finding of fact can be transformed into an Edwards v Bairstow question of law. One need only suggest that the evidence did not merit a finding of primary fact or an inference of secondary fact which an arbitrator drew. There is a real danger in allowing Edwards v Bairstow unreasonableness as a ground for judicial review that the Court will be encouraging a detailed trawl through the evidence adduced before an arbitrator and a micro-reading of awards in order to justify submissions that the arbitrator acted without any or any sufficient evidential foundation. This is plainly not what applications for leave to appeal against awards were intended to be. Nor would a detailed review of evidence by the Court on a leave hearing be conducive to endowing arbitrations with finality.

77.Swire Properties does not expressly mention Edwards v Bairstow unreasonableness as a ground for giving leave. But, in stating that "each case ... will have its own particular features bearing upon the discretion to grant or refuse leave to appeal from an arbitral award," the Court of Final Appeal may arguably have left open the door to other grounds for appeal on questions of law and thereby did not rule out appeals on Edwards v Bairstow grounds. Nonetheless, the tenor of present day thinking, including that of Hong Kong Courts, is to hold parties to the consequences of their decision to proceed by arbitration. One such consequence is that an arbitrator may get some or all of the law or the facts wrong. I therefore do not think that the Court of Final Appeal intended its judgment in Swire Properties to be read as completely open-ended (if at all) on factors justifying leave to appeal. Indeed, implicit in Swire Properties must be an assumption that not every error of law made by an arbitrator will merit judicial review, only serious or obvious errors as the case may be.

78.AO s. 23 itself recognises that not every question of law arising from an award is justiciable in Court. AO s. 23(1) explicitly deprives the Court of jurisdiction to set aside an award on the ground of "errors of ... law on the face of the award" except as permitted by AO s. 23(2). The general rule against revisiting errors of law in AO s. 23(1) must have some purpose. It cannot just be said that AO s. 23(2) allows appeals on questions of law generally and therefore the proscription in AO s. 23(1) can be ignored. Swire Properties lists at least some situations when an error of law would qualify for the grant of leave to appeal under AO s. 23(2). Given then that not all errors of law are susceptible to judicial review, where does one draw the line between situations where appeal is permissible (albeit possibly not expressly identified in Swire Properties) and those where pursuant to the general rule in AO s. 23(1) there is no jurisdiction for the Court to intervene?

79.One answer may be that leave to appeal on an Edwards v Bairstow question should only be given when the consequences of the error to a party's interest are significant. What is significant would then be left to judicial discretion. But such answer would be unsatisfactory. The criterion would only repeat AO s. 23(4). Once again, implicit in Swire Properties is a proposition that, however significant the likely impact on a party of an adverse award, if the latter does not appear seriously or obviously wrong, leave should not be granted. This means the granting of leave under AO ss. 23(2) and (3)(b) cannot simply be a question of the degree of impact alone, but must be subject to some additional qualification not already encompassed by AO s. 23(4).

80.Given my conclusion that the Arbitrator did not seriously or obviously go wrong in holding that Aoki consented to the omission of the turf, I do not need finally to decide the question I have posed in respect of Edwards v Bairstow unreasonableness. To my mind, there is no such unreasonableness on the facts of the present case.

81.For what it is worth, my tentative view is that the Court should not rule out a possibility of granting leave to appeal where a finding of fact (primary or secondary) is so egregious as to offend against a sense of justice. See, for example, Fence Gate v NEL Construction (2001) 82 Con LR (at §43) and note the contrary view of Steyn LJ in The "BALEARES" [1993] 1 Lloyds Rep 215, at 232.

82.In a commercial context, between parties dealing with each other at arm's length, a helpful test may be to apply a species of the officious bystander test. The Court might ask itself whether at the time of entering into the arbitration agreement the parties would have testily dismissed a suggestion by an officious bystander that arbitration was inappropriate because they could find themselves bound, without recourse to judicial appeal, by an erroneous finding of the arbitrator of the nature sought to found the relevant appeal. In other words, even in one-off fact-sensitive situations, the parties should not be held to have agreed to a blatant disregard of law and logic by the Arbitrator.

83.Applying that test to the present facts, I do not think that the parties would have been deterred from entering into the arbitration agreement. I suspect that, if warned by the officious bystander not to enter into an arbitration agreement because the Arbitrator may misconstrue the ambit of evidence to the effect that one or other side agreed to waive a loss of profit claim, neither HKIE nor Aoki would have been deterred from agreeing to resolve any disputes arising between them in respect of the Tai Po campus by arbitration. The error alleged by Mr Yu (if an error at all) was a subtle one which (to my mind) would have been well within the implicit risks of arbitration contemplated by the parties.

84.It may be appropriate for the Court to require a party relying on Edwards v Bairstow irrationality as a ground for leave to appeal to show that the evidence as whole (not just that recited in an award) could never justify the conclusion reached by an arbitrator. But such a rule, too inflexibly imposed, could easily do more harm than good to the goal of final arbitration awards. It would impose a high burden on a would-be applicant, but it may also encourage detailed and possibly expensive trawls through the corpus of evidence in order to prove the negative. See, however, Fence Gate Ltd at §45.

85.Third, like Mr Yu, I am puzzled by the Arbitrator's fallback position that the omission caused no critical delay. It seems to me to add nothing to his main reasoning. However, in light of my conclusion that the Arbitrator was not seriously or obviously wrong on his principal ground for rejecting Aoki's argument on the turf, there is no need for me to consider further the mystery of precisely what the Arbitrator meant by his fallback position.

86.On signage the Arbitrator stated (at Award §127):-

"This item is the equivalent for the Packages C and D contract to the omission of the artificial turf in the Package B contract. On the facts, there is no dispute that, under the Packages C and D, Aoki were originally required to provide some signs, that this requirement was deleted from scope, that the deletion or mission of this work caused no delay to the completion of any of the three phases of work and that, after practical completion , the required signage was installed or carried out by a third party. Why, or in what circumstances, the omission of this minor obligation from Aoki's work was instructed remains obscure. Mr Marrin submits that there is no evidence of any improper motive and, therefore, that the omission cannot constitute a breach. I am prepared to infer that this omission was instructed because it was feared that, without such an instruction, the Institute's right to liquidated damages would be adversely affected. In my opinion, any such fears were misconceived. Be that as it may, the application of the same reasoning, as set out during consideration of the omission of the turf and the sports' equipment in the Package B story, dictates the same conclusion. The omission of the signage did not result in time being at large under the Packages C and D contract."

87.In relation to signage, Mr Yu makes similar submissions to those canvassed above on the turf. He additionally points out that on signage there was no finding by the Arbitrator that the omission was consensual.

88.The Arbitrator appears to be saying that, even if HKIE feared inclusion of the signage would have jeopardised its claim for liquidated damages, "such fears were misconceived". In other words, unlike the situation with the turf where inclusion would have entitled Aoki to EOT, the Arbitrator believes that inclusion of the signage would not have adversely affected HKIE's right to liquidated damages. Accordingly, while the Arbitrator does not explain in what way his reasoning on the turf is equally applicable to the signage in the absence of consensual agreement, I am not prepared to hold that the Arbitrator was obviously or seriously wrong in rejecting Aoki's argument in relation to signage. The Arbitrator's doubts as to any effect on liquidated damages arising from retention of signage indicates that for the Arbitrator signage was not causatively relevant to HKIE's entitlement or non-entitlement to liquidated damages.

89.I note that the Arbitrator refers to signage as a "minor obligation". I am not satisfied on the evidence before me that any question of law which may possibly be involved on signage is one which could substantially affect Aoki's rights under the 2nd Agreement as required by AO s. 24(4).

90.For the above reasons, I reject the omission of the turf and signage as a ground for granting leave to appeal. In terms of characterisation, the matters complained of here are clearly one-off fact situations.

B. 6 Agreements cl. 22(4)

91.Clause 22 of the Agreements, which was heavily revised from the Standard Form, provided as follows:-

"(1) If the Main Contractor fails to complete the Works or the part of the Works by the Date for Completion of the Works or the Dates for Completion of the parts of the Works stated in the Appendix to these Conditions or within any extended time fixed under Clause 23 (as amended) or clause 33(1)(c) of these Conditions and the Architect certifies in writing that in his opinion the same ought reasonably so to have been completed, then the Main Contractor shall pay or allow to the Employer a sum calculated at the appropriate rate stated in the said Appendix as Liquidated and Ascertained Damages for the period during which the Works or the parts of the Works shall so remain or have remained incomplete, or the Employer without prejudice to any other method of recovery may deduct such sum from any monies due or to become die to the Main Contractor under this Contract.

(2) Should any certificate so issued indicate that the said period is reduced from that shown in any previous certificate and should the Employer have exercised his right wholly or in part to make a deduction in respect thereof then the Main Contractor shall be repaid any excess monies so deducted and for the purpose of clauses 26(1)(a) and (b), the said repayment shall be regarded as if it were an Interim Certificate issued under clause 30(1).

(3) Where delay is caused in the manner contemplated by sub-clause (4) below then the period of this delay shall not be included in any computation of the period during which the Works remain incomplete for the purposes of sub-clause (1) above.

(4) Should the Architect issue an instruction in accordance with clause 2(3) causing delay thereby to the Works or any Section thereof during a period where the Main Contractor is continuing to execute the Works or any Section thereof beyond the Date(s) for Completion stated in relation thereto in the Appendix to these Conditions or beyond any extended time fixed under any clause of these Conditions then the Architect shall assess the delay caused by the said instruction to other work in progress required for the completion of the Works or of the relevant Section of the Works and shall grant in writing a fair additional period of time for the said instruction to be carried out, which period shall not be included in calculating the period of delay in respect of which the Employer is entitled to be paid or to deduct Liquidated and Ascertained Damages under this Condition. In the event that such a grant is made after a certificate under this Condition has been issued and Liquidated and Ascertained Damages have been deducted from the period or part of the period which is the subject of the grant, then the Employer shall repay the Main Contractor such Liquidated and Ascertained Damages. The Contractor shall nevertheless use constantly his endeavours to prevent further delay and complete the Works or any Section thereof. Save in the manner aforesaid no instruction issued by the Architect in the manner contemplated by this sub-clause shall in any way affect the right of the Employer to deduct Liquidated and Ascertained Damages as set out in sub-clause (1) above or by virtue of any other provision of these conditions.

For the avoidance of doubt, it is expressly agreed that where the Architect issues instructions during a period where the Main Contractor is liable to pay liquidated damages to the Employer, then the effect of such instructions from the Architect shall not be to extinguish the Employer's right to liquidated damages; the effect of such instructions from the Architect shall be only to relieve the Main Contractor of the duty to pay liquidated damages for the amount of time required in the opinion of the Architect for the Main Contractor to comply with the Architect's instructions."

92.Various Architect's Instructions ("AIs") were issued during the periods when Aoki was in culpable delay in respect of Packages B and Phases C1, C2 and C3. With regard to Package B, the time required to carry out the relevant AIs amounted to 1 year and 2 months. For Phases C1 and C2 almost the whole of the period after the date of completion would be spanned by the time assessed by both parties to have been necessary for carrying out the relevant AIs. For Phase C2 there was only a gap of slightly more than 1 month which was not covered by the time necessary to carry out the relevant AIs. Aoki contends that by operation of the proviso³ ("the proviso") to Agreements cl. 22(4) it should not be liable for liquidated damages over the periods necessary to carry out the AIs for Package B and Phases C1, C2 and C3. The Arbitrator held against Aoki on the point but expressly found that if its argument were right there would be a "substantial" effect on the liquidated damages due to HKIE.

93.The Arbitrator decided that the proviso only applied where AIs caused "critical delay". Since the evidence showed (and Aoki did not suggest) that the AIs caused critical delay, the proviso was inapplicable and liquidated damages were payable for the entire of the period that Aoki was in culpable delay notwithstanding that a substantial part of that period happened to be covered by the time needed for the AIs.

94.Mr Yu submits that the proviso is clear and the Arbitrator was obviously wrong in not giving effect to the proviso's clear meaning.

95.In my judgment, the Arbitrator, far from being obviously or even seriously wrong, was most probably correct in his construction. The proviso cannot be read in a vacuum. It must be construed along with the opening words of cl. 22(4), namely: "Should the Architect issue an instruction ... causing delay thereby to the Works or any Section thereof". Those words emphasise that the Main Contractor is only absolved from culpable delay by the issue of an AI which causes delay. The proviso makes it clear that, where there an AI is issued which causes critical delay, the Employer should not be deemed to have lost his right to claim liquidated damages for any period not covered by the delay-causing AI. The proviso is inserted not for the benefit of the Main Contractor but to protect the Employer.

96.I therefore reject this ground, which strikes me as a one-off point, as a basis for leave to appeal.

B. 7 Architects' failure in his duty under Agreements cl. 22(1)

97.Mr Yu argues that, by Agreements cl. 22, 2 requirements must be fulfilled before an Employer becomes entitled to claim liquidated damages. These are:-

(1) The Main Contractor must fail to complete the works or section thereof within the stipulated time (including any EOT granted); and,

(2) The Architect must certify in writing his opinion that the works or section thereof ought reasonably to have been completed within the stipulated time.

These are prerequisites to liquidated damages which are commonly specified in many construction contracts.

98.Mr Yu contends that in forming his opinion in relation to the 2nd requirement the Architect must allow for circumstances which are known to the Architect and which reasonably excuse the Main Contractor from his obligation to complete the works or section thereof within the stipulated time. If those circumstances reasonably excuse delay on the part of the Main Contractor, the Architect should not certify and trigger liquidated damages.

99.Mr Yu accepts that under Agreements cl. 23 the Architect is empowered to grant an EOT on the grounds specified in cl. 23(2)(a)-(k) only upon written notice being given by the Main Contractor of the material circumstances (including the cause or causes of delay). In Award §135 the Arbitrator held that the plain construction of Agreements cl. 23 was that "[t]he notice provisions here amount to conditions precedent to extensions of time". Thus, in those situations where Aoki failed to give the requisite notice, there was no obligation (the Arbitrator concluded) for the Architect independently to certify an EOT, even though (had notice been given) Aoki might have been entitled to an EOT.

100.But Mr Yu says that is only half of the picture. The Arbitrator failed to deal with the Architect's own obligation to both Employer and Main Contractor under Agreements cl. 22(1) to satisfy himself that the Main Contractor ought reasonably to have completed the works or section thereof within the stipulated time. There is nothing in cl. 22 (Mr Yu submits) that permits the Architect to shut his eyes to circumstances which he knows and which excuse delay on the Main Contractor's part. Because the Architect here ignored such independent consideration and failed in effect to grant extensions when circumstances warranted, HKIE's liquidated damages claim must be examined to take account of EOTs which ought to have been (but which were not) granted by the Architect. To his error, the Arbitrator did not do this.

101.During the arbitration, Aoki submitted that on the evidence "the Architect never relied on the absence of notices and that the clear policy of the Institute as reflected in reports from ASD was that it did not intend to enforce its notice provisions" (see Award §146). By the same token, that evidence shows (Mr Yu suggests) that, not only did HKIE waive the requirement of notice in Agreements cl. 23(1), but also that the Architect realised that his obligation in relation to certification was not predicated on notice having first been received from Aoki.

102.I do not think that the Arbitrator was in obvious or even serious error on this point. Having carefully evaluated the factual evidence, the Arbitrator found that HKIE had made no unequivocal representation that it would waive the notice provisions in cl. 23 in any circumstances whatsoever. That conclusion seems to me impeccable.

103.As to Mr Yu's main point on the Architect's obligations under cl. 22, it is first worth noting in passing that the Architect seems to have been fully aware of the Architect's duties under cl. 22. Thus, in answer to Mt. Tackaberry's submission that the Architect's writing to Aoki asking for submission of any quantified claims for extension of time after the extended date for completion had passed constituted a waive of the notice provisions in cl. 23(1), the Arbitrator stated (at Award §147):-

"For the Architect to have called for any quantified claim to time after the extended date for completion had passed seems to me entirely consistent with the discharge of their functions under Clause 22."

104.More substantively, Agreements cl. 23(1) specifically provides that:-

"Any notification or claim for extension of time which is not:-

(i) made within 14 days of the event giving rise to the claim or notification; and

(ii) accompanied by detailed reasons and supporting documentation within 30 days of the event giving rise to the claim or notification,

shall have no validity under the Contract to the effect that the Main Contractor shall not pursue such a claim for extension of time in any arbitration and/or litigation. Where the Main Contractor has failed to comply strictly with the provisions of this clause he shall thereafter in respect to events giving rise to the invalidated claim make no claim based upon any alleged duty of the Architect or other consultant employed by the Employer to independently assess the consequence of events giving rise to delay and/or any alleged duty of the Architect or other consultant to independently award extensions of time."

In making the argument based on the Architect's independent duty under cl. 22, Aoki appears to be doing the very thing which it agreed it would not do where it has failed to give proper notice. In that light, I do not see that the Arbitrator was obviously or seriously wrong in holding that the giving of notice was a pre-requisite to the grant of an extension by the Architect.

105.I reject this ground as a basis for leave to appeal. In my view, the matter raises more of a one-off point than a question of general legal importance. Mr Yu correctly says that the mechanism of Architect's certification appears in many construction contracts. But the scope of the Architect's function depends, not just on the general law, but also on the terms of the relevant contract. In this case, those functions largely hinge on the construction of cls. 22 and 23, both of which were tailor-made for the Tai Po campus development.

B. 8. Conclusion on the HCCT 110 Motion

106.Although the Notice in HCCT 110 raises many grounds, Mr Yu in his oral and written submissions helpfully reduced those grounds to those which I have dealt with in Sections B. 1 to B. 7 above. I did not understand Mr Yu to be pursuing any other bases apart from those canvassed by him before me. For the reasons which I have discussed, none of the grounds pursued raises a sufficient basis for the grant of leave to appeal. Aoki therefore fails in its Motion for leave to appeal.

C. The HCCT 7 Summons

C. 1 HKIE's application and Aoki's objections

107.AO s. 2GG provides:-

"Enforcement of decisions of arbitral tribunal

(1) An award, order or direction made or given in or in relation to arbitration proceedings by an arbitral tribunal is enforceable in the same way as a judgment, order or direction of the Court that has the same effect, but only with the leave of the Court or a judge of the Court. If that leave is given, the Court or judge may enter judgment in terms of the award, order or direction.

(2) Notwithstanding anything in this Ordinance, this section applies to an award, order and direction made or given whether in or outside Hong Kong."

108.HKIE applies for judgment to be entered against Aoki for Sum Z in terms of the Award as corrected pursuant to AO s. 2GG. Aoki resists the application on 2 bases. The 1st ground, Aoki's challenge to the Award, has been disposed of in the course of my consideration of HCCT 110. The 2nd ground alleges that "the enforcement of the Award would be repugnant to the fair and equitable debt restructuring scheme ['the Scheme'] in force [in relation to Aoki] under the civil rehabilitation proceeding in Japan, the jurisdiction where Aoki was incorporated" (Mr Yu's Skeleton §49).

C. 2 The Japanese civil rehabilitation process

109.The Japanese Civil Rehabilitation Law ("the Law") came into effect on 1 April 2000. There was no evidence before me on when the Law was first enacted. Art. 1 of the Law identifies its objective as the rehabilitation of a debtor's business or economic well-being by giving legal effect to a restructuring plan which a majority of the debtor's creditors have accepted and which the Japanese Court has approved. Art. 84 of the Law extends the scope of a rehabilitation plan to all monetary claims which have arisen out of a cause existing before the commencement of rehabilitation proceedings against the debtor. The relevant process is conducted under the supervision of the Japanese Court. In general, the process has the effect of releasing the debtor from relevant debts save to the extent that they are preserved by the restructuring plan approved by creditors and sanctioned by the Japanese Court. By Arts. 3 and 177 the Law applies to all of a debtor's creditors, both domestic and overseas.

110.The Tokyo District Court issued an order to commence Aoki's civil rehabilitation on 10 December 2001.

111.The various stages of civil rehabilitation proceedings may be summarised as follows:-

(1) The Court issues a public notice in Japan's Official Gazette ("the Gazette") advising the commencement of the proceedings, the time limit by which creditors must report their claims, and the period during which claims will be investigated.

(2) At the same time the Court issues individual notices of the proceedings to the debtor, to all known creditors and to supervising commissioners, receivers and preservation administrators. Interested parties may inspect relevant documents and obtain copies thereof within defined periods.

(3) A creditor intending to take part in the proceedings must file particulars of his claim, including the basis thereof and the amount said to be due, within a specified time. According to the Affirmation of Masato Shibata filed on Aoki's behalf, by Art. 95 of the Law a creditor:-

"failing to submit a claim within the stipulated time because of a reason which is not imputable to it may only supplement its report within one month after the reason ceases to exist and any claims which arise after the stipulated time must be filed within one month after they arise. Article 95 also provides, however, that such supplement and claims may not be submitted after a ruling to the effect that a meeting of creditors for making resolution on a rehabilitation plan is to be called, or a ruling to the effect that a rehabilitation plan is to be submitted for a resolution in writing, has been made." (Shibata §13).

(4) The Court investigates the claims lodged.

(5) The debtor must prepare a statement of approval or disapproval in relation to each claim. Under Art. 101(3) a debtor who knows of a claim that has not been submitted, must describe the particulars of such claim which it acknowledges on the statement. Where a debtor acknowledges particulars of a claim and no timely objection has been made by a creditor, such particulars are treated as final and conclusive.

(6) The debtor must prepare a Rehabilitation Plan. The Plan should be approved by:-

(a) more than 50% of the creditors who are entitled to vote in, and who are in attendance at, a creditors' meeting; and,

(b) 50% or more of the aggregate votes of creditors entitled to vote.

(7) The Court then approves the Plan.

112.Under Art. 178 a debtor is discharged of responsibility in respect of all rehabilitation claims when a Plan becomes final except to the extent provided in the Plain. However:-

(1) if claims are not filed in time for reasons which are not imputable to a creditor and the same reasons prevent the creditor from filing his claim prior to the resolution of a Plan;

(2) if claims arise after a Court order; or,

(3) if claims are not listed n a statement of approval or disapproval by a debtor even though he knew of their existence,

the relevant claims are not extinguished.

113.Aoki says that none of the foregoing 3 exceptions to the application of the Law apply here. That is because, although Aoki contended in the course of the arbitration that HKIE was a net debtor to it, Aoki of its own motion in fact listed HKIE's claim among those covered by the Scheme. HKIE's claim was thus included in the Scheme as a "Debt of Uncertain Amount".

114.Art. 85 of the Law provides that no payments may be made and no payments be accepted otherwise than in accordance with the provisions of the Plan.

115.For the sake of completeness, Mr Shibata points out that the Japanese Law Relating to the Recognition and Assistance for Foreign Insolvency Proceedings (Law No. 129 of 2000) provides for recognition in Japan of foreign insolvency proceedings, including proceedings for corporate restructuring.

C. 3 The Scheme and its aftermath

116.Aoki's civil rehabilitation was completed on 18 September 2002. Under the Scheme:-

(1) creditors for amounts up to ￥3.5 million (about $260,000) would be paid in full;

(2) creditors for amounts between ￥3.5 million and ￥175 million (about $13 million) would receive ￥3.5 million.

(3) creditors for amounts in excess of ￥175 million would receive 2% of their claim.

Payments were made to creditors (not including HKIE) in September 2003. Claims not included in the Scheme cannot now be enforced against Aoki in the Japanese Courts.

117.The Affidavit of Timothy Charles Hill, filed on Aoki's behalf, further discusses the Scheme as follows:-

"11. Aoki's financial difficulties and the fact of their rehabilitation was widely publicised, including in newspaper reports in Hong Kong in December 2001. The ASD, which was Project Manager, was briefed in respect of the position at a meeting on 24 January 2002. In accordance with the Civil Rehabilitation Law a notice was placed in the [Gazette] on 7 January 2002 notifying creditors of the need to lodge claims. The existence of the civil rehabilitation proceedings was known to the Institute at least by the time that it prepared its Statement of Case in the arbitrations. The Statements of Case were served on 3 October 2002.

....

13. Pursuant to the Rehabilitation Law, Aoki was requested to prepare a rehabilitation plan. There is now produced to me marked 'TCH-3' a copy of the full Rehabilitation Plan dated 6 March 2002. Unfortunately in the time available it has not been possible to prepare a translation of the document [which is in Japanese]. There is produced to me marked 'TCH-4' a copy of the translation of the front page of these documents and extracts relevant to the position of the Institute. There is produced to me marked 'TCH-5' an English translation of the Outline of the Civil Rehabilitation Plan dated 6 March 2002. I am instructed that the Outline is a brief summary of the full scheme.

14. The Rehabilitation Plan recognised the insolvency of Aoki and proposed a plan to seek support from sponsor companies. It records that according to the balance sheet submitted to the Tokyo District Court of 6 February 2002 Aoki had total assets of 50.1 billion yen and total debts of 357.0 billion yen after deducting the amount expected to be set off and the amount subject to special preference rights. It was estimated that the ratio of distribution would be 0.6% or so. The scheme proposed that with the support of sponsors Takamatsu Corporation ['Takamatsu'] and Asunaro Construction ['Asunaro'] funds would be made available to enhance the distribution to (inter alia) 'Normal Rehabilitation Creditors' to the levels stated by Mr Boyle at paragraph 10(v) of his 2nd Affidavit. In the case of the Institute it would, on the basis of the Award, be entitled to 2%.

15. The Court was notified of the interest of the Institute together with those of other uncertain creditors. It will be appreciated that Aoki consider and considered at the time that the Institute was indebted to them. In light of the dispute as to who is entitled to payment, it could not be determined if there was debt due to the Institute and, if so, how much. This group of 'Debts of Uncertain Amount' are treated under the scheme pursuant to Article 2.8(2). In essence the amount of their claim once determine is substituted into and treated in the same way as other 'Normal Rehabilitation Creditors'.

16. The Institute is entitled to 2% of the Award once determined, provided the Award exceeds 175 million yen. I respectfully disagree with Mr Boyle's assertion that the Institute is barred from securing the benefit of the Award to this extent. Indeed, as stated at paragraph 24, Aoki is and has at all times been willing to meet this payment once the Award is corrected and published subject to the protection of its legitimate interests.

17. As stated by Mr Boyle the Plan was approved by the Tokyo District Court in June 2002 and payments were made thereafter, with the assistance of an injection of funds by the sponsors."

118.In July 2002 Takamatsu acquired 28% of Aoki, while its affiliate Asunaro acquired 12% of the company. On 17 December 2003 Aoki and Asunaro agreed to a consolidation with effect from 1 April 2004.

119.Following the implementation of the Scheme, Aoki remains on the Hong Kong Government's List of Approved Contractors for Public Works although it has not taken on new public sector work for more than 3 years. It has applied to the Hong Kong Government to transfer its Hong Kong business (including novation of all contracts) to Lanon Development Limited ("Lanon"), apparently its wholly-owned subsidiary. The application remains under consideration.

120.HKIE says that it was never invited to register its claim against Aoki in the Japanese civil rehabilitation proceedings and that it did not take part in the same.

C. 4 The proper legal approach

121.Mr Scott submits that the Scheme can have no impact on a Hong Kong creditor's ability to enforce a debt based on a contract governed (as here) by Hong Kong law as it proper law. In support of this proposition, Mr Scott relies on Anthony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399. That case is cited in Dicey and Morris on the Conflict of Laws (13th ed.), II, §31R-080 as authority for Rule 170 that:-

"A discharge from any debt or liability under the bankruptcy law of a foreign country outside the United Kingdom is a discharge therefrom in England if, and only if, it is a discharge under the law applicable to the contract."

122.But Dicey and Morris is critical of Gibbs and comments at §31-085:-

"Rule 170, combined with Rules 167 and 168, leads to the following curious result. Under Rule 170, a discharge under the bankruptcy law of a foreign country outside the United Kingdom is strictly territorial; it has no effect in England unless that law happens to coincide with the law applicable to the contract. But if it does not so coincide, the debtor cannot obtain a discharge in the country of the governing law, for ex hypothesi no bankruptcy proceedings have taken place there. Yet (assuming that the foreign court had jurisdiction over the debtor) under Rule 167 his movables situate in England will have vested in the foreign trustee in bankruptcy; and under Rule 168 the English courts may have appointed the foreign trustee a receiver of the rents and profits of his immovables situated in England. Thus the bankrupt remains liable in England to perform his contract, but he will have been deprived of his assets. If the courts of the country whose law governs the contract recognise the discharge as valid (although in the absence of bankruptcy proceedings they cannot grant it), this unfortunate result could be avoided by assuming that a discharge will be recognised as valid in England if it is either granted or recognised as valid by the law applicable to the contract. This would be an application not of the doctrine of renvoi but of the analogous doctrine⁴ of Armitage v Att.-Gen. [[1906] P 135] and is therefore not inconsistent with the proposition that the doctrine of renvoi does not apply in the field of contract."

According to Dicey and Morris then, a more rational approach in the present would be to ask whether Hong Kong law as the proper law of the contract recognises the Japanese civil rehabilitation proceedings. Here, Aoki being a Japanese company, there should be no objection in principle to applying the rule in Armitage and seeing to what extent (if at all) the Hong Kong court recognises the change in Aoki's status as a debtor brought about by the operation of the Scheme in the country of Aoki's incorporation.

123.Dicey and Morris is not alone among commentators in questioning the scope and utility of Gibbs. For example, having mentioned the ratio in Gibbs, Professor Smart in Cross-Border Insolvency (2nd ed.), pp. 259-60 continues:-

"Nevertheless, in some instances it is relevant to broaden the inquiry and consider issues that arise even though a discharge has not been granted in accordance with the proper law. Let us say that a trader carrying on business mainly in New York and Ontario has been declared bankrupt in the US courts. Most of the creditors and assets are in New York or Ontario, but there are some assets in England. As far as English law is concerned, any discharge in the US proceedings will only be effective in respect of contracts governed by American law (that is, the law of the State of New York, Oregon, etc.): a US bankruptcy will not discharge a contract the proper law of which is the law of Ontario. Yet, of course, a creditor under an Ontario contract can only bring an action in England once the jurisdictional requirements of English law are satisfied. Much more significantly, even if a creditor has got judgment in England he may not be allowed to levy execution upon the debtor's assets in England. For if a foreign insolvency is recognised in England and is shown to extend to assets situated in England, then no individual creditor may gain a priority over the general body of creditors by an attachment in England subsequent to the commencement of the foreign insolvency proceedings.

In conclusion, where a debt has been discharged under the proper law that is an end of the matter: the plaintiff will no longer have a valid cause of action. But if there has been no discharge, under the proper law or at all, it simply means the plaintiff's claim cannot be struck out as non-existent. Such a plaintiff may take advantage of an attachment put in force in England prior to a foreign bankruptcy (Galbraith v Grimshaw) or liquidation (Levasseur v Mason & Barry Ltd); however, subsequent attachments will not be effective. A convenient illustration may be found in Cape of Good Hope Bank v Mellé [(1893) 10 J 280], a decision in the Cape Colony. In 1891 the defendant's estate had been sequestered in the Transvaal and a trustee appointed. Subsequently, the bank brought an action in the Cape to recover a debt. The debt had been incurred and was payable in the Transvaal (i.e. the law of the Transvaal was the proper law). The law of the Transvaal was to the effect that a sequestration did not extinguish the debt but merely restrained the remedies of a plaintiff. De Villiers CJ following the decision fo the Court of Exchequer in Frith v Wollaston [(1852) 21 LJ Ex 108], held that the Transvaal sequestration was not a discharge and could not therefore preclude an action in the local courts. However, in the light of the prior foreign insolvency, the Bank could not levy execution against any of the insolvent defendant's estate in the Cape which might be claimed by the foreign trustee."

Smart thus suggests that the effect of a foreign discharge of a plaintiff's claim can be analysed in 2 stages. Insofar as a plaintiff seeks judgment, his claim is not struck out because the foreign discharge does not form part of the proper law which governs the contract and gives rise to the claim. Judgment may accordingly be entered in the plaintiff's favour. But, when it comes to the question of enforcing the judgment, insofar as the foreign proceedings giving rise to the discharge have consequences on a debtor's assets situate in Hong Kong (for example, the vesting of the debtor's movables here in a foreign trustee-in-bankruptcy), execution against such assets may be refused by the Hong Kong court.

124.In a similar vein, Professor Fletcher in Insolvency in Private International Law (1999), pp. 107-9 states:-

"Criticism of the current law

For more than a hundred years the Gibbs case has been accepted as a definitive authority on English law's position concerning the effects of a foreign discharge. The decision has been consistently followed and applied, has been commended as correct by the House of Lords, and has been accepted in Commonwealth countries, including Canada and Australia, as the basis for their own approach to this question. Nevertheless, the rule cannot escape criticism on an umber of grounds and it is submitted that it ought to be revised and restated. The most glaring anomaly produced by the rule in its current form is the contrast between the narrow limits within which a foreign bankruptcy is held to give rise to a discharge of liability, and the unconfined claims made by English law for the effects of a discharge under English bankruptcy proceedings. The latter type of discharge, as was seen at 2.5 above, is considered to release all liabilities which qualify as bankruptcy debts, irrespective of their applicable law. A related, and logically indefensible, aspect of the consequences of English law's treatment of foreign insolvency proceedings is that the generous and mainly admirable, policy of recognition of the effects of a foreign adjudication in relation to the bankrupt's property wheresoever found, and the assistance available to the foreign trustee to reclaim English assets on behalf of the general body of creditors, results in the unjust situation that English law accepts that all the bankrupt's property has been lawfully taken away by virtue of the foreign insolvency process, while simultaneously holding him liable to be sued here in respect of liabilities comprised in those selfsame proceedings.

The law to be developed

It is submitted that what is required is a modern reformulation of the English rules so that they form a more coherent structure. In keeping with the universalist aspirations of English law towards its own insolvency proceedings, including the effects claimed for an English discharge, there needs to be a balanced approach over the question of the effects to be accorded to analogous, foreign proceedings. While it is doctrinally sound to make reference to the applicable law to determine questions of extinction or release of obligations, a rigid rule which in practice denies any possibility for discharge to come about by means of proceedings in any country other than that of the applicable law itself is an obstacle to the development of mature international relationships between legal systems, based on even-handedness and mutual respect.

The Gibbs doctrine belongs to an age of anglocentric reasoning which should be consigned to history. In its place, supplementary rules are required which take account of the circumstances under which the foreign proceedings were opened, and subsequently conducted, before reaching a conclusion about the international effects to be accorded to those proceedings and to any discharge or composition to which they give rise. Before any creditor can subsequently be permitted to take action in England to enforce an obligation which the defendant claims was comprised within the foreign discharge, but whose applicable law was not that of the country of bankruptcy, the court should have regard to whether the plaintiff had adequate notice of the foreign proceedings and a reasonable opportunity to participate in them in accordance with acceptable standards of fair and equal treatment. If this was the case, the remedies of English process should be withheld on the basis that the plaintiff is estopped from invoking them. In the case of a contractual obligation which happens to be governed by English law, a further rule should be developed whereby, if one of the parties to it is the subject of insolvency proceedings in a jurisdiction with which he has an established connection based on residence or ties of business, it should be recognised that the possibility of such proceedings must enter into the parties' reasonable expectations in entering their relationship, and as such may furnish a ground for the discharge to take effect under the applicable law. In seeking in this way to establish a more internationally enlightened mode of responding to the effects generated by foreign insolvency proceedings, English law would in fact be returning to the open-minded tradition of the formative period of this particular branch of our jurisprudence...."

Professor Fletcher sees too mechanical an application of Gibbs as contrary to the spirit of comity which should underlie a Court's approach to corporate insolvency or restructuring procedures in an age of globalism. There is a hint in the passage which I have just quoted that Professor Fletcher would not be averse to an approach similar to that espoused by Professor Smart wherein the operation of Gibbs is confined to an initial stage where the merits of a claim are determined, while a broader range of factors (including the existence and effect of foreign proceedings) are taken into account in a 2nd stage when the modes of enforcement or execution open to a plaintiff in the domestic forum (if any) are determined.

125.The attitude of comity in relation to foreign insolvency (or similar) proceedings is one which English and Hong Kong Courts have espoused.

126.Lord Dunedin in Galbraith v Grimshaw [1910] AC 508 (at 513) long ago observed:-

"Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the Court finds that there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution; and that I take to be the doctrine at the bottom of the cases of which Goetze v Aders [(1874) 2 R 150] is only one example."

127.More recently, in Banque Indosuez SA v Ferromet Resources Inc. [1993] BCLC 112 (at 117), a bank obtained an ex parte injunction in England against UK plc, an associate company of Inc, to restrain dealing with certain assets which the bank claimed had been charged by Inc to the bank. The bank (along with others) also commenced proceedings in Texas for the involuntary bankruptcy of Inc.. As a result of the Texas action, there was an automatic stay pursuant to the US Bankruptcy Code of all proceedings against Inc and any attempt to obtain possession of Inc's property. UK applied to discharge the bank's injunction. Hoffmann J stated:-

"The court is not of course bound by the stay under United States law but will do its utmost to cooperate with the United States Bankruptcy Court and avoid any action which might disturb the orderly administration of Inc in Texas under ch. 11 [of the US Bankruptcy Code]. The court has jurisdiction to make interlocutory orders for the preservation of Inc's property in this country by way of assistance to the United States Bankruptcy Court but no such assistance has been requested here. So far as the evidence shows, these proceedings are the individual act of a single creditor and, if successful, would enable that creditor to secure some of Inc's assets outside the United States bankruptcy process. Mr Neville-Clarke said that these proceedings had been taken with the consent of the other banks but a private sharing arrangement of that kind is no substitute for administration n accordance with the law of the jurisdiction seized of the bankruptcy.

In exercising the discretion as to whether to grant or refuse injunctive relief, I therefore think that I should take into account the fact that the proceedings have not been authorised by the United States court. I think that this is particularly significant in a case in which the United States proceedings have been initiated by, among others, the bank itself. In my view the only justification for maintaining the injunctions in these circumstances would be, first, if I was satisfied that any assets recovered in the proceedings would be made subject to the ch 11 administration and secondly, if action without the authority of the United States court was necessary to prevent some dissipation of assets which would be to the prejudice of the bank's rights under the United States bankruptcy law. If these conditions were satisfied, it would then be necessary to examine the balance of convenience in accordance with the Cyanamid guidelines...."

128.Hoffmann J was more explicit on the need for comity in insolvency matters in Barclays Bank plc v Homan and others [1993] BCLC 680 (approved by the Court of Appeal at 694 ff.). There he stated (at 691g - 692a):-

"In other words, the normal assumption is that the foreign judge is the best person to decide whether an action in his own court should proceed. Comity requires a policy of non-intervention not only for the same reason that appellate courts are reluctant to interfere with the exercise of a discretion, namely that in the weighing of various factors, different judges may legitimately arrive at different answers. It is also required because the foreign court is entitled, without thereby necessarily occasioning a breach of international law or manifest injustice, to give effect to the policies of its own legislation. Such legislation may have a broader reach than English legislation without necessarily attracting the international opprobrium which the United States anti-trust jurisdiction has done. As the Vice-Chancellor said in Paramount Airways, the only satisfactory solution to the possibility of jurisdiction conflicts in cross-border insolvencies would be an international convention. In the absence of such a convention, the only way forward is by the discretionary exercise of jurisdictional self-restraint. But one cannot expect every jurisdiction to exercise that discretion in the same way."

129.Given the tension between the approach exemplified in Gibbs and the demands of comity, how have the Hong Kong Courts actually dealt with the question of recognising foreign restructuring proceedings such as the Law? I examine 2 cases which are indicative of the approach here. The 2 cases are Modern Terminals (Berth 5) Ltd v States Steamship Company [1979] HKLR 515 and CCIC Finance Limited v Guangdong International Trust & Investment Corporation HCA No. 15651 of 1999, 31 July 2001.

130.Modern concerned a contract (governed by Hong Kong law) whereby a Hong Kong company (P) agreed to provide services to a Nevada company (D). The contract gave exclusive jurisdiction to the Hong Kong Court. P sued D in Hong Kong for monies due under the contract. D applied for a stay of proceedings here on the ground that it had filed a bankruptcy petition under chapter 11 of the US Federal Bankruptcy Act in the Northern District Court of California. As a result, the latter court claimed exclusive jurisdiction over D and its property wherever situated.

131.Trainor J entered summary judgment against D in P's favour. He believed it was appropriate to do so in light of the choice of law and forum clauses in the contract.

132.But Trainor J also stated (at 521):-

"I am satisfied that chapter XI proceedings in the United States are intended by the legislature primarily to be for the benefit of all creditors while at the same time affording an insolvent corporation the opportunity to recuperate. The proceedings are only possible with the consent of the creditors who hope that by consenting to them they will receive, at the least, a better dividend. The property and business of the petitioner is operated by him but in the same way as a liquidator in bankruptcy under the laws of Hong Kong might be empowered to carry on the business of a company in liquidation. The chapter XI debtor is a trustee for the creditors, and his primary function is to operate to their best advantage. In other words, when a debtor is in possession under chapter XI there is a position analogous to the 'process of universal distribution' referred to by Lord Dunedin at p. 513 in Galbraith v Grimshaw. I hold that by virtue of the law of the United States and the order of its court the property of the defendant is vested in it as if it were a trustee in bankruptcy and that such property wherever situate is under the control of the bankruptcy court in California and that the court in Hong Kong should respect that jurisdiction so far as movable property here is concerned."

133.In light of his conclusion on the effect of US bankruptcy law, the question of D's liability was not the only relevant issue. Trainor J continued (at 523-5):-

"There is , however, a further aspect to be considered. I have held that by the law of the United States the bankruptcy court of that country obtained jurisdiction of the property of the bankrupt wherever situated as if an adjudication in bankruptcy had been ordered when the defendant filed its petition. The defendant has money in Hong Kong. In my opinion it is vested in the defendant as trustee for its creditors⁵. Should I order a stay of execution? Not to do so would mean that the plaintiff would be entitled to take the money on execution, oust the jurisdiction and control of the courts of the United States and divest the defendant as trustee of the creditors of the property here.

....

In my opinion the principle in Galbraith v Grimshaw applies and there should be a stay of execution...."

134.Thus, Trainor J ultimately resolved the matter along the lines sketched out by Professor Smart. He treated the question of liability on P's claim as a separate issue from that of enforcement. Although (following Gibbs) Trainor J had jurisdiction to consider the merits of P's claim and give judgment in its favour, the principle of comity (as recognised in Galbraith) constrained the judge to recognise the vesting of Hong Kong movables in the US trustee-in-bankruptcy and grant a stay of execution.

135.Before turning to CCIC, I note that Modern was considered in Felixstowe Dock & Railway Co. v United States Lines Inc. [1989] 1 QB 360. In that case a US company (D) operated as an overseas company in the UK. It filed for corporate reorganisation under chapter 11 of the US Bankruptcy Code. The US court stayed all claims against D within and outside the US. D's English and European creditors (collectively, P) sought payment in the English court for services rendered to D. P obtained a Mareva against D's English assets. D applied to set the same aside.

136.Hirst J rejected Trainor J's characterisation in Modern of chapter 11 as resulting in a debtor holding his assets on trust for his creditors. Instead Hirst J thought that chapter 11 did not affect D's ownership of its assets. On the other hand, the restraining order made by the US court was "in personam" in nature although the US bankruptcy jurisdiction was generally "in rem" in effect. The judge accordingly accepted D's submission (at 379E):-

"that the English practice is to regard the courts of the country of incorporation as the principal forum for controlling the winding up of a company, but that in so far as that company has assets here, the usual practice is to carry out an ancillary winding up in England in accordance with our own rules, while working in harmony with the foreign courts... English courts would not and should not favour an order which removed the English assets entirely outside their control."

On the balance of convenience the judge concluded that, notwithstanding the US proceedings, P's Mareva should continue.

137.On its face Felixstowe runs contrary to the principle of comity. Reorganisation proceedings under chapter 11 were not given effect to by Hirst J apparently because D's assets did not vest in a trustee but remained in D, unlike the situation where a foreign trustee-in-bankruptcy is appointed in normal bankruptcy proceedings.

138.Hirst J's judgment attracted strong criticism from Sir Peter Millett (as he then was) in a lecture "Cross-Border Insolvency: The Judicial Approach", (1997) 6 Int. Insolv. Rev. 99 (see especially at 107-8), who described Felixstowe as "the leading example of the failure to exercise judicial restraint". Sir Peter comments (at 108):-

"The decision did great harm to the relations between the courts of the two countries, and seriously damaged the esteem in which UK courts had previously been held by insolvency practitioners and judges abroad. There was clearly a very difficult issue to resolve -- the relative weight to be given to the competing claims of the creditors outside the United States and the survival of the company and its business in the United States -- but, with great respect to Hirst J, it was not for him to resolve. Th English and European creditors had dealt with a US corporation (i.e. a corporation which was amenable to Chapter 11) and had to take the consequences. The creditors had a case because they were entirely excluded from the scope of the proposed reconstruction; but, in my view, it was a case which should have been presented to the New York court."

It will be seen that, as far as Sir Peter is concerned, the paramount consideration should be comity. That consideration cannot hinge on mechanically applying a single criterion as to whether a debtor's assets continue to be held by him beneficially or as trustee for his creditors.

139.It is fortunately unnecessary for me to evaluate the rights and wrongs of Felixstowe. However, it is useful to note that something of the 2-stage approach suggested by Professor Smart is hinted at by Hirst J Although he allowed the Mareva over D's English assets to continue apparently giving the English and European creditors an advantage over other creditors, he did not do so unconditionally. At 386B-D, he said:-

"For good measure, I can, and shall, as a condition of continuing the Mareva orders, require notice of the chapter 11 proceedings and their consequences to be given to the bank (though they probably know all about this already): and I can and shall also require an undertaking from the plaintiffs not to take any steps to release the frozen funds until after the expiry of a reasonable period of notice to [D], during which [D] would, as Mr Brice accepts, be free to apply to the English court for a winding up order; technically this would require the consent of the United States bankruptcy court, but in such circumstances that is extremely unlikely to be withheld."

The condition imposed essentially restricted P from executing any judgment in its favour against the assets subject to the Mareva without giving D a chance to take steps to preserve such assets for the general body of its creditors. Implicit in the condition is a segregation of the issues of judgment and execution in considering the effect of foreign insolvency or similar proceedings on domestic assets.

140.In CCIC Finance obtained a default judgment against GITIC and a garnishee order nisi against GITIC HK. GITIC was the subject of bankruptcy proceedings in the Mainland and GITIC HK was in voluntary liquidation, owing money to GITIC. GITIC HK resisted the making of a garnishee order absolute and GITIC applied for a stay of Hong Kong proceedings. Deputy Judge Gill referred to Sir Peter Millett's criticism of Felixstowe and then concluded:-

"The exercise of discretion

96. I propose to exercise my discretion by refusing the application for garnishee order absolute. My primary reason for doing so is because, as I have found, the GITIC liquidation is being pursued on the basis of a universal collection and distribution of assets and the creditors world-wide are to be paid pari passu with each other subject only to ranking. To have granted the application would have offended the principle of equality in that one of the creditors, [Finance], would have achieved an unfair preference ahead of those others ranking at the same level.

....

98. That CCIC's proof has been rejected is no counter to the proposition that CCIC has been treated fairly. The reasons for the rejection have been fully made known and are on the merits, not for the reasons of territoriality.

....

100. That GITIC HK is itself in liquidation is neither here nor there.

101. The concept of comity of nations is not of itself reason to turn away a litigant with a bona fide claim that should otherwise be granted on the merits. But where a foreign jurisdiction is actively and openly pursuing a liquidation in which it says it intends to treat all creditors, domestic and foreign, alike, and then patently does so, it is not, I believe, for the courts of Hong Kong to interfere with that process.

The application to stay

102. Because my reasons for turning down [Finance's] application for a garnishee order absolute are that to have granted it would have offended the principle of a pari passu distribution, it follows that all enforcement action should properly not be allowed to proceed; GITIC's application for a stay of all proceedings shall be granted."

CCIC is further evidence of a 2-stage approach. The Hong Kong Court allowed judgment to be entered against GITIC. On the question of execution, however, the Court took account of the existence of foreign insolvency proceedings and exercised a discretion to refuse enforcement against assets subject to those proceedings.

141.The foregoing brief survey leads me to the conclusion that my approach in relation to AO s. 2GG in the circumstances of this case should be as follows:-

(1) I should allow judgment now to be entered in HKIE's favour against Aoki up to Sum Z in terms of the Award as corrected. That would be in keeping with Gibbs.

(2) But, insofar as the later enforcement of that judgment is concerned, I have a discretion to impose terms on the enforcement of the judgment in light of the Scheme and the Law. The imposition of terms would be for the purpose of giving due recognition to the Japanese rehabilitation proceedings as a matter of comity and fairness. What those terms should be I shall discuss in a moment. The question of enforcement can be dealt with if and when HKIE applies to the Court for execution of its judgment.

C. 5 Validity of the 2-stage approach

142.Mr Yu argues that the 2-stage approach is unduly pedantic. What (he asks rhetorically) is the point of separating the question of execution from that of liability? If HKIE cannot enforce any judgment on the Award by reason of the Scheme, why enter a meaningless judgment to be entered against Aoki at all?

143.I would make 3 comments on Mr Yu's submission.

144.First, I am not satisfied that, even taking the Scheme into account, there is no point in now entering judgment in HKIE's favour. The Scheme does not in fact discharge Aoki of all obligations to HKIE under the Agreements. Under the Scheme Aoki must at least pay 2% of the value of HKIE's claim. Aoki, it is true, has offered to pay that amount into Court pending the outcome of any appeal against the Award. But I do not see why such offer should be a significant factor militating against allowing HKIE to enter judgment in terms of the Award to enable it to enforce rights under the Scheme (at least).

145.It is unclear on the evidence currently before me whether the Scheme encompassed Aoki's overseas assets (including those in Hong Kong). The evidence only refers to the Scheme applying to all Aoki's identifiable creditors in Japan and abroad. That does not necessarily mean that Aoki's foreign assets were subject to the Scheme. Nor does it necessarily mean that creditors covered by the Scheme are now precluded from enforcing their claims against any foreign assets not governed by the Scheme.

146.I have been provided with an English summary of the Scheme. Section II §9 of that summary states:-

"Claims held in overseas:

In the event that any rehabilitation creditors receive performance for the rehabilitation claims by exercising their rights on any assets of the Rehabilitation Debtor located in any foreign country on or after December 10, 2001, a date on which a decision to commence the rehabilitation proceeding is made, such creditors will not be able to receive performance under the present rehabilitation proceeding until other rehabilitation creditors would receive performance at the same rate of performance.

The conversion into Japanese yen will be at the exchange rate as at November 30, 2003."

The paragraph is ambiguous as to whether foreign assets were subject to the Scheme or whether it was and still is open to a creditor to enforce against them. No other part of the summary appears to bear directly on the question.

147.In light of the minimal evidence on the foreign assets (if any) falling within the Scheme, I cannot say at this time that a judgment in HKIE's favour would be wholly useless even taking account of the Scheme's existence.

148.Second, Mr Yu's submission does not reflect the approach which I have discerned from Hong Kong cases and academic opinion.

149.Third, even if I accepted Mr Yu's submission, given the present state of the evidence, I have reservations about the extent to which the Hong Kong Court should actually recognise the discharge of Aoki's obligations to HKIE. Comity does not mean blind recognition of any corporate restructuring proceeding in any jurisdiction whatsoever, however bizarre or oppressive the result. Mr Yu does not go so far. In his Skeleton §54 he suggests:-

"The approach of the English Court is to embrace the principle of fair and equitable distribution of assets of an insolvent individual or corporation, across jurisdictional boundaries and to render such assistance to foreign court having jurisdiction over the insolvent individual or corporation by taking or refraining from taking such steps as may be appropriate. Ring-fencing of assets is not permitted."

The Court must be satisfied that it is "fair and equitable" in all the circumstances to recognise the foreign proceedings.

150.Take an extreme example. Suppose that Company X applies for corporate restructuring in State Y with which X has absolutely no connection. Suppose that Y Courts are prepared to order an absolute discharge of X's debts upon presentation of a plan which has been approved by only 10% in value of X's identifiable creditors, regardless of whether the remaining 90% of creditors have had notice of X's application to the Y Courts for sanction of X's plan. In such a situation, it can hardly be claimed that the exigencies of comity mean that recognition should be accorded to a plan sanctioned by the Y Courts.

151.It is necessary to assess whether the foreign proceedings are on balance fair and equitable in all the circumstances. There would be an onus on the debtor to satisfy the Court that the Scheme approved by the foreign court was reasonable and just and was obtained through due process.

152.On this matter, I gratefully adopt Professor Fletcher's analysis in the "Foreign corporate rescue procedures" section of his Insolvency in Private International Law (at pp. 183-4):-

"It is submitted that the Felixstowe Dock case, while providing a useful illustration of the complex issues and conflicting interests to be encountered in a case of international corporate rescue, should not be regarded as a signal of negative intentions towards the recognition of such proceedings. If viewed in the context of its own special facts, it may be rationalised as a case where the English court could not be convinced that the substance and intended effects of the foreign reorganisation plan were such as to offer a proportionately fair compensation to the English and European creditors of the debtor company, as compared to their material prospects if the alternative of a liquidation were to be pursued. A more sensitively designed plan might not have encountered the same, defensive judicial response. In the quest to formulate suitable criteria for according recognition and assistance to foreign proceedings of this nature, it is especially important to avoid dogmatic, or over-generalised, declarations of policy. Indeed, so widely do the various national regimes for corporate rescue differ from one another in ways that are truly fundamental, that it would be totally unrealistic to treat all of them as though they comprised a single, discrete group. A more discriminating analysis is necessary, dealing with each foreign procedure on its own terms, and on merit, at the point of first encounter. On principle, one might expect English law to require that the foreign system, and the particular instance of its operation that is presented in any given case, should satisfy certain minimum standards of integrity and due process, including adequate protection for individual creditors, or for groups or classes among them, to safeguard them against unfairly prejudicial treatment in the context of the attempted rescue. Factors such as the adequacy of notice periods in the case of distant creditors resident in foreign countries, and the extent to which genuine efforts are made to afford such parties an opportunity to participate effectively in the proceedings in which their interests are also at stake, should also be taken into account.

As a basic rule of recognition, it is suggested that proceedings which have been commenced under the law of the company's formation (or within a sister jurisdiction in the case of a federal system such as that of the USA) should be eligible for recognition. Serious consideration should also be given to recognising proceedings which take place in the country where the company's central management and control have been established, where this is not also the country of incorporation. Provided that the company's association with the forum of its proceedings is bona fide and has been in existence for a reasonable time, it should be accepted that a rescue can be embarked upon under the law of the country with which the company is functionally connected in this way. However, in view of the way in which such procedures can radically alter the balance of the debtor-creditor relationship with retrospective effect, special attention would have to be paid to the matter of the reasonable assumptions underlying parties' dealings with the company prior to its entry into the rescue process. If the company's international modus operandi was such that parties might legitimately suppose that its fundamental connections continue to be with its country of registration (so that they would naturally look to the provisions of the laws of that country when trying to calculate any legal or economic hazard to which their dealings might expose them) there should be an extra onus upon those seeking to have the proceedings recognised in England, to satisfy the court that no material prejudice will be experienced by such creditors in consequence of the rescue being governed by a different country's law."

153.In the passage quoted above, Professor Fletcher provides a useful checklist (by no means exhaustive) of the factors which a Court shoudl take into account in deciding whether a foreign corporate restructuring process should be recognised domestically. Running through the checklist, I do not believe that the current evidence before me clearly points towards recognising the discharge of Aoki's liability to HKIE by the Scheme.

154.Aoki being a Japanese company, Japanese civil rehabilitation proceedings under the Law are certainly suitable for recognition.

155.But I have grave doubts whether HKIE received adequate notice of the Japanese civil rehabilitation proceedings and their potential effect on HKIE's rights. I am concerned that genuine efforts were not made by Aoki to afford HKIE with the opportunity to participate in the Scheme and, possibly, influence its outcome. Mr Hill's evidence is that Aoki's financial difficulties were reported in newspapers and ASD "was briefed in respect of the position". But what does that mean? Nothing is said about whether Aoki clearly told HKIE that HKIE had to lodge its claim within a certain date or risk certain consequences. What (if any) rights did HKIE have under the Law to make representations at creditors' meetings or before the Japanese Court and was it informed by Aoki of such rights?

156.The evidence is that the Law came into effect after HKIE entered into the Agreements with Aoki. There is no evidence as to when the law was enacted or whether anything similar to it was in force previously. Consequently, it is difficult to conclude that HKIE dealt with Aoki under the Agreements on the footing that Aoki was subject to the Laws. As far as I can see, no question of estoppel arises in this respect.

157.I have mentioned above my uncertainty as to whether the Scheme included Aoki's Hong Kong assets and now prohibits enforcement against them.

158.Mr Scott further submits that the Scheme may not have been fair in that it may have favoured corporate bondholders. He also suggests that Takamatsu and Asunaro may through Lanon unfairly reap the benefit of Aoki's contracts with the Hong Kong Government at the expense of creditors such as HKIE. I am not sure that Mr Scott's complaints in these respects are valid. But the present information is insufficient for me to be confident on those issues.

159.I have indicated where I find the present evidence lacking. On balance, if forced to eschew the 2-stage approach and deal with the entering and enforcing of a judgment on the Award as a single issue in the way Mr Yu submits, I would hold against Aoki on the present evidence and still enter judgment in HKIE's favour.

160.But, given my decision on the 2-stage approach, I should not be taken by my brief discussion here to preclude the parties from adducing further evidence on the Law and the Scheme at the time of any application by HKIE through the Court for enforcement of the Award as a judgment.

C. 6 Terms of execution

161.Mr Scott denied any intention on HKIE to gain an advantage over Aoki's other creditors. HKIE was only interested (Mr Scott said) in receiving fair treatment in all the circumstances. Mr Scott was not averse to the imposition of term in connection with the execution of a judgment in HKIE's favour. He proposed that I direct that any application by HKIE to enforce its judgment or wind-up Aoki by reason of non-compliance with the judgment be returnable before me. No enforcement proceedings requiring an order of the Court could thus take place without further reference to me. That would also ensure that arguments on the effect of the Law and Scheme on HKIE's rights could then be debated before me without wasting time and expense over matters already canvassed.

162.Mr Yu was against the entering of any judgment. But, if I were against him, he thought that HKIE should be restrained from taking any steps to enforce a judgment or wind up Aoki pursuant thereto without leave from me.

163.I believe that Mr Yu's formula would act as an unnecessary constraint on HKIE. In my judgment the direction proposed by Mr Scott would be adequate. If HKIE should say take some action on its judgment not requiring Court intervention (for example, service of a statutory demand), it would be open to Aoki (if it deemed fit) to apply before me to set aside the relevant action. That should afford sufficient protection to Aoki.

IV. Conclusion

164.The application in HCCT 109 now being unnecessary, that Motion is dismissed. I make an Order Nisi that there be no order as to the costs of that Motion.

165.Aoki having failed in its application for leave in HCCT 110, the Motion there is dismissed. I make an Order Nisi that HKIE is to have the costs of that Motion, to be taxed if not agreed.

166.As for the Summons in HCCT 7, I give leave for judgment in the amount of Sum Z on the terms of the Award as amended by the Correction be entered in HKIE's favour against Aoki. I direct that all applications by HKIE to enforce such judgment through the intervention of the Court (including any petition by HKIE to wind up Aoki on the basis of the judgment) be returnable before me. I make an Order Nisi that HKIE is to have the costs of the Summons, to be taxed if not agreed.

Representation:

Mr John Scott SC, instructed by Messrs Johnson, Stokes & Master, for the

Applicant in HCCT 109/2003 and 7/2004 and the Respondent in HCCT

110/2003

Mr Benjamin Yu SC, instructed by Messrs Lovells, for the Respondent in HCCT 109/2003 and 7/2004 and the Applicant in HCCT 110/2003

1 "There is a presumption (but no more) that it is a penalty when 'a single sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damages'."

2 Since the end of Phase C3 would coincide with the end of the works for the combined Packages C and D, Mr Yu accepts that the Architect may have had power to extend time for completion of Phase C3.

3 That is the part beginning "For the avoidance of doubt..."

4 This is the doctrine that a change of status (divorce in the case of Armitage) would be recognised in England if it would be recognised by the courts of the state in which the relevant party is domiciled. See Dicey and Morris §18-061.

5 In coming to this conclusion Trainor J propounded what became known as the "new entity" theory, whereby chapter 11 had the effect of divesting a debtor of the beneficial ownership of his assets and rejecting the same in the debtor as trustee for his creditors. This theory as to the effect of chapter 11 was queried by the US Supreme Court in Rehnquist J in National Labour Relations Board v Bildisco & Bildisco (1984) 465 US 513 (at 1188). See Felixstowe (cited below) for further details. at 364D - 365B. In arriving at the theory, Trainor J was disagreeing with the opposite view expressed by Cons J in Mobil Sales and Supply Corporation and others v The Owners of the "PACIFIC BEAR" [1979] hklr 125. Nevertheless, on proper analysis, I do not think that Trainor J''s new entity theory is logically material to his conclusion that the principle of comity in Galbraith should be followed.