Po Fat Construction Company Ltd v. The Incorporated Owners of Kin Sang Estate

HCCT 15/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 15 OF 2013

____________

_____________

__________________________

REASONS FOR DECISION

__________________________

Background

1.By an agreement dated 11 December 2006 (“Contract”), the plaintiff (“Contractor”) agreed with the defendant (“Owners”) to carry out renovation works at Kin Sang Estate (“Estate”) for $3.1 million.  These works included waterproofing works (“Works”) and replacement of drainage pipes on the canopies of 4 residential buildings at the Estate. 

2.Dispute arose as to the standard, quality and workmanship of the Works, whether the Contractor was liable to the Owners for water leakages which occurred at the canopies, and whether the Contractor was entitled to payment of the retention money withheld by the Owners under the Contract.  On the Contractor’s case, it issued notice of arbitration on 26 May 2010.  The hearing of the arbitration proceedings did not commence until 26 March 2012 (“Arbitration”), and an Award was eventually published on 27 April 2013 (“Award”).  Under the Award, the Contractor was held liable for breach of the Contract and ordered to pay to the Owners a sum of $4.2 million together with interest, representing the costs and expenses incurred by the Owners for rectifying the defective Works.  The Contractor’s claim for the retention money was dismissed by the arbitrator.

3.On 27 May 2013, the Contractor commenced court proceedings by Originating Summons (“Originating Summons”) issued under HCCT 15/2013 (“HCCT 15/2013”), seeking leave to appeal against the Award on questions of law.  The Originating Summons does not set out the questions of law in respect of which the Contractor seeks leave to appeal against.  No affirmation in support of the proceedings was filed until 16 August 2013.  On the same day, the Contractor issued a summons in HCCT 15/2013 (“Summons to amend”), for leave to amend the Originating Summons: to seek an order to set aside the Award, on the stated ground that the arbitrator has breached due process in the Arbitration, and in the alternative, for leave to appeal against the Award, on the stated question of law as to whether the arbitrator can make “unpleaded” findings as to the Contractor’s design responsibility and its breach of implied duty, without giving the Contractor an opportunity to fully present its case.

4.On 3 July 2013, the Owners applied to the court, by the usual ex parte application in HCCT 23/2013 (“HCCT 23/2013”), for leave to enforce the Award as a judgment of the court.  On 27 August 2013, the arbitrator amended the Award to deal with the question of his taxation of the costs of the arbitration.  On 18 September 2013, Au J made an order in HCCT 23/2013 (“Order”), granting leave to enforce the Award, as amended.

5.On 8 October 2013, the Contractor applied under HCCT 23/2013 to set aside the Order.  The affirmation of Yeung Sui Yung (“Yeung”) was filed on the same day in support of the application.

6.The Originating Summons in HCCT 15 /2013 was issued under s 6 of Schedule 2 of Cap 609. 

7.On the materials before me, the Arbitration would appear to have been deemed to be commenced on 26 May 2011, before the Arbitration Ordinance Cap 609 (“Cap 609”) came into effect.  If that was the case, the Arbitration “and all related proceedings” would be governed by the repealed Arbitration Ordinance Cap 341 (“Cap 341”), “as if Cap 609 had not been enacted”, by virtue of s 1 of Schedule 3 of Cap 609.  However, presumably because the hearing of the Arbitration only commenced in March 2012, after Cap 609 had come into operation on 1 June 2011, the Contractor and the Owners agreed, and it was ordered and directed by the arbitrator on 25 October 2011, that “Cap 609, including Schedule 2 of the Ordinance shall be applied” to the Arbitration.  For that reason, counsel for the Contractor accepted at the hearing before me on 30 October 2013 that despite the Contractor’s reference to ss 23 and 25 of Cap 341 in the proposed Amended Originating Summons in HCCT 15/2013, the Arbitration was governed by Cap 609 and Schedule 2 of Cap 609.  Both the Contractor and the Owners have agreed, for the purposes of the Contractor’s application for leave to appeal, its application to set aside the Award for breach of due process (if the court should grant leave to the Contractor to amend the Originating Summons), and the application to set aside the Order, are governed and are to be determined by Cap 609 (and Schedule 2), and the current Order 73 RHC which applies to applications under Cap 609. 

8.At the conclusion of the hearing on 30 October 2013, I dismissed the Contractor’s Summons to amend, its application for leave to appeal against the Award, its application to set aside the Award, and its application to set aside the Order, all with costs on an indemnity basis.  The following are the reasons for my decision.

Whether leave to amend and file evidence out of time should be granted

9.Under Order 73 r 5 of the Rules of the High Court (“RHC”), any application to challenge and arbitral award on the ground of serious irregularity under s 4 of Schedule 2, and any application for leave to appeal on a question of law arising out of an arbitral award under s 6 of Schedule 2, must be made, and the originating summons must be served, within 30 days after the award is “delivered”.  The former Order 73 r 5 (2), which applied to applications to the court under the repealed Ordinance, provided that in the case of an appeal to the court under s 23 (2), the summons for appeal has to be served within 30 days after the award has been “made and published” to the parties.  “Made and published to the parties” has been interpreted by the Court of Appeal in Kwan Lee Construction Co Ltd v Elevator Parts Engineering Co Ltd [1997] 1 HKC 97 to mean when the arbitrator informs the parties that the award has been made and is ready for collection, with or without the prior payment of fees.  I see no reason why the “delivery” of an award should be construed differently. 

10.In this case, the Contractor accepts that the Award was published and available for collection by the parties on 27 April 2013.  The Contractor claims that it decided for its own reasons only to collect the Award “in or about mid-May 2013”, but as the arbitrator was out of Hong Kong, the Award was only available for the Contractor’s collection on 28 May 2013. 

11.The Contractor chose to issue the Originating Summons on 27 May 2013, before it collected the Award, in order to apply for leave to appeal before the expiry of 30 days from 27 April 2013.  It was presumably for that reason that it could not specify the precise question of law in respect of which it sought leave to appeal.  The Originating Summons seeks leave to appeal from the Award, simply “on questions of law”, stated to be substantially affecting the rights of the parties, on questions of general importance, and states that the decision of the Arbitrator is open to serious doubt or obviously wrong. 

12.Order 73 r 5 (4) RHC requires an application under r 5(1) and (2) to be served with the affidavit evidence on which the application is founded.  No affirmation was filed or served with the Originating Summons on 27 May 2013, as Yeung’s affirmation was only served on 16 August 2013, nearly 3 months thereafter.

13.In the case of Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] HKEC 643, Reyes J held that an application for leave to appeal against an arbitration award filed without any affidavit in support amounts to an abuse of process.  His Lordship states in paragraphs 5 and 6 of his judgment:

“It is normally bad practice, often amounting to an abuse of process, to file a Motion or Summons (whether originating or interlocutory) without a supporting affidavit. A respondent to any such application is entitled to know of the facts and matters said to support such application at the earliest opportunity.

In the case of applications for leave to appeal against an arbitration award, it seems to me to be not just bad practice, but an abuse, to file a holding Motion or Summons without any supporting affirmation.  Appeals against an arbitration award must be made promptly within a short time, 21 days, after an award is published.  This is because parties resort to arbitration as it is supposed to be speedier and less expensive than conventional litigation as a means of resolving disputes.  There is thus all the more reason here why a given party should know as soon as possible where he stands in relation to a published award.”

14.The decision in Free Form related to the repealed Cap 341, but I fully endorse the comments made by Reyes J in the context of Cap 609, particularly in the aftermath of the Civil Justice Reform.  The object of Cap 609 is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and the courts aim, by the procedural rules set out in Order 73 and in the exercise of its powers and discretion under Cap 609, to support this expedient method of dispute resolution chosen by the parties.

15.Counsel for the Contractor sought to distinguish Free Form on the basis that in that case, the application for leave to file the affidavit evidence in support of the Motion was only issued on the day of the hearing of the Motion.  I do not consider that the facts in the present case present the Contractor in any better light.  In Free Form, the Motion was filed on 21 January 2008 without any affidavit in support.  The late affirmation was only made on 27 March 2008, and the summons for leave to file the late affirmation was issued on 7 April 2008, for the hearing on 8 April 2008.  In the present case, the late affirmation of Yeung was served on 16 August 2013, on the same day as the summons for leave to file the affirmation was issued, and the Originating Summons was issued on 27 May 2013.  There is still a delay of about 12 weeks, during which the Owners were kept in the dark not only as to the status of the Award, but also as to the point of law in respect of which the Contractor sought leave to appeal, which is the entire basis of the application.

16.The fact that the Contractor, and those advising it, chose to apply for leave to appeal against the Award before they collected the Award and had the chance to consider it, is clearly evidence of abuse of process.  Not having reviewed the Award, let alone considering the findings of fact and questions of law raised, it goes without saying that the Contractor and those advising it could not specify the grounds of appeal, nor the questions of law raised, in respect of which it is alleged that the arbitrator was “obviously wrong”.

17.As Reyes J pointed out in Free Form, where the necessary application for leave to appeal was filed without the affidavit evidence in support as required under Ordered 73 rule 5, the application should be treated as an application to extend time for filing the application for leave, and such leave should only be given in exceptional circumstances and only for compelling reason.

18.No satisfactory, let alone compelling, reason has been given by the Contractor in Yeung’s affirmation.  In respect of the delay, Yeung only stated that although the Award was published and available for collection on 27 April 2013, the Contractor “decided to collect (the Award) in or about mid-May 2013”, and as the arbitrator was out of Hong Kong at that time, the Award was only available for collection on 28 May 2013.  He explained that the Originating Summons was filed before the collection of the Award, in order to meet the 30 day time limit, and thereafter, the Contractor’s solicitors ceased to act and the Contractor appointed new solicitors in mid June 2013, and new counsel took over the matter.  The Contractor chose for its own reasons to delay the collection of the Award until mid-May 2013, so any delay between 27 April 2013 and 27 May 2013 resulted from its own decision.  Needless to say, the subsequent change in the Contractor’s legal team cannot constitute an excuse for the delay.

19.In these circumstances, I see no justification whatsoever to grant leave to the Contractor either for extension of time to file its affirmation in support of the Originating Summons, or to make the application for leave to appeal out of time.  Nor do I see any justification to grant leave to the Contractor to amend the Originating Summons to include the new grounds to challenge the Award, for alleged breach of due process.

Whether leave to appeal or setting aside should be ordered

20.Even if I were to grant leave to the Contractor as sought, I consider that there are no merits whatsoever in the Contractor’s applications for leave to appeal against the Award on a question of law, and to set aside the Award.

21.According to the proposed Amended Originating Summons, the ground of the Contractor’s application to set aside the Award for breach of due process or misconduct, and to appeal from the Award on a question of law, is that the arbitrator had found the Contractor to be liable for the design of the waterproofing system of the canopies, and to be in breach of its implied duty to warn the Owners on the design defects and deficiencies, when these are not pleaded issues, and without giving the Contractor the opportunity to fully present its case on these matters.

22.The Owners pointed out that they had in fact pleaded (in paragraph 5 of the Defence and Counterclaim filed in the Arbitration) that the scope of the renovation works and services under the Contract included waterproofing works, and that the Contractor was to ensure that all defects should be remedied.  It was also pleaded (in paragraph 7 of the Defence and Counterclaim) that it was an implied term of the Contract that the Contractor would carry out the renovation works and services with reasonable care and skill, and (in paragraph 9 of the Defence and Counterclaim) that the Contractor was in breach of the express and implied terms of the Contract. In paragraph 14 of the Defence and Counterclaim, the Owners referred to the report of the Owners’ expert, and the conclusion made by the expert that the defects in the canopies were due to the Contractor’s poor workmanship as well as inadequate waterproofing design and details.

23.On the basis of these pleadings, the arbitrator considered the issues of (inter alia) what were the contractual duties of the Contractor, whether the Contractor was responsible for the design of the waterproofing and drainage system to the canopies, whether the design was improper and inadequate, and if not, whether the Contractor had an implied duty to carry out the waterproofing works with reasonable care and skill, including a duty to warn the Owners of any defects in the design, and whether the works carried out met the standards specified in the Contract.  He found that the Contractor was responsible for the design of the waterproofing system.

24.On the basis of paragraph 14 of the Defence and Counterclaim, I cannot agree that the arbitrator’s finding on the Contractor’s liability for the waterproofing design was one made on an unpleaded issue.

25.I also agree with counsel for the Owners that the finding on the Contractor’s breach of its implied duty to warn the Owners of design defects is a finding on the Contractor’s breach of the implied term to carry out the Works with reasonable care and skill, which is pleaded in paragraph 7 of the Defence and Counterclaim.  The arbitrator referred in paragraph 109 of the Award to the concession made by the Contractor, that it must have impliedly undertaken to perform the Works in a workmanlike manner, and that the Contractor had no objection to the Owners’ reliance on the implied duty of reasonable care and skill in relation to the services supplied and the quality of the materials supplied.

26.Counsel for the Owners highlighted the fact that counsel representing the Contractor at the Arbitration had in fact made submissions and presented arguments at the hearing, that the implied duty to warn had not been pleaded by the Owners.  This is referred to in paragraph 112 of the Award, and the arbitrator dealt with these arguments in paragraphs 113 to 126 of the Award.  Having had the opportunity to present arguments on the point, I fail to see how it can be said now, that the Contractor had been deprived of the opportunity to present its case, or that the arbitrator had breached due process.

27.Counsel for the Owners also drew the attention of the court to the fact that the witnesses of the Contractor had been examined on the Contractor’s design responsibilities under the Contract, its selection of materials and its work methods in relation to the Works, and that the Contractor’s counsel had submitted full arguments on these matters at the hearing of the Arbitration.

28.Counsel for the Contractor sought to highlight and distinguish the Contractor’s responsibility for the design of the “waterproofing system” from its responsibility for the design of the Works, and sought to emphasize that the owners had not pleaded the Contractor’s responsibility for the design of the “waterproofing system”, as found by the arbitrator.  Even if such a distinction can validly be made, on the materials before me as to the evidence presented and arguments made at the hearing, I cannot agree that the conduct of the arbitrator, in allowing the issues of the Contractor’s responsibility for the design of the “waterproofing system” and the implied duty to warn to be raised, and making findings against the Contractor on these issues, is so serious or egregious (as used by the Court of Appeal in Grand Pacific Holdings Limited v Pacific China Holdings Limited (in liquidation) (No 1) 4 HKLRD 1) as to justify the Award being set aside.

29.Significantly, the authorities are clear that even if a party was unable to present its case, or there had been some serious procedural irregularity or error such that due process can be said to have been undermined, the court will not exercise its discretion to set aside an arbitral award, if it is not satisfied that the outcome of the dispute would have been affected by such irregularity or breach of due process, or if the court is satisfied that the arbitral tribunal could not have reached a different conclusion (Brunswick Bowling & Billiards Corp v Shanghai Zhonglu Industrial Co Ltd [2011] 1 HKLRD 707, Grand Pacific Holdings Limited v Pacific China Holdings Limited (in liquidation) (No 1) 4 HKLRD 1).

30.Here, the arbitrator had made express findings (in paragraphs 142, 146, 164, 167 to 168, 170 and 218 of the Award) as to the Contractor’s liability in respect of poor workmanship and defects found in the Works as a result.  Even if the Contractor was correct, in that the arbitrator should not have dealt with the issues of design and implied duty to warn of design defects, any such error is non-material, in that it would not affect the outcome of the Award and the Contractor being held liable for the sum of $4.2 million with interest.

31.Counsel for the Contractor sought also to argue that the arbitrator’s findings, as to the Contractor’s responsibility for the design of the waterproofing system and its duty to warn of design defects, are outside the scope of the parties’ submission to arbitration.  This ground of setting aside is narrowly construed, to include only those decisions which are clearly unrelated to, or not reasonably required for the determination of the issues that have been submitted to arbitration (Grant Thornton International Ltd v JBPB & Co (A Partnership), unreported, HCCT 13/2012, 5 April 2014.  In my judgment, the arbitrator’s findings in question are related to and reasonably required in order to determine the pleaded issues of the Contractor’s liability for the Owners’ loss and damages sustained as a result of the alleged defects in the Works.

32.As to whether the arbitrator was entitled to amend the Award on 27 August 2013, to provide for the costs of the arbitration to be taxed by him, instead of by the court, the Owners pointed out that this amendment was made as a result of enquiries raised by Au J on the Owners’ ex parte application for leave to enforce the Award in July 2013.  Even if the Contractor was correct in that the arbitrator had no power to make the amendment after 30 days of the Award, such amendment makes no difference to the Contractor’s liability for the sum of $4.2 million and costs.

Whether material non-disclosure

33.Lastly, I deal with the Contractor’s claim that the Order of Au J, granting leave to the Owners to enforce the Amended Award as a judgment, should be set aside for the Owners’ failure to make full and frank disclosure of the fact that prior to the Owners’ ex parte application on 3July 2013, the Contractor had applied in HCCT 15/2013 for leave to appeal against the Award.

34.As counsel for the Owners pointed out, the Originating Summons was defective, not having stated the precise ground of the application for leave to appeal on a point of law, and not having been served with the affidavit evidence in support.  Nor does any purported appeal operate as a stay of the Award.  Counsel accordingly argued that it was not a material fact which was relevant to the balancing exercise to be made by the judge at the ex parte application, so as to require disclosure.

35.Although it is true that the materiality of a fact or matter is to be left for the decision of the ex parte judge, having held that the Contractor’s issue of the Originating Summons was an abuse of process, I will not exercise my discretion to set aside the Order on the basis of the Originating Summons.

Conclusion

36.For all the above reasons, it is clear that the Contractor has no merits in seeking leave to appeal, or to set aside the Award on any ground.  All the applications made by the Contractor, including the application to set aside the Order, were accordingly dismissed.  This is an appropriate and obvious case for an order to be made that the Contractor should pay the Owners’ costs of the Originating Summons, the Summons to amend and the application to set aside the Order of Au J on an indemnity basis, with certificate for 2 counsel.

37.No further orders are required to be made on the Owners’ Summons issued on 11 October 2013.

Mr Gary Soo and Mr Solomon Lam, instructed by Leung & Associates,for the claimant/plaintiff in HCCT 15/2013 & for the respondent(claimant) in HCCT 23/2013

Mr Kenneth CL Chan and Ms Margaret KM Chan, instructed by Lee & Associates Law Office, for the respondent/defendant in HCCT 15/2013 & for the applicant (respondent) in HCCT 23/2013