Re P.T. Dover Chemical Co.

CACV000155/1989

Headnote

When dismissing an appeal against judge's refusal to give leave to appeal against the award of an arbitrator, court reconsidered application of Nema guidelines and held: -

IN THE COURT OF APPEAL

(ON APPEAL FROM HIGH COURT MISCELLANEOUS
PROCEEDINGS NO. MP 1306 OF 1989)

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Coram: Hon Fuad, V-P, Hunter and Penlington, JJA

Date of Hearing: 1 and 2 March 1990

Date of Handing Down of Judgment: 20 March 1990

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JUDGMENT

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Hunter, JA :

1. This appeal is brought against the rejection on 10th October 1989 by Barnett J of the appellant's motion under s 23(3)(b) of the Arbitration Ordinance (Cap 341) for leave to appeal from the interim award of an arbitrator.

2. The appellant applicants, Lee Chang Yung Chemical Industry Corporation (LCY), a Taiwanese Corporation, entered into a written agreement dated 14th April 1982 with the respondents, P.T. Dover Chemical Company (PTD), an Indonesian corporation, for the design and supply by LCY to PTD in Indonesia of equipment for (inter alia) a formaldehyde plant, and for the provision of other related services. The contract contained a Hong Kong arbitration clause, and designated Hong Kong law as the proper law of the contract. Disputes arose, and on 1st April 1986 Mr David Gardam QC was appointed sole arbitrator.

3. PTD were the claimants in the arbitration complaining of the sufficiency and efficiency of LCY's performance. LCY counterclaimed for various alleged unpaid sums. A hearing on the issues of liability took place in Hong Kong in July 1987. On 29th February 1988 the arbitrator published his first interim award with extensive accompanying reasons. He awarded in favour of PTD in four respects of their claims, and in favour of LCY in four respects in their counterclaims. We are concerned only with the awards in favour of PTD which were : -

4. Following this award the claimants formally quantified their claims. In summary they were under (A) for the price of the rectifier and accessories supplied; and under (B), (C) and (E) for the costs of necessary works. The present dispute which then emerged centers on the conversion work done under (E). The circumstances were very special. PTD had on its hands a superfluous rectifier, the return of which LCY declined to accept; and an inadequate absorber. A Mr Lee Poh Cheong devised their ingenious solution. They utilised the shell of the rectifier tower; constructed a proper modern absorber within this shell; and brought this new absorber into service in place of the old with minimum loss of production. Had this been all, no one could have been disputed the arbitrator's conclusion that these were sensible steps in mitigation. The only dispute was likely to have been about the size of the credit (if any) PTD had to allow for the value of the rectifier so used, against its claim for the price. But there was a special additional twist. The rectifier tower as supplied was marginally larger in diameter than the original absorber tower. Its use produced an 8 per cent increase in the cross sectional area, with the consequence, LCY alleged, of an 8 per cent increase in production. LCY argued that the profits from such increased production should be brought into account against all the claimants' claims, and would by 1992 or thereabouts amount to a sum sufficient to extinguish all these claims.

5. The arbitrator was accordingly invited and agreed to rule upon a preliminary issue in the following terms : -

"Does the rule as to avoided loss apply in the circumstances of this case to any and if so which of claimants' claims?"

Following a two-day hearing in London, the arbitrator published his second interim award with accompanying reasons on 23rd May 1989. The arbitrator correctly construed this question, which is not without its ambiguities, as raising the issue

"Whether as a matter of principle, the value of any increased production caused by the claimants' action in building the new absorber must be set off against the claimants' claims so as to reduce or extinguish them."

His answer and award in the claimant's favour was "no". From this award LCY sought leave to appeal.

6. Barnett J in the exercise of his discretion refused leave. There was no issue but that this question "could substantially affect the rights of the parties" so that s 23(4) was satisfied. In refusing leave the judge reasoned thus. First he held the case to be one which fell into the "standard" not "the one-off" category. Secondly he accepted that there was at least a good arguable case that the arbitrator was wrong, which on his first conclusion was as far as he needed to go. But since he accepted Mr Temple's argument "wholly", and that had included a submission that the arbitrator was "obviously" wrong, Mr Temple argued that this conclusion embraces this argument as well. Thirdly the judge concluded that the determination of the question of law would not add "significantly to the clarity and certainty of Hong Kong commercial law" because it involved the application of well established principles to particular facts. LCY's notice of appeal, and PTD's cross notice put in issue all the judge's reasoning and conclusions.

7. Guideline cases fall into a special category. As Lord Diplock put it in Antaios Compania Naviera SA v Salen Rederierna AB, The Antaios [1985] AC 191, p 200B : -

"Like all guidelines as to how judicial discretion should be exercised they are not intended to be all-embracing or immutable, but subject to adaptation to match changes in practices when these occur or to refinement to meet problems of kinds that were not foreseen, and are not covered by what this House said in the Nema." Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1982] AC 724.

These guidelines were first adopted in Hong Kong, with some emphasis on what may be described as their detailed fetters, in AG v Technic Construction Co Ltd [1986] HKLR 541. This case involved the construction of familiar clauses in Hong Kong building contracts in typical circumstances. Since then these guidelines have been further considered and refined in England especially by Mustill LJ in Aden Refinery Co Ltd v Ugland Management Co Ltd [1987] 1QB 650 and by the Court of Appeal in Ipswich Borough Council v Fisons PLC [1990] 2WLR 108. In addition in Hong Kong the legislature has now enacted the Arbitration (Amendment) (No. 2) Ordinance 1989, albeit that it has yet to be brought into force.

8. In these circumstances it seems to be right that this court should pose to itself the same question (with necessary Hong Kong adaptations) as Lord Donaldson MR posed in Fison : -

"What criteria should be adopted in deciding whether or not to grant leave under s 23(3)(b) of the Arbitration Ordinance 1982 when the subject matter of the arbitration is not 'commercial' in the sense of being concerned with contracts of maritime affreightment as was the case" in The Nema and The Antaios.

It is manifest that the purpose of the courts in The Nema and The Antaios was to fill the legislative omissions in the UK Arbitration Act 1979, and to give judicial guidance as to how, in the exercise of their s 1 (3) discretion, the English judges should give effect to the manifest intention of the 1979 Act to give greater finality to arbitration awards and materially to reduce judicial review of arbitrator's decisions. As this court concluded in Technic, the same legislative intent is sufficiently manifested in the amendments to the Hong Kong Ordinance which were made consequent to and were overtly based upon the UK Act.

"We therefore conclude, as did Lord Diplock, that it is proper to assume that those who resort to arbitration in Hong Kong do not wish also to be involved in subsidiary litigation in the courts, save where it is abundantly clear that the arbitrator has made serious errors of law"

per Roberts CJ Technic p 546H. So in relation to overall legislative intent the Hong Kong position is indistinguishable from that in England.

9. When however one turns to consider the implementation of that intent and the formulation of guidelines, the legislative differences between the UK Act and the Hong Kong Ordinance have to be noted. They are now four in number.

"the question of law to which (his) decision relates either is one of general public importance or is one which for some other special reason should be considered by the Court of Appeal."

	It is true that this subsection relates only to a substantive decision of the judge, and not to the grant or refusal of leave, so that its absence was not directly relevant to the question before the court in Technic, 545J. But it seems to me difficult to ignore the reliance placed in England upon this subsection as an indication of Parliamentary intent. Its existence materially contributed to the formulation of the guidelines.
	The phrase : "a 'one-off' clause in a 'one-off' contract" originated in the judgment in Lord Denning MR in the Court of Appeal in The Nema [1980] 1QB 547, 564. He drew his distinction between "one-off" and "standard" clauses specifically by reference to this subsection. In the same context Lord Diplock said, The Nema p 740E : -
		"The subsection (1(7)) also draws a significant distinction between a question of law which arises in connection with a 'one-off' case, and the question of law of general importance to a substantial section of the commercial community, such as may arise under standard term contracts."
	The absence of this provision in Hong Kong most probably arises, like s 1(6A) to perceived differences in local conditions. The question remains how far this absence of express legislative intent requires reconsideration of the basic guideline distinctions. The answer I think is that the implementation of the overriding statutory intent requires in any event the notional creation of a scale of cases such as has now firmly developed in England; see Mustill and Boyd, Commercial Arbitration, 2nd edition, pps 604-608. What is not explicit in our Ordinance is implicit in its implementation. Both counsel urged us to follow and apply this scale approach, which was rejected by this court in Technic in favour of a compartmental approach, p 548G. I agree, and for the future think that the proper approach particularly in the light of the Hong Kong legislation, is not to label the case but to seek to point to its position in the scale.

3.

The absence in Hong Kong of the equivalent of s 4 in the UK Act. Sections 3 and 4 in the UK Act render ineffective pre-arbitration exclusion agreements in two circumstances; first, where the arbitration agreement is domestic; and secondly, where it concerns the particular trades specified in s 4, shipping, commodity and insurance. In Hong Kong our s 23B almost precisely follows s 3. But we have no s 4, again I would surmise because of the vast differences between Hong Kong and London as arbitral centres. In The Nema Lord Diplock relied particularly upon s 4 as manifesting a parliamentary intention to preserve the court's supervisory role in standard term disputes : -

"It was this useful function that it was the plain intention of the Act of 1979 to preserve by s 4."

he said, p 738B. In the same context at p 741 he referred particulavly to the use of standard forms of contract by foreign nationals opting for London arbitration. Lord Diplock did not allude to the identical limitations relating to domestic agreements in s 3, I suspect because the international situation was uppermost in his mind.

In the absence of the equivalent of s 4, the same inference cannot be drawn in Hong Kong. But Lord Diplock's reasoning seems to me equally applicable to s 23B, and would suggest a legislative intention more readily to preserve the court's "useful function" in domestic disputes than in non-domestic disputes. This would be consistent with the arbitral scene in Hong Kong, where the bulk of arbitrations are domestic and usually or necessarily governed by Hong Kong law; whereas the non-domestic agreements within the old definition in s 23 (8), are fewer in number and could involve foreign proper law or laws. This suggests a marginal difference under present law between domestic and non-domestic cases.

10. Having noted these differences I return to the question posed. First it is clear that although The Nema and The Antaios guidelines were formulated in and for their particular maritime context, they are not confined to it but are intended to be of wide application. In that application the English Courts have now shown that what applies and binds is the principle not the detail. Adopting Mustill LJ's approach in Ugland, Lord Donaldson MR said this in Fison p 112C : -

"... there is a clear distinction to be drawn between passages in the speeches which (a)  constitute authoritative pronouncements on the spirit in which judges should approach the exercise of the discretionary power under s 1(3) and (b) guidelines or illustrations of the way in which, approaching the matter in that spirit, the discretion would be exercised in certain situations which are commonly encountered. ...

The approach should always be consistent with what Lord Diplock had described in The Nema [1982] AC 724, 739-40, as

'a parliamentary intention to give effect to the turn of the tide in favour of finality in arbitral awards ... where this does not involve exposing arbitrators to a temptation to depart from 'settled principles of law' " .

11. The court in short rejected as appropriate what Mustill LJ had described in Ugland as "a mechanical process" [1987] QB   668B. 

12. Lord Donaldson continued, p 112 : -

"The distinguishing feature between arbitration and litigation is that, in the former case, the parties have chosen to submit their dispute to a tribunal of their own choice in preference to the courts. In making this choice they may have been influenced by a number of considerations, such as the expertise of the chosen tribunal, privacy, speed, wider rights of representation, flexibility of procedure, improved enforceability in other jurisdictions, cost and many other matters. But the fundamental point is that it was their choice. If, in the light of the award, both parties in effect resile from that choice and wish to seek a decision from the courts on the legal aspects of their dispute, they are free to do so without leave: see s 1(3)(a). (Our s 23(3)(a)) But if it is only the party aggrieved by the award who seeks to do this, there is a presumption in favour of finality and thus against granting leave. However, the presumption is neither irrebuttable, nor is it of constant weight. On the other hand it always has some weight. This is inherent in the parliamentary intention to give greater weight to finality than had been the case prior to the passing of the Act of 1979."

13. It follows that the mechanical fetters suggested in Technic are no longer appropriate. The trial judge has been proved right when he there spoke of a "spectrum of cases". There is no need to categorise the dispute as suggested at p 548G; or to follow any particular sequence or thought process, p 549A.

14. At the top of the scale or spectrum the presumption of finality is strongest in the "one-off" case or "one-off" event. Typically this will concern a specially drawn contract giving rise to no point of construction: peculiar or special facts: a question of law "in which the general market and the commercial fraternity has no interest (it merely affects the rights of the particular parties) per Lord Donaldson MR in The Kelaniya (1989] 1 Lloyds Rep 30, 32: and a question of law decided by an arbitrator chosen for his legal qualifications and arising in an international context. Then leave should be granted only if the arbitrator is, in Lord Diplock's reformulation in The Antaios p 206 : -

"So obviously wrong as to preclude the possibility that he might be right."

15. In the simpler and more homely language of Lord Donaldson in The Kelaniya 32 : -

"... there is a strong presumption that they have also accepted him for better or for worse in relation to questions of law. This is not however to say that, even in a one-off case, an arbitrator is to be allowed to cavort about the market carrying a small palm tree and doing what he thinks appropriate by way of settling the dispute. What it does amount to is that the Courts will normally leave him to his own devices and leave the parties to the consequences of their choice. They will only intervene if it can be demonstrated quickly and easily that the arbitrator was plainly wrong."

16. At the bottom end of the scale the presumption is weakest where the dispute arises between Hong Kong parties out of a standard form of contract in regular use in Hong  Kong; turns upon the construction of that contract in the context of events which are commonplace or likely to recur; and has given rise to a question of law decided by a non-legal arbitrator, eg an architect or engineer. This is the classic standard case envisaged by Lord Diplock in The Nema where he said at p 743D : -

"Rather less strict criteria are in my view appropriate where questions of construction of contracts in standard terms are concerned. That there should be as high a degree of legal certainty as it is practical to obtain as to how such terms apply upon the occurrence of events of a kind that it is not unlikely may reproduce themselves in similar transactions between other parties engaged in the same trade, is a public interest that is recognised by the Act particularly in s 4. So if the decision of the question of construction in the circumstances of the particular case would add significantly to the clarity and certainty of English commercial law it would be proper to give leave."

17. I have cited this passage in full because to my mind it shows the true ambit of the phrase "clarity and certainty". It is not being used in the general sense of the resolution of some interesting point of law, or of the filling of some lacuna in the books, for the benefit of the public and lawyers generally. I would be minded to regard it as questionable whether leave should ever be given for that purpose. This phrase and "public benefit" relate I think to a particular class of the public, to those participating in the particular group or trade that uses the common form of contract in question. In those circumstances both the parties and other participants in that trade may have both a present and a future interest in the true construction and effect of the particular clause. The courts can still on occasion play a useful role in fostering uniformity of approach. But this desirable result can only be achieved widely if arbitrators and parties can openly be informed of their colleague's decisions by the parties consenting to the publication of awards with all necessary safeguard as to identity cp Arbitration (Amendment) (No. 2) Ordinance 1989 s 2E, Eeven in such circumstances as these leave should only be granted if a strong prima facie case of error is made out.

18. If these principles are applied to present facts, I think it is beyond question that this is a one-off case at or very close to the top of the scale. It features no question construction of any contract; very special facts; and an award based upon a question of law decided by a highly qualified legal arbitrator for international parties. In Lord Diplock's sense no question of clarifying any particular area of the law arises at all. The case may give rise to a nice question of general law upon which there is a dearth of authority in both England and Hong Kong, but I can give no weight to that. It follows in my judgment that the judge misdirected himself, and that this court must reconsider for itself his exercise of discretion.

19. The issue then is whether this arbitrator was "clearly wrong". I question whether the judge impliedly so found, but if he did, then I respectfully disagree. For my part I think that the arbitrator was most probably right, so that I am very far from convinced that he was "obviously wrong". A simple expression of this conclusion would be consistent with the exhortations to brevity in the authorities, and would suffice if I was for allowing this appeal. But as I am not, I think that some indication of my reasoning  is appropriate in deference to the detailed reasoning of the arbitrator, and to the very careful submissions of counsel on both sides to whom I would like to express my gratitude.

20. LCY's submissions both to the arbitrator and to this court seem to me to have founded upon two submissions as to the effect of the decision in British Westinghouse Electrical and Manufacturing Co v Underground Electric Railway Co of London Ltd [1912] AC 673. These submissions were : -

21. My initial view is that the arbitrator was right to reject both these submissions. On the first, it seems to me contrary to basic principle to divorce statements of principle from the relevant facts. I would also regard the debate over the use of the word "avoided" as going to semantics not substance. Upon the second, I cannot start so to read this speech. The only issue before the House was that raised by the arbitrator's questions 17 and 18, see p 676; they related exclusively to the cost of the Parsons machines; as did the House's answer to those questions. I can see no substance in the suggestion that this £42,000 claim was somehow brought back into the arena.

22. I am also minded to share the view of the arbitrator that the principles of British Westinghouse did not expressly cover this case. The true avoided loss in British Westinghouse was further and continuing additional expenditure after the Parsons purchase. This was mitigated because : -

"The transaction was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach."

by Viscount Haldane at p 691. No comparable claim was made here. Of the available alternatives the claimant had chosen a capital/cost of works claim and not a loss of profits claim; compare Cullinane v British "Rema" Manufacturing [1954] 1QB 292.

23. Secondly the arbitrator concluded that the claim for the recovery of the cost of the Parsons machines themselves failed in the very special circumstances that the same event was sufficiently close to go in mitigation but sufficiently remote not itself to give rise to recovery : -

"Apart from the breach of contract, the lapse of time had rendered the appellants' machines obsolete, and men of business would be doing the only thing they could properly do in replacing them with new and up-to-date machines."

Viscount Haldane p 691. Again there was no question here of the replacement of obsolescent machines.

24. In these circumstances the arbitrator applied the principles of Cullinane to a capital calculation, and required the claimants to give credit for the proper value of the rectifier against their claims in (A) and (E). In rejecting LCY's claim for further credit he seems to have followed the suggestion in Benjamin Sale of Goods, 3rd edition, paras 1352 and 1382 that the principles of British Westinghouse do not apply to a claim formulated as that under (E) and that a closer analogy was to be found in the betterment cases like Harbutts "Plasticine" Ltd v Wayne Tank and Pump Co Ltd [1971] 1QB 447. It may be noted that McGregor recognises in paras 16 and 17 these two separate exceptions to the principle of perfect indemnity, but suggests no line of demarcation.

25. For these reasons I would affirm Barnett J's decision to refuse leave to appeal, albeit on different grounds, and dismiss this appeal.

Fuad, V-P :

26. I agree that the appeal should be dismissed for the reasons given by my Lord. I also agree with his view as to the proper approach now to the exercise by a judge of his discretion under s 23(3) of the Arbitration Ordinance.

Penlington, JA :

27. I also agree.

Fuad, V-P :

28. In handing down this judgment we make an order nisi that the appellants do pay the respondents costs of this appeal (to be taxed if not agreed) including the costs of and occasioned by the respondents' notice.

Representation:

Anthony Temple, QC, John Yan (M/s Denton, Hall Burgin & Warrens) for Appellants

Anthony Butcher, QC, KC Chan (m/s Freshfields) for Respondents