Hong Kong Court of Appeal upholds Arbitration Ordinance limits on rights of appeal

The Hong Kong Court of Appeal has rejected a challenge to the constitutionality of s.81(4) of the Arbitration Ordinance (Cap. 609), under which a party who wishes to appeal a Court of First Instance (CFI) decision on setting aside an arbitral award must obtain leave to appeal from the CFI.

Article 82 of the Basic Law, which operates as Hong Kong's constitutional document, vests the power of final adjudication in the Court of Final Appeal (CFA). The Applicant in China International Fund Limited v Dennis Lau & Ng Chun Man Architects & Engineers (HK) Limited v Secretary for Justice argued that s.81(4) of the Arbitration Ordinance is unconstitutional, in that it disproportionately restricts the CFA's power of final adjudication under the Basic Law.

In its 12 August judgment, the Court of Appeal confirmed that, although s. 81(4) constitutes a restriction of the power of final adjudication vested in the Court of Final Appeal, such restriction is no more than is necessary to achieve legitimate aims, and hence is proportionate and constitutional. The Court of Appeal further held that, notwithstanding the apparent finality of s.81(4), it retains a residual jurisdiction to supervise the process in the CFI in cases of refusal of leave, and to provide redress, but that this jurisdiction will be invoked only in extreme situations.

The Court of Appeal ordered costs on the indemnity basis, as is now the norm for arbitration-related cases in Hong Kong.

This is a significant decision, and likely to be the authority on the constitutionality of the relevant statutory provisions of the Arbitration Ordinance and the Court of Appeal's residual jurisdiction in the appeal process in arbitration cases.

Herbert Smith Freehills acted for the successful Respondent in the arbitration and court proceedings.

Background

The proceedings arose out of an arbitral award made in favour of the Respondent, Dennis Lau & Ng Chun Man Architects & Engineers (HK) Limited, against the Applicant, China International Fund Limited. There were cross applications to the CFI to set aside the award, and for leave to enforce the award and judgment to be entered in terms of the award, pursuant to ss. 81 and 84 Arbitration Ordinance, respectively. The CFI decided in favour of the Respondent on all applications. The Applicant sought leave to appeal from the CFI but leave was refused. Subsequently, the Applicant applied to the Court of Appeal for leave to appeal to that court.

The Respondent argued that the Court of Appeal has no jurisdiction to grant leave because, on the proper construction of s. 81(4) of the Arbitration Ordinance, leave from the "Court" (defined in s. 2 of the Arbitration Ordinance as the CFI) is required for the intended appeal. The Applicant agreed, but contended that s. 81(4) is unconstitutional in that it disproportionately restricts the power of final adjudication of the Court of Final Appeal under Article 82 of the Basic Law. The Court of Appeal regarded these issues as issues of "general public importance", meriting full oral arguments before a three-judge bench and invited Hong Kong's Secretary for Justice to intervene in the proceedings. The full hearing took place on 24 July 2015.

Judgment

The Court of Appeal held that, as decided earlier in Guangdong Changhong Electronic v Inspur, on a proper construction of ss.81(4) and 84(3) of the Arbitration Ordinance, only the CFI (not the Court of Appeal) has the power to grant leave to appeal against a decision on set-aside or enforcement of arbitral awards. As such, s.81(4) of the Arbitration Ordinance constitutes a restriction of the power of final adjudication vested in the Court of Final Appeal under Article 82 of the Basic Law. Such restriction is no more than is necessary to achieve legitimate aims, hence proportionate and constitutional. On this basis, the Applicant's application was dismissed.

Optional nature of arbitration

The Court emphasised the optional nature of arbitration, observing that the proportionality of the restriction must be assessed against the regime (consisting of the Arbitration Ordinance and the Court of Appeal's residual jurisdiction) as a whole. Even though the role of the Court of Appeal under the primary scheme in the Arbitration Ordinance (including s. 81) is more limited than in usual proceedings in the High Court, parties can opt for provisions in Schedule 2 of the Arbitration Ordinance to allow a wider scope of the involvement of the CFI and the Court of Appeal. This is entirely a matter of the parties' choice. If they do not opt for the Schedule 2 regime, parties are taken to have chosen the more limited s.81 regime.

In the Court of Appeal's view, it is not a disproportionate restriction that a judge of the CFI should have power to grant or refuse leave to appeal against his or her own decision. The Court of Appeal pointed out that there is a dedicated arbitration list in HK, heard by specialist judges. These judges are accustomed to deciding whether an appeal (including appeals against their own decisions) has a reasonable prospect of success. Indeed, it is proportionate that the first instance judge who hears the set aside application, who will be more familiar with the details of the case, be entrusted with the decision.

Moreover, the legitimate aims of finality, speed, and reduction of cost in arbitration would be undermined by allowing multiple leave applications. The limitation on the rights of appeal is therefore consistent with the philosophy underpinning arbitration.

Residual jurisdiction of the Court of Appeal

The Court of Appeal confirmed that it does retain a residual jurisdiction to supervise the process in the CFI, by reading down s14(3)(ea)(iv) and (v) of the High Court Ordinance. However, the Court of Appeal emphasised that this jurisdiction will be invoked extremely rarely. The residual jurisdiction targets substantial defects in the fairness of the CFI process and provides a means of redress in the rare case where the decision to refuse leave in the CFI "cannot be regarded as a 'judicial' decision". Even in such cases, appeal does not lie to the Court of Appeal. Instead, the CFI's decision will be set aside and the intended appellant can re-apply to the CFI for leave to appeal.

Merits of the application for leave to appeal

While the Court of Appeal was focused primarily on the technical questions regarding rights of appeal, and reiterated that it had no jurisdiction to entertain the application, it did take the opportunity to comment on the merits of CFI's application for leave to appeal. In the Court's view, the application did not enjoy a reasonable prospect of success. It was, in substance, an attack on the substantive merit of the award, dressed up as attacks on the integrity of the arbitration process.

Comment

The Court of Appeal has now confirmed the position on the limited rights to appeal in arbitration cases and the constitutionality of the relevant provisions. With the Court of Appeal's decisions on the statutory interpretation and constitutionality of s. 81(4) of the Arbitration Ordinance, it is now clear that there will be only one chance for the losing party in an application for setting aside arbitral awards to apply for leave to appeal, subject to the residual jurisdiction of the Court of Appeal to review the process in the CFI in refusing leave (which will be rarely invoked).

The pro-arbitration approach of the Hong Kong courts shines through the Court of Appeal's decision. One factor clearly at the forefront of the Court's thinking was that, by agreeing to arbitrate in the first place, the parties had chosen to submit their disputes to a "final and binding" process, which was not meant to be subject to appeal on the merits (nor lengthy and protracted intervention by the domestic courts). The interest in bringing an appeal must be weighed against "the importance one place[s] on party autonomy in arbitration, the promotion of speed and reduction of cost in those cases". Once again, the courts of Hong Kong have demonstrated unequivocally their support for the integrity of the arbitral process.

For further information, please contact Justin D'Agostino, Partner, Dominic Geiser, Partner, Briana Young, Professional Support Lawyer or your usual Herbert Smith Freehills contact.