HONG KONG COURT REFUSES LEAVE TO APPEAL AN ARBITRAL AWARD IN "DOMESTIC" ARBITRATION

In A and Others v Housing Authority (HCCT 54/2017), the Hong Kong Court of First Instance (Court) reiterated the high threshold for leave to appeal an arbitral award on a question of law.  In dismissing the Plaintiffs' application, the Court confirmed that leave would only be granted if it can be demonstrated to the Court, clearly, quickly and easily, without meticulous legal argument that the decision is "obviously, or demonstrably, wrong", or that the correctness of the decision is "seriously in doubt".

Under current legislation, parties to arbitrations seated in Hong Kong do not, in general, have an automatic right to appeal an arbitral award on a question of law. Such right, along with other special rights of recourse to the courts set out in Schedule 2 to the Arbitration Ordinance (Cap. 609) (Ordinance), is a key feature of the old "domestic regime" and, since 1 June 2017, parties wishing to enjoy such rights must expressly "opt in" to these provisions pursuant to Section 99 of the Ordinance.  That said, the provisions in Schedule 2 will continue to apply to arbitration agreements providing for "domestic arbitration" that were entered into before 1 June 2017 (see our earlier blog post for detail). Accordingly, this case remains an important decision.

Background

The parties entered into various contracts (Contracts), by which the Plaintiffs agreed to carry out maintenance and refurbishment works in housing blocks managed by the Defendant.  Pursuant to the Contracts, the Defendant issued work orders, instructing the Plaintiffs to replace existing window hinges for aluminum windows in those housing blocks (Relevant Works).

A dispute arose, however, between the parties as to which specific rates specified in the Schedule of Rates (SOR) in the Contracts should be used when valuing the Relevant Works, which was referred to arbitration.  While the Defendant considered that only the three rates set out under the section of the SOR headed "Ironmongery and fittings to metal window and doors" (referred to as Rates 1, 2 and 3) should be used, the Plaintiffs contended that two other rates in the section headed "Repairs, etc to metal windows and doors” (Rates 4 and 5) should also be applied.

In its Partial Award (Award), the Tribunal found that the Relevant Works related solely to the replacement of window hinges, and did not involve any "repair", in whole or in part.  The Tribunal also considered that Rates 1, 2 and 3 covered all the works incidental to and included in the Relevant Works.  Accordingly, the Tribunal found that only Rates 1, 2 and 3 applied to the valuation of the Relevant Works.

Dissatisfied with the Award, the Plaintiffs applied for leave to appeal it on a question of law, under Section 6(1)(b) of Schedule 2 to the Ordinance. The question of law identified was whether, on a proper construction of the SOR, the Relevant Works should be measured and valued under Rates 1 to 3 only, or under Rates 1 to 5 inclusive.

Test for leave to appeal against an arbitral award

Justice Mimmie Chan noted that the legal principles governing applications for leave to appeal against an arbitral award are clear.

 Under Section 6(4) of Schedule 2 to the Ordinance, leave to appeal is to be granted only if the Court is satisfied that, on the basis of the findings of fact in the award, the decision of the arbitral tribunal on the question is "obviously wrong", or the question is one "of general importance" and the decision of the arbitral tribunal is "at least open to serious doubt".

When considering the meaning of these terms, Justice Chan reviewed a number of cases. In particular, she noted that the Court of Final Appeal held in Swire Properties v Secretary for Justice (2003) 6 HKCFAR 236 that: "Leave should not normally be given in ‘one-off’ disputes unless the arbitral tribunal’s construction is ‘obviously wrong’; but leave can sometimes be given in ‘standard clause’ disputes as long as there is at least ‘a strong prima facie case’ that the arbitral tribunal’s construction is wrong."

In the same case, the Court of Final Appeal had also cited the following dicta in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 with approval:

"Where, as in the instant case, a question of law involved is the construction of a ‘one-off’ clause the application of which to the particular facts of the case is an issue in the arbitration, leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the Tribunal that they had chosen to decide the matter in the first instance."  [Emphasis added]

Justice Chan concluded that whether the appropriate test to be applied is "obviously wrong" or "open to serious doubt", the threshold is high. It is insufficient for it to be shown that the decision of the tribunal is arguably wrong, or that it is arguable that the decision is open to some doubt.  Rather, it must be demonstrated to the court, clearly, quickly and easily, without meticulous legal argument that the decision is "obviously, or demonstrably, wrong", or that the correctness of the decision is "seriously in doubt".  Accordingly, she added that leave to appeal would only be granted in exceptional cases.

Decision

The Plaintiffs argued that the relevant test should be whether the decision of the arbitrator was "at least open to serious doubt", since the question of law identified was a question of general importance.  This was on the basis that there were a huge number of work orders for the Relevant Works, with a total value exceeding HKD 100 million, and that the question of law identified would affect the meanings of various terms commonly employed in standard forms of contracts used in the industry.  The Plaintiffs also argued that even if the "obviously wrong" test was applicable, such test was satisfied in any event.

Justice Chan dismissed the Plaintiffs' arguments.

She considered that the Award was based on the construction of specific words in the provisions of the Contracts in the context of this particular case. Accordingly, she rejected the Plaintiffs' argument that the Award would have binding effect on the general meaning of those provisions.  On this basis, Justice Chan held that the test should be whether the decision of the Tribunal was "obviously wrong", and found that it was not.  Justice Chan also held, obiter, that even if the question was one of general importance, the Award was not open to "serious doubt".

In reaching the above conclusions, Justice Chan stated that far from taking the view that the Tribunal's decision was "obviously wrong" or "open to serious doubt", she tended to agree with the Tribunal's reasoning and decision.  In that regard, she found that the basis of the Award flowed from the Tribunal’s findings that Rates 1, 2 and 3 covered all the works incidental to and included in the Relevant Works.  Since such inclusive price principle was not a novel concept, she rejected the Plaintiffs' argument that the arbitrator's decision lacked commercial sense.

Conclusion

This decision demonstrates the high threshold in Hong Kong for appealing arbitral awards (consistent with the pro-arbitration approach adopted by the Hong Kong judiciary), and illustrates that, even in the context of "domestic" arbitrations, the courts will be slow to interfere with the decisions of arbitral tribunals.