Hong Kong Court refuses leave to appeal arbitral award

In Buda Pipe Rehabilitation Engineering Co. Limited v CPC Construction Hong Kong Ltd [2019] HKCFI 503, the Hong Kong Court of First Instance dismissed Buda Pipe Rehabilitation Engineering Co. Limited (BPR)'s application for leave to appeal a 2018 arbitral award, clarifying the proper application of Schedule 2 of the Arbitration Ordinance (Cap. 609) (Schedule 2).

Background

The matter concerned the replacement of water mains for the government Water Services Department (WSD) in East Kowloon. Lam Woo & Co Ltd. (LW), a company in the same corporate group as CPC Construction Hong Kong Ltd. (CPC), held the licence to tender for government waterworks, so signed an agreement with WSD as the main contractor (the LW Contract). CPC subsequently entered into an agreement with BPR subcontracting the execution of the works (the BPR Contract). BPR failed to meet the relevant performance levels and, following delayed progress to the project, CPC terminated the contract in January 2011 and commenced arbitration proceedings to claim damages for BPR's breach.

Under the arbitral award, BPR was ordered to pay damages to cover CPC's expenses incurred in carrying out the outstanding works. In its application for leave to appeal, BPR sought to contest the award on two grounds:

• for serious irregularity (under Sections 4 and 5 of Schedule 2); and
• on a question of law (under Section 6 of Schedule 2).

Decision

The Court rejected both arguments put forward by BPR and did not grant leave for BPR to appeal the arbitration award.

With respect to BPR's first ground for appeal, the Court applied Order 73 Rule 5(4) of the Rules of the High Court, according to which the summons to set aside an award due to serious irregularity under Section 4, or on a question of law under Section 6, must state the grounds for the application. BPR's originating summons issued to the Court did not outline grounds for its serious irregularity claim, giving reasons only for its application to appeal on a question of law. The Court followed Free Form Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] HKEC 643 and Po Fat Construction Co Ltd v Incorporated Owners of Kin Sang Estate HCCT 15 & 23/2013, holding that applications which do not comply with Rule 5(4) are an abuse of process and liable to be struck out. The serious irregularity strand of BPR's application was therefore dismissed.

With respect to BPR's application to appeal on a question of law, CPC contended that Schedule 2 did not in fact apply. Under Section 100 of the Arbitration Ordinance, the arbitration under the agreement must be a domestic arbitration for Schedule 2 to apply. However, the BPR Contract provided for arbitration "in accordance with Cap. 341" (Hong Kong's previous Arbitration Ordinance), which permitted both domestic and international arbitration. BPR sought to apply Section 101(1) of the Arbitration Ordinance, which allows the provisions of an arbitration agreement from the main contract to be carried down into a subcontract where the "relevant operation" is subcontracted, and there is an arbitration agreement in that subcontract. Here, the LW contract provided for domestic arbitration only, and BPR was subcontracted to execute the relevant operation (replacing the water mains). However, the arbitrator found that due to the conduct of the parties and a verbal agreement, there was a "CPC Contract" in existence, under which LW had subcontracted the main contract to CPC (which then subcontracted onto BPR). As the CPC Contract did not include any arbitration agreement at all, the requirements for Section 101(c) were not met, and Schedule 2 did not apply.

Finally, the Court considered that, even if Schedule 2 were applicable, BPR should not be granted leave to appeal, as the decision of the tribunal was not "obviously wrong". Section 6(4) of Schedule 2, which deals with the right to appeal on a question law, requires the Court to be satisfied that:

• the decision of the question will substantially affect the rights of one or more of the parties;
• the question is one which the arbitral tribunal was asked to decide; and
• on the basis of the findings of fact in the award, the decision of the tribunal on the question is obviously wrong.

The Court examined the tribunal's reasoning with respect to issues of affirmation, waiver and estoppel, and found no evidence to support any argument that the tribunal's decision on each of these questions was wrong.

Discussion

This decision demonstrates the need for procedural rigour when a party seeks to appeal an arbitral award, and emphasises the high standard required for such appeal to be granted. In order for an application for leave to appeal an arbitral award on a point of law, it is first essential to show that Schedule 2 applies to the proceedings. Once that is achieved, the applicant must also satisfy the procedural requirements, and demonstrate that the tribunal's decision was "obviously wrong". The decision moreover clarifies the limitations of the application of Schedule 2 where there are multiple subcontracts, and serves as a reminder that implied contracts must be given equal consideration when applying the Arbitration Ordinance (Cap. 609).