HK Court Rejects Serious Irregularity Ground Of Appeal In Tunnel Dispute

Maeda Kensetsu Kogyo Kabushiki Kaisha & China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited [2019] HKCFI 1006 concerns a dispute in relation to the construction of the diaphragm walls of the tunnels for the Hong Kong to Guangzhou Express Rail Link. Following various awards, Maeda challenged the awards on the ground of serious irregularity under Sch. 2 of the Arbitration Ordinance, seeking orders to declare parts of the awards to be of no effect on grounds of serious irregularity, to set aside parts of the Awards, and to remit the parts of the Awards to the Arbitrator for reconsideration.

Maeda argued that they had been prevented from presenting their case; that the Arbitrator had dealt with a dispute not contemplated by or falling within the terms of the submission, had failed to deal with all issues that were put to the tribunal, or had made decisions on matters beyond the scope of the submission to arbitration; and that the arbitral procedure was not in accordance with the parties’ agreement.

The three factual issues concerned:

  • Issue 1: The Arbitrator’s finding that the Defendant was entitled to recover for the idling of rebar and concreting resources on the basis that such resources would idle for 30% of the additional idling cutter hours thereby entitling the Defendant to additional payment of HKD5,278,482. The Plaintiff argued that there was no such pleaded case advanced by the Defendant nor any evidential basis for such a finding.
  • Issue 2: The Arbitrator’s finding that the Defendant’s pleaded case that an instruction was issued on 14 July 2011 to change the design of the reinforcement cages in fact embraced all changes to the design of the reinforcement cages including changes made prior to 14 July 2011 thereby allowing the Defendant to recover inter alia additional costs incurred prior to 14 July 2011 amounting to HKD7,157,959.56. The Plaintiff argued that the Arbitrator failed to give effect to the pleaded case advanced by the Defendant, allowed the Defendant to expand beyond its pleaded case in circumstances where the Plaintiffs had not had any reasonable opportunity to investigate the underlying facts nor was there any evidential basis for such findings.
  • Issue 3: The Arbitrator’s finding that the Plaintiffs were not entitled to recover any additional costs in respect of defective works by Bauer at certain panels on the grounds that these defects would have been remedied by the toe grouting work that the Plaintiffs were required to do in any event. The Plaintiff argued that the Arbitrator failed to consider and give any decision in respect of a group of panels for which the evidence showed that only remedial grouting but not toe-grouting works were carried out.

The Court set out the relevant principles [4-9]:

“As the decisions in Grindrod Shipping Pte Ltd v Hyundai Merchant Marine Co Ltd [2018] EWHC 1284 (Comm), Terna Bahrain Holding Co WLL v Bin Kamel Al Shamzi [2013] 1 Lloyd’s Rep 86, Reliance Industries Ltd v The Union of India [2018] EWHC 822 (Comm), and P v M [2018] HKCFI 2280, 9 October 2018 illustrate, the test of a serious irregularity giving rise to substantial injustice (the language used in section 4 (2) of the Schedule) involves a high threshold. In Reliance Industries Ltd v The Union of India, the English Court stated that only an extreme case justified the court’s intervention under section 68 of the Arbitration Act 1996, which adopts the same wording of “serious irregularity” giving rise to “substantial injustice” as in our section 4 (2). As this Court recognized in P v M, a balance is to be drawn between the need for finality of an arbitral award and the need to protect parties against the unfair conduct of the arbitration. The threshold for setting aside must be high, in line with the objectives of the Ordinance to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and upholding the parties’ choice to resolve their dispute by arbitration (section 3 of the Ordinance), which must require minimal intervention by the courts in the arbitral process.”

“Serious irregularity” is set out in in section 4 (2) of the Schedule. These include failure by the arbitral tribunal to comply with its duties of independence, impartiality and the use of appropriate procedures, as provided for in section 46 of the Ordinance; the tribunal exceeding its powers; failure to conduct the proceedings in accordance with the procedure agreed by the parties; and failure to deal with all the issues that were put to it.”

“Setting aside of arbitral awards under Article 34 of the Model Law includes the ground of a party being unable to present his case; the award dealing with a dispute not contemplated by or not falling within the terms of the submission to arbitration or containing decisions on matters beyond the scope of the submission; and the arbitral procedure not being in accordance with the agreement of the parties.”

“It has to be borne in mind, as the courts have emphasized in many cases, that the setting aside remedy and any intervention by the Court under the Ordinance (other than a permitted appeal on a question of law under section 5 of the Schedule) is not an appeal against the arbitral award, on facts or on law. In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, which concerned an application under Article 34 of the Model Law to set aside an award on the ground of inability to present one’s case, and the arbitral procedure not being in accordance with the agreement of the parties, the Court of Appeal highlighted the fact that the Court is concerned with the structural integrity of the arbitration proceedings, and will not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law. I cannot see any rationale for adopting a different approach in a case where an award is challenged on the ground of serious irregularity under section 4 of the Schedule, based on the same cause of the tribunal’s failure to conduct the proceedings in accordance with the procedure agreed by the parties, or its failure to deal with all the issues that were put to it, or its having failed to treat the parties fairly and impartially and giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents (as required under section 46 (3) (b)) of the Ordinance). The Court should not be concerned with whether the arbitrator made errors of fact or law, but should only be concerned with the process of the arbitration, and whether it is fair.”

“When considering whether the applicants in question had been denied equality of treatment and the opportunity to present their case, Tang VP (as His Lordship then was) observed in Grand Pacific Holdings (at paragraph 94 of his judgment):

“…I gather that the conduct complained of must be serious, even egregious, before a court could find that a party “was otherwise unable to present his case”. It is unnecessary for me to decide, and I do not decide, how serious or egregious the conduct must be before a violation could be established. Nor, do I decide whether “the conduct… must be sufficiently serious to offend… basic notions of morality and justice”. I am inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party had been denied due process.”

“It must also be emphasized that under section 4 (2) of the Schedule, the serious irregularity alleged must have caused or will cause “substantial injustice” to the applicant. Section 68 of the Arbitration Act 1996 has the same wording. In Terna Bahrain Holdings Company WLL v Al Shamsi, Popplewell J set out the applicable principles on the court’s intervention for serious irregularity (paragraph 85 of the judgment), and in the context of substantial injustice, stated:

“… (vi) The requirement of substantial injustice is additional to that of a serious irregularity, and the applicant must establish both.
(vii) In determining whether there has been substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. The applicant does not need to show that the result would necessarily or even probably have been different. What the applicant is required to show is that had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome.” (Emphasis added)

In the event, the Court dismissed Maeda’s application for setting aside and remission on the grounds of serious irregularity and alleged failure to present their case.

In relation to Issue 1, the the Court stated [36]:

The Plaintiffs had notice of the Defendant’s claim for the idling/non-productive rebar and concrete resources, and a fair and reasonable opportunity to deal with the Defendant’s claim and to address the Arbitrator on the question of the additional costs/hours and the idling alleged. The extent of the Defendant’s entitlement in respect of the idling resources was “in the arena” (Warborough Investments Ltd v S robinson & Sons (Holdings) Ltd [20002] EWHC 2502 (Ch)), and if the Plaintiffs did not take the opportunity to make submissions on the extent to which the non-productive and/or idling resources claimed were equal to, or only formed a portion of, those periods/duration incurred in relation to the cutters, they cannot complain of any alleged serious irregularity, if the Arbitrator allowed a part of the Defendant’s claim. I fail to see how the Arbitrator’s assessment of the Defendant’s claim, and his allowance of 30% of such claim, can be said to be “so far removed from what could be reasonably expected … that justice calls out for it to be corrected” (Grindrod Shipping Pte Ltd), or that the structural integrity of the arbitral process has been compromised as a result.”

In relation to Issue 2, the Court stated [49-50]:

“As highlighted in the earlier part of this Judgment, a challenge against an arbitral award on the ground of alleged serious irregularity should not be used as a guise for an appeal on findings of fact, which are not susceptible to review by the courts.”

“Having regard to the entirety of the Defendant’s pleading in paragraphs 166 to 176 of the Statement of Claim, it cannot be said that the Arbitrator’s understanding of the Defendant’s pleaded case is wrong. The correctness of his findings in law and on facts is not a matter of concern in this application before the Court.”

In relation to Issue 3, the Court stated [62-63]:

“This claim, and the issues relating to the claim, were dealt with in the Award. In dismissing the Plaintiffs’ counterclaim, the Arbitrator must have rejected the Plaintiff’s evidence as to the water jetting issue, and the claim that the grouting works were not required for the 39 Panels.”

“It has to be repeated, that the focus of an inquiry under section 4 of the Schedule is due process, not the correctness or otherwise of the tribunal’s decision. The evaluation of the evidence and findings of fact on the evidence are matters entirely for the tribunal (Sonatrach v Statoil [2014] EWHC 875 (Comm), Primera Maritime (Hellas) Limited v Jiangsu Eastern Head the Industrial Co Ltd [2013] EWHC 3066 (Comm)). These principles are indisputable.”

Note for Hong Kong Practitioners

Hong Kong practitioners should also take note of the Court’s observations in relation to the affirmations filed in these proceedings [70-72]:

“…O 41 r 5 RHC contains the general statement that an affidavit may contain only such facts as the deponent is able of his own knowledge to prove. Submissions and arguments should not be made in affidavits filed in interlocutory proceedings. These are to be made by counsel or the advocate, in skeleton arguments which should comply with the practice directions and any specific directions which may be made by the court.”

“In this case, several lengthy affidavits have been made by the solicitors acting for the parties, containing lengthy submissions, and arguments on what is or is not relevant or correct, which submissions or arguments are then referred to by Counsel in their skeleton submissions and responded to. This manner of presenting and dealing with the case is totally unhelpful to the Court’s efficient consideration and disposal of the questions to be decided. I have made scarcely any reference to the affidavits as it is not necessary to do so, when the appropriate submissions should have been made in Counsel’s skeletons.”

“The affidavits and the costs incurred are totally unnecessary…”

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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