Hong Kong Court considers test to be applied when appealing arbitral award on a question of law

In Chun Wo Construction & Engineering Co Ltd & Others v The Hong Kong Housing Authority [2019] HKCA 369 the Court of Appeal had to consider which test should have been applied by the Court of First Instance (CFI) when deciding whether to grant leave to appeal an arbitral award on a question of law: the “obviously wrong” test (i.e. the decision of the arbitral tribunal was obviously wrong) or the “serious doubt” test (i.e. the question was one of general importance and the decision of the arbitral tribunal was at least open to serious doubt. The Court of Appeal held that the CFI had correctly applied the “obviously wrong” test, as the CFI was resolving a “one-off” question of contractual construction, which merely affected the rights and liabilities of the parties to the contract and was of no general legal interest.

Background

The Defendant managed housing estates and under 21 contracts with the Plaintiffs, the Plaintiffs were required to carry out works in the housing estates (Contracts). The works which formed the subject matter of this case involved replacement of sliding window hinges used to affix aluminum window sashes to window frames (Works).

The Contracts contained a Schedule of Rates (SOR) pursuant to which the Works were to be valued. A dispute arose as to which rates should be applied and the dispute was referred to arbitration.

The Plaintiffs contended that the Works should be valued by reference to Rates 1 to 3 (under the heading of “ironmongery and fittings to metal windows and doors”) and Rates 4 and 5 (under the heading of “repairs, etc to metal windows and doors”) in the SOR.  

The Defendant contended that only Rates 1 to 3 were applicable and that parts of the Works alleged by the Plaintiffs to fall under Rates 4 and 5 were incidental to and covered by Rates 1 to 3.

The arbitrator ruled in the Defendant’s favour. 

CFI Decision

The Plaintiffs applied for leave to appeal the arbitral award on a question of law under section 6(1)(b) of Schedule 2 of the Arbitration Ordinance (Cap.609) (AO), namely whether on the proper construction of the SOR, the Works should be measured and valued under Rates 1 to 3 only, or under Rates 1 to 5 inclusive.

Under section 6(4) of Schedule 2 of the AO, leave to appeal on a question of law is granted only if the Court is satisfied that:-

“(a)     the decision of the question will substantially affect the rights of one or more of the parties;

 (b)     the question is one which the arbitral tribunal was asked to decide; and

(c)      that, on the basis of the findings of fact in the award–

(i)      the decision of the arbitral tribunal on the question is obviously wrong; or 

(ii)     the question is one of general importance and the decision of the arbitral tribunal is at least open to serious doubt.”

The CFI Judge had found that criteria (a) and (b) were satisfied, but that (c) was not and refused to grant leave to appeal (Refusal Decision) because:-

(1)        The question of law was not one of general, since the award concerned the construction of specific provisions of the Contracts in the context of this one-off case, and had no binding effect on the general meaning of those provisions;

(2)        Therefore, the applicable test was whether the decision of the arbitrator was obviously wrong, and on the facts, it was not; and

(3)        Even if the question of law was one of general importance, the arbitrator’s decision was not “open to serious doubt”.

Grounds of Appeal

The Plaintiffs appealed to the Court of Appeal against the Refusal Decision on four grounds, namely:-

(1)        the CFI Judge had wrongly found that the question of law was not one of general importance, and had therefore wrongly held that the applicable test was whether the arbitrator’s decision was “obviously wrong” instead of “‘at least open to serious doubt” 

(2)        the CFI Judge had failed to apply the correct test for whether the arbitrator’s decision was “at least open to serious doubt” 

(3)        the CFI Judge had failed to apply the correct principles for contractual interpretation in construing the five Rates in the Contracts and had failed to give consideration to the "values" provided as part of the description of Rates 1 to 5 against the overall purpose, relevant background facts and commercial common sense; and

(4)        as a result, the CFI Judge had failed to find that the arbitrator’s decision was “obviously wrong” or “at least open to serious doubt”

Court of Appeal Decision 

The Court of Appeal dismissed the appeal, holding: 

  • This was a “one off” situation and resolution of a “one-off” question of construction, which merely affected the rights and liabilities of the parties to the contract and would be of no general legal interest. It was a dispute “in which the general market and the Commercial fraternity has no interest”. The CFI Judge had therefore correctly applied the “obviously wrong” test. 
  • The CFI Judge had considered both the “obviously wrong” test and the “serious doubt” test, as the Plaintiffs’ case was that they could satisfy both. Although the CFI Judge had adopted an incorrect approach for the “serious doubt” test (by requiring a strong prima facie case), unless the CFI’s Judge’s decision had been plainly wrong, this Court should not intervene. There was no ground for doing so here.
  • How a judge conducts the iterative process of contractual interpretation must depend on the context of the case. This was not a case where the judge was required to carry out the contractual interpretation afresh. She already had the benefit of the analysis of a very experienced arbitrator (who was also a former High Court judge). The judge who presides on a leave application does not need to carry out the analysis afresh and is entitled to give weight to the arbitrator’s analysis.

Comments

This case illustrates the matters taken into consideration by the courts when deciding whether to grant leave to appeal an arbitral award on a question of law under section 6(4) of Schedule 2 of the AO. Whereas the first two criteria under section 6(4) are usually not controversial, the third one may cause the applicant difficulties. The Court of Appeal helpfully clarified the scope of the “obviously wrong” test and “serious doubt” test under section 6(4)(c) of Schedule 2 of the AO. The “obviously wrong” test will not be satisfied if the arbitrator “might be right”. It also clarified that, even if the “strong prima facie case” approach is no longer used for the “serious doubt” test, its threshold remains high. It is unfortunate that the Court of Appeal did not take the opportunity to provide guidelines to the CFI on what broader test should be applied in substitution for the “strong prima facie case” that had been applied under the now repealed Arbitration Ordinance (Cap 341).

The Plaintiff argued that the CFI Judge had failed to undertake the requisite iterative process of contractual construction. In considering whether to give leave to appeal against an arbitration award, the Court of Appeal must be right that the Judge is not required to carry out the contractual interpretation afresh. However, the judgment only mentioned that the arbitrator had set out the detailed arguments of the Plaintiffs as to why Rates 4 and 5 should apply as well as the counter arguments of the Defendant and he gave reasons for rejecting the Plaintiffs’ arguments. It remains unclear what is the iterative process required to be applied and how the Court of Appeal arrived at the conclusion that it had been undertaken by the arbitrator. It is interesting to note that the same CFI Judge, in a decision subsequent to this Chun Wo one stated that the correct interpretation exercise should involve the Court undertaking a “unitary process, checking a putative meaning against the commercial context, the commercial purpose and commercial consequences” (See Maeda Kensetsu Kogyo Kabushiki Kaisha v Baur Hong Kong Ltd,  HCCT 4/2018, reported in our previous article). It appears that the Court of Appeal had not considered this passage (in particular the “unitary process” of interpretation adopted). As such, the law in this important aspect remains unclear. 

Moreover, a party lodging an appeal against an award should be careful when its question of law concerns the construction of non-standard terms. If this is the case, it is most unlikely that the Court will view the question to be one of general importance (unless the dispute involves an event which is considered not to be a one-off event), such that the party must satisfy the more difficult “obviously wrong” test.

This case also reminds us that the Court of Appeal is unlikely to disturb the first instance judge’s exercise of discretion to refuse to grant leave, unless the judge’s decision is plainly wrong. 

In view of the difficult hurdles for bringing an appeal against an award, parties to an arbitration should bear the above in mind when assessing the cost effectiveness of such course, especially when the first instance judge has already refused to grant leave to appeal.