When will the court give leave to appeal an arbitration award on a question of law?

It is the policy of the Hong Kong Courts to give finality to arbitral awards. Parties may opt into Schedule 2 (Schedule 2) of the Arbitration Ordinance if they want to retain their right to appeal against an arbitral award on a question of law.  An applicant has to overcome a high hurdle before it can obtain leave to appeal against an arbitral award from the Court and there are very few successful applications.  Please refer to our previous article regarding challenging arbitral awards under Schedule 2.

In the recent case of Maeda Kensetsu Kogyo Kabushiki Kaisha v Bauer Hong Kong Ltd, HCCT 4/2018, an application was made for leave to appeal against the arbitrator’s 2^nd Interim Award on a question of law, pursuant to s.6(1)(b) of Schedule 2.  Leave to appeal was granted for two questions out of the four of the questions of law raised by the Plaintiffs.

Under s.6(4) of Schedule 2, leave to appeal against an arbitration award on a question of law is to be 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) on the basis of the findings of fact in the award, the decision of the tribunal on the question is “obviously wrong”; or the question is one of general importance and the decision of the tribunal is “at least open to serious doubt”.

In applying the third limb of the test above, Mimmie Chan J took the following approach:

• Where there was no claim or assertion that the question of law for which leave to appeal was sought was a matter of general importance, the judge would apply the higher threshold of “obviously wrong” for granting leave to appeal.
• However, if the plaintiff claimed and the judge accepted that the question was a matter of general importance, the lower threshold of “at least open to serious doubt” would be applicable under s.6(4)(c) of the Schedule.

For example, in deciding whether there was compliance with the notification of claim provision and whether the expression “fair valuation”  must mean one  based on actual costs, the Plaintiff claimed and the judge accepted that the construction of the clauses was of general importance to the construction industry in Hong Kong, as the provisions are commonly used in the construction industry, and there are identical or similar provisions contained in the standard form conditions of contract used by the Government, MTR Corporation, the Hong Kong Airport Authority and  Institute of Surveyors/ Architects.  Such somewhat liberal approach followed the decision of Fok JA (as he then was) in Maeda-Hitachi-Yokogawa-Hsin Chong JV v HKSAR (2012) [para. 12] that the “value” loading in that case necessarily turned on its own facts, it was a commercial exercise of sufficient general prevalence which justified applying “at least a serious doubt” test.   On the facts, it was held that the arbitrator’s decisions were at least open to serious doubt, and leave was granted for appeal on these two questions. 

In the present case, the court gave little explanation of the phrases “obviously wrong” and “at least open to serious doubt”. Previously, in A & Others v Housing Authority [2018] HKCFI 147, Mimmie Chan J referred to the Hong Kong Court of Final Appeal decision in Swire Properties Ltd & Others v Secretary for Justice (2003) 6 HKCFAR 236 and explained the applicable principles as follows:-

“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.”

For the meaning of the phrase “obviously wrong”, Mimmie Chan J applied the  dicta in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724  as approved by Swire:

“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.”

However, subsequent to the Nema decision, the English Court of Appeal in CMA CGM SA v Beteiligungs-KG MS “Northern Pioneer” Schiffahrsgesellschaft mbH & Co [2003] 1 WLR 1015 modified the “strong prima facie case” requirement to a “broader” test and imposed a “less severe restraint” threshold after the amendment to section 69(3)(c)(ii) of the Arbitration Act 1996 in England. The Northern Pioneer case was also referred to in the obiter dicta of Swire, considering it relevant to the construction of the statutory regime in Hong Kong, even if Hong Kong at the time had amended the Arbitration Ordinance to incorporate section 69(3)(c)(ii).

There is little authority in Hong Kong as to the meaning of “obviously wrong” expressed in the Nema-Antaios Guidelines.  In Nema, Lord Diplock had identified two situations which would justify the court’s interference: (1) the tribunal misdirected itself in law; (2) the decision was such that no reasonable tribunal could reach it.   More recently, the English Court of Appeal added “a false leap in logic” in the tribunal’s conclusion (HMV UK v Propinvest Friar Limited Partnership [2011] EWCA Civ 1708). 

These observations do not help one to decide readily in a given case what the appellant has to show before the court can be satisfied that the arbitral decision’s is “plainly wrong”.  By way of example, Lord Donaldson MR said that undoubtedly the arbitrator was not “allowed to cavort about the market carrying a small palm tree and doing whatever he thinks appropriate by way of settling the dispute” (Seaworld Ocean Line Co SA v Catseye Maritime Co Ltd (“The Kelaniya”) [1989] 1 Lloyds Rep 30.

In the present case, Mimmie Chan J did not explain the meaning of “obviously wrong” or make reference to the Nema-Antaios Guidelines of requiring “a strong prima facie case” as the threshold test of “open to serious doubt” as in A & Others v Housing Authority [2018] HKCFI 147. Nor was there reference to the “less severe restraint’ threshold, which ‘opens the door a little more widely” than the Nema-Antaios Guidelines, as applied in Swire.

Schedule 2 of the Arbitration Ordinance is commonly adopted by the parties to construction contracts. More guidance as to the meaning of “obviously wrong” and “at least open to serious doubt” is required, particularly the former, since in the majority of cases, the dispute is either a “one off” or the provision to be construed is non-standard.  How obviously wrong does the tribunal’s decision have to be shown to be?   The late Justice Coleman spoke ex-judicially of the obviousness in these terms, which is thought-provoking:

“What is obviously wrong?  Is the obviousness something which one arrives at ….on first reading over a good bottle of Chablis and some pleasant smoked salmon, or is ‘obviously wrong’ the conclusion one reaches at the twelfth reading of the clauses and with great difficulty where it is finely balanced.  I think it is obviously not the latter.”

More authoritative and specific guidelines from the appeal courts on these two thresholds would be welcomed by arbitration practitioners.