Introduction

The Court of First Instance (the “Court”) has recently in N v C [2019] HKCFI 2292 provided guidance on the specific circumstances under which the Court would refuse to exercise its power to set aside an arbitral award on the ground of serious irregularity.

Background

In this case, the Plaintiff was an employer who engaged the Defendant, the main contractor, to construct a residential development in Macau under a contract dated 28 March 2007 (the “Contract”). The completion date of the residential development was delayed for 360 days from 27 December 2008 to 22 December 2009. Pursuant to the Contract, the Defendant claimed payment for extension of time (“EOT”). The Architect granted the Defendant EOT payment for (i) loss and expense or prolongation costs at MOP 100,000 per day for 181 days and (ii) delay related fluctuation costs of MOP 12 million. A dispute arose between the parties as to the aggregate amount of the EOT payment (the “Dispute”) and it was referred to arbitration (the “Arbitration”) pursuant to the arbitration clause in the Contract.

The parties agreed that Hong Kong procedural law including the Arbitration Ordinance (“Ordinance”) and Schedule 2 of the Ordinance (“Schedule”) should apply to the Arbitration, which was to be conducted in accordance with the HKIAC Domestic Arbitration Rules (2014 edition), subject to amendments.

The Arbitration

In the Arbitration, the Plaintiff (as the Respondent) had denied the Defendant (as the Claimant)’s entitlement to recover any loss and expense on the ground that the Claimant had failed to make timely application for loss pursuant to Clause 24(1) of the Conditions of Contract which required the Claimant to submit its application for loss and expense within 2 months from the date of the event giving rise to the loss claimed (“Clause 24”). The Claimant submitted that Clause 24 was not a condition precedent and the Respondent had never raised any alleged time-bar issue during parties’ negotiation. Even if, which was denied, the alleged 2-month period constitutes a condition precedent, the Respondent had by conduct waived such condition precedent and proceeded to assess the Claimant’s loss and expense claim.

The Arbitrator awarded to the Claimant delay related loss and expense (prolongation costs) of MOP 25,500,000, and delay related loss and expense (fluctuation costs) of MOP 12 million (the “Award”), for the original 181 days as certified by the Architect and a further 74 days of EOT for delays.

The Application to set aside the Award

The Plaintiff applied to the Court for an order to set aside, or alternatively to remit, parts of the Award under sections 4(1) and (3) of the Schedule or alternatively on section 81(1) of the Ordinance, on the ground that there was serious irregularity because:

1. 1. the Plaintiff was unable to present its case;
   2. the Tribunal had exceeded its powers;
   3. the Tribunal failed to conduct the proceedings in accordance with the procedure agreed by the parties, which was for the Tribunal to decide on pleaded cases and agreed issues; and/or
   4.  the Tribunal failed to deal with all the issues which were put to it.

The Plaintiff submitted that although the Arbitrator found that the Defendant had no contractual entitlement to loss and expense under Clause 24 for the EOT, he nevertheless allowed the Defendant’s claim on the basis of an agreement having been reached between the parties, that the EOTs which were awarded would give rise to an entitlement to loss and expense (“Agreement on Entitlement”). The Plaintiff argued that this was contradictory to the Arbitrator’s own summary of the parties’ agreed position that any agreement was “subject to matters on entitlement”. Furthermore, the Plaintiff put forward that the Agreement on Entitlement was never pleaded, nor identified as an issue, neither party had sought to adduce evidence on this issue. The Plaintiff had been deprived of the opportunity to present its case and the Arbitrator had exceeded its powers and failed to conduct the proceedings in accordance with the parties’ agreement (“Plaintiff’s 1st Arguments”). Also, the Plaintiff submitted that the Arbitrator failed to deal with an essential issue raised in the pleadings, that the Defendant had failed to submit any application for loss and expense within the time prescribed under Clause 24 so that its claim should be time-barred (“Plaintiff’s 2nd Arguments”).

The Decision

The Plaintiff’s 1st Arguments were rejected. The Court held that the Agreement on Entitlement was in fact raised in the pleadings. It was confirmed by the Plaintiff in its pleadings for the Arbitration that there was an agreement between the parties to pay for loss and expense at a daily rate. The parties only disputed as to whether the agreement should apply to the period of EOT after the agreement had been made. The Arbitrator’s ruling in favour of the Defendant in respect of the Agreement of Entitlement was based on his finding on the meaning and effect of the parties’ agreement on the use of the daily rate upon evidence and facts put before the tribunal. Hence, the Plaintiff had been given full opportunity to present its case.

The Court was not satisfied that the Arbitrator’s dealing with and deciding on the Agreement on Entitlement is so far removed from what could reasonably be expected from the Arbitration, that justice calls out for it to be corrected as a serious irregularity or as an egregious denial of due process.

The Court also rejected the Plaintiff’s 2nd Argument. Based on the Arbitrator’s findings, the time-limit under Clause 24 would not apply as D’s claims were allowed based on the Arbitrator’s finding of the Agreement of Entitlement. Although the Arbitrator had not given adequate reasons for his Award, or sufficiently clarified that the claim of time bar fell away because of his findings on the existence, meaning and effect of the Agreement on Entitlement, the Court referred to Secretary of State for the Home Department v Raytheon Systems Ltd [2014] EWHC 4375 and held that there was no need for the tribunal to provide any or any sufficient reasons for its decision. A failure by a tribunal to set out each step by which they reach its conclusion or deal with each point made by a party was not a failure to deal with an issue that was put to it. A tribunal did not fail to deal with issues if it does not answer every question that qualifies as an “issue”. It could deal with an issue where that issue did not arise in view of its decisions on the facts or its legal conclusions.

Apart from addressing the issues of the Application, the Court also reiterated that it is not to be used “as a means of launching a detailed inquiry into the manner in which the tribunal considered the various issues”. Instead, the Court is concerned with a failure, where the arbitral tribunal has not dealt at all with the case of a party so that a substantial injustice has resulted or where the decision cannot be justified as a particular key issue has not been decided which is crucial to the result. Whether the Arbitrator is right on his findings of facts and law, whether his decision is supported by evidence, whether he has given sufficient reasons for his finding, and the quality of the Arbitrator’s reasoning, are not matters of consideration in an application to set aside for serious irregularity, or under section 81 of the Ordinance. The Court referred to Warborough Investments Limited v S Robinson & Sons (Holdings) Limited [2002] EWHC 2502 (Ch) which stated that for an application under section 4 of the Schedule, “The issue is not whether the Arbitrator came to the right conclusion. The sole issue is whether he committed a serious irregularity in coming to the conclusion that he did.”

In the end, the Plaintiff’s application to set aside the arbitral award pursuant to section 4(1) and (3) of the Schedule or alternatively, section 81 of the Ordinance was dismissed.

Conclusion

This case clearly illustrates the Court’s unwillingness and reluctance to intervene with any arbitral award save that there is any serious irregularity involved. To prevent any abuse of its power, the Court also set out a non-exhaustive list of circumstances where it will refuse to exercise its power to set aside an arbitral award on the ground of serious irregularity. Any future applicant who would like to apply to the Court to set aside any arbitral award on the ground of serious irregularity are reminded to think carefully with reference to this list or seek legal advice, if necessary, in order to avoid incurring unnecessary time and costs in making such an application.