Hong Kong Court Gives Guidance on Appealing a Question of Law Arising from an Arbitral Award

In MC v. SC [2020] HKCFI 2337, the Hong Kong Court of First Instance (Court) addressed an application for leave to appeal on a question of law¹ arising out of an arbitral award on the basis that the question was of general importance and at least open to serious doubt². Taking a pro-arbitration stance, the Court emphasised that it was important for the relevant facts found by the arbitrator to support this contention. In particular, it emphasised the difficulties inherent in making such an application based on (i) questions of mixed fact and law (e.g., repudiatory³ breach); and/or (ii) amended or supplemented standard form contracts.

Background

The main contractor (MC) was engaged by the employer (Employer) to renovate a complex in Hong Kong (Project). MC entered into a subcontract (Sub-Contract) with a specialist external facade sub-contractor (SC) nominated by the Employer. The Sub-Contract contained an arbitration clause which provided for the application of Arbitration Ordinance (Cap. 609)(AO) Schedule 2, sections 5 and 6.

During the course of the Project, SC entered into a payment agreement with the Employer directly (SPA) which supplemented the terms of the Sub-Contract. Subsequently, the architect for the Project issued a variation instruction (AI) to MC on behalf of the Employer, omitting more than 60 percent of the Sub-Contract works from the Sub-Contract and instructing MC to carry them out instead. MC, in accordance with its main contract obligations, forwarded the AI to SC and expressly invited SC to question or challenge the AI under relevant provisions allowing for this in the Sub-Contract.

Instead of challenging the AI, the SC terminated the Sub-Contract, alleging that MC's omission of significant Sub-Contract works and the addition of these same works to MC's scope of works (Omission) constituted a repudiatory breach of the Sub-Contract. This termination was accepted by MC as SC's repudiatory breach of the Sub-Contract.

An arbitration was brought under the arbitration clause, and the parties requested that the arbitrator decide two preliminary issues:

• Was the Omission a breach of the Sub-Contract and/or SPA?
• Was any such breach repudiatory in nature, giving SC a right to terminate the Sub-Contract?

The arbitrator decided in favour of SC on these two preliminary issues. In response, MC sought leave to appeal these rulings under AO Schedule 2, sections 5 and 6.

Parties' Arguments

MC claimed that the arbitrator had erred in law in deciding that MC's breach was repudiatory in nature (Issue), and that the Issue was of general importance as required under AO Schedule 2, section 6(4)(c)(ii) because it turned on the interpretation of standard form special conditions of sub-contract (Special Conditions) which were commonly used in the building industry in Hong Kong: A decision on the Issue would therefore clarify the law to the benefit of the industry.

SC opposed MC's application for leave to appeal on the basis that the Issue was not one of general importance, for the following reasons:

• The Special Conditions which had been adopted in the Sub-Contract had since been significantly amended and so the provisions in issue in the arbitration were no longer generally used by the industry.
• The arbitrator's decision also took into account the SPA, which was specifically agreed between the Employer and SC for the Project, and supplemented the contractual relationship between MC and SC.
• Having regard to the above, the arbitrator's decision involved only a "one-off "dispute between the parties (having no general importance to the building industry) and depended on the particular facts of the case.

Decision

The Court agreed with SC that the Issue was a "one-off" dispute between the parties and not of general importance for the following reasons:

• The parties' contractual relationship had been supplemented by the SPA, which was specifically agreed between the Employer and SC; and
• The arbitrator's decision depended on the particular facts of the case, which were not of general importance, for the following reasons:
  • The arbitrator's decision concerned whether MC's actions constituted a repudiatory breach, which is always a question of mixed fact and law, is highly fact sensitive, and must be considered on the basis of the findings of fact.
  • The arbitrator's decision on the Issue had in fact been based on his construction of the relevant contractual provisions and consideration of the entirety of the evidence before him, including correspondence between the parties and the conduct of the parties which was specific to this case and not of general importance.
  • The arbitrator is entitled to make findings of fact, and decide what weight to give to the primary facts when reaching a decision.

Accordingly, the Court dismissed MC's application for leave to appeal, and ordered indemnity costs against MC.

Comment

This case provides a reminder that, even where parties have expressly provided⁴ that a question of law arising from an arbitrator's award may be appealed⁵, the circumstances in which this will be allowed are narrow. Where a party seeks to appeal a question of law on the basis that it is of general importance and the decision of the arbitral tribunal is at least open to serious doubt⁶, it is important to ensure that the relevant facts support this contention.

This case suggests that:

• bespoke amendments to commonly used standard forms and/or bespoke supplemental agreements may prevent questions of interpretation relating to such standard forms being considered "of general importance" and instead these maybe considered as "one-off" issues; and
• where the question of law is one that requires consideration of a mix of fact and law, the Court may be reluctant to hold that such a question is "of general importance" unless the relevant facts as found by the arbitrator also support this contention.

Finally, parties are reminded that, for any provisions in AO Schedule 2 to apply, these must be expressly provided for in the arbitration agreement. The automatic opt-in provisions found in AO sections 100 and 101 have now long since lapsed.