WING HONG CONSTRUCTION LTD v. TIN WO ENGINEERING CO LTD

HCCT 13/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDING

NO. 13 OF 2010

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BETWEEN

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D E C I S I O N

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1.  In a decision handed down on 13 May 2010, I dismissed Wing Hong’s application pursuant to s 23(3)(b) Arbitration Ordinance for leave to appeal from an award made in an arbitration between the parties. I made an order nisi that costs be Tin Wo, to be taxed on a party and party basis.

2.  Now, the solicitors for Tin Wo seek to vary the costs order, first asking that the costs be on an indemnity basis, and second that there be a certificate for two counsel.

3.  Mr Yip relies upon the following passage from the judgment of Reyes J in A v R [2010] 3 HKC 67, at 79:

“Parties should comply with arbitration awards. A person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course.

Applications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.

Further, given the recent introduction of Civil Justice Reform (CJR), the Court ought not normally to be troubled by such type of application. A party unmeritoriously seeking to challenge and award would not be complying with its obligation to the Court under Order 1A Rule 3 to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute.

If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.

Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially ‘worth a go’. That cannot be conducive to CJR and its underlying objectives.

Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis.  The respondent will here pay the applicant’s costs on an indemnity basis.”

4.  I agree entirely with these sentiments.

5.  Mr Tsang relies on the decision of the Court of Appeal in Sung Foo Kee Ltd v Pak Lik Co (a firm) [1996] 3 HKC 570 at 575, to say that there must be a special or unusual feature to justify an award of costs.  The relevant passage is:

“Here, as in England and Wales, the judge has a discretion, in a case which does fall outside the general rule, to direct taxation of the receiving party’s costs on the basis which he considers to be appropriate to that case. This is not a discretion limited by indications in previous cases, such as, e.g. the observations of Godfrey J in Overseas Trust Bank Ltd v Coopers & Lybrand [1991] 1 HKLR 177 (in which he declined to order the successful party’s costs to be taxed on the indemnity basis), as to the sort of special or unusual feature (there does have to be some special or unusual feature) which could justify an award of indemnity costs.”

6.  Mr Tsang argued that I was bound by the decision in Overseas Trust Bank, it being a decision of the Court of Appeal, and that in the absence of any special or unusual feature in the present case, an award of indemnity costs could not be justified.

7.  I am satisfied, for two reasons, but I am not bound by that decision.  First, it is a decision in relation to costs in an action, not in relation to the level of costs to be awarded on an application under the Arbitration Ordinance for leave to appeal against an award.  Second, it is a decision that predates CJR.  Consequently it is not a decision that was made at a time when the court was obliged to give effect to the underlying objectives contained in O 1A r 1, of the Rules of the High Court, as required by O 1A r 2.  Any statements of the courts as to principle in respect of costs, delivered prior to CJR, must now, necessarily, be reconsidered in the light of O 1A RHC.

8.  As I have said, I agree entirely with the sentiments of Reyes J, set out in paragraph 3 above.

9.  Mr Tsang sought to argue that the present case could neither be said to be an abuse of process, or an unmeritorious application.  In those circumstances, he said, an award of indemnity costs was not justified.

10.  It is clear that Reyes J did not consider that an application for leave to appeal against an award, or to set aside an award, or for an order refusing enforcement, were, ipso facto, an abuse of process. 

11.  They are however applications which are exceptional events.  The whole principle of arbitration is that a person who obtains an award in his favour is entitled to expect that the Court will enforce the award as a matter of course.  It is not necessary for a party successfully resisting an application seeking to challenge the award, to establish the application  itself as an abuse of process to justify indemnity costs.  The nature of arbitration is such that, having regard to the underlying objectives in the RHC, an unsuccessful application to challenge an arbitrators award will normally attract indemnity costs against the applicant.

12.  Counsel for the applicant had been obliged to accept that the clauses, the interpretation of which was sought to be challenged, were not standard clauses but were “one-off” clauses, peculiar to this particular arbitration agreement.  The burden faced by an applicant in challenging a one-off clause is high: the arbitral tribunal’s construction must be shown to be “obviously wrong”.  Mr Tsang pointed to the fact that I thought that on first impression the argument for the applicant might be right.  That, he said, the application being brought before the court.

13.  But when regard is had to the hurdle to be mounted by the applicant, it is immediately seen that a mere first impression will fall a long way short of being able, even arguably, to meet the standard of showing that the interpretation is “obviously wrong”.  I accept that the challenge was not of itself an abuse of process, but it was a challenge made in circumstances where the prospect of establishing that the interpretation was “obviously wrong” was at best remote.  In those circumstances there is no reason to depart from what is now the usual rule, that costs on a failed challenge to an arbitrators award should be on an indemnity basis.

14.  Where the prospect of success is at best remote, an application to challenge an award may properly be characterised as unmeritorious.

15.  Mr Yip drew my attention to four factors which he said, in addition to the principles set out above, justified indemnity costs.

16.  First, he said that Wing Hong had sought leave to appeal two aspects of the award, but that it had pursued only one of those aspects at the hearing.  That only one aspect was to be pursued was not notified to the solicitors for Tin Wo until 10 days before the hearing, by which time argument had already been prepared.

17.  Mr Tsang responded by saying that it was a regular event in litigation that a particular argument would be signalled in a summons, but not pursued in the event.

18.  That is right, but it must not be open to parties to include, without proper consideration, unmeritorious arguments, whether to use them as bargaining points or not, only to abandon them later.  Once the argument has been signalled by its inclusion as a ground in a summons, an applicant must appreciate that the other side would need to give that argument consideration in order to properly respond.  If a ground is abandoned there may be a consequence in costs.

19.  Second, Mr Yip said that the proposed abandonment of the retention money aspect was used as a bait in an attempt to persuade Tin Wo to settle for what he described as unreasonable and onerous terms, including as to Tin Wo’s own costs.

20.  Mr Tsang responded by saying that that was nothing more than the usual negotiation that takes place in the course of litigation.

21.  That may well be right, but when such conduct takes place in the context of the enforcement of arbitration proceedings then, having regard to the right of the party to an arbitration who has succeeded in obtaining an award to have that award enforced, the matter comes in a different light.  Where threats are made to attack an award, if then used as a basis to settle for a lesser amount, and the basis of the attack is subsequently abandoned, or are unsuccessful at the hearing, the party making the attack cannot expect to have to meet merely party and party costs.  If a challenge is to be made to an award must have a proper basis.

22.  Third, Wing Hong’s solicitors had set the application down for a 15 minute hearing on 13 April 2010, without first consulting the solicitors for Tin Wo.  Tin Wo’s solicitors came to that hearing prepared to argue the matter, having sensibly taken note of the decision of Reyes J in Free Firm Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] 3 HKC 415, to the effect that an application for leave to enforce an award might well be dealt with in a 30 minute hearing.  In that case the judge pointed out that in practice leave to appeal against an award is rarely granted and that:

“…it is the Court’s custom to rule quickly, at the earliest possible opportunity, with a minimum of flurry, on the question of leave.”

23.  That is quite right.  A party who seeks to prevent the enforcement of an award must come to court expecting the matter to be dealt with expeditiously.  By Wing Hong not being prepared to argue the matter on 13 April 2010, costs were wasted.

24.  Fourth, as at 27 May 2010, the date on which Mr Yip prepared his skeleton for the costs argument, full payment of the amount due under the award had still not been made.  In fact, final payment was made only on 28 May 2010, the date of the hearing of the costs argument.  The award was originally published on 3 February 2010, but could not be collected immediately because Wing Hong delayed payment of the arbitrators fees until 19 February 2010.  They then delayed making payment and sought to settle the matter by paying less than the amount awarded.  When that did not succeed they then challenged the award.  Even after the handing down of the decision rejecting the challenge to the award, the final payment was still not made immediately.

25.  By these tactics, Wing Hong effectively delayed payment by three months.  It is plain that the tactics adopted were designed, at least in part, with a view to delay payment.

26.  I am satisfied, first, that as a matter of principle in the special circumstances of arbitration proceedings, where an applicant fails to successfully establish a basis to challenge the award, the proper award of costs will usually be an award of indemnity costs.  There is no reason to depart from that principle in this case.  Second, I am satisfied that while the four factors set out by Mr Yip do not themselves justify indemnity costs, they do go to substantiate Mr Yip’s submission that there was no basis in the present case to reduce the level of costs.

27.  I accordingly order that Wing Hong must pay Tin Wo’s costs, of and incidental to the proceedings, on an indemnity basis.

28.  Mr Yip sought a certificate for two counsel.  Mr Tsang opposed the grant of a certificate, arguing that the complexity of the matter was not such as to justify two counsel.  Mr Yip reminded me that Wing Hong had been represented by leading counsel and junior counsel in the original application.

29.  The factors that are relevant in determining whether there should be a certificate for two counsel are set out in Hong Kong Practice, paragraph 62/App/48.  They are not exhaustive factors.  The mere fact that one side has instructed two counsel is not of itself sufficient to justify a certificate: see British Metal Corporation Ltd v Ludlow Bros (1913) Ltd [1938] Ch 787[1], at 790.  But it is a factor which may be taken into account.

30.  Looking at the case as a whole, I am satisfied that the amount of money involved, the importance to the client, and the specialised area in which the dispute lay, together with the fact that the applicant had instructed both leading counsel and a junior, justified Tin Wo in instructing two counsel, albeit both juniors.

31.  Accordingly, there will be a certificate for two counsel.

Mr David Tsang, instructed by Messrs Leung & Associates, for the Applicant

Mr Steven Yip Wing Yiu of Messrs Minter Ellison, for the Respondent

[1] Incorrectly cited in Hong Kong Practice, 2010, Vol 1 1157 as [1938] Ch 774.

HCCT 13/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDING

NO. 13 OF 2010

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D E C I S I O N

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Introduction

1.  In the construction project leading to these proceedings Wing Hong was the main contractor for the execution and completion of a substantial residential building development in Beacon Hill Road, Kowloon.  Tin Wo undertook to carry out certain steel cutting and fixing works by way of a subcontract. 

2.  A dispute arose between the parties, with Tin Wo claiming against Wing Hong for the balance of payment for the value of work done, and prolongation costs arising out of what it said was delay on the part of Wing Hong.  Wing Hong counterclaimed against Tin Wo for contra charges and loss incurred due to delays in the project which it said were attributable to the works of Tin Wo.  The dispute was referred to arbitration.

3.  The arbitrator delivered an interim award on 3 February 2010, which was substantially in favour of Tin Wo.  Wing Hong now seeks leave pursuant to s 23(3)(b) Arbitration Ordinance to appeal from the award.

4.  The errors of law alleged by Wing Hong are detailed in the summons in the following way:

“(A) (Tin Wo) was entitled to the second moiety of the retention monies whilst the same should only be released under SSC 22 of the Subcontract within 30 days from the date of issue of the Certificate of Making Good Defects and such Certificate of Making Good Defects had not yet been issued (refer to paragraphs 81 to 91 of the Reasons for Interim Award);

(B)    (Wing Hong) was not entitled to rely on the absence of a date for the completion of the Subcontract Works (refer to paragraph 108 of the Reasons for Interim Award), and the conditions of the Subcontract do not have the effect of excluding (Tin Wo) from claiming compensation for delay to the completion of the Subcontract Works (refer to paragraph 109 of the Reasons for Interim Award).”

5.  The contract was in Chinese, but the arbitrator has set out a translation of the three relevant clauses, and there is no dispute as to the translation.  The determinations made by the arbitrator, and challenged by Wing Hong turn on to provisions in the contract.  These are, first, clause 48 of the “Contract - General Conditions of Sub-contract”, (SGC), and second clause 24 of the “Special Conditions of Sub-contract”, (SSC).  These provide:

“SGC 48

The contract period of these works is to be calculated from the date of notification of commencement of works up to the completion of these works, (Tin Wo) shall follow (Wing Hong’s) rate to complete these works.  If the rate of (Tin Wo’s) works causes delay to these works, (Tin Wo) shall take responsibility and pay for the ensuing consequences.”

“SSC 24

The completion period for these works is to be calculated from the date of notification of commencement of works up to the completion date to be drawn up by (Wing Hong).  If by reason of rate of works the time limit is delayed (Tin Wo) shall complete this works contract in accordance with (Wing Hong’s) rate of works, and cannot by reason of this demand any compensation whatsoever.”

6.  Mr Clayton for Wing Hong says that SGC 19 is also relevant.  That provides:

“If during the carrying out of works, (Tin Wo) finds that (Wing Hong) impedes its execution of the works, (Tin Wo) shall on that day verbally inform (Wing Hong’s) Person-in-charge and subsequently inform (Wing Hong) in writing.  (Wing Hong) upon having verified its truthfulness will inform (Tin Wo) in writing about giving (Tin Wo) extension of time.”

The relevant principles

7.  The principles to be applied are well settled, but are worth repeating.  The leading authority in Hong Kong is Swire Properties Ltd & Ors v Secretary for Justice (2003) 6 HKCFAR 237, with the essential principles being sent out by Bokhary PJ at para 31 in the following terms:

“At the risk of over-simplification, one might say that what Lord Diplock said in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 comes to essentially this: 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.  Summaries have their merit.  But over-simplification is not a risk that ought to be run in this context.  So I propose to quote the whole of the passage from Lord Diplock’s speech in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) which I have in mind.  It appears at pp732H-743F:

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.”

8.  Mr Clayton properly accepted that the clauses under consideration were “one-off” clauses, and not standard clauses.  Both counsel accepted that in considering whether or not the arbitrator was obviously wrong, I was not confined solely to the award, but without having resort to full adversarial argument, I could have regard to the fundamental contentions advanced by each side as to the interpretation of the relevant clauses and view the conclusions of the arbitrator in the light of those contentions.

9.  I approach the application for leave to appeal with these principles in mind.

Discussion

10.  The first argument advanced by Wing Hong before the arbitrator was that there was no date for the completion of the contract.  This argument goes to the error of law set out in paragraph 4(A), above.  The argument was that without a completion date, there could be no breach of any implied term not to hinder or prevent completion by that date nor lack of cooperation precluding competition by that date and, hence, the common law damages claim was bound to fail. 

11.  There is no dispute between the parties that Wing Hong did not, in compliance with SSC 24, notify, either by letter or notice to Tin Wo, a completion date for the works. 

12.  In those circumstances the arbitrator found, at paragraph 108 of the Reasons for Award, that the subcontract did stipulate a date for completion, in SSC 24, and that date was a date to be drawn up by Wing Hong after the issue of notification of commencement of works.  The arbitrator concluded that Wing Hong had not done that.  He found that Wing Hong was in breach of SSC 24 in failing to “draw up” a date for completion.  In the course of reaching that conclusion the arbitrator noted that a party cannot rely upon his own wrong in enforcing a contract.  He concluded that Wing Hong’s first argument had no effect on the validity of Tin Wo’s claim.

13.  The arbitrator went on to conclude that although Wing Hong had not complied with SSC 24, and “drawn up” a date for completion, it was possible to determine the date for completion by reference to the works programme which identified a date for the completion of the subcontract works, (see Reasons for Award paragraph 108).

14.  I cannot say that the conclusion reached by the arbitrator is obviously wrong.  He might have better expressed himself, but it is plain from a reading of the award as a whole that the arbitrator has concluded that although Wing Hong had not formally notified Tin Wo of a completion date, the completion date was capable of determination by reference to the works programme that had been prepared by Wing Hong, and that the lack of formal notification of that completion date by Wing Hong could not stand in the way of a claim by Tin Wo. 

15.  It is clearly arguable that the works programme had plainly been “drawn up” by Wing Hong.  It is equally arguable that the failure to formally notified Tin Wo of the date arrived at by that programme did not in any way detract from the consequence of drawing up the date.  In those circumstances, and having regard to the arbitrator’s comment that the finding that Wing Hong was in breach of SSC 24 had no effect on the validity of Tin Wo’s case is entirely understandable.

16.  I accept Mr Manzoni’s submission that the real complaint is that Wing Hong is dissatisfied with the arbitrator’s finding of fact as to the date for completion.  There is of course no right to appeal a finding of fact.

17.  In the absence of notification of a completion date the arbitrator was perfectly entitled to infer, if he could, from the provisions of the contract a completion date.  That is all he has done.

18.  It may well be that Mr Clayton is right when he says that the application of the principle of the party cannot rely on his own wrong was inappropriate in the circumstances of this case.  But that does not make wrong the essential conclusion of the arbitrator, that, in the absence of stipulation on the part of Wing Hong of a completion date, a completion date may be inferred.

19.  I cannot say that the conclusion of the arbitrator set out at paragraph 4(A) above is obviously wrong.  It was a conclusion he was entitled to reach.

20.  The second argument which Wing Hong advanced to the arbitrator was that the language of the second sentence of SSC 24 specifically precluded recovery of prolongation costs by Tin Wo.  This argument goes to the error of law set out in paragraph 4(B) above. 

21.  Central to Mr Clayton’s argument was an assertion that it was absolutely plain that the expression “rate of works” refers to Tin Wo’s rate of works.  On first impression that may be so.  But Mr Manzoni argues that the expression is equally applicable to Wing Hong’s rate of work.  On a second reading of the clause, I cannot say that that is wrong. 

22.  Mr Manzoni points out that the interpretation sought by Mr Clayton would have the subcontractor entering into a fixed-price contract which required him to work at any rate that the main contractor desired, and to be on site for as long as the main contractor desired, without any entitlement to additional remuneration.  That simply does not make commercial sense.  While a foolish subcontractor might enter into such a provision, if clearly to that effect, where the provision is not clearly to that effect, but requires that interpretation, the commercial unreality of the argument for that interpretation militates strongly against saying that the arbitrator was obviously wrong in not so finding.

23.  I cannot say that the conclusion of the arbitrator set out at paragraph 4(B) above is obviously wrong.  It was a conclusion he was entitled to reach.

24.  I have not embarked upon a detailed analysis of the various contentions as to the interpretation of the clauses.  That is not appropriate in an application for leave to appeal an award.  There are plainly arguments for different interpretations of the relevant clauses, to those reached by the arbitrator.  This is simply not a case where I can say that the arbitrator is obviously wrong in either of the two matters upon which the application is based.

Costs

25.  There will be an order nisi that Wing Hong must pay Tin Wo’s costs of the proceedings, to be taxed on a party and party basis if not agreed.