CHUN WO CONSTRUCTION & ENGINEERING CO LTD AND OTHERS v. THE HONG KONG HOUSING AUTHORITY [2019] HKCA 369; CACV 431/2018 (27 March 2019)

CACV 338/2018 & CACV 431/2018

(HEARD TOGETHER)

[2019] HKCA 369

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 338 OF 2018

(ON APPEAL FROM HCCT NO. 54 OF 2017)

________________________

IN THE MATTER of the Arbitration Ordinance (Cap. 609)
and
IN THE MATTER of Arbitrations

________________________

BETWEEN
CHUN WO CONSTRUCTION & ENGINEERING CO. LTD 1st Plaintiff (1st Claimant in Arbitrations)
HONG KONG MACAU (ASIA) ENGINEERING CO. LTD 2nd Plaintiff (2nd Claimant in Arbitrations)
NEW HOPES CONSTRUCTION CO. LTD 3rd Plaintiff
(3rd Claimant in Arbitrations)
SING FAT CONSTRUCTION CO. LTD 4th Plaintiff
(5th Claimant in Arbitrations)
SUN ON ENGINEERING CO. LTD 5th Plaintiff
(6th Claimant in Arbitrations)
WECON LTD 6th Plaintiff
(7th Claimant in Arbitrations)
YAU LEE CONSTRUCTION CO. LTD 7th Plaintiff
(8th Claimant in Arbitrations)
and
THE HONG KONG
HOUSING AUTHORITY
Defendant
(Respondent in Arbitrations)

________________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 431 OF 2018

(ON APPEAL FROM HCCT NO. 54 OF 2017)

________________________

IN THE MATTER of the Arbitration Ordinance (Cap. 609)
and
IN THE MATTER of Arbitrations

________________________

BETWEEN
CHUN WO CONSTRUCTION & ENGINEERING CO. LTD 1st Plaintiff
(1st Claimant in Arbitrations)
HONG KONG MACAU (ASIA) ENGINEERING CO. LTD 2nd Plaintiff
(2nd Claimant in Arbitrations)
NEW HOPES CONSTRUCTION CO. LTD 3rd Plaintiff
(3rd Claimant in Arbitrations)
SING FAT CONSTRUCTION CO. LTD 4th Plaintiff
(5th Claimant in Arbitrations)
SUN ON ENGINEERING CO. LTD 5th Plaintiff
(6th Claimant in Arbitrations)
WECON LTD 6th Plaintiff
(7th Claimant in Arbitrations)
YAU LEE CONSTRUCTION CO. LTD 7th Plaintiff
(8th Claimant in Arbitrations)
and
THE HONG KONG
HOUSING AUTHORITY
Defendant
(Respondent in Arbitrations)

________________________

(HEARD TOGETHER)

 

Before: Hon Lam VP, Cheung and Yuen JJA in Court
Date of Hearing: 5 March 2019
Date of Judgment (CACV 431/2018) : 5 March 2019
Date of Judgment (CACV 338/2018) and Reasons for Judgment (CACV 431/2018) : 27 March 2019

________________________

J U D G M E N T

________________________

Hon Lam VP :

1. I respectfully agree with the judgment of Cheung JA and for the reasons he shall give, both appeals are dismissed and a costs order nisi as per [10] in this judgment. For my part, I wish to highlight the futility of CACV 431 of 2018. The subject matter of this appeal concerns the leave granted by the judge under Section 6(5) of Schedule 2 for an appeal to be brought to this Court. Whilst as a matter of jurisdiction in cases other than those brought under the statutory regime of the Arbitration Ordinance (for which different rules apply, see [9.5] and [9.6] below) it is open to this Court to re-visit a leave granted by the judge below (e.g. in a case where this Court dismissed a renewed application for leave on specific ground and revoked leave already granted below on some other grounds, see Chan Lap Kit v Yushun Technology Ltd [2018] 1 HKLRD 192), in most cases it would not be appropriate for an appeal to be brought against such grant of leave. In addition to the requirement of Section 14AA leave as discussed by my Lord at [9.4] below, arguments in an appeal of that nature are most likely to be overlapped with arguments to be canvassed in the appeal which had been brought pursuant to leave granted by the judge in the Court of First Instance. The two appeals are likely to be heard together and no advantage is gained by having the second appeal. In such circumstances, bringing another appeal against the grant of leave to appeal to this court only adds overall costs to the litigation process and rarely serves any good. In most cases, appeals of such nature are in substance satellite litigations which our Civil Justice Reform sought to discourage. Legal practitioners should reflect on the utility of a process before they advise their clients to embark on the same.

Hon Cheung JA :

I. The two appeals

2.1 The arbitrator, Professor Reyes SC, gave an arbitral award in favour of the defendant. The plaintiffs sought leave to appeal on a point of law against the arbitral award from Mimmie Chan J. The Judge refused to grant leave (‘the refusal decision’). The plaintiffs then sought leave from the Judge to appeal against the refusal decision. The Judge granted leave (‘the leave decision’).

2.2 Pursuant to the leave decision, the plaintiffs lodged their notice of appeal (CACV 338 of 2018). In the meantime, the defendant lodged an appeal against the leave decision (CACV 431 of 2018). Both appeals were listed for hearing before us. We dealt with CACV 431 of 2018 first and dismissed it. We reserved our decision in CACV 338 of 2018. I will now first give our decision in CACV 338 of 2018 and then my reasons for judgment in CACV 431 of 2018.

II. The arbitration

1) Background

3.1 The defendant managed various housing estates. It entered into 21 contracts with the plaintiffs by which the plaintiffs were required to carry out maintenance improvement and refurbishment works in the housing estates. From time to time, Work Orders would be issued by the defendant instructing the plaintiffs to carry out specific tasks. The tasks which were the subject matter of the arbitration were Work Orders for the replacement of the sliding window hinges which were used to affix aluminum window sashes to the window frames of the flats in the housing estates (‘the Relevant Works’). These hinges had to be replaced as a result of accidents of window sashes falling onto passing pedestrians. The hinges had become worn and fatigued by usage.

3.2 The four steps in the procedure involved in replacing the window hinges were as follow :

(1) taking down (cutting away) hinges from the transom and sill of the window frame, the securing of the window sash, and the removal of the rivets or screws which attach the legs of the window hinges to the transom and sill of the window frame;

(2) taking down hinges from the window sash, detaching the sliding shoes from the window sash, and clearing away the window hinges;

(3) supplying and fixing hinges to the window sash;

(4) re-fixing the window sash to the window frame, by fixing hinges to the transom and sill of the window frame, drilling new holes into the transom and sill of the window frame, securing the window sash and then re-fixing the sash into the window frame.

3.3 The contracts between the parties contained a Schedule of Rates (‘SOR’). The parties agree that the Work Orders should be valued pursuant to the SOR, but there is disagreement as to which specific rates in the SOR should be used in valuing the work. The plaintiffs consider that they should be valued by SOR Items 10183B, 10183C, 10184B, 10146A and 10147A (‘Rate 1’, ‘Rate 2’, ‘Rate 3’, ‘Rate 4’ and ‘Rate 5’) which are as follows :

Rate 1 : ‘Supply and fix sliding shoes, pivots and friction side arms for projecting casement.’ ($98.36/each)
Rate 2 : ‘Take down and clear away sliding shoes, pivots and friction side arms for projecting casement.’ ($7.61/each)
Rate 3 : ‘Extra over last item for fixing with and including stainless steel rivets and/or stainless steel screws with plastic plugs and/or stainless steel coupler including pointing corroded holes with approved sealant. ($59.68/each)
Rate 4 : ‘Take out and set aside for re-use metal sash, ventilator or door of any size including cutting hinges away from frame.’ ($45.22/each)
Rate 5 : ‘Re-fix only sash, ventilator or door to existing frame including welding or riveting hinges.’ ($81.48/each)

3.4 The defendant considered that only Rates 1, 2 and 3 are applicable. The arbitrator agreed and held that only Rates 1, 2 and 3 are applicable.

2) Contentions of the parties

3.5 As summarised by the Judge, the contentions of the parties are as follows :

‘ 16. The parties’ competing contentions are summarized in paragraphs 14 to 16 of the Award. The Plaintiffs claim that each of the steps undertaken should be valued and paid for. The work required to remove the existing hinges from the transom and sill of the window frame should be valued under Rate 4; the work required to remove the existing sliding shoes and hinges from the top and bottom of the window sash should be valued under Rate 2; the supply of the new sliding shoes and the attachment to the top and bottom of the window sash should be valued under Rates 1 and 3; and the re-fixing of the window sash to the window frame by attaching the new hinges to the transom and sill of the window frame should be valued under Rate 5.

17. The Defendant’s case is that absent any specified method of measurement to the contrary, a rate for a measured item is deemed to cover all work indispensably necessary to complete the item of work to which the rate relates. The Relevant Works are the replacement of existing window hinges for aluminum windows. Tasks relating to the setting aside and re-fixing of the window sash is ancillary to the replacement of the existing window hinges. The Relevant Works do not involve any repairs to window sashes, as opposed to merely supplying and fitting hinges to windows. According to the Defendant, the only relevant section of SOR No 10, for valuation purposes, is that on “ironmongery and fittings to metal windows and doors”, and not that on “repairs, etc to metal windows and doors”.’

3.6 The evidence adduced at the arbitration was that until November 2013, the defendant had applied Rates 1 to 5 in the valuation of the Relevant Works. The defendant, however, stated that the application of Rates 4 and 5 prior to November 2013 had been a mistake. It also stated that although different combinations of Rates 1 to 5 had been adopted, there is no evidence that all Rates 1 to 5 had been applied and paid in any one case.

 

3) The arbitrator’s decision

3.7 The arbitrator identified Rates 1, 2 and 3 as falling under the section of the SOR headed ‘Ironmongery and fittings to metal windows and doors’, and that Rates 4 and 5 are in a section headed ‘Repairs, etc to metal windows and doors’. The section of the SOR which sets out ‘ironmongery and fittings to metal windows and doors’ specifically states that items of the metal windows include all ironmongery and fittings, and further states specifically that ironmongery and fittings to metal windows include ‘all drilling, tapping, riveting, welding, providing screws, rivets, cutting holes, mortices, slots, etc in metal frames’.

3.8 The arbitrator gave three main reasons in favour of the defendant’s approach :

(1) The Relevant Works are replacement rather than repair;

(2) The removal and brief storage of the window sash in the course of such operation are merely temporary works which are not to be measured and valued separately.

(3) There are anomalies in the plaintiffs’ construction of the SOR.

3.9 The arbitrator explained :

‘ 51. First, I am not persuaded that the relevant works can properly be characterized as involving repair in whole or part. The works are (as the Authority points out) purely the replacement of window hinges. It seems to me that it is artificial to describe the works as involving “partial repair” and by this means to introduce Rates 4 and 5, merely because the works involve removing hinges from the window frame and sash. I agree instead with the Authority that the section headed “REPAIRS, ETC.” must be intended to apply when repair is the specific item of work that a contractor is instructed to undertake. In this connection, I accept the Authority’s Killer Point No.3.

52. Second, in my view the Authority is correct on Killer Points Nos.1 and 2, purely as a matter of construction, in their natural and ordinary meaning, “Take down and clear away” (Rate 2) and “Supply and Fix” (Rates 1 and 3) together envisage the whole of the operation of removing the window hinge from the window frame and sash, supplying a new hinge, and fixing the same to the window sash and frame. The removal and brief storage of the window sash in the course of such operation, are merely necessary “Temporary works” which are not to be measured and valued separately.

53. Third, I agree with the Authority’s Killer Points Nos. 4, 5 and 6. As a matter of generality, I accept the Claimants’ point that, where a contract like the DTC has grown organically over the years with provisions tacked on over the course of time, the resulting agreement may not be the neatest and most elegant product in terms of drafting. Thus, the mere fact that a construction of the contract leads to duplications or anomalies here and there, will not necessarily mean that the construction is wrong. Provided that the clear words of the contract lead to a particular outcome, a tribunal should not strive in the name of neatness and elegance to read the parties’ agreement in some other way. But there is a limit to the deference to be shown to a given construction of a contract. I do not think that glaring oddities, such as the “half-and half point” and the fact that the “extra over” in Rate 3 is limited to Rate 1, can be ignored. These anomalies arising out of the Claimants’ construction of the SOR are clear pointers to there being something wrong with the Claimants’ reading of the SOR.’

3.10 The arbitrator also dealt with other issues but these three reasons formed the foundation of his decision.

III. Appeal on a point of law

1) The Arbitration Ordinance (Cap. 609)

4.1 Section 5(1) of Schedule 2 of the Arbitration Ordinance (Cap. 609) provides that, subject to section 6 of Schedule 2, a party to arbitration proceedings may appeal to the Court on a question of law arising out of an award made in the arbitral proceedings.Section 6 of Schedule 2 provides that :

‘ 6(1) An appeal under section 5 of this Schedule on a question of law may not be brought by a party to arbitral proceedings except—

(a) with the agreement of all the other parties to the arbitral proceedings; or

(b) with the leave of the Court.

(2) An application for leave to appeal must—

(a) identify the question of law to be decided; and

(b) state the grounds on which it is said that leave to appeal should be granted.

(3) The Court must determine an application for leave to appeal without a hearing unless it appears to the Court that a hearing is required.

(4) Leave to appeal is to be granted only if the Court is satisfied—

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

(b) that 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.

(5) The leave of the Court or the Court of Appeal is required for any appeal from a decision of the Court to grant or refuse leave to appeal.

(6) Leave to appeal from such a decision of the Court must not be granted unless—

(a) the question is one of general importance; or

(b) the question is one which, for some other special reason, should be considered by the Court.’ (emphasis added)

4.2 The plaintiffs’ application for leave to appeal against the award on a question of law was made pursuant to section 6(1)(b) of Schedule 2. The question of law identified is whether on the proper construction of the SOR, the Relevant Works should be measured and valued under Rates 1 to 3 only, or under Rates 1 to 5 inclusive.

4.3 The construction or interpretation of contract is traditionally classified as a point of law. As Lord Diplock pointed out in Pioneer Shipping Ltd v. BTP Tioxide Ltd. (The Nema) [1982] AC 724 at page 736, this classification is too well entrenched to be disturbed.

4.4 In the present case, in respect of section 6(4), there is no dispute that criteria (a) and (b) have been satisfied. The issue before the Judge is in respect of criterion (c), namely, whether the decision of the arbitrator on the question is obviously wrong (‘the obviously wrong test’) or the question is one of general importance and the decision of the arbitrator is at least open to serious doubt (‘the serious doubt test’).

2) The cases

4.5 The Judge referred to Swire Properties Ltd v Secretary for Justice (2003) 6 HKCFAR 236 on guidance for questions which are considered to be ‘of general importance’ and for the phrase ‘obviously wrong’ :

‘ 8. In the decision of the Court of Final Appeal in Swire Properties v Secretary for Justice (2003) 6 HKCFAR 236 (which was decided under the repealed Arbitration Ordinance, Cap 341), some guidance can be found as to questions which are considered to be “of general importance”. At paragraph 31 of the judgment, the Court stated:

“ 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.

9. As to the meaning of the phrase “obviously wrong”, the dicta in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 was cited with approval by the Court of Final Appeal in Swire Properties:

“ 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.” ’ (emphasis added)

4.6 The Nema is a case concerned with the United Kingdom Arbitration Act 1979. Section 1(3) provided for appeal to the High Court on any question of law arising out of an award on an arbitration agreement either with the consent of all the parties to the reference or with the leave of the Court. Section 1(4) further provided that :

‘ The High Court shall not grant leave under subsection (3)(b) above unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement…..’

4.7 The discussion of a ‘one-off contract’ is found in the speech of Lord Diplock at 736 C :

‘ In the case of a “one-off contract” where the exact combination of words and phrases that fall to be construed has not only never been used before and so did not possess an already established meaning of which each party was entitled to assume the other knew when he entered into the contract, but is also unlikely to be used in future by any other parties, it is not self-evident that an arbitrator or arbitral tribunal chosen by the parties for his or their experience and knowledge of the commercial background and usages of the trade in which the dispute arises, is less competent to ascertain the mutual intentions of the parties than a judge of the Commercial Court, a Court of Appeal of three Lords Justices or even an Appellate Committee of five Lords of Appeal in Ordinary.’ (emphasis added)

4.8 In respect of standard terms, Lord Diplock at 737 F explained :

‘ My Lords, when contracts are entered into which incorporate standard terms it is in the interests alike of justice and of the conduct of commercial transactions that those standard terms should be construed and treated by arbitrators as giving rise to similar legal rights and obligations in all arbitrations in which the events have given rise to the dispute do not differ from one another in some relevant respect. It is only if parties to commercial contracts can rely upon a uniform construction being given to standard terms that they can prudently incorporate them in their contracts without the need for detailed negotiation or discussion. Such uniform construction of standard terms had been progressively established up to 1979, largely through decisions of the courts upon special cases stated by arbitrators. In the result English commercial law has achieved a degree of comprehensiveness and certainty that has made it acceptable for adoption as the appropriate proper law to be applied to commercial contracts wherever made by parties of whatever nationality. So, in relation to disputes involving standard terms in commercial contracts an authoritative ruling of the court as to their construction which is binding also upon all arbitrators under the sanction of an appeal from an award of an arbitrator that has resulted from his departing from that ruling performs a useful function that is lacking in that performed by the court in substituting for the opinion of an experienced commercial arbitrator its own opinion as to the application of a “one‑off” clause to the particular facts of a particular case.’ (emphasis added)

4.9 The Arbitration Act 1979 was replaced by the Arbitration Act 1996 where the provisions for leave to appeal against an arbitral award are similar but not identical to our current Arbitration Ordinance which came into effect on 1 June 2011. Section 69 of the Arbitration Act 1996 provides for appeal to the Court on the question of law arising out of an arbitration award on the agreement of the parties or with the leave of the Court. Section 69(3) provides for the criteria that are required for the granting of leave :

‘ (3) Leave to appeal shall be given only if the court is satisfied―

(a) that the determination of the question will substantially affect the rights of one or more of the parties,

(b) that the question is one which the tribunal was asked to determine,

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

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

(ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and

(d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.’ (emphasis added)

4.10 As one can see from these provisions, the wording of the ‘obviously wrong’ test is the same as the Hong Kong provision of section 6 of Schedule 2. However, in respect of the ‘serious doubt’ test, our section 6(4)(c)(ii) omits the word ‘public’. The Hong Kong provision also does not have the words of section 69(3)(d).

4.11 In CMA CGM SA v Beteiligungs‑KG MS “Northern Pioneer” Schiffahrtsgesellschaft mbH & Co and others (‘The Northern Pioneer’)[2003] 1 WLR 1015, Lord Phillips of Worth Matravers MR construed section 69(3)(c)(ii) of the Arbitration Act  1996. He held :

‘ 11 The statutory criteria are clearly strongly influenced by the Nema guidelines. They do not, however, follow these entirely. We have concluded that they open the door a little more widely to the granting of permission to appeal than the crack that was left by Lord Diplock….’ (emphasis added)

4.12 Dealing with the strong prima facie case that Lord Diplock had advocated in The Nema, Lord Phillips held :

‘ 60. …. We do not, however, consider that this part of the Nema guidelines survives the provisions of section 69. The criterion for granting permission to appeal in section 69(3)(c)(ii) is that the question should be one of general public importance and that the decision of the arbitrators should be at least open to serious doubtThese words impose a test which is broader than Lord Diplock’s requirement that permission to appeal should not be given “unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction….’ (emphasis added)

4.13 Bokhary PJ in Swire Properties Ltd referred to what Lord Phillips said about the difference. He held that :

‘ 35. Since the dispute concerned in the present case is of the “one-off” type, the disposal of the present appeal does not require a decision as to what approach our courts ought to adopt where other types of dispute are concerned….I should say this. The absence of a statutory provision like s.69(3)(c)(ii) of the 1996 Act does not render irrelevant a serious doubt as to an arbitral award’s correctness on a question of law of general public importance or the construction of a standard clause. It is open to us to take the view that such a doubt is normally a good reason for the High Court to exercise its discretion in favour of granting leave to appeal from an arbitral award ….. As Lord Phillips of Worth Matravers MR said (at p.l039G‑H in the CMA CGM SA v Beteilingungs KG MS Northern Pioneer Schiffahrtsgesellschaft mbH & Co [2003] 1 WLR 1015 case), that particular guideline of Lord Diplock’s “was calculated to place a particularly severe restraint on the role of the commercial and higher courts in resolving issues of commercial law of general public importance”. I see no reason to hide the fact that I do not think that s.23 of the Arbitration Ordinance [the repealed legislation] can have the effect of imposing that restraint on our courts.’

4.14 Earlier, in Ha Hau Kwan Fong Mary v The Incorporated Owners of Golden Plaza, HCCT 9/2002, a case dealing with the repealed Arbitration Ordinance (Cap. 341), Ma J (as he then was) held that :

‘ 21. Where the event or clause is not “one-off” or the case has important repercussions beyond the parties, the court is more relaxed and more inclined to grant leave if it can be shown that there exists a reasonable argument.’

IV. The Judge’s refusal decision

5. The Judge held :

‘ 22. Far from taking the view that the Arbitrator’s decision is “obviously wrong” or “open to serious doubt”, I tend, on perusal of the Reasons for the Award, to agree with his reasoning and decision.

……

26. The Award is on the construction of specific words in provisions of the Contracts, in the context of the facts and particular work procedures of this case. I am not persuaded that the Award has binding effect on the general meaning of these provisions, to render the question of law raised to be one of general importance, beyond the Plaintiffs who dispute the valuation of the Defendant. The test should be whether the decision of the Arbitrator is “obviously wrong”, and I find that it is not. Even if the question is one of general importance, I am not satisfied that the decision of the Arbitrator in this case is open to “serious doubt”.’

V. Principles on construction of contract

6.1 The parties before the arbitrator agreed that operative principles for construing a contract are found in the judgment of Lord Neuberger PSC in Arnold v Britton [2015] UKSC 36 where he held :

‘ 15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. …’

6.2 The arbitrator held that of the seven factors articulated by Lord Neuberger, the first four are relevant :

‘ 17. First, the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision [involves] identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again, save perhaps in a very unusual case, the parties must have been specifically focusing on the issue covered by the provision when agreeing the wording of that provision.

18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19. The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. ….

20. Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to [enter] into arrangements which are ill‑advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re‑writing it in an attempt to assist an unwise party or to penalise an astute party.’

6.3 In Arnold, Lord Hodge JSC further held :

‘ 76 This conclusion is not a matter of reaching a clear view on the natural meaning of the words and then seeing if there are circumstances which displace that meaning. I accept Lord Clarke of Stone‑cum‑Ebony JSC’s formulation of the unitary process of construction, in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, para 21:

“the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

77 This unitary exercise involves an iterative process by which each of the rival meanings is checked against the provisions of the contract and its commercial consequences are investigated: In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, per Lord Mance JSC. But there must be a basis in the words used and the factual matrix for identifying a rival meaning. The role of the construct, the reasonable person, is to ascertain objectively, and with the benefit of the relevant background knowledge, the meaning of the words which the parties used. The construct is not there to re-write the parties’ agreement because it was unwise to gamble on future economic circumstances in a long term contract or because subsequent events have shown that the natural meaning of the words has produced a bad bargain for one side….’

6.4 In Secretary for Justice v Joseph Lo Kin Ching (2015) 18 HKCFAR 169, Lord Walker of Gestingthorpe NPJ discussed the iterative process and at [31] he adopted the speech of Lord Mance in Re Sigma Finance Corp [2010] 1 All ER 571 at [12] :

‘ Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving ‘checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences’.’

6.5 Lord Walker further held :

‘ 31. ……. The iterative process is often laborious. It may require the court to go forwards and backwards painstakingly between the various words and phrases, occurring in different parts of the document, which give rise to the problem. That is the process that must be followed in construing Nina’s will.’

VI. The plaintiffs’ grounds of appeal

7. Mr Coleman SC (together with Mr Eric Chung and Ms Sheena Wong) for the plaintiffs advanced four grounds of appeal, namely,

1) the Judge wrongly found that the question was not one of general importance, and 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) she failed to apply the correct test for whether the arbitrator’s decision was ‘at least open to serious doubt’;

3) she failed to apply the correct principles for contractual interpretation in construing the five Rates in the contracts and 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, she failed to find that the arbitrator’s decision was ‘obviously wrong’ or ‘at least open to serious doubt’.

VII. My view

8.1 I will now discuss these grounds.

1) Ground 1

8.2 The plaintiffs’ case is that the Judge was wrong to apply the ‘obviously wrong’ test instead of the ‘serious doubt’ test and in respect of the latter test, the Judge had adopted the wrong approach by requiring the presence of a ‘strong prima facie case’ as advanced in The Nema.

8.3 To start with, the Judge considered both tests because the plaintiffs’ case below was that they could satisfy both tests for leave to be granted. I accept that it is no longer appropriate to rely on the strong prima facie case approach for the ‘serious doubt’ test as it was held in The Northern Pioneer to be inconsistent with the wording of the 1996 Arbitration Act. But even on that basis, this Court still needs to consider whether the Judge’s decision is plainly wrong as this Court had said in Maeda Kensetsu KogyoKabushiki Kaisha (also known as Maeda Corporation) v. China State Construction Engineering (Hong Kong) Limited and others (‘Maeda Corporation’), HCMP 1342/2017 :

‘ 18. The remaining criterion in Section 6(4)(c)(ii) is that the decision of the arbitrator is at least open to serious doubt. As we said in the course of hearing, the assessment of that criterion could be quite subjective and different judges could reasonably come to different views. In an assessment of that nature, particularly bearing in mind that we are dealing with a decision to grant leave, the Court of Appeal should not intervene unless it can readily be demonstrated that the judge had been plainly wrong in coming to the conclusion that the criterion had been satisfied. As acknowledged by Mr Pennicott, it is an onerous task.’

8.4 In the present case, I do not consider that the Judge had been plainly wrong on the result of the ‘serious doubt’ test because it is clear that the Judge in [22] of her judgment had accepted the correctness of the arbitrator’s decision although she did not have to go as far as that for the purpose of considering whether leave should be granted. On such basis, according to her judgment, the plaintiffs must have failed to satisfy the threshold of either of these two tests. This is what Mr Pennicott SC described as the ‘realty check’ of the case.

8.5 However, as this is not an appeal proper of the arbitrator’s award but rather an appeal on the correctness of the refusal decision, I will first discuss whether this is a ‘one‑off’ contract situation for which the ‘obviously wrong’ test is relevant or whether it is a standard term situation for which the ‘serious doubt’ test is relevant.

8.6 Mr Coleman emphasised that this dispute is not a ‘one‑off’ case but concerns the construction of ‘standard terms’ which could affect the valuation of tens of thousands of Works Orders, undertaken by the eight claimants under the 26 contracts the subject of the arbitrations (seven of them are plaintiffs in this appeal), as well as at least 13 other contractors (not party to the arbitration proceedings) under 30 other contracts, from 2003 to 2013 across major public housing districts in Hong Kong.

8.7 Mr Coleman argued that the relevant SOR provisions and items ‘Take down and set aside for re‑use’ and ‘refix only’ under General Regulations (‘GR’)‑XI and GR‑XIII are found in all editions of the defendant’s SORs, and also apply to the valuation of the Works Orders undertaken by the 13 non‑party contractors in 30 other contracts. The Judge has also wrongly disregarded the factual finding of the arbitrator that even though the arbitrations referred only to a ‘relatively small number of Works Orders’, the difference in the parties’ valuation approaches may lead to ‘exceedingly large’ differences when the totality of the Works Orders (including those which are not the subject of this arbitration) are taken into account.

8.8 He further argued that, in any event, prior to November 2013, the defendant had itself, in fact, applied each of Rates 1 to 5 the valuation of certain Works Orders: Yu 2nd paragraph 9.2. The defendant now states that its own previous applications of Rates 4 and 5 were a ‘mistake’ and seeks to counterclaim for repayment of all such sums: RA paragraphs 16 to 17. The correct determination of the question is, therefore, of great importance to the claimants and non‑party contractors.

8.9 In my view, this is a ‘one‑off’ situation. I find the words of Lord Diplock on ‘one‑off contract’ to be instructive and apposite. The relevant contractual provisions in the present dispute do not possess an already established meaning for which each party was entitled to assume the other knew when he entered into the contract. Furthermore, it is also unlikely to be used in future by any other parties because the relevant provisions had been changed since early 2014 and the arbitrator’s award does not have any relevance to this specific type of contract after the change. While the arbitrator recognized that there may be a larger monetary value implication, this is only pertinent to the first criterion of section 6(4)(a) of Schedule 2, namely, it ‘will substantially affect the rights of one or more of the parties’ which is not an issue in dispute. There is no evidence as to the stand of the other parties who had not joined the arbitration. It is speculative to say that they would necessarily adopt the same views of the plaintiffs. Further, the arbitrator’s interpretation is only applicable to the replacement of aluminum window hinges and does not have a wider industrial application. In the words of Bokhary PJ in Swire Properties Ltd [29], this is a ‘dispute “in which the general market and the Commercial fraternity has no interest”. The resolution of a “one‑off” question of construction merely affects the rights and liabilities of the parties to the contract concerned. It will be of no general legal interest.’

8.10 This being the case the applicable test is the ‘obviously wrong’ test.

2) Ground 2

8.11 The plaintiffs argued that the Judge had wrongly conflated the two tests. The plaintiffs criticised the following passage of her judgment as being wrong :

‘ Whether the appropriate test to be applied is ‘obviously wrong’, or ‘open to serious doubt’, the threshold is high. It is not sufficient for it to be shown that the decision of the tribunal is arguably wrong, or that it is arguable that the decision is open to some doubt.’

8.12 As I agree with the Judge that the ‘obviously wrong’ test is the appropriate test, the argument now raised is academic. In any event, I do not regard the Judge had wrongly conflated the two tests. All that she meant is that the threshold for the ‘serious doubt’ test remains to be high by referring to Maeda Corporation at [18].

3) Grounds 3 and 4

8.13 Mr Coleman referred to Arnold and Joseph Lo Kin Ching and argued that the Judge had failed to undertake the requisite iterative process of contractual construction, and failed to realise that any reasonable man to whom the contracts were addressed would have understood the Relevant Works to be payable under Rates 1 to 5 inclusive (as opposed to Rates 1 to 3 only), and the arbitrator’s decision was obviously wrong or at least ‘open to serious doubt’. He argued that this is as a result of the Judge’s wrong application of the ‘serious doubt’ test, and therefore being wrongly confined to a ‘mere perusal of the award’ and wrongly thinking she was required to consider the award ‘quickly and easily, without meticulous legal argument’.

8.14 I disagree. How a judge conducts the iterative process of contractual interpretation must be considered in the context of the case. This is not a case where the Judge was required to carry out the contractual interpretation afresh as if she was dealing with the matter for the first time. She already had the benefit of the analysis of a very experienced arbitrator who is also a former High Court judge. 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. The arbitrator was in as good a position as any judge to carry out the interpretation exercise. The words of Lord Diplock in The Nema at 736 D on giving recognition to the decision of an experienced arbitrator are again apposite. In the circumstances, in the context of this case, it is not necessary for the Judge to set out the full arguments of the parties afresh and carry out a detailed analysis of their respective cases. This is clearly not the function of a judge who presides on a leave application. The Judge clearly is entitled to give weight to the arbitrator’s analysis.

8.15 Mr Coleman advanced three detailed arguments on why the arbitrator’s three reasons are obviously wrong (or at least open to serious doubt) (paragraphs 14 to 16 of the plaintiffs’ written submission). I have to say immediately that the plaintiffs’ arguments of the contractual provisions are repetitions of what had already been presented before the arbitrator which he had set out in detail in section III, Part A of his award. The arguments may be differently phrased but the substance is the same. The Judge addressed these issues in [22], [23], [24] and [25] of her judgment. I agree with her view.

8.16 I will only need to address Mr Coleman’s argument that both the arbitrator and the Judge had ignored the monetary value specified for each of the five rates. He argued that by agreeing with the defendant’s interpretation, the arbitrator and the Judge’s decisions would lead to the result that: (i) when a contractor is ordered to take down and set aside a window sash (say, during ‘repairs’ work), he would be paid HK$45.22 under Rate 4; (ii) but if he were ordered to take down and set aside the sash and remove a pair of window hinges attached to the sash, he would only be paid HK$15.22 (HK$7.61 x 2) under Rate 2; (iii) and if he were instructed to take down and set aside the sash, and remove just one window hinge (say, because the other hinge is still in working condition), he would only be paid HK$7.6l under Rate 2. This is commercially absurd and could not be what a reasonable person would have understood the parties to mean when entering into the contracts.

8.17 In respect of this specific argument that a relevant component, namely, the monetary value had been ignored by the arbitrator, it is plain that the plaintiffs had consciously decided at the hearing of the arbitration not to rely on the monetary value as a relevant part of their argument. This can be seen from the detailed submission of the plaintiffs summarised by the arbitrator in his award where the specific monetary value of the rates was not relied upon by the plaintiffs. The plaintiffs were represented by very experienced specialists in arbitration. If this matter had been raised and relied upon, one would have expected the arbitrator to have dealt with it in his award. This was not the case here.

8.18 Bokhary PJ has given guidance in Swire Properties Ltd on how the Court should deal with new points of law not taken in the arbitration :

‘ 50. The English practice on new questions under s.1 of the 1979 Act is discussed in Mustill & Boyd, The Law and Practice of Commercial Arbitration in England, (2nd ed., 1989) where this is at p.609:

(1) The fact that the point was not argued before the arbitrator is not an absolute bar to an appeal. It has to be borne in mind that it is not always possible during the course of argument at a hearing to forecast how the facts will be found and how one should argue the law in relation to them.

(2) The fact that the point was not argued must, however, be taken into account in the exercise of the discretion to give or to refuse leave to appeal.

(3) Where the failure to argue the point below has had the result that all the necessary facts are not found, this will be a powerful factor against granting leave.

(4) Even in such a case it may in very special circumstances be right to remit the award for further facts to be found with a view to granting leave, but this would probably be very unusual.

(5) If all the necessary facts have been found, the judge should give such weight as he thinks fit to the failure to argue the point before the arbitrator. In particular, he should have regard, on the one hand, to whether the new point is similar to points that were argued, perhaps a variant of one of those points or a different way of putting it, or, on the other hand, whether it is a totally new and different point.’

8.19 The argument on monetary value was raised before the Judge. Plainly she did not consider it would have made any difference to the outcome of the case. She specifically rejected the notion that it would not make commercial sense if the plaintiffs are only to be paid under Rates 1, 2 and 3 because the core issue is whether the Relevant Works comprised of replacement and not repair :

‘ 22. ….The fine arguments made by the Plaintiffs, on the basis of the alleged lack of commercial sense in parts of the Reasons for the Award, only go to arguments which had been raised by the Defendant and which the Arbitrator accepted as being consistent with or in support of his Award and his reasons. The basis of the Award remains and flows from the Arbitrator’s findings that the Relevant Works comprised the replacement of window hinges, and not repairs, that the removal of the hinges from the window sash, the supply of a new hinge and fixing the new hinge to the window sash and frame are all incidental to and included in the Relevant Works. In my view, the Arbitrator is justified and perfectly entitled to reach such a conclusion on the meaning of the Contract provisions and the applicable SOR.

23. The inclusive price principle, that in the absence of express provision, the quoted price or rates for works described are inclusive of all incidental, contingent or necessary work which is required to bring about the completion of the described work, is not a novel concept, and I cannot see how it can be said that it makes no commercial sense. Nor is there any evidence that the Defendant would in practice permit any contractor to be engaged only to do the “taking down and setting aside” step, to make it unfair for a contractor to undertake the supply and replacement part of the work, who would (on the Plaintiffs’ case) be paid less for doing more, ie including the taking down and setting aside of the replaced item. In any event, the Arbitrator heard the evidence on the relevant factual matrix of the Contracts, including evidence on the work procedures and steps, and came to his conclusion on the meaning to be ascribed to the SOR and the Rates, upon construction of the Contracts as a whole. It was open to him to come to such a conclusion, and I do not agree that the Award has been shown to be either obviously wrong, or open to serious doubt.’

8.20 The Judge’s reference at [22] to the defendant’s argument on lack of commercial sense is in respect of the evidence of the defendant’s expert Mr Battersby on commercial valuation which the arbitrator had considered and decided to be not relevant. As such this is not a point that affects this appeal or the decision below.

8.21 Accordingly, I would dismiss CACV 338/2018.

Reasons for Judgment (CACV 431/2018)

9.1 This can be dealt with shortly.

9.2 Notwithstanding the refusal decision, the Judge gave leave to appeal. It is pertinent to remind ourselves of what Lord Phillips said in The Northern Pioneer :

‘ 15. …., if the judge decides that the statutory criteria for granting permission to appeal are not satisfied, he should not grant permission to appeal against that decision. His decision on the merits of the application for permission to appeal should be final.’

9.3 Lord Phillips at [15] also recognised that this is subject to the qualification that there may be situations where elucidation of the manner of the application of the statutory guidelines may call for leave to appeal to be granted. The present appeal does not fall within those situations.

9.4 The defendant appealed against the leave decision. It did not obtain leave from the Judge or this Court before it lodged the appeal. In my view, the appeal is incompetent. The leave decision is an interlocutory judgment. Section 14AA of the High CourtOrdinance (Cap. 4) mandates that leave be obtained in order to appeal against an interlocutory judgment (Bright Shipping Limited v Changhong Group (HK) Limited, CACV 576/2018 [2019] HKCA 246). Applying the ‘application approach’, the leave decision does not finally determine any issue on the substantive rights between the parties (Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222 and B + B Construction Ltd v Sun Alliance & London Insurance (2000) 3 HKCFAR 503).

9.5 What is more important is that there is simply no provision for an appeal against the decision of a judge granting leave to appeal against the earlier decision where she had refused leave to appeal on the arbitral award. Section 14(3)(ea)(viii) of the High Court Ordinance (Cap. 4) provides that :

‘3) No appeal shall lie—

(ea) except as provided by the Arbitration Ordinance (Cap. 609), from any judgment or order of the Court of First Instance—

….

(viii) under section 5 or 6 of Schedule 2 to that Ordinance on a question of law arising out of an arbitral award;’

9.6 Section 6 of Schedule 2 is the comprehensive provision on granting leave to appeal against an arbitral award on a question of law. Whilst section 6(5) allows an appeal (by leave) from a decision of the Court granting or refusing leave to appeal from such an arbitral award, there is no provision for an appeal against the further leave decision made in respect of the earlier decision of granting or refusing leave to appeal against the arbitral award. In the absence of any express statutory provision, there is no jurisdictional basis for an appeal under CACV 431/2018 to be lodged.

VIII. Costs

10. I would give an order nisi that the plaintiffs are to pay the defendant’s costs of the appeal in CACV 338 of 2018 and the defendant is to pay the plaintiffs’ costs of the appeal in CACV 431 of 2018 with a certificate for two counsel.

Hon Yuen JA :

11. I agree with Cheung JA’s judgment and Lam VP’s observations.

(M H Lam) (Peter Cheung) (Maria Yuen)
Vice-President Justice of Appeal Justice of Appeal

Mr Russell Coleman SC, Mr Eric Chung and Ms Sheena Wong, instructed by Pinsent Masons, for the 2nd, 3rd, 5th and 7th Plaintiffs

Mr Ian Pennicott SC, instructed by Holman Fenwick Willan, for the Defendant