HKCFI 1006
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO 5 OF 2018
|IN THE MATTER of the Arbitration Ordinance (Cap 609)|
|IN THE MATTER of an Arbitration|
|MAEDA KENSETSU KOGYO KABUSHIKI KAISHA
also known as
(1st Respondent in the Arbitration)
|CHINA STATE CONSTRUCTION ENGINEERING (HONG KONG) LIMITED||2nd Plaintiff
(2nd Respondent in the Arbitration)
(together as the “Plaintiffs”)
|BAUER HONG KONG LIMITED||Defendant
(Claimant in the Arbitration)
Before: Hon Mimmie Chan J in Chambers
Date of Hearing: 21 November 2018
Date of Judgment: 18 April 2019
J U D G M E N T
1. This is an ongoing dispute between the Plaintiffs and the Defendant in relation to the Sub-Contract between them for the Defendant’s diaphragm wall works for the construction of the tunnels for the Hong Kong to Guangzhou Express Rail Link (“Sub-Contract”). In February 2018, the Plaintiffs applied to challenge the Second Interim Award, the Corrected Second Award, and the Third Interim Award as corrected and re-corrected, on the ground of serious irregularity under section 4 of Schedule 2 (“Schedule”) to the Arbitration Ordinance Cap 609 (“Ordinance”).
2. By the Re-Amended Originating Summons (“OS”) issued in these proceedings, the Plaintiffs seek orders to declare parts of the aforesaid awards to be of no effect on grounds of serious irregularity, to set aside parts of the Awards, and to remit the parts of the Awards to the Arbitrator for reconsideration. The grounds relied upon are that the Plaintiffs have been prevented from presenting their case; that the Arbitrator had dealt with a dispute not contemplated by or falling within the terms of the submission, had failed to deal with all issues that were put to the tribunal, or had made decisions on matters beyond the scope of the submission to arbitration; and that the arbitral procedure was not in accordance with the parties’ agreement.
“3.2.1 The Arbitrator’s finding at paragraph 415 of the Second Interim Award that the Defendant was entitled to recover for the idling of rebar and concreting resources on the basis that such resources would idle for 30% of the additional idling cutter hours thereby entitling the Defendant to additional payment of HKD5,278,482. There was no such pleaded case advanced by the Defendant nor is there any evidential basis for such a finding.
3.2.2 The Arbitrator’s finding at paragraph 519 of the Second Interim Award that the Defendant’s pleaded case that an instruction was issued on 14 July 2011 to change the design of the reinforcement cages in fact embraced all changes to the design of the reinforcement cages including changes made prior to 14 July 2011 thereby allowing the Defendant to recover inter alia additional costs incurred prior to 14 July 2011 amounting to HKD7,157,959.56. The Arbitrator failed to give effect to the pleaded case advanced by the Defendant, allowed the Defendant to expand beyond its pleaded case in circumstances where the Plaintiffs had not had any reasonable opportunity to investigate the underlying facts nor is there any evidential basis for such findings.
3.2.3 The Arbitrator’s finding at paragraph 1339 of the Second Interim Award that the Plaintiffs were not entitled to recover any additional costs in respect of defective works by Bauer at certain panels on the grounds that these defects would have been remedied by the toe grouting work that the Plaintiffs were required to do in any event. The Arbitrator failed to consider and give any decision in respect of a group of panels for which the evidence showed that only remedial grouting but not toe-grouting works were carried out.”
Claims of serious irregularity, setting aside and legal principles
4. As the decisions in Grindrod Shipping Pte Ltd v Hyundai Merchant Marine Co Ltd  EWHC 1284 (Comm), Terna Bahrain Holding Co WLL v Bin Kamel Al Shamzi  1 Lloyds Rep 86, Reliance Industries Ltd v The Union of India  EWHC 822 (Comm), and P v M  HKCFI 2280, 9 October 2018 illustrate, the test of a serious irregularity giving rise to substantial injustice (the language used in section 4 (2) of the Schedule) involves a high threshold. In Reliance Industries Ltd v The Union of India, the English Court stated that only an extreme case justified the court’s intervention under section 68 of the Arbitration Act 1996, which adopts the same wording of “serious irregularity” giving rise to “substantial injustice” as in our section 4 (2). As this Court recognized in P v M, a balance is to be drawn between the need for finality of an arbitral award and the need to protect parties against the unfair conduct of the arbitration. The threshold for setting aside must be high, in line with the objectives of the Ordinance to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and upholding the parties’ choice to resolve their dispute by arbitration (section 3 of the Ordinance), which must require minimal intervention by the courts in the arbitral process.
5. “Serious irregularity” is set out in in section 4 (2) of the Schedule. These include failure by the arbitral tribunal to comply with its duties of independence, impartiality and the use of appropriate procedures, as provided for in section 46 of the Ordinance; the tribunal exceeding its powers; failure to conduct the proceedings in accordance with the procedure agreed by the parties; and failure to deal with all the issues that were put to it.
6. Setting aside of arbitral awards under Article 34 of the Model Law includes the ground of a party being unable to present his case; the award dealing with a dispute not contemplated by or not falling within the terms of the submission to arbitration or containing decisions on matters beyond the scope of the submission; and the arbitral procedure not being in accordance with the agreement of the parties.
7. It has to be borne in mind, as the courts have emphasized in many cases, that the setting aside remedy and any intervention by the Court under the Ordinance (other than a permitted appeal on a question of law under section 5 of the Schedule) is not an appeal against the arbitral award, on facts or on law. In Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1)  4 HKLRD 1, which concerned an application under Article 34 of the Model Law to set aside an award on the ground of inability to present one’s case, and the arbitral procedure not being in accordance with the agreement of the parties, the Court of Appeal highlighted the fact that the Court is concerned with the structural integrity of the arbitration proceedings, and will not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law. I cannot see any rationale for adopting a different approach in a case where an award is challenged on the ground of serious irregularity under section 4 of the Schedule, based on the same cause of the tribunal’s failure to conduct the proceedings in accordance with the procedure agreed by the parties, or its failure to deal with all the issues that were put to it, or its having failed to treat the parties fairly and impartially and giving them a reasonable opportunity to present their cases and to deal with the cases of their opponents (as required under section 46 (3) (b)) of the Ordinance). The Court should not be concerned with whether the arbitrator made errors of fact or law, but should only be concerned with the process of the arbitration, and whether it is fair.
8. When considering whether the applicants in question had been denied equality of treatment and the opportunity to present their case, Tang VP (as His Lordship then was) observed in Grand Pacific Holdings (at paragraph 94 of his judgment):
“…I gather that the conduct complained of must be serious, even egregious, before a court could find that a party “was otherwise unable to present his case”. It is unnecessary for me to decide, and I do not decide, how serious or egregious the conduct must be before a violation could be established. Nor, do I decide whether “the conduct… must be sufficiently serious to offend… basic notions of morality and justice”. I am inclined to the view that the conduct complained of must be sufficiently serious or egregious so that one could say a party had been denied due process.”
9. It must also be emphasized that under section 4 (2) of the Schedule, the serious irregularity alleged must have caused or will cause “substantial injustice” to the applicant. Section 68 of the Arbitration Act 1996 has the same wording. In Terna Bahrain Holdings Company WLL v Al Shamsi, Popplewell J set out the applicable principles on the court’s intervention for serious irregularity (paragraph 85 of the judgment), and in the context of substantial injustice, stated:
“… (vi) The requirement of substantial injustice is additional to that of a serious irregularity, and the applicant must establish both.
(vii) In determining whether there has been substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. The applicant does not need to show that the result would necessarily or even probably have been different. What the applicant is required to show is that had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome.” (Emphasis added)
The idling of rebar and concreting resources
11. The Defendant made claims in the Arbitration for additional cutter hours incurred during the panel excavation, arising out of its claims relating to the nature and quantity of the rock encountered in the course of its work under the Sub-Contract. The Defendant claimed that the rebar and concreting resources idled “one-for-one” with the additional cutter hours, and sought additional costs caused by the alleged knock-on delay to the rebar and concreting resources.
12. According to the Plaintiffs, a key issue for the Arbitrator was whether it was appropriate to take a “one-for-one” approach to any “knock-on” effect of additional cutter hours on the rebar and concreting activities.
13. The Plaintiffs argued that the Defendant’s only pleaded case in the Arbitration, which was denied by the Plaintiffs, was that there was a one-for-one relationship between idling hours for each of the rebar and the concreting resources and the additional hours spent by cutters in excavation on a daily basis, such that the consequential idling of concreting and rebar activities was equal to the additional hours claimed for the cutter operation. They emphasized that no alternative case was ever pleaded by the Defendant, apart from this one-for-one basis. All the evidence adduced by the Defendant was premised upon such a one-for-one relationship, and there was no factual evidence or calculation of individual rebar and concreting resources idling because of the cutter idling, the Plaintiffs highlighting that the Defendant had not in fact produced any factual records at all which showed that there was idling of the claimed resources, as alleged.
15. The Arbitrator found (in paragraph 415 of the Second Interim Award (“Award”) that a one-for-one approach was not appropriate in the absence of any factual record of particular idling. The Plaintiffs complain that notwithstanding this, instead of dismissing the Defendant’s claim, the Arbitrator proceeded to adopt an assessment of the idling of rebar and concreting activities at 30% of the additional cutter hours, which the Arbitrator indicated was “at the bottom of the scale”, thereby allowing an additional payment to the Defendant of HK$5,278,482. This was despite his finding that there were no records of idling (paragraph 414) and that a degree of idling of the concreting and rebar resources would be inevitable in any event (paragraph 415).
(1) the Arbitrator denied the Plaintiffs a reasonable opportunity to present their case on the 30% allowance, which was not claimed;
(2) the Arbitrator did not decide the dispute which was referred to him, when it was not the pleaded case of either party that there could be any assessment of the idling rebar and concreting resources on a sliding scale of the additional cutter hours, whether 30% or otherwise, or had decided a dispute which did not fall within the terms of the submission;
(3) the Arbitrator gave no finding or reasons as to what he considered to be the appropriate scale, and why 30% would be “near the bottom” of such scale, such that the assessment of 30% was arbitrary, unreasonable and without any evidential basis.
17. The Plaintiffs’ claim, that there was no evidential basis to support the Arbitrator’s finding and assessment of 30% can be dealt with shortly. Setting aside for serious irregularity is not an appeal on facts or law. There is no ground under section 81 of the Ordinance to set aside an arbitral award on the ground of error of law. A claim that a decision should be set aside because there is no evidence to support a particular finding of fact, or that the only reasonable conclusion on the evidence does not support a determination, should be dealt with by way of an appeal on law, on the basis that the court should intervene on errors of law “buried beneath conclusions of fact”. No leave to appeal on a question of law has been sought.
18. As the Court pointed out in Warborough Investments Limited v S Robinson & Sons (Holdings) Limited  EWHC 2502 (Ch), setting aside on the ground of serious irregularity causing substantial injustice is not to be used as a back door way of appealing on facts. The Court emphasized, at paragraph 64 of the judgment:
“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.”
19. A failure by the Arbitrator to set out the detailed reasons for his allowance of 30% is not a ground to set aside the award. Nor should the court on an application made under section 4 of the Schedule be making a detailed inquiry to assess the quality of the Arbitrator’s reasoning.
20. In Margulead Ltd v Exide Technologies  EWHC 1019 (Comm), the court highlighted the point that a deficiency of reasons in a reasoned award is not capable of amounting to a serious irregularity within the meaning of section 68 of the 1996 Act, unless it amounts to a “failure by the tribunal to deal with all the issues that were put to it” within section 68(2)(d). The court referred to section 70(4) of the Act, equivalent to section 7(2) of the Schedule to the Ordinance, and observed (at paragraph 41 of the judgment):
“Deficiency of reasoning in an award is therefore the subject of a specific remedy under the 1996 Act. It is accordingly self-evident that:
i) failure to deal with an “issue” under Section 68(2)(d) is not equivalent to failure to deal with an argument that had been advanced at the hearing and therefore to have omitted the reasons for rejecting it;
ii) Parliament cannot have intended to create co-extensive remedies for deficiency of reasons one of which (Section 68) was a general remedy which might involve setting aside or remitting the award in a case of serious injustice and one of which (Section 70(4)) was designed to provide a specific remedy for a specific problem;
iii) The court’s powers under Section 68(2) being engaged only in a case where the serious irregularity has caused substantial injustice, the availability of the facility to apply for reasons or further reasons under section 70(4) would make it impossible to contend that any “substantial injustice” had been caused by deficiency of reasons.”
21. The same analysis applies to sections 4 and 7(2) of the Schedule. The deficiency of reasons as to the Arbitrator’s allowance of 30% cannot, by itself, be regarded as a serious irregularity within the meaning of section 4 of the Schedule.
22. The nub of the Plaintiffs’ complaint is that they had been deprived of a reasonable opportunity to present their case, when the Arbitrator decided on a new issue (whether the idling of the rebar and concreting resources would be of a particular percentage of the additional cutter hours) outside the scope of the submission, and made the 30% allowance which was not raised in the pleadings, without giving prior notice to the parties as to his intention to allow 30% despite the pleaded case.
23. On their part, the Defendant pointed out that its claim was not limited to idling, but related to “non-productive and/or idling” of resources, submitting that the likelihood of records existing is improbable. They highlighted the fact that the Plaintiffs themselves did not deny the relationship between the idling of the rebar and concrete resources and additional cutter hours and, further, that the Plaintiffs themselves had referred to the serious knock-on effect to subsequent operations, in their own submission to the Employer.
“163. Further, the Plaintiff avers that the following additional costs were incurred by reason of non-productive and/or idling of the following resources and that the extent to which such were non-productive and/or idling was equal to those periods/durations incurred in relation to the cutters particularised in paragraphs 154 to 162 above, such that the Plaintiff is entitled to payment for the same on the same contractual bases:…”
“Paragraph 163 is denied. In further response thereto, the Defendants plead as follows:
(1) For the reasons pleaded in paragraphs 97 to 100 above, there is no entitlement in respect of the matters pleaded in paragraphs 154 to 162 and, hence, no entitlement in respect of this claim reliant thereon.
(2) It is not admitted that there was non-productive or idling time of the resources claimed for or that purported costs were incurred as alleged.
(3) Paragraphs 97(6), (7) and (8) above are repeated in respect of this claim.
(4) Save as aforesaid the paragraph is denied and it is specifically denied that the Plaintiff is entitled to recover any sum in respect of this claim.”
26. The Defendant argued that based on their pleading, the Plaintiffs had put the Defendant to strict proof of its claim, and as such, the Plaintiffs should have contemplated the possibility of the Defendant’s claim not prevailing in its entirety, and the Arbitrator making a finding as to entitlement on the basis of what he considered to be proved as a matter of fact on the evidence. If they chose not to make submissions to cater for such possibility, they should not be allowed to complain after the event.
“Issue 30(1) Did any of Baurer’s resources, identified in paragraph 163, suffer any non-productive or idling time by reason of the matters pleaded at paragraphs 154 to 162 2ASOC and, if so, which resources and for how long?
Issue 30(2) If so, is Bauer entitled to recover in respect of any such non-productive or idling time and, if so, on what basis or bases? In this regards issues 25(6), 26(7), 27(3), 28(4) and 29(4) above are repeated.
Issue 30(4) Is Bauer entitled to recover any sum and, if so, what sum in respect of this claim?”
28. I agree, that on the basis of the pleadings, as reflected in the List of Issues, and in light of the detailed submissions made on the factual and expert evidence adduced in the Arbitration, it cannot be reasonably said that the issue of the Defendant’s entitlement to payment for any non-productive or idling time, or the amount to which they may be found to be entitled, was not contemplated to be an issue for the Arbitrator’s determination. The Plaintiffs could not have been under any doubt that one of the key issues to be decided by the Arbitrator was whether, and the extent to which, the Defendant was entitled to payment for any idling or non-productive rebar and concrete resources, whether as claimed to be equal to the hours spent by cutters, or at all. The List of Issues do not replace the pleadings, but they do reflect the parties’ understanding of the questions in dispute for determination by the Arbitrator, and of what they should deal with in the Arbitration.
29. The Arbitrator had clearly heard evidence as to the impact of the additional cutter time on the rebar and concrete resources. He accepted the evidence of the Defendant as to the knock-on effect of additional cutter time on the rebar and concrete resources (paragraph 415 of the Award), and was entitled to make his own findings as to the apportionment and costs to which he considered to be the Defendant’s entitlement, on the evidence presented and the submissions made at the hearing. Whether the Arbitrator had made the right apportionment on the evidence is not the issue.
30. In Terna Barry Holding Company WLL v Al Shamsi and in Grindrod Shipping Pte Ltd v Hyundai Merchant Marine Co Ltd, the court emphasized the important distinction between, on the one hand, a party having no opportunity to address a point or his opponent’s case, and on the other hand, a party failing to recognize or take the opportunity which existed. What section 46 (3) (b) of the Ordinance requires is to give to parties a “reasonable opportunity” to present their case and to deal with the case of their opponent. In Grindrod Shipping, the learned judge (in paragraph 40 of his judgment and his analysis of the authorities) observed, regarding the operation of the English equivalent to our section 4 (2) of the Schedule and section 46 of the Ordinance:
“A balance has to be drawn between the need for finality of the award and the need to protect parties against the unfair conduct of the arbitration. In striking this balance, only an extreme case would justify the Court’s intervention. Relief under section 68 will only be appropriate where the tribunal has gone so wrong in its conduct of the arbitration, and where its conduct is so far removed from what could reasonably be expected from the arbitral process, that justice calls out for it to be corrected.
There will generally be a breach of section 33 where a tribunal decides the case on the basis of a point which one party has not had a fair opportunity to deal with. If the tribunal thinks that the parties have missed the real point, which has not been raised as an issue, it must warn the parties and give them an opportunity to address the point.
There is, however, an important distinction between, on the one hand, a party having no opportunity to address a point, or his opponent’s case, and, on the other hand, a party failing to recognize or take the opportunity which exists. The latter will not involve a breach of section 33 or a serious irregularity.”
31. In the case of Terna Bahrain Holding, it was argued before the court that there was serious irregularity when the arbitrator decided the case on the ground of rescission when the claim brought was for damages or, alternatively, for the enforcement of a call option under the agreement. The court held that the arbitrator was to determine in the arbitration which party was in breach of the agreements. Having determined that one party was in breach, and that its opponent’s claim for breach of contract had succeeded, the arbitrator was entitled, after hearing submissions, to reject certain other remedies, and to hold that the contractual remedy of rescission was available and appropriate. It was not a case of the arbitrator deciding on a basis which had never been put forward, or relying on an argument which had never been ventilated.
32. The court explained (in paragraph 106 of the judgment) that the requirement of affording a reasonable opportunity to a party to present its case does not mean that the tribunal is acting unfairly, in deciding a case on a point to which the party raising it “does not give any great emphasis, or which is not the subject matter of any great exposition”. Popplewell J went on to explain:
“If a point is raised only briefly, that is in accordance with the ideal of speedy resolution which is an objective of the arbitral procedure (whether or not in a given case the objective is achieved). It is nonetheless so if a host of what turns out to be bad points are also raised and it is on those other points that the party raising the issues concentrates his exposition. Provided the issue is raised, however briefly, the opposing party has an opportunity to address it at whatever length and in whatever detail he chooses. If he chooses to invite the tribunal to reject it without addressing it in detail, that may well be a sensible tactic, in order to avoid the risk of giving it more weight and prominence that the party advancing it has done. But that is not the same as having been deprived of an opportunity of addressing it, still less of an unfair procedure having been adopted.”
“These principles apply to argued points of law or construction as they do to an argued questions of fact. In such cases, whilst it is not necessary for the tribunal to refer back to the parties each and every legal inference which it intends to draw from the primary facts on the issues placed before it, the tribunal must give the parties ‘a fair opportunity to address its arguments on all of the essential building blocks in the tribunal’s conclusion’ (ABB AG v Hochtief Airport  2 Lloyds Rep 1, para 72).” (Emphasis added)
“ … Section 68 (2) (d) is not to be used as a means of launching a detailed inquiry into the manner in which the tribunal considered the various issues. It is concerned with a failure, that is to say where the arbitral tribunal has not dealt at all with the case of a party so that a substantial injustice has resulted, eg where a claim has been overlooked, or where the decision cannot be justified as a particular key issue has not been decided which is crucial to the result.
… is an arbitral tribunal obliged to confront a party with the proposed finding when it is not one that a party has sought? Obviously the tribunal should inform the parties and invite submissions and further evidence before making an award if the finding is novel and was not part of the cases presented to the arbitral tribunal. On the other hand in many arbitrations, especially those in the construction industry, there are many findings other than those which the parties have invited the tribunal to make. Matters of quantification and valuation frequently lead to the tribunal taking a course which is not that put forward by either party, but which lies somewhere between “Doing the best one can on the material provided” almost inevitably produces such a result. Provided that the finding is not based on the proposition which the parties have not had an opportunity of dealing with the tribunal will not be in breach of its duties under section 33 nor will its award be liable to challenge under section 68 (2) (a) or (d) if it makes such a finding without giving the parties a chance of dealing with it. In many such cases the tribunal will have been appointed for his expertise so that in addition there would be no obligation to consult the parties. Any other course would defeat the objective of avoiding ‘unnecessary delay and expense’ as provided by section 1 (a).” (Emphasis added)
“If evidence and argument is given in relation to a particular issue and one party puts forward proposition A while the other party puts forward proposition B, it would rarely be argued that the arbitrator was not entitled without notice to decide on proposition C if it were a compromise between A and B. But if C was not a position between A and B, it would be a question of fact and degree in every case whether it was unfair for an arbitrator to decide on proposition C without giving notice to the parties so that they could argue the point or perhaps call further evidence about it.”
36. After a review of the authorities, and having considered in this case the pleadings served in the Arbitration, the List of Issues adopted in the Arbitration, the submissions and evidence to which the Arbitrator referred in the Award, I do not agree that the 30% additional time (as opposed to 100%) can be said to be a new issue, outside the scope of the submission to arbitration, which had taken the Plaintiffs by surprise. The Plaintiffs had notice of the Defendant’s claim for the idling/non-productive rebar and concrete resources, and a fair and reasonable opportunity to deal with the Defendant’s claim and to address the Arbitrator on the question of the additional costs/hours and the idling alleged. The extent of the Defendant’s entitlement in respect of the idling resources was “in the arena” (Warborough Investments Ltd v S robinson & Sons (Holdings) Ltd  EWHC 2502 (Ch)), and if the Plaintiffs did not take the opportunity to make submissions on the extent to which the non-productive and/or idling resources claimed were equal to, or only formed a portion of, those periods/duration incurred in relation to the cutters, they cannot complain of any alleged serious irregularity, if the Arbitrator allowed a part of the Defendant’s claim. I fail to see how the Arbitrator’s assessment of the Defendant’s claim, and his allowance of 30% of such claim, can be said to be “so far removed from what could be reasonably expected … that justice calls out for it to be corrected” (Grindrod Shipping Pte Ltd), or that the structural integrity of the arbitral process has been compromised as a result.
The change to reinforcement cage design
38. The Defendant’s work under the Sub-Contract included the construction of reinforcement cages for installation into the diaphragm wall panels prior to concreting. The overall design of the reinforcement cages was provided by the Plaintiffs.
39. The Defendant claimed in the Arbitration that by drawings issued on 14 July 2011 (“July Drawings”), the Plaintiffs issued new design information which required the reinforcement cages to be of substantially greater quantity and weight than as shown in the initial tender drawings. The Defendant claimed that the requirement necessitated a change to higher capacity cranes in order to lift the heavier reinforcement cages, and sought additional costs.
40. According to the Plaintiffs, the Defendant’s pleaded case in the Arbitration as to its entitlement was on the basis that the instruction in respect of the July Drawings was a variation under the Sub-Contract. A Sub-Contract variation required a written confirmation or order under the contractual provisions. The Plaintiffs emphasized that the Defendant never amended its pleaded case, that the alleged changes to the Defendant’s site establishment were necessitated by the July Drawings. This was, according to the Plaintiffs, despite the evidence adduced by the Plaintiffs that there had already been changes to the Defendant’s site establishment (including craneage changes) before the July Drawings and the alleged variation.
41. The Plaintiffs’ complaint is that the Arbitrator decided the Defendant’s entitlement on the basis of unpleaded factual matters, by accepting that the weight of the panels had increased 105% between tender stage and the time of the July Drawings, and 116% between tender stage and the as-built position (paragraph 520 of the Award), and allowing the Defendant’s claims for increased costs on that basis. In coming to his decision, the Plaintiffs argued that the Arbitrator had erred by expanding the scope of the dispute submitted, to extend to changes to the reinforcement cage design which arose prior to the issue of the July Drawings, and by allowing and considering inadmissible evidence to expand the Defendant’s pleaded case. The Plaintiffs contend that the Arbitrator had accepted the Defendant’s claims of unparticularised and unpleaded variations, apart from the only pleaded case of a variation based on the July Drawings, when there was no issue before the Arbitrator to determine any other previous changes to the weight of the reinforcement cages, apart from the pleaded variation based on the July Drawings. As such, the Plaintiffs allege that the Arbitrator had dealt with matters beyond the submission to arbitration, and the arbitral procedure was not in accordance with the parties’ agreement, to amount to serious irregularity under section 4 (2) (c) of the Schedule. The Plaintiffs further contend that they had been denied a reasonable opportunity to present their case on the unpleaded and unparticularised variations.
“166. An integral part of the Diaphragm Wall construction works at both the C & C and the ERS involved the use of steel rebar cages as reinforcement for the concrete. The Plaintiff’s tender was based upon the size and weight of re-bar cages shown on the tender drawings and other documents which the Defendants had forwarded to the Plaintiff at tender stage. By an email dated 14 July 2011 (timed at 12.05) from the Defendants’ Mr Stanley Chan to the Plaintiff’s Mr Michael Lorenz, and after the Plaintiff had completed its site establishment works and commenced the construction of the Diaphragm Walls, the Defendants issued new design information for the C & C of the Sub-Contract Works which required the re-bar cages to be of substantially greater quantity and weight than shown on the tender drawings.
167. By an email dated 16 July 2011 (timed at 09.27) from the Plaintiff’s Mr Michael Lorenz to the Defendant’s Mr Stanley Chan, the Plaintiff advised the Defendants that the new design would exceed the maximum capacities of the site arrangements in respect of the production facilities of the steel yard, lifting capacities of the cranes and lifting gears and the loading capacities of the guide walls already constructed on site. The plaintiff also advised that in order to implement such changes to the design a very long lead time for preparation would be required.
168. The Plaintiff avers that the requirement referred to in paragraph 166 above constituted an instruction to increase substantially the quantity and weight of rebar that had to be used in the re-bar cages and amounted to a Sub-Contract Variation under clauses 1.2.7A and 17 of the Conditions as set out in paragraphs 2 and 13 of Appendix A attached hereto in that it constituted, inter alia, an addition and/or change in quality and/or dimension and/or substitution and/or alteration to the Sub-Contract Works.”
43. The Plaintiffs appear to confine the Defendant’s pleaded case to paragraph 166, but the Arbitrator referred to and placed reliance on other pleaded details as set out in paragraphs 169, 173 and 174 of the Statement of Claim. These are set out below:
“169. The Defendants’ requirements to revise the design of the reinforcement steel was discussed at a meeting held on 18 July 2011 at which the Plaintiff confirmed, inter alia, that it would change the crane in the C & C to suit the actual site requirement and that the existing guide walls could only carry a maximum cage weight of 34 tonnes. The Plaintiff also expressed its concern that the site set-up might need to be altered due to the increased weight of the rebar. Subsequent to the aforesaid meeting, by a letter dated 22 July 2011 (ref: BHK016/L11/A-01/082/ML/AG/jc) the Plaintiff (a) advised the Defendants that the substantial increase in the weight of the rebar cages as per the latest design information may require a complete review of its entire site establishment resources and equipment mobilised for the project; (b) notified the Defendants that the substantial increase aforesaid constituted a variation of the Sub-Contract Works under clause 17 of the Conditions and that a claim would be made for an extension of time and additional payment under clauses 14.3.3 and 21.1.6 of the Conditions respectively; and (c) provided the Defendants with detailed information comparing the weight of the rebar cages for the first fourteen (14) panels as required by the latest design shop drawings with the same fourteen (14) panels as per the tender drawings, which comparison demonstrated that, as was the case, on average, the rebar cages had increased from 28 tonnes per panel to 60 tonnes per panel.
173. It is the Plaintiff’s case that with regard to the quantities derived from the as-built drawings in respect of the 51 Diaphragm Wall panels at the C & C executed by the Plaintiff, the total weight of the re-bar cages has increased by approximately 1,942 tonnes, which represents an increase of approximately 122% from the quantities to be derived from the Sub-Contract Schedule of Prices (Part IV, B of the Appendix-Sub-Contract Pricing Document) and/or the Sub-Contract Drawings.
174. Full details of the weight increase on a panel-by-panel basis are attached hereto at Appendix K1.”
“519. Secondly, it is necessary to consider the pleaded case. The issue is whether the change in weight occurred with the Rev C Drawings or changed by revisions issued between tender stage and the Rev C Drawings. The pleaded case at paragraph 166 of the Statement of Claim relates to the Rev C Drawings which were issued under cover of the email of 14 July 2011. Whilst the pleading relates to the Rev C Drawings, it is clear by reference to Bauer’s email of 22 July 2011 pleaded at paragraph 169 of the Statement of Claim that the increase in weight is calculated as the difference between that at tender stage and that in the Rev C Drawings rather than between the information issued immediately before the Rev C Drawings and those Rev C Drawings. Whilst the matter might have been put more clearly, I consider that the pleaded case relates to the difference between the Rev C Drawings and the information at tender stage and is then at paragraph 173 of the Statement of Claim expanded further to the as-built position
520. On that basis, I consider that the weight of the panels increased by 105% between tender stage and the Rev C Drawings and 116% between tender stage and the as-built position and that, to the extent that Bauer can establish a claim based on those increases, those increases are within Bauer’s pleaded case.”
45. In reaching his decision, the Arbitrator had considered paragraphs 166, 169, 173 and Appendix K3 of the Statement of Claim, to conclude what he found to be the Defendant’s pleaded case on the additional costs claimed as a result of the alleged change to the reinforcement cage design.
46. The Plaintiffs had made submissions to the Arbitrator, in opening and on closing, as to the scope of and restrictions in the Defendant’s pleaded case, to the effect that the Defendant’s case was confined to the effect of the changes in the July Drawings, and on the basis of the July Drawings being an alleged variation under the Sub-Contract. They had also made submissions on their evidence adduced as to the changes made to the Defendant’s craneage and site establishment prior to July 2011, as well as on the late evidence sought to be adduced by the Defendant, as being outside the Defendant’s pleaded case and outside the issues for determination in the Arbitration. The Arbitrator came to the conclusion which he did on the Defendant’s pleaded case in the Statement of Claim, after hearing and considering the parties’ submissions.
47. If the Plaintiffs claim that the Arbitrator was wrong, in allowing the Defendant’s claim as a variation under the Sub-Contract in the absence of any instruction in writing as required, or was wrong in his valuation of the Defendant’s claim as a variation, the proper avenue for challenge should be by way of appeal on law, upon obtaining leave of the Court.
48. Whether there was evidence, or enough credible evidence, to support or prove the alleged increase in the weight of the reinforcement cages and the alleged increase in costs as the Arbitrator found go to the question of whether the Arbitrator’s findings and decision are correct in law.
49. As highlighted in the earlier part of this Judgment, a challenge against an arbitral award on the ground of alleged serious irregularity should not be used as a guise for an appeal on findings of fact, which are not susceptible to review by the courts.
50. Having regard to the entirety of the Defendant’s pleading in paragraphs 166 to 176 of the Statement of Claim, it cannot be said that the Arbitrator’s understanding of the Defendant’s pleaded case is wrong. The correctness of his findings in law and on facts is not a matter of concern in this application before the Court.
51. The Plaintiffs seek to place reliance on the Arbitrator’s order dated 15 October 2015 to argue that the Arbitrator’s acceptance of the Defendant’s evidence and pleaded case went against such order. Having reviewed the order in question and the Arbitrator’s Reasons, I cannot see how it can further assist the Plaintiffs’ complaint. The order did not deal with the pleadings on this issue of the increased reinforcement quantities. Even if it can be construed to mean, generally, that statements irrelevant to any pleaded issues do not have to be responded to, the Arbitrator’s findings and decision on the reinforcement quantities are based on his own conclusions on the scope of the Defendant’s pleaded case, and his view that the claim did fall within the pleaded case.
52. On the question of the Defendant’s claim of increase in reinforcement quantities, I do not consider that there is any serious irregularity as alleged by the Plaintiffs. I find that the Plaintiffs had the reasonable opportunity to present their case on the Defendant’s claim which, as the Arbitrator found, was throughout maintained on the basis of the difference between the tender quantities and the as-built quantities, particularized in paragraphs 169 to 173 of and in Appendix K to the Statement of Claim.
The remedial grouting works
53. The construction of a diaphragm wall requires that, after the pouring of concrete, a verification test be carried out to ensure that there is a sound interface between the diaphragm wall panel and the underlying rock. Where there is no such sound interface, remedial grouting works are required to rectify the interface. Where a watertight diaphragm wall is required, toe-grouting works may be required below the level of the diaphragm wall.
54. In the Arbitration, the Plaintiffs counterclaimed against the Defendant for recovery of the costs of remedial grouting works carried out by sub-contractors engaged by the Plaintiffs, in respect of what the Plaintiffs alleged to be interface defects and imperfections in the Defendant’s work, for which they say the Defendant was liable to rectify under the Sub-Contract (“Defects”). The Defendant denied that these Defects were the result of their workmanship, and refuted liability to carry out these remedial grouting or rectification works. They also claimed that the work which they were instructed by the Plaintiffs to do were ground improvement works, rather than rectification works required under the Sub-Contract.
55. The Arbitrator dismissed the Plaintiffs’ counterclaim in its entirety, on the basis that the Plaintiffs did not incur any additional expenditure for the remedial works, since the Defects would have been remedied by the toe-grouting work which would have been carried out by the Plaintiffs on the panels in any event (paragraphs 1336 to 1338 of the Award), and such toe-grouting work would have dealt with any defects.
56. The Plaintiffs argued that the decision of the Arbitrator gave rise to a serious irregularity, in that he “failed to address and give any decision in respect of the Plaintiffs’ case and evidence” (para 6.6 of the Grounds of Application stated in the OS) that:
(1) 39 panels required remedial grouting for which there was no toe-grouting work carried out under the Sub-Contract; and
(2) the water jetting works carried out on 139 defective panels, prior to toe-grouting or remedial grouting, would only be required for rectification works and not for toe-grouting works.
57. The Plaintiffs highlighted the fact that extensive quantum evidence was given in relation to the unaddressed matters referred to in the preceding paragraph 53 (“Unaddressed Matters”). Both parties had dealt with the Unaddressed Matters in the closing submissions, and there was no doubt that these issues were put to the Arbitrator for decision, on the basis that the Plaintiffs had identified 39 panels where (on the evidence) only remedial grouting but not toe-grouting was carried out (“the 39 Panels”); and 139 defective panels where high-pressure water jetting was carried out and such jetting was only required for remedial grouting works (“the 139 Panels”).
58. The Plaintiffs pointed out that as a result of the Arbitrator’s failure to address and decide on the Unaddressed Matters, the Plaintiffs were deprived of the possibility of a successful outcome in respect of part of the claim allowed, in the sum of HK$3,877,962 (including the remedial grouting costs on the 39 Panels and the costs for the water jetting). They argued that by reason of serious irregularity under section 4 (2) (d) of the Schedule, the parts of the Award dealing with the issue of the remedial grouting works should be remitted to the Arbitrator for reconsideration (skeleton submission of the Plaintiffs’ leading counsel).
59. The Defendant has referred to section 69 of the Ordinance, which provides for a party’s right to apply to the tribunal to make an additional award as to “claims presented in the arbitral proceedings but omitted from the award”. The Defendant claims that under section 7 (1) of the Schedule, an application under section 4 to challenge an award on the ground of serious irregularity may not be brought if the applicant has not first exhausted any available recourse under section 69 of the Ordinance. The Defendant argued that the Plaintiffs should first have recourse to applying under section 69 to have an additional award, before seeking to set aside on the ground of the serious irregularity complained of.
60. The application under section 4 (2) (d) is made on the ground that the tribunal failed “to deal with all the issues that were put to it”. By contrast, section 69 refers to a party’s right to apply to the tribunal to make an additional award “as to claims presented in the arbitral proceedings but omitted from the award”. “Issues” are in my view wider than “claims”. As the Plaintiffs themselves accepted and pointed out, their “claims” (made by counterclaim) for the costs of remedial works had already been dealt with by the Arbitrator, when he dismissed these claims. What the Plaintiffs now complain of, as the alleged serious irregularity under section 4, is that the Arbitrator failed to deal with all the “issues” relating to the Plaintiffs’ counterclaim for the costs of the remedial works sought, the issues being the fact that remedial grouting works were not required for the 39 Panels, and water jetting works were not required for the toe-grouting works which the Defendant had argued to be inevitable, such that there was no additional expenditure required by the Plaintiffs.
61. Whilst I accept the Plaintiffs’ argument that section 7 (1) of the Schedule is not applicable, I do not accept their case that there is serious irregularity in the arbitral process by reason of the Arbitrator’s failure to deal with the Unaddressed Matters.
62. As the Plaintiffs themselves pointed out, the Arbitrator dismissed the Plaintiffs’ claim for the costs of the remedial works, as a result of the Defects in the Defendant’s work under the Sub-Contract. This claim, and the issues relating to the claim, were dealt with in the Award. In dismissing the Plaintiffs’ counterclaim, the Arbitrator must have rejected the Plaintiff’s evidence as to the water jetting issue, and the claim that the grouting works were not required for the 39 Panels.
63. It has to be repeated, that the focus of an inquiry under section 4 of the Schedule is due process, not the correctness or otherwise of the tribunal’s decision. The evaluation of the evidence and findings of fact on the evidence are matters entirely for the tribunal (Sonatrach v Statoil  EWHC 875 (Comm), Primera Maritime (Hellas) Limited v Jiangsu Eastern Head the Industrial Co Ltd  EWHC 3066 (Comm)). These principles are indisputable.
64. If the Plaintiffs’ complaint is that the evidence relating to the 39 Panels and the 139 Panels did not support the Arbitrator’s finding in paragraph 1338, that the Plaintiffs had not incurred any cost to remedy the Defects complained of, then the Plaintiffs can (at most) only apply for leave to appeal on a question of law. Alleged errors of fact and law are not the grounds of any challenge for serious irregularity. The fact that the tribunal had overlooked or mischaracterized a particular piece of evidence in reaching its finding of fact is not sufficient to set aside the award on the ground of serious irregularity (Sonatrach v Statoil  EWHC 875 (Comm)).
65. If the Plaintiffs’ complaint is that the Arbitrator did not give reasons to support his decision to dismiss the counterclaim, the courts have made it clear that it is not necessary for the tribunal to deal with each and every argument raised by the parties (Byuk Camlica Shipping Trading & Industry Co Inc v Progress Bulk Carriers Ltd  Bus LR D 99).
66. Carefully analyzed and understood, the “issues” in the Arbitration relating to the Plaintiffs’ counterclaim are whether there were Defects in the works carried out by the Defendant, to constitute a breach of its duties under the Sub-Contract, and if yes, whether and what damages were sustained by the Plaintiffs in rectifying the breach complained of. The further issue may be whether the Plaintiffs’ damages included the costs of carrying out the toe-grouting works, and if these costs were actually incurred by the Plaintiffs as a result of the Defendant’s breach.
67. The Plaintiffs’ counterclaim was dismissed, and the key issue dealt with and determined by the Arbitrator was that there were no damages sustained by the Plaintiffs to rectify any breach complained of by them. Properly analyzed, the Unaddressed Matters were only arguments raised by the Plaintiffs, to support their case on the key issues of breach and damage allegedly sustained as a result of the breach complained of. The key issues of breach and damage were determined, and there was no necessity for the Arbitrator to give detailed reasons or to set out his analysis as to how these Unaddressed Matters, raised as arguments, were dealt with. As the court observed in Ascot Commodities NV v Olam International Ltd  CLC 277 at 284, it is not incumbent on arbitrators “to deal with every argument on every point raised”. In Primera Maritime (Hellas) Limited v Jiangsu Eastern Head the Industrial Co Ltd, the court highlighted the following distinction (at paragraph 41 of the judgment):
“It is wrong in principle to look at the quality of the reasoning if the tribunal has dealt with the issue. This emerges clearly from the judgment of Thomas J (as he then was) in Hussmann (Europe) Ltd v Al Ameen Development & Trade Co  CLC 1243 at :
‘I do not consider that s 68 (2) requires a tribunal to set out each step by which they reached their conclusion or deal with each point made by a party in an arbitration. Any failure by the arbitrators in that respect is not a failure to deal with an issue that was put to it. It may amount to a criticism of the reasoning, but it is no more than that.’” (emphases added)
69. The Plaintiffs’ application for setting aside and remission on the grounds of serious irregularity and alleged failure to present their case is dismissed. I make an order nisi that the costs of the application made by the OS are to be paid by the Plaintiffs to the Defendant on indemnity basis (A v R (Arbitration: Enforcement)  3 HKLRD 389).
70. Finally, an observation must be made in relation to the affirmations filed in these proceedings. O 41 r 5 RHC contains the general statement that an affidavit may contain only such facts as the deponent is able of his own knowledge to prove. Submissions and arguments should not be made in affidavits filed in interlocutory proceedings. These are to be made by counsel or the advocate, in skeleton arguments which should comply with the practice directions and any specific directions which may be made by the court.
71. In this case, several lengthy affidavits have been made by the solicitors acting for the parties, containing lengthy submissions, and arguments on what is or is not relevant or correct, which submissions or arguments are then referred to by Counsel in their skeleton submissions and responded to. This manner of presenting and dealing with the case is totally unhelpful to the Court’s efficient consideration and disposal of the questions to be decided. I have made scarcely any reference to the affidavits as it is not necessary to do so, when the appropriate submissions should have been made in Counsel’s skeletons.
72. The affidavits and the costs incurred are totally unnecessary, and any costs allowed on taxation should be kept to the minimum. I would also regard any such costs imposed on the lay clients to be unreasonably incurred.
|Judge of the Court of First Instance|