Hong Kong Court remits award back to arbitral tribunal due to serious irregularity

17 December 2018, Construction, by Kwok Kit Cheung,

The recent case of P v M [2018] HKCFI 2280 concerned an appeal against an arbitral award on the grounds of serious irregularity, under section 4 of Schedule 2 of the Arbitration Ordinance (Cap 609). The Court held that the arbitral tribunal failed to comply with section 46(3)(b) of the Arbitration Ordinance by not giving a party a fair and reasonable opportunity to present its case and to deal with the opponent's case. The Court remitted the award back to the arbitral tribunal for reconsideration, rather than setting it aside.

Background

Under a construction contract, P engaged M as its main contractor to carry out construction works (Contract). The Contract contained an arbitration agreement which provided for domestic arbitration in accordance with the Domestic Arbitration Rules (2014 Edition) of the HKIAC. Schedule 2 of the Arbitration Ordinance applied to the arbitration agreement.

GCC 27 and 28 of the Contract required a contractor to give notice of its loss and expense claim.

Arbitration

M claimed for its site expenses and overheads as well as its extended CAR and EC insurance costs for the period from 1 October 2013 to 8 March 2014 (Disputed Amount). M’s case was that there was no need for a notice in respect of its claim, but that if there was a need for notice, then there was waiver or estoppel.

P referred the arbitral tribunal to a schedule of list of issues, in which P highlighted that M had not given any notice pursuant to GCC 28, and emphasized that M did not allege that it had done so.

During the course of the arbitration, M’s letter of 30 September 2013 (September Letter) and its email dated 20 November 2013 attaching a breakdown of costs (November Breakdown) emerged.

The tribunal allowed the Disputed Amount representing M’s costs of insurance and its site overheads and expenses for the extended period of work, by finding that the September Letter and November Breakdown constituted M’s notification of claim under GCC 27 and 28.

Application to court to challenge interim award

P made an application to challenge parts of the interim award made by the arbitrator, on the ground of serious irregularity, under section 4(2)(b) and/or 4(2)(c) and 4(3)(c) of Schedule 2.

P claimed that the tribunal exceeded its powers and/or failed to conduct the arbitration in accordance with the procedure agreed by the parties, by finding in the Award that the September Letter and November Breakdown constituted notification of M’s claims for site overheads and insurance costs pursuant to GCC 27 and 28, when M had never claimed in the arbitration that any notice of claim had ever been given, or was relied upon by M.

The Court referred to Article 6.3 of the HKIAC Domestic Arbitration Rules, which states that:-

“… the Respondent shall send to the Arbitrator a Statement of Defence setting out a full description in narrative form of the factual matters and contentions of law in the Statement of Claim which he admits or denies, on what grounds, and specifying any other factual matters…” (emphasis added)

The Court said that M should have stated facts and grounds which supported its denial of the lack of compliance with GCC 28 or absence of any notice of claim in the Statement of Defence, but had not done so. Neither M nor the tribunal had made it clear to P that the September Letter and November Breakdown would be relied upon. P had therefore been deprived of the fair opportunity to deal with any pleadings and submissions to the September Letter and November Breakdown and to present its case and make submissions to the tribunal on their effect and adequacy as proper notices under the Contract. It was possible, the Court said, that the tribunal might have reached a different decision on M’s claim for the Disputed Amount, after hearing P’s submissions.

The Court said that it accepted that a balance had to be drawn between the need for finality of an award and the need to protect parties against the unfair conduct of the arbitration and that only an extreme case should justify the court’s intervention.  On the facts of this case, the Court. Found that there was a serious error which affected due process and the structural integrity of the arbitral proceedings. 

The Court said that, as recognised by section 46(3) of the Arbitration Ordinance and Article 5.1 of the HKIAC Domestic Arbitration Rules adopted by the parties in the arbitration, parties should be treated fairly, and with equality and it is a fundamental rule of natural justice that each party should be given the fair and reasonable opportunity to present its case and to deal with the case of its opponent.  Parties to an arbitration have the right to expect, the Court said, that it will be conducted fairly, in accordance with the procedure they had agreed under the rules to which they had submitted as governing the arbitration, the conduct of the arbitration, and the rules of pleading of their case.

The tribunal had therefore failed to comply with section 46(3)(b) of the Arbitration Ordinance and to conduct the proceedings in accordance with the procedure agreed by the parties, which constituted serious irregularity within the meaning of section 4(2) of Schedule 2.

Award

Section 4(5) of Schedule 2 states that:-

“The Court must not exercise its power to set aside an award or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the arbitral tribunal for reconsideration.” (emphasis added)

Since no allegation had been made by P that the arbitrator was biased, not fit to determine the issues or had misconducted himself and since the challenge was confined to the issue of whether notification of the claim had been given of the Disputed Amount,  the Court considered it appropriate to remit the matter to the tribunal for the purpose only of enabling directions to be given for P to make proper submissions to the tribunal on the meaning and effect of the September Letter and November Breakdown and whether they may constitute valid notification of claims under the Contract. Submissions in reply could then be made by M.

The Court therefore exercised its express power under section 4(3)(a) of Schedule 2, to remit the matter back to the tribunal.

Comments

This case serves as a reminder of the duty of an arbitral tribunal to act in accordance with the procedure agreed by the parties to the arbitration.

Although P succeeded in the application, it may have been disappointed with the Court’s order to remit the award back to the same arbitrator for re-consideration. The arbitrator may still decide against P after considering the parties’ submissions on the meaning and effect of the September Letter and November Breakdown. Such post-hearing submissions on issues which had not been raised at the hearing, arguably, should not be allowed by the arbitrator after the hearing, especially when witnesses may need to be re-called for speaking to the September Letter and November Breakdown.