KH Foundations Ltd v Sze Fung Engineering Ltd, CAMP 222/2020, concerned a dispute between a contractor and subcontractor arising from five subcontracts regarding two residential development projects. The dispute was referred to arbitration and the sole arbitrator issued an interim award on liability in favour of Sze Fung Engineering Ltd (SF), with quantum to be assessed at a later stage. KH Foundations Ltd (KH), for whom Deacons acted, applied to the Court of First Instance (CFI) for leave to appeal the award on questions of law. That application was refused (Refusal Decision). KH‘s application to the Court of Appeal for leave to appeal the Refusal Decision was dismissed. The judgment usefully sets out the requirements for appealing an arbitral award on questions of law and also the requirements for obtaining leave to appeal a decision granting or refusing leave to appeal an arbitral award.
When will the Court interfere with an arbitral award?
The Court of Appeal noted that a prominent theme of the Arbitration Ordinance (Cap 609) (Ordinance), is that the court’s interference with arbitral awards is strictly circumscribed. There is no general right of appeal to the court from arbitral awards, but a limited regime for appeals on questions of law arising out of arbitral awards, is preserved in Schedule 2 to the Ordinance (Schedule 2). Schedule 2 may apply by the parties’ choice or automatically in certain specified cases. It applied in this case.
Section 5 of Schedule 2 provides that, subject to section 6, a party to arbitral proceedings may appeal to the CFI on a question of law arising out of an award. The fundamental requirement, therefore is that the question put forward must be a question of law, not of fact.
How to distinguish a question of law from a question of fact
The Court of Appeal referred to the fact that some questions are easy to classify: the correct scope and content of a specific legal rule is obviously a question of law and traditionally the interpretation of contracts has been regarded as a question of law. The Court of Appeal said that in less straightforward cases, dividing an arbitrator’s process of reasoning into three stages, may be of assistance:
- Stage 1: The arbitrator ascertains the facts and makes findings on any facts which are in dispute.
- Stage 2: The arbitrator ascertains the law, which involves not only identification of all material rules of statute and common law, but also identification and interpretation of the relevant parts of the contract, and identification of those facts which must be taken into account when the decision is reached.
- Stage 3: In the light of the facts and the law so ascertained, the arbitrator reaches his decision.
- In some cases, stage 3 will be purely mechanical. Once the law is correctly ascertained, the decision follows inevitably from the application of it to the facts found. In other instances, however, the third stage involves an element of judgment on the arbitrator’s part.
- Stage 2 is the proper subject matter of an appeal. In some cases, an error of law can be demonstrated by studying the way in which the arbitrator stated the law in his reasons. It is, however, also possible to infer an error of law in those cases where a correct application of the law to the facts found would lead inevitably to one answer, whereas the arbitrator has arrived at another.
The Court of Appeal said that the above suggested that, whilst generally only stage 2 of the process is the proper subject of an appeal on law, a question of law may arise in the third stage, if the decision is such as to be necessarily inconsistent with a correct understanding or application of the law.
Leave to appeal an arbitral award on a questions of law – the requirements
The Court of Appeal referred to the requirements for obtaining leave to appeal an arbitral award on a question of law:
- The application for leave to appeal must identify the question of law (section 6(2)(a), Schedule 2 of the Ordinance). The failure to identify a clear, crisp and correct question of law may result in the application being rejected on that ground alone.
- Leave to appeal is to be granted only if the court is satisfied of three conditions:
- The decision of the question will substantially affect the rights of one or more of the parties (section 6(4)(a), Schedule 2 of the Ordinance). The question must be a point of practical importance i.e. not an academic or minor point.
- The question is one which the arbitral tribunal was asked to decide. This will exclude any appeal on a new point of law which was not before the arbitral tribunal. It also means that not all errors of law that an applicant alleges to have been made by the arbitrator necessarily give rise to admissible questions of law for an appeal to the court. Simply posing the question whether the arbitrator may in law properly take a certain course does not mean it is therefore a question of law arising out of the award which the arbitrator was asked to determine.
- On the basis of the findings of fact in the award, the arbitral tribunal’s decision on the question of law was obviously wrong. This is a very high hurdle. Alternatively, on the basis of the findings of fact in the award, the question is one of general importance and the decision of the arbitral tribunal is at least open to serious doubt. “Open to serious doubt” represents a lower threshold than “a strong prima facie case”.
Appealing a decision to grant or refuse leave to appeal an arbitral award
Once the CFI has made a decision to grant or refuse leave to appeal on the question of law arising out of the award, an appeal may lie from that decision but only with leave of the CFI or the Court of Appeal (section 6(5), Schedule 2 of the Ordinance). Such leave to appeal will not be granted unless (a) the appeal has a reasonable prospect of success, or (b) there is some other reason in the interests of justice why the appeal should be heard. However, a reasonable prospect of success is not enough, as by virtue of section 6(6) of Schedule 2, leave to appeal against such decision 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”.
The Court of Appeal held in Maeda Kensetsu v Kogyo Kabushi Kaisha v Bauer Hong Kong Ltd that where the CFI has granted leave to appeal from an award on the basis that the arbitral decision is at least open to serious doubt, since the assessment of that criterion can be quite subjective and different judges can reasonably come to different views, the Court of Appeal should not intervene unless it can readily be demonstrated that the judge was “plainly wrong” in coming to that conclusion.
Court’s decision
The Court of Appeal dismissed the application as it found that there was neither general importance nor special reasons in the questions raised by KH. Accordingly, by virtue of section 6(6), Schedule 2 of the Ordinance, leave to appeal from the Refusal Decision simply could not be given.
Comments
Whilst the Ordinance allows parties to adopt Schedule 2 so that a party may appeal an arbitral award on a question of law, this case demonstrates the narrow circumstances and high hurdle to appeal an arbitral award on a question of law under section 5, Schedule 2 of the Ordinance, and to appeal a decision granting or refusing leave to appeal under section 6, Schedule 2 of the Ordinance. In many cases, the formulation of a question of law is not straight forward, especially when the question is a mixed question of fact and law.
For further information, please contact:
Justin Yuen, Partner, Deacons
justin.yen@deacons.com.hk
