HCCT 4/2018
[2019] HKCFI 916
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO 4 OF 2018
______________
| | IN THE MATTER of the Arbitration Ordinance (Cap 609) |
| | and |
| | IN THE MATTER of an Arbitration |
______________
| BETWEEN |
| | MAEDA KENSETSU KOGYO KABUSHIKI KAISHA
also known as MAEDA CORPORATION | 1st Plaintiff
(1st Respondent in the Arbitration) |
| | CHINA STATE CONSTRUCTION ENGINEERING (HONG KONG) LIMITED | 2nd Plaintiff
(2nd Respondent in the Arbitration)
(together as the “Plaintiffs”) |
| and |
| | BAUER HONG KONG LIMITED | Defendant
(Claimant in the Arbitration) |
______________
| Before: | Hon Mimmie Chan J in Chambers |
| Date of Hearing: | 8 November 2018 |
| Date of Judgment: | 9 April 2019 |
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J U D G M E N T
_______________
Background
1. On 30 August 2018, I granted leave to the Plaintiffs to appeal against the Second Interim Award of the Arbitrator published on 3 January 2018, as corrected on 3 March 2018, on two questions of law:
(1) whether there was compliance with the condition precedents to give notice under Clause 21.1 and 21.2 of the Sub-Contract between the Plaintiffs and the Defendant; and
(2) the valuation of variation of works under the Sub-Contract.
2. The abbreviations set out in my Decision of 30 August 2018 are adopted.
3. This is the substantive appeal against the Award on the two questions of law identified. As such, the Court is to decide the questions of law on the basis of the findings of fact in the Award (section 5 (3) of the Schedule to the Ordinance). In deciding the questions of law, section 5 (4) of the Schedule expressly states that the Court must not consider any of the criteria set out in section 6 (4) (c) (i) or (ii) of the Schedule (ie the criteria of “obviously wrong” or “at least open to serious doubt”).
4. On behalf of the Defendant, it was emphasized that the Arbitrator’s findings on law, as to the construction, effect and requirements of Clause 21, are made on the basis of his findings of fact, as to the time when and the factual circumstances in which the ground conditions claims became apparent, how the impact of the ground conditions was realized by the parties, and the extent of the Plaintiffs’ knowledge of these ground conditions. An arbitrator’s findings on facts are assumed to be correct and are not to be revisited. Questions of law are to be decided on the basis of the findings of fact in the award (section 5 (3) of the Schedule to the Ordinance). The Defendant submits that the proper test on an appeal on a question of law is to consider whether interference with the arbitrator’s award is necessitated because the arbitrator had obviously misdirected himself in law, by invoking legal principles which were self-evidently incorrect, and alternatively, the Plaintiffs must establish that although the law stated was correct, the decision reached was one that no reasonable arbitrator could reach (Kwan Lee Construction v Elevator Parts Engineering [1997] HKLRD 965 at 971).
5. In Cosemar SA v Mariamararna Shipping Co Ltd (The “Matthew”) [1990] 2 Lloyd’s Rep 323, the Court held that for an appeal to succeed on a mixed question of fact and law, it has to be shown that the decision of the arbitrator was outside the permissible range of solutions which were open to him.
6. The case of Kwan Lee Construction Co Ltd v Elevator Parts Engineering Co Ltd [1997] HKLRD 965 concerned an application for leave to appeal against an arbitral award. However, in the judgment of the Court of Appeal, His Lordships referred to the function of the court to which an appeal on the question of law is brought. Both Mayo JA and Litton VP cited Pioneer Shipping v BTP Tioxide [1982] AC 724, and reference was made to the speech of Lord Radcliffe in Edwards v Bairstow [1956] AC 14:
“If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. So there, too, there has been error in point of law.”
Lord Denning’s summary in Edwards v Bairstow was also referred to, that to justify interference with an arbitrator’s award, it must be shown that the arbitrator had misdirected himself in law, or that the decision was such that no reasonable arbitrator could reach.
The notice compliance question
7. By way of quick recap, the Plaintiffs in this case were the main contractors under the Main Contracts with the MTRC as Employer, to construct tunnels for the Hong Kong to Guangzhou Express Rail Link. The Plaintiffs subcontracted the diaphragm wall works under the contracts to the Defendant. Disputes arose which were submitted to arbitration initiated by the Defendant, and this led to various awards which have been made. The Defendant’s primary case in the Arbitration was that the unforeseen ground conditions gave rise to a variation of the scope of works under the Sub-Contract, so as to entitle the Defendant to claim additional payment under the express variation provisions. In the alternative, the Defendant made a “like rights” claim under sub-clause 1 of S-CC 21.1 of the Sub-Contract (“Clause 21”).
8. In the Award, the Arbitrator referred to the “ground conditions claims” made by the Defendant in the Arbitration. At paragraph 164, the Arbitrator described the Defendant’s primary case, as follows:
“Bauer’s primary case is that the ground conditions differed from those described in the Geotechnical Baselines and the (Geotechnical Baseline Report) and that this difference amounted to a Variation or a Sub-Contract Variation which is to be valued. The JV submits that Bauer’s claims based on Variations or Sub-Contract Variations are unsustainable because the ground conditions were as the parties found them, they were known to be variable and unpredictable and were not instructed. It says that Bauer was obliged to carry out the Sub-Contract Works, irrespective of whether the ground conditions were more or less difficult than envisaged.
In particular, the JV refers to Clause 17.2 of the Sub-Contract which provides that: “No Variation, Sub-Contract Variation … shall be implemented by the Sub-Contractor without an order in writing by the Contractor.” It submits that, without an order in writing there can be no claim for a Variation or Sub-Contract Variation.
The JV challenges Bauer’s contention that a change from a parameter baselined in the GBR is a variation. It submits that there would be no change to the Sub-Contract Works which Bauer was obliged to perform merely because a baselined parameter was not met. The JV says that, absent a route to recovery, the ground conditions are at Bauer’s risk.”
9. The Arbitrator rejected the Defendant’s primary claim of variation. At paragraph 177 of the Award, the Arbitrator states:
“Whilst, as set out below, I have found that the final changes to the founding level were instructed as Variations or Sub-Contract Variations and that such changes were instructed, I do not consider that Bauer is entitled to a Variation or Sub-Contract Variation merely because there was a change in the conditions which could have been foreseen and that this had an effect on the work. An essential part of the variation mechanism is that there has to be an instruction by the Engineer and/or by the JV. Where in carrying out the diaphragm wall work, Bauer encountered unanticipated ground conditions, it was still obliged to carry out the same work in terms of the volume of material which had to be excavated and there was no change to the scope of the work. Nor was there any instruction. I therefore accept the JV’s submission that the changed ground conditions do not, in themselves, give rise to payment as a Variation or Sub-Contract Variation, in the absence of an instruction.”
10. The Arbitrator then proceeded to consider the claims made by the Defendant to see whether the different conditions said to have been encountered differed either from the geotechnical baselines or from the conditions which could reasonably have been foreseen by an experienced contractor, and made different findings. At paragraph 321 of the Award, he concluded:
“I have held above that, prima facie, the evidence establishes that Bauer has 4 heads of claim: Additional 1 (c) rock excavation, additional rock excavation caused by the inclination of the rock, additional rock excavation caused by instructions to deepen founding levels and excavation of HTL (hard transitional layer). I now turn to consider whether Bauer has complied with the relevant notice provisions under clauses 21 and 14.”
Clause 21 deals with service of notice of claims, and clause 14 deals with revision of the date for completion of the Contract Works.
11. At paragraph 300, the Arbitrator repeated the findings he had made in the First Award on the notice provisions:
“In the First Award I made certain findings about the need for notice under the Sub-Contract. In paragraphs 249 to 252 of the First Award I held that in relation to the notice provisions in Clauses 21.2 to 21.3 of the Sub-Contract:
(1) Those provisions did not apply to a claim for the standby/idling rate under the Sub-Contract, alternatively actual loss, under paragraph (1)(f) of the Preambles: paragraph 249 of the First Award;
(2) Those provisions did apply to a claim based on the JV’s breach of the express or the implied terms of Sub-Contract: paragraph 250 of the First Award;
(3) Those provisions did not apply to a claim for payment for a valuation of a Variation or Sub-Contract Variation under Clause 19 but would apply to a claim for “loss or expense”: paragraph 251 of the First Award;
(4) Those provisions did apply to a claim to recover from the JV any additional payment or loss and expense Bauer incurred as a result of any circumstances or occurrence as a consequence of which the JV is entitled to additional payment or loss and expense under the Main Contract, pursuant to Clauses 8.3.4 and 21.1.1: paragraph 252 of the First Award.
In addition, at paragraph 122 of the First Award I held that Bauer was only obliged to give notices under the notice provisions of Clause 21 as from 2 August 2011 in respect of events which had occurred prior to that date.
I also held that there was no requirement for one notice to be given and therefore notice could be given by reference to previous documents and that the notice had to be construed in the light of the background knowledge which the parties would reasonably have.”
12. The Arbitrator then considered Clause 21. At paragraph 322 of the Award, the Arbitrator states:
“The basis of claim for additional rock excavation caused by instructions to deepen founding levels was a Variation or Sub-Contract Variation and, as stated in the First Award, the valuation of such a Variation or Sub-Contract Variation would not be subject to the requirements of notice under Clause 21. The other claims, being “like claims” under Clause 38, do have to comply with the conditions precedent in Clause 21.
323. The first notice under Clause 21.1 is a “notice of its intention” to claim within 14 days after the event, occurrence or matter giving rise to the claim became apparent or ought reasonably to become apparent to the Sub-Contractor. I consider that the notice of intention does not need to specify which of Clauses 21.1.1 to 21.1.6 it is being made under but has to show an intention to make a claim.
324. The second notice under Clause 21.2 can be one of two types. Generally under Clause 21.2 the second notice has to be given within 28 days after giving the Clause 21.1 notice and has to state: “the contractual basis together with full and detailed particulars and the evaluation of the claim” under 21.2.1 and also “details of the documents and any contemporary records that will be maintained to support such claim” under Clause 21.2.3 and “details of the measures which the Sub-Contractor has adopted and proposes to adopt to avoid or reduce the effects of such event, occurrence or matter which gives rise to the claim.
…
327. In summary I have held that Bauer has established the following claims:
(1) Hard Transitional Layer: This claim is based on encountering the HTL which was no (sic) shown in GBR.
(2) Increased Inclination of Rockhead. This claim is based on the increased inclination of rockhead compared to GBR.
(3) Additional excavation by reason of higher 1(c) rock head. This claim is for additional excavation by reason of a higher 1(c) rockhead above base slab bottom level.
(4) Excavation below founding level in 1(c)/1(d). This claim is for additional excavation instructed by JV below “specified founding level”. I have found that the claim is based on a Variation or Sub-Contract Variation and the notice provisions of Clause 21 do not apply to the valuation of a variation.”
13. After considering the evidence on the meetings held on 27 and 28 July 2011, the Claim Notices sent by the Plaintiffs to MTRC on 27 July 2011, and the letters from the Defendant to the Plaintiffs of 1 August, 2 August and 10 August 2011, the Arbitrator first found that the Defendant had given the notice required under Clause 21.1. The Arbitrator considered that: (1) at the meeting on 27 and 28 July 2011, the Defendant had explained to the Plaintiff that the main cause of the slow progress of works was the additional quantity of toe-in rock which had to be excavated; (2) the Plaintiff’s Claim Notices of 27 July 2011 to MTRC had referred to the delay and disruption to the Works by adverse physical conditions, and that the event giving rise to the claim was: “The existing level of Cat 1 (c) and Cat 1 (d) rock obtained for Granodiorite rock to be encountered in the excavation … obtained from pre-drilled boreholes indicate that the levels are generally higher than the corresponding Baselines for rock levels included in the GBR”; and (3) the Defendant had referred in the letters of 1 and 2 August 2011 to an increase in quantity and quality of rock excavation, and this had to be read against the background knowledge which the Plaintiffs had at the time.
14. The Arbitrator then went on to consider whether the Defendant had given the appropriate notice under Clause 21.2. In this context, the Arbitrator pointed out that he had raised in closing submissions the question of “whether the contractual basis of the claim made under Clause 21.2 had to be the same as the contractual basis of the claim made in the arbitration”. At paragraph 332, the Arbitrator then stated:
“I consider that both as a matter of sympathy and as a matter of construction, the contractual basis of the claim stated in the Clause 21.2 notice does not have to be the contractual basis on which the party in the end succeeds in an arbitration. First, to expect a party to finalize its legal case within the relatively short period and be tied to that case through to the end of an arbitration is unrealistic. Secondly, what is important from the point of view of the Contractor is to know the factual basis for the claim so that it can assess it and decide what to do.
Indeed, as can be seen on the facts here, the JV’s view of the appropriate legal basis for the claim was that it was a Clause 38 unforeseen physical conditions claim as well as a Variation claim, as shown in the notices which were then given to the MTRC. It therefore follows that the fact that Bauer have made its claims on the basis of the relevant claim being a Variation or Sub-Contract Variation does not preclude Bauer from making the claim on a new legal basis based on notices given by reference to a different legal basis.”
15. The Defendant’s letter to the Plaintiffs of 1 August 2011 (held by the Arbitrator to be one of the notices under Clause 21.1) referred to the following:
“We confirm the issuance of said design information/founding levels are causing a substantial increase in the quantity and quality of rock we are required to excavate compared to what was allowed for in our Sub-Contract. Please be advised that these additional quantities and change in quality represent variations to our Sub-Contract Works under Clause 17.1 of our Sub-Contract Agreement which shall be valued under Clause 19 and for which we are entitled to and will claim an extension of time in accordance with Clause 14.3.3 and additional costs as provided for under Clause 21.1.6.” (Emphasis added)
16. The other letter, of 2 August 2011, which was found to comprise the notice under Clause 21.1 stated the following:
“As notified in the above correspondence and meetings held with your goodselves the quantity and quality of rock excavation we have been instructed to excavate below rockhead level have increased substantially from those provided under the Sub-Contract and these amount to a variation of our Sub-Contract Works.
…
This substantial increase in the quantity and quality of our work represents a variation under Clause 17.1 of our Sub-Contract Agreement which shall be valued under clause 19 of the Sub-Contract Agreement. In addition, we are entitled to an extension of time under Clause 14.3.3 for execution of the aforesaid additional works and would calculate our entitlement as follows…
In accordance with the Sub-Contract Agreement we are entitled to claim additional costs under Clause 21.1.6 in respect of the instructed variations and resultant extension of time to our Sub-Contract Works which is a course we will follow…” (Emphases added)
17. Essentially, the Arbitrator’s finding is that the appropriate Clause 21.2 notice had been given, despite the fact that the Defendant had made its claims in its letters of 1, 2 and 10 August 2011 on the basis of a Variation or Sub-Contract Variation (under Clause 21.1.6), and not on a “like rights” basis under Clause 21.1.1. The Arbitrator made it clear in the Award that the claim allowed in the Arbitration is a new legal basis, but that the Defendant was not precluded under Clause 21.2 to pursue a different contractual or legal basis. This is reflected in paragraphs 333 and 334 of the Award:
“Indeed, as can be seen on the facts here, the JV’s view of the appropriate legal basis for the claim was that it was a Clause 38 unforeseen physical conditions claim as well as a Variation claim, as shown in the notices which were then given to the MTRC. It therefore follows that the fact that Bauer have made its claims on the basis of the relevant claim being a Variation or Sub-Contract Variation does not preclude Bauer from making the claim on a new legal basis based on notices given by reference to a different legal basis.
Bauer then sent further letters on 19,20 and 25 August 2011 which between them provided further details of the claims for the purpose of Clause 21.2. I consider that certainly by the time of Bauer’s letter of 29 August 2011 it had complied with Clause 21.2.2. … ”
18. With respect, in coming to such a conclusion, the Arbitrator failed to pay heed and give effect to the express provisions of Clause 21.2, which is clearly stated to be a condition precedent for any claim to additional payment or loss and expense, and is required by the express provisions of clause 21.3 to be “strictly complied with”.
19. Clause 21 is set out below:
“21.1 If the Sub-Contractor intends to claim any additional payment or loss and expense pursuant due to:
21.1.1 any circumstances or occurrence as a consequence of which the Contractor is entitled to additional payment or loss and expense under the Main Contract;
21.1.2 any alleged breach of the Sub-Contract, delay or prevention by the Contractor or by his representatives, employees or other sub-contractors;
21.1.3 any claim for discrepancy between Sub-Contract Drawings and documents pursuant to Clause 8.4;
21.1.4 any claim under Common Law, statute laws or by-law;
21.1.5 any extension of time granted to the Sub-Contractor with exception to those cases which the delay are caused by typhoon signal no. 8 and/or force majeure etc.
21.1.6 any Variation of Sub-Contract Variation,
as a condition precedent to the Sub-Contractor’s entitlement to any such claim, the Sub-Contractor shall give notice of its intention to the Contractor within fourteen (14) days after the event, occurrence or matter giving rise to the claim because apparent or ought reasonably to have become apparent to the Sub-Contractor. For the avoidance of doubt, the Sub-Contractor shall have no entitlement to any additional payment or any additional loss and expense and no right to make any claim whatsoever for any amount in excess of the Sub-Contractor Sum in respect of any event, occurrence or matter whatsoever unless this sub-Contractor sets out an express right to that additional payment, additional loss and expense or claim.
21.2 If the Sub-Contractor wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Sub-Contractor shall as a condition precedent to any entitlement, within twenty eight (28) Days after giving of notice under Clause 21.1, submit in writing to the Contractor:
21.2.1 the contractual basis together with full and detailed particulars and the evaluation of the claim;
21.2.2 where an event, occurrence or matter has a continuing effect or where the Sub-Contractor is unable to determine whether the effect of an event, occurrence or matter will be continuing, such that it is not practicable for the Sub-Contractor to submit full and detailed particulars and the evaluation in accordance with Clause 21.2.1, a statement to that effect with reasons together with interim written particulars. The Sub-Contractor shall thereafter, as a condition precedent to any entitlement submit to the Contractor at intervals of not more than twenty eight (28) Days (or at intervals necessary for the Contractor to comply with his obligations under the Main Contract, whichever is shorter) further interim written particulars until the full and detailed particulars are ascertainable, whereupon the Sub-Contractor shall as soon as practicable but in any event within twenty eight (28) Days (or as necessary for the Contractor to comply with his obligations under the Main Contract, whichever is shorter) submit to the Contractor full and detailed particulars and the evaluation of the claim;
21.2.3 details of the documents and any contemporary records that will be maintained to support such claim; and
21.2.4 details of the measures which the Sub-Contractor has adopted and proposes to adopt to avoid or reduce the effects of such event, occurrence or matter which gives rise to the claim.
21.3 The Sub-Contractor shall have no right to any additional or extra payment, loss and expense, any claim for an extension of time or any claim for damages under any Clause of the Sub-Contract or at common law unless Clauses 21.1 and 21.2 have been strictly complied with.”
20. The claim pursued by the Defendant in the Arbitration, and the subject matter of the Award and the present appeal, is a claim for additional payment or loss and expense pursuant to “any circumstances or occurrence as a consequence of which the Contractor is entitled to additional payment or loss and expense under the Main Contract”, under Clause 21.1.1. Notice of intention to make such a claim must, under Clause 21.1, be given “as a condition precedent to (the Defendant)’s entitlement to such claim”.
21. Clause 21.2 expressly provides that, “as a condition precedent to any entitlement”, if the Defendant wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Defendant “shall” within 28 days after giving notice under Clause 21.1 submit in writing (under clause 21.2.1) “the contractual basis together with full and detailed particulars and the evaluation of the claim”. (Emphases added)
22. Clause 21.3 clearly states that the Defendant “shall have no right” to any additional or extra payment, loss and expense, under any Clause of the Sub-Contract or at common law “unless Clauses 21.1 and 21.2 have been strictly complied with”.
23. In my view, there can be no dispute, and no ambiguity, from the plain and clear language used in Clause 21, that the service of notices of claim in writing referred to in Clause 21.1 and 21.2 are conditions precedent, must be “strictly” complied with, and failure to comply with these conditions will have the effect that the Defendant will have “no entitlement” and “no right” to any additional or extra payment, loss and expense.
24. On behalf of the Defendant, it was argued that Clause 21 is in substance an exclusion or time-bar clause, and such clauses are strictly construed. Leading Counsel for the Defendant referred to Keating on Construction Contracts:
“… Ambiguity in an exclusion clause may be given a narrow construction because it cuts down or detracts from the ambit of an important obligation in a contract or a remedy conferred by the general law, such as an obligation to give effect to a contractual warranty by paying compensation for breach of it. Parties are not likely to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect. However, this approach is not now regarded as a presumption nor a special rule justifying the giving of a strained meaning to a provision merely because it is an exclusion clause. Instead, all the tools of linguistic, contextual, purposive and common sense analysis should be deployed to establish the proper construction of the provision. Only if that approach still results in an ambiguity in the meaning of the exclusion clause may it have to be resolved by a preference for a narrower construction. In construction contracts, exemption clauses should be seen as part of the contractual apparatus for distributing risk and there should be no predetermined mindset to cut them down.”
25. As recognized in the above cited passage, it is only in the event of ambiguity that a narrower construction may be applied. As the court made clear in Waterfront Shipping Co Ltd v Trafigura AG [2007] EWHC 2482 (Comm), the words in a time-bar provision must be given their ordinary and natural meaning, notwithstanding that it must be clear and unambiguous if effect is to be given to it. At paragraph 16 of the judgment, Gloster J stated in Waterfront Shipping:
“The authorities show that parties are obliged to comply carefully and strictly with demurrage time-bar clauses of this sort, which are well known within the industry. Importance is also attached to requirements for signed documents were included. …”
Gloster J explained at paragraph 17 of his judgment that the commercial purpose of such clauses is to achieve finality, citing The Yellow Star [2000] 2 Lloyd’s Rep 637 at 641.
26. Clause 21 of the Sub-Contract is in my view clear and unambiguous in its provision and requirement for written notices to be served as a condition precedent to any claim or entitlement of the contractor. The Defendant argued that the ambiguity or uncertainty arises in relation to the requirement under clause 21.2.1 to state “the contractual basis” of the contractor’s claim for additional payment, loss and expense. The Arbitrator appears to base his findings on the fact that notice had been adequately given to the Plaintiffs, at the meetings and in the August correspondence, of the “ground conditions” encountered by the Defendant, and the fact that there was a substantial increase in the quantity and quality of the work encountered. He made it clear that the Defendant’s claims made in the Arbitration were on a “new legal basis” or “a different contractual basis”, compared to the basis referred to in the August correspondence comprising the Clause 21.1 notice. Yet, the Arbitrator considered that as the Plaintiffs were able in this case to notify MTRC in the Claim Notices of delay and disruption to the Works by adverse physical conditions, the principal purpose of Clause 21 - to enable the contractor to know the factual basis for the claim so that it can assess it and decide what to do - had been complied with.
27. Again, with due respect to the Arbitrator, what the Defendant had done by service of the letters of 1, 2 and 10 August 2011 was simply to give notice of the ground conditions encountered at the site, and the additional quantities and quality of the rock to be excavated. At most, these form the factual basis which may, or may not, give rise to a claim under the Sub-Contract. The facts may result in different consequences and give rise to different rights and entitlement of the Sub-Contractor. Clause 21.1 itself envisages different bases for claims of additional payment or loss and expense: namely, circumstances as a consequence of which the Contractor is entitled to additional payment or loss and expense under the Main Contract; alleged breach of the Sub-Contract, delay or prevention by the Contractor; claim for discrepancy between Sub-Contract drawings and documents; any claim under common law; extension of time granted; and/or any Variation.
28. Clause 21.2 requires the Defendant, again as a condition precedent, to submit “the contractual basis”, together with the detailed particulars and evaluation of the claim which the Defendant wished to pursue after the service of the Clause 21.1 notice. The sub-clause refers not only to the submission of the detailed factual particulars, but “the contractual basis” together with the full detailed particulars. What is required under Clause 21.2 therefore must be the basis which the Defendant claims it is entitled under the Sub-Contract to maintain and pursue its claim, by reason or as a result of the factual circumstances which have arisen. There may be one, or more, contractual bases, which can be stated in the Clause 21.2 notice, but the “contractual basis” under Clause 21.1 is one or more of the different causes or events set out in Clause 21.1.1 to Clause 21.1.6 as giving rise to a claim.
29. The August letters found by the Arbitrator to constitute the notices under Clause 21.1 state the factual basis of changed ground conditions, and further state the contractual basis of the Defendant’s claims to be Variations. There is no basis to find that the Defendant had complied strictly with Clause 21.2.1, in relation to any “like rights” claim made under Clause 21.1.1 and maintained under Clause 21.2. As such, by operation of Clause 21.3, the Defendant should have no right to the additional extra payment, loss and expense claimed.
30. The Arbitrator pointed out that it was unrealistic to expect a party to finalize its legal case within a relatively short period of time and to be tied to that case through to the end of an arbitration. As Leading Counsel for the Plaintiffs pointed out, the Defendant had 42 days from the event or occurrence giving rise to the claim to serve the notice required under Clause 21.2. That is not an unrealistic timeframe to identify the contractual basis of a claim.
31. In any event, however much sympathy the contractor may deserve, Clause 21 employs clear and mandatory language for the service and contents of the notices to be served, with no qualifying language such as “if practicable”, or “in so far as the sub-contractor is able” (cf Multiplex Construction (UK) Ltd v Honeywell Control Systems (No 2) [2007] 111 Con LR 78). As the passage in Keating on Construction Contracts recognizes, exemption clauses in construction contracts should be seen as part of the contractual apparatus for distributing risk. There is commercial sense in allocating risks and attaining finality by designating strict time limits for claims to be made and for the contractual basis of claims to be specified. In particular, the language used in Clause 21.1 is in my view clear on its plain reading, and the decisions in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and Arnold v Britton [2015] AC 1619 highlight the importance of the language used in the provision to be construed, notwithstanding the need to read such language in the proper factual and commercial context. There is no basis for a court or tribunal to rewrite the Sub-Contract or Clause 21 for the parties after the event.
32. If, on the facts of a particular case, a claim of waiver or estoppel may be made as a result of the way in which the parties had conducted themselves in relation to a claim or claims made and notified, that may well be pleaded and raised in the Arbitration but it should not affect the construction of a contractual provision which is clear and unambiguous on its face as to its requirements and the effect of non-compliance with its requirements.
33. I come to the conclusion that on proper construction of Clause 21 of the Sub-Contract, the Defendant had failed to give proper notice under Clause 21.2, and that the Arbitrator’s decision to allow the Defendant’s claim of “like rights” was wrong in law.
The valuation of variation question
34. The Defendant contended in the Arbitration, and the Arbitrator accepted, that the deferment of the Area 1a panels for the diaphragm wall constituted a variation under the Sub-Contract (“Variation”). The Arbitrator proceeded to assess the value of the Variation, including the Defendant’s claim for standby of the plant and equipment required for the diaphragm wall for the period from 19 May to 4 July 2012.
35. The relevant contractual provision for valuation is S-CC 19 of the Sub-Contract (“Clause 19”), which is set out below.
“19.1 The value of any Variation, Sub-Contract Variation or Sub-Contract Change required pursuant to Clause 17 to be implemented by the Sub-Contractor shall be ascertained and determined by the Contractor in accordance with the following principles:
19.1.1 any work added or omitted which is the same as or similar in character to and executed under the same or similar conditions to any item of work priced in the Sub-Contract Pricing Document shall be valued at the Sub Contract Rate for that item of work. Provided that if the nature or extent of any Variation or Sub-Contract Variation relative to the nature and extent of the whole of the Sub-Contract Works shall be such that any Sub-Contractor Rate for any item of work is rendered unreasonable or inapplicable in such manner that the Sub-Contractor is unable to achieve the same return on his employed resourced as if such work would have not varied, such Sub-Contract Rate shall be varied and a new rate shall be determined taking into account all the relevant circumstances as may be reasonable and appropriate;
19.1.2 any work added which is not the same as or of a similar character or is not executed under similar conditions to work priced in the Sub-Contract shall be valued at a rate or price based on the Sub-Contract Rates so far as may be reasonable, failing which, at a rate or price agreed between the Parties as being a fair and reasonable rate or price. If the Parties are unable to agree a fair and reasonable rate or price, such rate or price shall be determined by the Contractor for preliminary and interim provisional payment until the final rate will have been agreed mutually or under the dispute regulation/determination.”
36. Notwithstanding the fact that, as the Arbitrator found (in paragraph 672 of the Award), the plant and equipment in question was in storage during the relevant period and was not in use, the Arbitrator valued the Variation on the basis of “cost plus OH&P (overheads and profit)” (paragraph 679 of the Award), and accepted the cost, OH&P figure of HK$3,991,333 on the expert evidence adduced by the Defendant.
37. According to the Plaintiffs, the Arbitrator was in error to include as “cost” an amount not actually incurred by the Defendant, when the Arbitrator stated that he was using a “cost plus” valuation approach (paragraph 679 of the Award).
38. The Plaintiffs pointed out that Clause 19 provides in essence for “fair valuation”, but allowing the Defendant to recover a considerable sum for the value of the plant which the Defendant did not own and did not actually incur any costs nor make any payment for, together with overheads and profit, results in a windfall for the Defendant which is not fair to the Plaintiffs. The Plaintiffs emphasized that the equipment was in storage, was not operating at all, and that it would not cost anything to the Defendant, for the purposes of valuation.
39. Both the Plaintiffs and the Defendant referred to various legal authorities and text books in support of what they contend to be the correct method of valuation, but it appears from these authorities that there is no fixed rule as to how variations should be valued.
40. The Plaintiffs rely on Max Abrahamson’s Engineering Law and the ICE Contracts, 4th Edition, and contend that a “fair valuation” normally means cost plus a reasonable percentage for profit. Reliance is also placed on the judgment in Henry Boot Construction v Alstorm Combined Cycles Ltd [1999] BLR 123 at 137, where it is stated:
“A fair valuation when used as an alternative to a valuation by, or by reference to, contract rates and prices generally means a valuation which will not give the Contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit - for anything more would confer on him an additional margin for profit and would not be fair to the Employer.” (Emphasis added)
41. In FloodsofQueensferry Ltd v Shand Construction Ltd [1999] 319 at 324, the same judge stated:
“Where, in general, contract rates and prices are not available or appropriate and where the contractor’s actual costs of labour, plant and materials reasonably and properly incurred can be established with an acceptable degree of certainty then those figures, together with an appropriate addition for site and head office overheads and profit, would produce a fair and reasonable valuation.” (Emphases added)
42. It should be borne in mind that under the contractual framework provided for in Clause 19, for any work added which is not the same or of a similar character or is not executed under similar conditions to work priced in the Sub-Contract, the value of the variation is to be ascertained at “a rate or price based on the Contract Rates so far as may be reasonable, failing which, at a rate or price agreed between the parties as being a fair and reasonable rate or price”. Under Clause 19.1.2, if the parties are unable to agree “a fair and reasonable rate or price”, the final rate or price is to be agreed or determined under the dispute determination.
43. At paragraph 4-037 of Keating on Construction Contracts 10th Edition, the learned author stated, in the context of assessment of “a reasonable sum”:
“The courts have laid down no rules limiting the way in which a reasonable sum is to be assessed. Different considerations can arise depending on whether the claim is for a quantum meruit in the absence of a contract or a reasonable price payable within a contractual framework. Where a quantum meruit is recoverable for work done outside an existing contract, the work cannot generally be regarded as though it had been performed to any extent under the contract. A restitutionary award made on the basis of unjust enrichment should be calculated as the value of the benefit received by the defendant at the expense of the claimant. The enrichment should be valued at the time it was received and, where the benefit was in the form of services, the starting point was normally the objective market value of the services, tested by the price which a reasonable person in the defendant’s position would have had to pay for them and taking into account conditions which increased or decreased their objective value to any reasonable person in that position….
In relation to construction contracts, the starting point should be that the contractor should be paid at a fair commercial rate for the work done but taking account of any applicable conditions as described above.”
44. In the case of Laserbore Limited v Morrison Biggs Wall Limited [1993] Lexis Citation 2055 25th of August 1993, the Court construed an agreement to “reimburse” the contractor “fair and reasonable payment for all works executed and agreed” as meaning a liability to pay the contractor costs plus profit and overheads. On assessment of the amount payable, the plaintiff-contractor’s expert attempted to assess “reasonable rates” while the defendants’ expert considered the matter on a “costs plus” basis. In deciding the “fair and reasonable payment” to which the contractor is entitled, the court referred to the statement in the 10th edition of Hudson’s Building and Engineering Contracts:
“In practice, in determining a reasonable price, the courts may act upon evidence calculated upon the cost of labour, plant and materials plus a reasonable percentage for profit, or they may act upon evidence of what reasonable rates or prices for the physical work involved would be. This is a perennial problem in the conduct of building litigation arising out of less formal contracts or disputed variations and there is no general rule of practice with regard to it. The decision may depend upon the nature and amount of the work involved, or upon whether the work has been actually carried out, or is hypothetical work, eg in a claim for damages for loss of profit, or upon the nature of the issues raised between the parties, and will be influenced by considerations of convenience from the evidentiary point of view. As stated, some work is, of course, by its nature incapable of accurate measurement by means of rates.”
45. In Laserbore, the judge considered that the better approach (citing Keatingon Building Contracts and Greenmast Shipping Co v Jean Lion et Cie (The Saronikos) [1986] 2 Lloyd’s Rep 277 at 279) was to ask, “What would be a fair commercial rate for the services provided?” Referring to the “reasonable rates” basis and the “costs plus” basis of the experts, the judge then stated:
“I am in no doubt that the costs plus basis in the form in which it was applied by the defendant’s quantum expert (though perhaps not in other forms) is wrong in principle even though in some instances it may produce the right result. One can test it by example. If a company’s directors are sufficiently canny to buy materials for stock at knockdown prices from a liquidator, must they pass on the benefit of their canniness to their customers? If a contractor provides two cranes of equal capacity and equal efficiency to do an equal amount of work, should one be charged at a lower rate than the other because one crane is only one year old but the other is three years old? If an expensive item of equipment has been depreciated to nothing in the company’s accounts but by careful maintenance the company continues to use it, must the equipment be provided free of charge apart from running expenses (fuel and labour)? On the defendants’ argument, the answer to those questions is, “Yes”. I cannot accept that that begins to be right.”
46. Leading Counsel for the Defendant emphasized that valuation, as opposed to assessment of damages, is a contractual entitlement and does not require proof of loss. He referred to paragraph 298 of the judgment in Floods of Queensferry, where the judge stated:
“Thus FOQ is not entitled to recover as part of any damages for breach of contract the cost of any plant or management services covered by any credit note. Its other claims are unaffected since valuation is a contractual entitlement and does not require proof of actual loss.”
47. The Defendant further relies on Sergeant and Wieliczko’s Construction Contract Variations, 2014 Edition, where the authors state at paragraphs 11.78:
“Most contracts provide that, if contract rates and prices are inappropriate, a “fair” or “reasonable” valuation should be undertaken. …
Such terms as “fair” and “reasonable” are, of course, very vague. In practice such an assessment is likely to be undertaken in one of 2 ways:
• Cost-based analysis. It is possible to undertake the analysis by asking what the variation work has actually caused, or what it would cost the contractor. Such an approach may be tempered by allowing only reasonably incurred costs. Overhead and profit may be added. Certain contracts specifically stipulate such a cost-based approach.
• Market rate analysis. Rather than asking what the work cost, an alternative approach is to ask what the market price for the additional work is. Evidence of the market rate for work can be sought, or a party could use its company’s norms or published pricing books to justify sums claimed.”
48. The learned authors conclude at paragraph 11.90 as follows:
“If a valuation is undertaken by reference to cost, this raises questions as to the evidence that needs to be provided by a contractor to justify payment. The right to be paid for a variation is contractual and the valuation process exists to determine the level of the contractor’s entitlement for the changed work it has been instructed to undertake. A variation provision does not normally provide for the compensation of loss, as may be the case with other contract mechanisms, such as the loss and expense provision. Under a variation clause “valuation is a contractual entitlement and does not require proof of actual loss”. In most cases a valuation will be undertaken using extrapolated rates and therefore the question of a contractor proving what costs it has incurred does not arise. Since proof of actual loss should not be required, it could be said that establishing “cost” should involve assessing what certain work would have cost it, rather than having to prove what the work did cost.” (Emphases added)
49. I accept the submissions made on behalf of the Defendant, that the Arbitrator’s decision on the valuation of the Variation is a mixed question of law and fact. The Arbitrator received and considered evidence from the parties and their experts on the nature of the work involved, and the costs and value asserted by the Defendants and examined by the Experts, and concluded on all the evidence available before him that the quantification of HK$3,991,333 represents the “fair and reasonable rate” to be decided and allowed under Clause 19. He stated at paragraph 684 of the Award:
“Whilst it seems that Bauer did not have to pay for the items of plant during the period, I am concerned with valuation of a variation and the issue of whether a party has or has not paid for a piece of plant does not determine the issue of the value of the piece of plant. I consider that in valuing the variation it is the “cost” in terms of what it would cost which is the relevant information and that the issue does not depend on questions of payment.”
50. On review of the authorities, it cannot be said that the Arbitrator had misdirected himself in law, or that his decision was outside the permissible range of solutions which were open to him (Cosemar SA v Mariamararna Shipping Co Ltd (The “Matthew”) [1990] 2 Lloyd’s Rep 323).
Disposition
51. The appeal on the first question of law on notice compliance is allowed. The appeal on the second question of law on variation valuation is dismissed.
52. A fair costs order nisi would be for the Defendant to pay to the Plaintiffs 50% of the costs of the appeal.
| | (Mimmie Chan) |
| | Judge of the Court of First Instance
High Court |
Mr Peter Clayton SC, instructed by Pinsent Masons, for the 1st and 2nd plaintiffs
Mr Anthony Houghton SC and Mr James Niehorster, instructed by Bryan Cave Leighton Paisner LLP, for the defendant