Kim Hung Construction & Engineering Co Ltd v. Standard Refrigeration & Engineering Co Ltd
Read the full judgment text of CACV 90/2015 on BabelCite. This 高等法院上訴法庭 judgment was delivered on 7 January 2016 before Hon Cheung JA, Hon Kwan JA, Hon McWalters JA.
Civil Procedure — Arbitration — Appeal on point of law from arbitral award — Delay claims in construction contracts — Contractual interpretation of tentative possession dates — Whether tentative dates binding or provisional — Pleadings and admissions in arbitration — 'Pay-when-paid' clause construction — Arbitration Ordinance (Cap 341) section 23(2) — Costs. Standard Refrigeration subcontracted by Kim Hung Construction for HVAC works in public hospitals. Standard claimed loss due to Employer's delay in site possession. Arbitrator upheld delay claim; Deputy High Court Judge set aside award, holding tentative dates in contract were provisional, not binding contractual dates. Court of Appeal upheld setting aside. Court held that SP 6.02 dates were expressly tentative and not contractual; arbitrator erred in treating them as binding. Admissions by Kim Hung related only to factual delay, not contractual liability. Absence of architect's written possession notifications was not pleaded or proven, so tentative dates remain provisional. Court found no clear 'pay-when-paid' provision making Kim Hung's payment to Standard conditional on its receipt from employer; judge had erred but overall outcome unaffected. Appeal dismissed; costs ordered against Standard on usual party-party basis with certification for two counsel.
Legal issues: Contractual dates for possession · Admissibility and effect of admissions by Kim Hung · Whether the issue should be remitted to the arbitrator · Effect of absence of written architect notifications · Interpretation of ‘pay-when-paid’ clause applicability
Outcome: Appeal dismissed; judgment below upheld
Cites 5 cases
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CACV 90/2015 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 90 OF 2015 (ON APPEAL FROM HCCT 37 OF 2012) ________________________
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____________________ J U D G M E N T Hon Cheung JA : I. The appeal 1.Standard Refrigeration & Engineering Co. Limited (‘Standard’) obtained an arbitral award against Kim Hung Construction & Engineering Co. Limited (‘Kim Hung’) for HK$1,143,144.06. Pursuant to leave granted by Deputy High Court Judge Lok (as he then was) Kim Hung appealed against the award. The Judge (hearing the appeal proper at the same time as the application for leave to appeal) reversed the decision of the arbitrator and set aside the award. Standard now appeals against that decision to this Court. II. Background of the case 1) The contracts 2.1The Hospital Authority, as the employer, engaged Kim Hung, as the Main Contractor, to carry out construction works for the improvement of infection control provisions for autopsy facilities in eleven public hospitals. Standard, as a sub-contractor, was engaged by Kim Hung to carry out the upgrading of the mechanical ventilation air-conditioning system (‘the MVAC works’). 2.2The Main Contract between the Hospital Authority and Kim Hung was by way of the Hong Kong Standard Form of Building Contract. It was supplemented and amended by Specification Preliminaries which included, amongst other clauses, sections SP 6.02, 7.02 and 7.03. The Sub-Contract between Kim Hung and Standard was based on the Hong Kong Construction Association’s Standard Form of Domestic Sub-Contract 1994 Edition (‘SFDSC’) as supplemented by Standard’s letter dated 3 April 2006 and Kim Hung’s subsequent letter of acceptance also dated 3 April 2006. 2.3It was confirmed in the acceptance letter of 3 April 2006 that all the terms and conditions of the Main Contract would be equally applicable to the Sub-Contract on a ‘back-to-back’ basis. 2.4Under the Main Contract and Sub-Contract, the works in the hospitals were divided into three sections. Section l involved the works to be carried out to the Nethersole Hospital, the Pamela Youde Hospital, the Kwong Wah Hospital and the United Christian Hospital. The Section 2 hospitals were North District Hospital, Queen Mary Hospital, Queen Elizabeth Hospital and Tseung Kwan O Hospital. The Section 3 hospitals were Prince of Wales Hospital, Tuen Mun Hospital and Yan Chai Hospital. 2) The claimant’s claim 2.5Standard in the arbitration proceedings claimed that it suffered loss as a result of the delay in giving possession of the hospitals for it to carry out the Sub-Contract work. This claim (‘the delay claim’) is the only issue that this Court has to deal with in this appeal. 2.6Standard pleaded in paragraph 8 of the Statement of Claim of the arbitration proceedings that section 6.02 of the Specification Preliminaries listed the dates for possession of the sites for the various hospitals to enable the works to be undertaken. From section 6.02 it can be identified that upon completion of the Section 1 hospitals, the Section 2 hospitals were to be handed over to Kim Hung (and hence Standard) for executing the Main Contact and Sub-Contract Works and upon completion of the Section 2 hospitals, the Section 3 hospitals were to be handed over to Kim Hung. Section 1 hospitals were originally due for completion on 28 April 2006 and the date for possession of the Section 2 hospitals was originally 29 April 2006 for Queen Elizabeth, Queen Mary and North District Hospitals and 3 April 2006 for Tseung Kwan O Hospital. The original dates for possession of the Section 3 hospitals were 1 September 2006 for Prince of Wales Hospital and Yan Chai Hospital and 15 September 2006 for Tuen Mun Hospital. 2.7Standard then pleaded in paragraph 9 that the Section 1 hospitals were actually completed as follows :
2.8Standard pleaded in paragraph 10 that the possession of the sites for the Section 2 and Section 3 hospitals was given as follows :
2.9Standard pleaded in paragraph 11 that there was delay in possession of the Section 2 and Section 3 sites and the approximate delay was
2.10Standard claimed in paragraph 12 that as a result of the delayed possession of the Section 2 and Section 3 hospital sites, its suppliers had considerably increased their equipment and material prices and mobilisation charges had also increased :
2.11It claimed HK$1,067,824. 2.12Standard further pleaded in paragraph 13 that this claim was made pursuant to the incorporated provisions of Special Condition 11 - amending Clause 21 of the Main Contract Conditions. Under Special Condition 11(4), if Kim Hung is involved in additional expenditure by reason of the progress of the works or any part thereof having been materially affected by the failure of the employer to give possession then the Quantity Surveyor shall ascertain the cost incurred and shall certify in accordance with Clause 30 of the conditions. 2.13Standard then pleaded Clauses 10.2 and 10.3 of the Sub-Contract Conditions :
3) Kim Hung’s case 2.14Kim Hung denied that Standard was entitled by the contractual provisions to claim loss by reason of delay. 4) The award 2.15The arbitrator upheld Standard’s claim that there had been contractual delay on the part of the Hospital Authority in giving possession of Sections 2 and 3 hospitals, so that Kim Hung was entitled to claim payment and Standard had the equivalent right for payment as Kim Hung had under the Main Contract. III. Appeal on point of law 3.1An appeal from an arbitral award must be based on a question of law and pursuant to leave. As noted by the Judge, the Notice of Arbitration of this Reference was issued on 22 July 2010 and hence the Reference is governed by the Arbitration Ordinance (Cap 341). This Ordinance was repealed and replaced by the current Arbitration Ordinance (Cap 609) which came into operation on 1 June 2011. However, according to paragraph 1 of Schedule 3 of the current Arbitration Ordinance (Cap 609), the application for leave to appeal is a set of proceedings related to the Reference which should be governed by the repealed Ordinance. Further, by virtue of section 110 of the current Arbitration Ordinance (Cap 609), the repealed Order 73 of the Rules of High Court (Cap 4A) continues to apply to this application for leave to appeal. 3.2Under section 23(2) of the repealed Ordinance an appeal shall lie to the Court on any question of law arising out of an award made on an arbitration agreement. IV. The contractual dates 1) The fundamental question 4.1The fundamental question in this appeal is what were the contractual dates for the giving of possession of the hospitals to Standard? These contractual dates must be properly ascertained before Standard could even begin to complain about delay in giving it possession. The arbitrator held that :
4.2It is extremely unclear how the arbitrator came to this finding. He held that :
4.3I agree with the Judge that the arbitrator erred when he held that there is a conflict between SP 6.02 and SCC 11(4). SP 6.02 is under the heading of ‘Possession of the Site’. It provides that Kim Hung shall be given sectional possession of the site in groups as stated in the Appendix to the General Conditions of Contract and shall return these groups to the employer on or before the relevant Date for Handover as stated below or a date which may be notified by the architect in writing, whichever is the later. 4.4What follows is the Schedule listing the tentative dates for possession of the hospitals and handover to the employer and also the time for completion of works. SP 6.02 also provides that Kim Hung shall note that the possession dates given above are tentative dates only and Kim Hung is deemed to have allowed in its tender for all extra costs and expense that may be incurred due to early or delayed possession of any of the site and Kim Hung shall not be entitled to claim any extension of time or loss and expense in the event that the actual dates are different from the above. 4.5SCC 11(4) governs the position where the employer did not give possession of the hospital sites to Kim Hung after notification issued by the architect. In such a case, Kim Hung is entitled to lodge a delay claim against the employer. 4.6In my view there is no conflict at all between them. SCC 11(4) only provides for the consequence of delay if the contractual obligations were not observed. It is this error which led the arbitrator to commit the error in law by holding that the tentative dates were, in fact, the contractual dates upon which the parties’ rights and liabilities were based. 2) Construction of contract 4.7It is a matter of construction of the terms of the contract between Kim Hung and Standard in order to find out what were the dates for giving possession to Standard. In so doing one needs to pay heed to the context or the factual background at the time when the contract was made between Kim Hung and Standard. As Ma CJ observed in Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351 at 361:
4.8What then is the context to be examined? Both the Main Contract and the Sub-Contract have to be considered. The starting point must be SP 6.02. It listed the tentative dates for possession of the hospitals as pleaded in paragraph 8 of the statement of claim. But it also expressly provided that the possession dates given there ‘are tentative dates only and [Kim Hung] is deemed to have allowed in his tender for all extra costs and expense that may be incurred due to early or delayed possession of any of the site and [Kim Hung] shall not be entitled to claim any extension of time or loss and expense in the event that the actual dates are different from the above.’ 4.9As Mr Chong and Mr Tam for Kim Hung correctly submitted, the arrangement under the Main Contract was that the tentative possession dates estimated by the employer in the preparation of its tender documents were indicated to Kim Hung for reference so that it could calculate the tender prices and make preparations for taking possession of the sites and commencement of the works by ordering materials and equipment, arranging deliveries and engaging labour resources. Nonetheless, the sites would only be delivered when the employer was ready to do so some time after the award of the Main Contract, and by then the architect would notify Kim Hung the actual dates in writing. 4.10This view is supported by SP 7.02 and SP 7.03. SP 7.02 provides that the dates for site possession are to be notified by the architect. SP 7.03 provides, amongst other things, that :
4.11The word ‘tentative’ means ‘provisional’ or ‘uncertain’, see Shorter Oxford English Dictionary Volume 2, 5th edition, at 3213. Whilst it is accepted that the ordinary or natural meaning of words no longer provides the only key to contractual interpretation, in the context of this case, the word ‘tentative’ is consistent with the context and purpose of SP 6.02. In view of the ‘back-to-back nature’ of the Main Contract and the Sub-Contract, the dates for possession and handover attached to Kim Hung’s letter of acceptance of 3 April 2006 can only be a reference to the tentative nature of the possessions. 4.12Furthermore, the relevant possession dates set out in this letter of acceptance were already different from the dates set out in SP 6.02 of the Main Contract. The schedule of tentative dates for possession and handover of the hospitals referred to in this letter of 3 April 2006 are as follows :
4.13As explained by Chu Yu Tin, the project manager of Kim Hung, this schedule of tentative dates for possession and handover of the hospitals was prepared on the basis of the table in SP 6.02 but the specific dates therein were amended according to the actual Dates for Possession of Areas Outside Mortuary of Section 1 hospitals, i.e. 23 December 2005. It is common ground that the relevant dates for possession are those dates in respect of ‘Areas outside Mortuary’. So there were two sets of tentative dates. 4.14Another important factor in the context or factual background is that when Kim Hung accepted the Standard’s offer on 3 April 2006, postponement of the tentative dates for possession of all the sites had already occurred. This means if Standard’s claim is valid, Kim Hung would have been in breach of the Sub-Contract at the very moment when it came into existence. This interpretation will lead to such an absurd result that one should strive to avoid. As Lord Hoffmann observed in Investors Compensation Scheme Ltd v West Bromwich Building Society[1998] 1 W.L.R. 896,
See also Chitty on Contracts (32nd edition), paragraph 13–056 which summarised the principles on absurdity. 4.15In my view, the arbitrator clearly had committed an error in law when he construed the tentative dates stated in the contractual documents as the contractual dates which Kim Hung was obliged to perform. 3) Admissions by Kim Hung? 4.16The sole basis of Standard’s appeal is that the arbitrator was correct in its decision because of the admissions made by Kim Hung in the pleadings. The arbitrator stated that :
4.17Mr Clayton SC and Mr Yan for Standard submitted that admissions were made by Kim Hung in paragraphs 8, 11, 32 and 33 of the Defence and Counterclaim. The relevant parts of the Defence and Counterclaim are as follows :
4.18I have already referred to the relevant parts of the Statement of Claim in which Standard pleaded its case on delay. In my view, Standard is really clutching at straws to say that there was admission by Kim Hung on Standard’s case of delay, particularly when one takes into account what Kim Hung pleaded in paragraph 6 of its Defence and Counterclaim, namely,
4.19The Judge held that the arbitrator was wrong to rely on the alleged admission. This is what he said :
4.20Whilst the Court recognizes the usefulness of pleadings in arbitration proceedings particularly when the parties themselves have chosen to rely on pleadings, the heart of the arbitral procedure lies in its ability to provide speedy determination of the real issues : Imperial Leatherware Company Pty Ltd. v. Macri and Marcellino Pty Ltd. (Supreme Court of New South Wales No. 50798 of 1990, unreported, 11 April 1991) per Rogers C.J. Comm. D. at pages 15 and 16. This being the case, narrow and technical construction of the claims made in the pleadings filed in an arbitration should be discouraged, in order to give effect to the intention of the parties to use arbitration as the more informal manner of dispute resolution, as opposed to litigation in the courts : see S Co v B Co [2014] 6 HKC 421 at 451, Unistress Building Construction Ltd v Humphreys Estate (Forrestdale), [1992] 2 HKLR 145, Mustill & Boyd on Commercial Arbitration, pp 15, 18 and 19. 4.21The question of the contractual dates of giving possession of the hospitals was hotly contested before the arbitration. Even if, for the sake of argument, the nature of Kim Hung’s defence was not clearly pleaded, its witness statements had put it beyond doubt that there was no admission to Standard’s claim. Mr Chu emphasized on the tentative nature of the possession dates listed in the contractual documents whilst accepting that there was actual delay by the employer in giving possession of the hospitals. He stressed in his supplemental witness statement :
4.22Further as the Judge had observed, Kim Hung in its written opening and closing submissions before the arbitrator expressly stated that the contractual delay was a disputed issue. In the light of this, the arbitrator could hardly have decided the case solely by reference to the state of pleadings. When he referred to the admissions by Kim Hung, it must be in the context of the admissions of the factual delay and not of delay in breach of the contractual terms. If, indeed, he had relied on the admissions, then he had erred in law. 4) Remission of case to arbitrator? 4.23Mr Clayton submitted that if there were a justifiable complaint by Kim Hung that it had sufficiently raised issues on whether or not the dates pleaded by Standard were the contractual dates and the arbitrator had not taken proper account of these and instead should have allowed Kim Hung to amend, this does not give rise to an appeal on a point of law. Instead, Kim Hung should have applied for remission or to have the award set aside because of a procedural mishap pursuant to section 24 or section 25 of the previous Arbitration Ordinance (Cap 341), but has not. 4.24Sections 24 and 25 are as follows :
4.25In Arbitration in Hong Kong A practical Guide (2003 Ed), pp203-205 and 469-471 the authors discussed the scope of section 24 :
4.26Then at paragraph 16–20 the authors stated that :
4.27It is not clear that the Judge had been invited to take this approach as suggested by Mr Clayton. By now it would be a waste of time to have the matter remitted to the arbitrator. In any event, if the arbitrator had indeed relied on the admissions, then this is a matter that goes beyond merely a procedural mishap and constitutes an error in law. 5) Notification from the architect 4.28Standard further argued that, absent written notifications from the architect, the tentative dates for possession referred to in SP 6.02 are (as a matter of interpretation of the clause) the contractual dates, and were these in issue in the arbitration, the factual basis for any change from those contractual dates and the consequence thereof would need to be pleaded. As Kim Hung did not plead any such written notifications, the contractual timetable on the pleadings remains as set out in SP 6.02. 4.29In my view, the Judge had correctly addressed this issue on notification from the architect :
4.30In my view, Standard has failed in its contractual delay point and the appeal can be dismissed on this ground alone. I further agree with Kwan JA on the ‘pay when paid’ issue. V. Conclusion 5.Accordingly, the appeal is dismissed. VI. Costs 6.Mr Chong asks for indemnity costs of the appeal. He relies on Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No.2) [2012] 4 HKLRD 569 (CA). That case deals with the unique situation of an appellant failing to set aside an arbitral award. This is not the situation here. This is simply a case of an appellant who fails to challenge the judgment below on appeal to this Court. There is nothing exceptional which requires this Court to depart from the usual party and party basis of taxation. We will order Standard to pay Kim Hung costs of the appeal and certify the case is fit for two counsel. Hon Kwan JA : 7.I agree with Cheung JA for the reasons given by him that the pleading point raised by Mr Clayton, SC should be rejected and that Deputy High Court Judge Lok was correct in holding that the arbitrator had clearly made an error in law in finding that there was contractual delay of the employer in giving possession of the Sections 2 and 3 Hospitals so that Kim Hung was held liable to Standard for the Delay Claim. 8.That would be sufficient to dismiss Standard’s appeal before us. It is not necessary to deal with the other issue of law which the judge had also ruled in Kim Hung’s favour, namely, whether Kim Hung would only be contractually liable to pay Standard the additional expenditure in the Delay Claim upon receipt of payment of the same from the employer (the “pay-when-paid” issue). 9.In deference to the submissions made to the court, and as I do not agree with the judge’s holding on this issue (even though it does not affect the outcome of the disposition of the application before the judge or the appeal before us), I will give my views succinctly on this issue. 10.This issue turns entirely on the construction of the contractual documents and specifically whether sufficiently clear wording was used to express a “pay-when-paid” agreement, see the authorities cited by the judge in §50 of his judgment (Wo Hing Engineering Ltd v Pekko Engineers Ltd, HCA 5561/1996, 7 September 1998, at §47; Honeywell Ltd v Kin Ming E&M Works Ltd & Anr, HCCT 76/2001, 5 May 2004, at §23; Massford (HK) Ltd v Wah Seng General Contractors Ltd [2006] 1 HKC 58 at §§12 and 13; and Chitty on Contracts – Hong Kong Specific Contracts (3rd ed) at §5-140). 11.In construing the contractual documents relevant to this issue, the judge had considered the letter of acceptance dated 3 April 2006 from Kim Hung to Standard; the Supplementary Conditions of Contract (“SCC”) of the Main Contract: SCC 11(4), SCC 11(6) and SCC 4; the Standard Form of Domestic Sub-Contract (“SFDSC”): SFDSC 10.3, in §§52 to 54 of his judgment. In §§55, 56, 58 to 63 and 66, he paid particular regard to SFDSC 15, which is the provision with the heading “Payment”. Construing all the provisions as a whole, he found that the payment for the Delay Claim has not yet become due under the Sub-Contract and so Standard cannot ask Kim Hung for such payment under SFDSC 15.8. 12.In reaching that finding, the judge had proceeded on the basis that “SFDSC 15 governs the procedure for the lodging of the Delay Claim, and Standard had properly included the Delay Claim in a “valid statement” as defined in SFDSC 15” (§59 of the judgment). Without doubt, SFDSC 15 formed a very important part of the judge’s reasoning in arriving at the view he did. 13.This is where I think the judge had fallen into error. A “valid statement” submitted by the Sub-Contractor for the purpose of SFDSC 15 is to comprise “the value of all work properly done under the Sub-Contract and of all materials delivered to the Site for incorporation in the Sub-Contract Works and if allowable under the Main Contract the value of off-site materials for incorporation in the Sub-Contract Works at the date of such statement” (SFDSC 15.1 and 15.2). It does not cover a claim for additional expenditure incurred by the Sub-Contractor by reason of the failure to give possession of the site in accordance with the contractual requirement. 14.Mr K M Chong contended that as the Delay Claim was not factored in the Sub-Contract Price, it had to be made under SFDSC 15.1 to 15.3. I fail to see why that should be so. 15.SFDSC 15 comes under the heading of “Payment”. For the making of claims, one goes to SFDSC 10.2 which is under the heading of “Notices and Claims”, and this provides that the Sub-Contractor shall have equivalent rights to payment for complying with or as a consequence of an instruction of the Employer’s Representatives or other event as the Contractor has under the Main Contract. The rights of the Contractor are provided in SCC 11(4), which reads as follows:
16.The judge was wrong to have regard to the provisions of SFDSC 15, which are irrelevant to the issue whether sufficiently clear wording has been used to provide for the Contractor to pay to the Sub-Contractor the additional expenses as a result of the failure to give possession in accordance with the contract only when the employer is to make payment of such expenses to the Contractor. Once the provisions of SFDSC 15 are removed from the consideration, none of the other provisions mentioned by the judge (such as SFDSC 10.3 which Mr Chong relied upon in particular), or the additional provisions mentioned in Mr Chong’s submissions, are sufficiently clear to support the construction that there was an agreement to pay such expenses only when paid by the employer. 17.But as I have stated earlier, even though I do not agree with the judge on this issue, this does not affect the overall outcome. Hon McWalters JA : 18.I agree with the judgment of Cheung JA. I also agree with Kwan JA on the ‘pay when paid’ issue.
Mr K M Chong and Mr Aidan Tam, instructed by Au, Thong & Tsang, for the applicant (respondent in arbitration) Mr Peter Clayton SC, Mr Yan Kwok Wing, instructed by Wong & Associates, for the respondent (claimant in arbitration) (now represented by K. H. Lam & Co.) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment