Maeda Kensetsu Kogyo Kabushiki Kaisha also known as Maeda Corporation and Another v. Bauer Hong Kong Ltd

HCCT 4/2018

[2018] HKCFI 2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 4 OF 2018

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Before:  Hon Mimmie Chan J in Chambers

Dates of Written Skeleton Submissions:  7, 14 & 21 August 2018

Date of Decision:  30 August 2018

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D E C I S I O N

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1.This is an application made by the Plaintiffs for leave to appeal against the 2^nd Interim Award of the Arbitrator published on 3 January 2018, as corrected on 3 March 2018 (“Award”). The application is made pursuant to s 6 (1) (b) of Schedule 2 (“Schedule”) to the Arbitration Ordinance (“Ordinance”), and 4 questions of law were identified for the intended appeal.

2.Under s 6 (3) of the Schedule, the Court “must” determine an application for leave to appeal without a hearing unless it appears to the Court that a hearing is required.  Under s 6 (4), leave to appeal is to be granted only if the Court is satisfied that (a) the decision of the question will substantially affect the rights of one or more of the parties; (b) the question is one which the arbitral tribunal was asked to decide; and (c) on the basis of the findings of fact in the award, the decision of the tribunal on the question is “obviously wrong”; or the question is one of general importance and the decision of the tribunal is “at least open to serious doubt”.

3.Pursuant to directions of the Court, written submissions (confined to 8 pages for each party) were filed on behalf of the parties in support and in opposition to the application.  The Court further directed that no hearing is required.

4.The directions of the Court, and the provisions of s 6 (3) of the Schedule, are in line with the objectives of the Ordinance, set out in s 3, to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense, and the principles that, subject to the observance of the safeguards that are necessary in the public interest, the parties to a dispute should be free to agree on how the dispute should be resolved, and that the Court should interfere in the arbitration of the dispute only as expressly provided for in the Ordinance.

5.It has to be borne in mind that an application for leave to appeal on a question of law arising out of an award is a filtering process.  As highlighted in the decision of Mustill J (as His Lordship then was) in Vinava Shipping Co Ltd v Finelvet AG (The “Chrysalis”) [1983] 1 Lloyd’s LR 503, the court at the first stage, of the application for leave, gives effect to the policy whereby “the interests of finality are placed ahead of the desire to ensure that the arbitrator’s decision is strictly in accordance with the law.” As His Lordship explained:

“Some examination of the merits takes place at this stage, because the stronger the applicant’s case for saying that the arbitrator was wrong, the better his prospect of obtaining leave to appeal. But the examination of the law is summary in nature, and does not lead to any definite conclusion. The exercise is discretionary throughout; the mesh of the filter is fine; and it must, I think, he recognized that some cases will be caught in the filter which would, if the appeal had been allowed to go forward, result in a decision that the award could not stand.”

6.The objectives of the Ordinance and the structure prescribed under s 6 of the Schedule (including the high threshold for granting leave to appeal) reflect the important consideration that the parties had chosen to resolve their dispute by arbitration and to put their dispute before an arbitrator of their choice, often an arbitrator with the relevant experience and expertise to determine the particular issues which had arisen in the dispute.  As the learned judge in the case of A v B [2017] EWHC 3557 (Comm) observed (at paragraph 13 of the judgment), and with whom I respectfully agree, the court dealing with an appeal against an arbitrator’s decision on a question of law has to approach the matter with care: “care to respect the choice of the parties to resolve this dispute by arbitration; care to respect the proper province of the, here, very experienced tribunal; and care - in the course of according that respect - to have full regard of the views they felt able to reach, on matters of business sense or commercial sense that form an important dimension of the context within which a decision - which is a decision of law - is to be reached on the true interpretation of the (relevant contract)”. 

7.In the present case, there is no dispute that the questions for which leave to appeal is currently sought were questions which the tribunal had been asked to decide.  These questions, as identified in this application for leave, relate to:

(1)  idling deduction and the construction of paragraph 1 (f) of Section C of the Sub-Contract Schedule of Prices;

(2)  whether there was compliance with the condition precedents to give notice under Clause 21.1 and 21.2 of the Sub-Contract;

(3)  the founding levels and criteria under the Sub-Contract and whether there was variation under the Sub-Contract;

(4)  the valuation of variation of works under the Sub-Contract.

Idling

8.The 1^st question of law is the interpretation of paragraph 1 (f) of Section C of Part IV of the Appendix to the Sub-Contract, which relates to the measurement of items of work under the Sub-Contract.  The Sub-Contract Schedule of Price sets out the rates for items of work, and refers to a rate for “standby and/or idling per rig”.  The relevant paragraph 1 (f) of Section C (under “General Preambles and Particular Preambles”) (“Para 1 (f)”) states as follows:

“The item of ‘standby and/or idling per rig’ shall only be measured if the delay is proved to be caused by the Engineer’s fault and the rate is deemed to include for the relevant plant operator(s) and associated plants and equipments. For clarity and cite of an example, any delay of the Sub-Contract Works which is proved to be caused by the unforeseen obstructions and/or utilities, and/or the Contractor’s fault etc, the actual loss (ie net costs and expenses) shall be reimbursed to the Sub-Contractor by the Contractor. It is also expressly agreed that the following items shall not be measured under the Sub-Contract: (1) time of idling of resources for archaeological investigation as stipulated under the Contract; and (2) the first twenty four (24) hours of time of idling of resources for reasons other than the Engineer’s responsibility. The Sub-Contractor shall be entitled for payment under the Sub-Contract, cumulative from the commencement of and up to the completion of the Sub-Contract Works.”

9.As identified by the Arbitrator at paragraph 429 of the Award, the issue between the parties was whether the 24 hour period of deduction applies to each event of idling, as the Plaintiffs contend, or to all events of idling cumulatively, as the Defendant contends.

10.I accept that this question substantially affects the rights of the parties.  The Award includes the Defendant’s claims for idling as well as additional time spent which includes idling time.  If the Arbitrator is shown to have erred in his interpretation of Para 1 (f), the Award would be reduced by a significant sum, to substantially affect the rights of both parties.

11.It has not been asserted that the 1^st question of law is a matter of general importance.  As such, the applicable test for granting leave to appeal is that the decision of the Arbitrator has to be “obviously wrong”.

12.I do not agree with the Plaintiffs that the Arbitrator had failed to apply the applicable principles of contractual construction: to undertake a unitary process, checking a putative meaning against the commercial context, the commercial purpose and the commercial consequences.  As can be seen from paragraphs 430 to 439 of the Award, this was exactly what the Arbitrator did, after considering the submissions made by the parties on the basis of the decisions in ICS v West Bromwich [1998] 1 WLR 896, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, Norwich Union Life and Pensions v Linpac Moldings Ltd [2009] EWHC 1602 (Ch), Arnold v Britton [2015] AC 1619, and Wood v Capita Insurance Services Ltd [2017] UKSC 24.

13.The parties’ submissions on common sense and the commercial realities affecting the interpretation of Para 1 (f) were referred to, and considered by the Arbitrator.  At paragraph 438, the Arbitrator considered the plain reading of the provision, and found that “it is the first 24 hours of time of idling of resources for reasons other than the Engineer’s responsibility which are not measured, and that the 24 hour period applies to the first 24 hours of all idling and is not applied to each period of idling”.  From this, it can be seen that the Arbitrator considered the meaning to be clear from the plain reading of the relevant provision, including the references to “any delay”.  Nevertheless, the Arbitrator went on to say that “if there had been ambiguity”, and he had to turn to business common sense, then he considered that business common sense would favor there being a reduction from the total hours of idling rather than from each and every idling occurrence.  His analysis was set out in paragraph 439.

14.I do not agree that the Arbitrator can fairly be said to have approached the interpretation of the contractual provision incorrectly, by reaching his decision “purely on a plain reading of the provision”.  The decisions in Rainy Sky and Arnold Britton 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.  The language in Para 1 (f) was considered as it was actually used (“the first twenty four (24) hours of time of idling”, as opposed to “the first twenty four (24) hours of time of each idling”, and the Arbitrator considered that on its plain reading, the provision does not apply to each period of idling.

15.The decision of the Arbitrator on the construction of Para 1 (f) took into consideration the fact that the “24 hours rule” applies in order to cut down the liability of the Plaintiffs to pay for the works of the Defendant, such that in the case of any ambiguity in the construction of the provision, Para 1 (f) should be given a more confined meaning in preference to a broader meaning (paragraph 439 of the Award).  I agree with the Defendant, that the Arbitrator is entitled to take such a view, as supported by Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128, the rationale being that parties are not lightly to be taken to have intended to give up valuable rights without making it clear that they intend to do so, or to cut down remedies which the law provides for breach of important contractual obligations, without using clear words having that effect.  It cannot be shown that the Arbitrator is “obviously wrong” to have given consideration to the “cutting down of liability” effect of Para 1 (f).

16.The Arbitrator did (in paragraph 439 of the Award) consider the commercial or business sense of the alternative constructions.  Bearing in mind that the entire commercial context of the Sub-Contract had been presented to and argued before the Arbitrator, I cannot say on my reading of paragraphs 428 to 440 of the Award that the Arbitrator’s construction of Para 1 (f) is not in tune with the commercial reality of the case as compared to the rival construction suggested by the Plaintiffs.   

17.As the courts sought to explain in Arnold v Britton (paragraphs 17, 19-20 of the judgment), commercial common sense should not be invoked to undervalue the importance of the language of the provision to be construed, and commercial common sense should not be invoked retrospectively, as it is not the function of the court when interpreting an agreement to relieve a party from the consequences of an imprudent term or arrangements which are ill advised, nor to rewrite the contract for the parties to achieve a result which the court considers more desirable. 

18.It may well be that the “24 hours rule” in Para 1 (f) was already the result of a balancing made, at the time of the Sub-Contract, of the respective interests of, and likely prejudices to, the paying party on the one part and the party to be paid on the other part, after consideration of the relevant factual circumstances known to the parties at the time of the Sub-Contract: such as the length of the contract period, the wide range of resources required, the pricing, etc.

19.It cannot be seen, from the Arbitrator’s analysis in paragraphs 438 and 439 of the Award, that the Arbitrator’s decision on the construction of Para 1 (f) is “obviously wrong”. 

Notice Compliance

20.The 2^nd question of law relates to whether Clause 21 of the Sub-Contract had been complied with, so as to entitle the Defendant to claim against the Plaintiffs for additional sums due under the Sub-Contract.

21.The Defendant was awarded around HK$x for claims made on the basis of unforeseen ground conditions, in addition to being awarded substantial extension of time and prolongation costs for the additional time spent in excavation.  Its entitlement to these substantial amounts depends on the proper interpretation of Clauses 21.1 and 21.2 of the Sub-Contract.  I accept that the decision of the application for leave will substantially affect the rights of the parties.

22.Clause 21 reads as follows:

“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 became 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.”

23.The question of law identified in the application for leave is whether the Defendant’s notification of a claim for unforeseen ground conditions, on a contractual basis of variation, could constitute proper notice as required under Clause 21.2.1, for the Defendant’s claim for unforeseen ground conditions on the contractual basis of like rights in the arbitration - and on the basis of which the Award was made.

24.Service of notice under Clause 21 is expressed as a condition precedent. The Plaintiffs claim that the construction of Clause 21 is of general importance to the construction industry in Hong Kong, as the notification of claim provision is commonly used in the construction industry, and there are identical or similar provisions contained in the standard form conditions of contract used by the MTR Corporation for major projects, such as the Express Rail Link and the Shatin to Central Link, and by the Hong Kong Government and the Hong Kong Institute of Architects for their building projects in Hong Kong.

25.The Defendant has pointed out that the language used in Clause 21 is in fact different to the language used in the notification of claim clauses used in the standard form contracts referred to by the Plaintiffs as being employed for projects of the MTR Corporation, the Government or the Institute.  Yet, I am prepared to accept the submissions made on behalf of the Plaintiffs, that despite the absence of identical wording, these notification of claim clauses may be compared in the sense that construction of one version of such clause may be of relevance in the construction of another version of such clause.  The notification of claim provision is of sufficient general prevalence, to be of general importance in the construction industry.  I am prepared to accept the test of “at least open to serious doubt” applicable under s 6 (4) (c) of the Schedule to the Ordinance.

26.The Plaintiffs have highlighted that in the arbitration, the primary case of the Defendant was that the unforeseen ground conditions gave rise to a variation of the work scope under the Sub-Contract, so as to entitle the Defendant to claim additional payment under the express variation provisions in the Sub-Contract.  In the alternative, the Defendant had made a “like rights” claim under Clause 21.1.1 of the Sub-Contract.　　The Arbitrator rejected the Defendant’s primary claim, that the actual ground conditions gave rise to a variation.  This can be seen from paragraph 177 of the Award.

27.However, the Arbitrator found in favor of the Defendant on the unforeseen ground conditions claim on the basis of a “like rights” entitlement. He found (paragraph 330 of the Award) that the Defendant had sent letters on 1 and 2 August 2011, which constitute the requisite notices under Clause 21.1, and further found (paragraph 334) that the Defendant had sent further letters and details of the claims on 19, 20 and 25 August 2011, and at the latest by 29 August 2011, so as to have complied with Clause 21.2.2.  This was on the basis of the Arbitrator’s finding that the notice required under Clause 21.1 is simply a notice of intention to claim, without the need to specify which of Clauses 21.1.1 to 21.1.6 the claim is made under. 

28.At paragraph 332 of the Award, the Arbitrator 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.”

29.The Arbitrator further stated in paragraph 334 that to the extent needed for a Clause 21.2.2 notice, the Defendant’s letter of 29 August 2011 referred to the “contractual basis” although that did not prevent the Defendant from pursuing the claim on a different contractual or legal basis.  His conclusion was that although the Defendant had made its claims on the basis of a variation, the Defendant was still able to make the claim on a new contractual or legal basis, based on the notices given by reference to a different basis.

30.The service of notice of intention to claim and the written submission of the contractual basis of the claim are both expressed in Clause 21.1 and Clause 21.2 to be “condition precedents”.  Further, Clause 21.3 expressly and clearly provides for the loss of right as a result of non-compliance with the notice requirement, by stating that the Sub-Contractor “shall have no right” to any additional or extra payment, loss and expense, any claim for an extension of time or for damages, “unless Clauses 21.1 and 21.2 have been strictly complied with”.  On its plain reading, the Defendant has no right under Clause 21.3 to any additional payment, loss and expense or any claim for damages under the Sub-Contract, if Clause 21.2 was not complied with “strictly”. If there was no submission in writing made in compliance with Clause 21.2, by giving the contractual basis of a claim to be pursued, there cannot be a claim which can be made, or pursued in the arbitration.

31.On the materials before me, I consider that the decision of the Arbitrator as to compliance with the conditions set out in Clause 21, for a claim to be pursued and an award to be made, is open to serious doubt, such that leave to appeal should be granted.

Founding levels

32.The 3^rd question of law relates to the Arbitrator’s finding that the founding levels determined from the pre-drill results and accepted by the Engineer at that stage formed the prescribed Sub-Contract Works, so that any further excavation constituted a variation.

33.There is no claim that the 3^rd question of law identified is a matter of general importance.  The threshold of “obviously wrong” is therefore applicable, for leave to appeal to be granted.

34.Sub-Contract Drawing No 823B/T/000/OAP/C01/004B provides for the “permanent diaphragm wall founding criteria”, and states that “all permanent diaphragm walls shall satisfy either of the following founding criteria”, as therein set out.  Essentially, the criteria require the diaphragm wall panels to be founded in category 1 (c) rock, or category 1 (d) rock.

35.The Plaintiffs placed reliance on and maintain the significance of the fact that the founding levels shown on the contract drawings were stated to be “tentative only”.  They maintain that it was the obligation of the Defendant to excavate until suitable founding material was encountered to verify the founding level required under the Sub-Contract.  The Plaintiffs refer to drawing 823B/T/000/OAP/C001/003B, which provides as follows:

“All founding levels of diaphragm wall panels shown on the drawings are tentative only. For diaphragm wall panels acting as temporary works, the contractor shall propose the founding level of each diaphragm wall panel and his temporary works design which shall be subject to the acceptance of the Engineer prior to diaphragm wall construction. For permanent diaphragm walls, the contractor shall propose the founding level of each diaphragm wall panel which shall satisfy the founding criteria of permanent diaphragm wall as specified and drawing no 823B/T/000/C01/004. The accepted founding levels shall be further verified for approval by the Engineer on site during excavation of each diaphragm wall panel.” (Emphasis added)

36.It cannot be disputed that the tentative founding levels specified in the Sub-Contract Drawings were based on assumed rock profiles.  The Plaintiffs argued that there was a two-stage process to be followed to ascertain the founding levels.  Before excavation, the Defendant was required to carry out pre-drilling to identify the likely depth of rock head and hence the tentative level to which the Defendant would need to excavate.  Then, when excavation reached the tentative level, the material extracted was inspected by the Engineer to verify, for his acceptance that the relevant specified founding criteria had been achieved and, if not, further excavation had to be carried out in order to achieve it.

37.Essentially, the Plaintiffs argued that the Engineer’s acceptance on verification of the founding level proposed by the Defendant was only part of the verification process, and that the Arbitrator was wrong in finding that one of the steps necessary for ensuring that the panels were founded in the contractual category 1 (c) or 1 (d) level can amount to a variation. 

38.I have carefully reviewed paragraphs 228 to 265 of the Award, which set out the Arbitrator’s identification of the issues in dispute between the parties, the submissions made by the parties, his analyses of the relevant Sub-Contract Drawings and the notes thereto, and his findings on the purpose and effect of the relevant Sub-Contract provisions on the founding level criteria, the contractor’s proposal of the founding level, the verification process, and the Engineer’s acceptance of the founding levels. 

39.The Arbitrator accepted that the founding levels shown in the relevant drawings were tentative.  He found that the detailed contractual procedure to establish the founding levels was that first, the Contractor had to propose the founding level of each wall panel for acceptance by the Engineer.  To propose the founding level, there was to be pre-drilling, the purpose of which was to establish the founding levels based on the specified founding criteria.  The appropriate founding criteria, based on the ground investigation by pre-drilling, would then be used to establish the level proposed by the Contractor.  The Arbitrator considered that the use of pre-drilling was recognized in the GEO Publication No 1/2006.  The further verification of the accepted founding levels, on site and during excavation, was considered by the Arbitrator to be for the purpose of verifying that the material at the founding level was consistent with the contractually prescribed category 1 (c) or 1 (d) material, but at that stage, the original and tentative founding levels had already been replaced by the founding levels accepted by the Engineer, such that if the Engineer should decide that further and additional work was required, that was a change in the accepted founding level, to amount to a variation.

40.I regret that I cannot see, from the Arbitrator’s analysis, that he can be said to be “obviously wrong”.  This is a high threshold, and I pay heed to the observations made in paragraphs 5 and 6 of this Decision.

Valuation of variation at cost

41.The last question of law identified is the Arbitrator’s finding that in respect of a variation for the construction of the diaphragm wall panels located at Kam Tin Road, the variation should be valued at “‘cost’ plus OH&P”, which he assessed and allowed at an amount which included an item of “cost” of equipment, which was not actually incurred by the Defendant.

42.The Defendant was awarded around HK$y for the variation, and as this is a substantial sum, I accept that the decision substantially affects the rights of the parties.

43.The valuation was made pursuant to clause 19 of the Sub-Contract.  This provides as follows:

“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.”

44.The Defendant pointed out that Clause 19 of the Sub-Contract was the subject of negotiations between the parties which resulted in amendments to the provisions of the clause.  The Defendant highlights the point that Clause 19 is differently worded to the variation provision contained in the Main Contract.  It also points out that the standard form contracts referred to by the Plaintiffs incorporate valuation provisions which are not in fact identical to those in Clause 19.

45.Nevertheless, the standard form contracts used by the Government, the Hong Kong Airport Authority and the Institute of Surveyors/Architects adopt variation provisions which refer to valuation at “fair rates”, or “fair valuation” or to rates “as may be reasonable”.  I therefore accept that the construction of the meaning of variation at rates “as may be reasonable”, or “as being a fair and reasonable rate” is a matter of general importance to the construction industry.  I adopt the threshold of “at least open to serious doubt” for granting leave to appeal.

46.At paragraphs 679 and 680 of the Award, the Arbitrator referred to the difference in the valuation of the variation work, as made by the expert for the Plaintiffs and the expert for the Defendant.   The cost of the equipment included by the Defendant’s expert was considered to be unreasonable by the Plaintiffs’ expert, because the Defendant in fact incurred no costs in respect of such equipment.  At paragraph 684 of the Award, the Arbitrator stated:

“Whilst it seems that (the Defendant) did not have to pay for the items of plant during the period, I am concerned with the 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…”

47.The Plaintiffs argued that a “fair valuation” should not give the contractor more than his actual costs plus expected overheads and profit, and that anything more would give the contractor an additional windfall profit and be unfair to the employer. 

48.Whilst the Arbitrator accepted that the Defendant did not have to pay for the items of plant during the period in question, he nevertheless allowed for the “cost” of such plant, as it was his decision that for the purpose of valuing the variation, “cost” is in terms of “what it would cost” the Defendant, and not actual payment made by the Defendant.  The Defendant sought to rely on Floods of Queensferry Ltd v Shand Construction Ltd [1999] BLR 319 and on paragraph 11.90 of Construction Contract Variations by Sergeant and Wieliczo, to support the decision of the Arbitrator, that valuation is a contractual entitlement and does not require proof of actual loss.

49.On its part, the Plaintiffs refer to the following passage in the judgment in Floods of Queensferry Ltd v Shand Construction Ltd (at p 324):

“The guiding principle is that set out in clause 9 (2): the valuation must be fair and reasonable. 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.”

50.There is no reference in the Award to the absence or inapplicability of the evidence of the Defendant’s actual costs of labour, plant and materials incurred.  It would appear on the face of the Award that there was in fact evidence of that, in the evidence reviewed by the experts.  At this stage, I consider that the Arbitrator’s decision, of allowing costs not incurred by the Defendant in his valuation of the variation as “fair and reasonable”, to be at least open to serious doubt.

Disposition

51.I grant leave to the Plaintiffs to appeal on the questions identified as questions 2 and 4.  Since the matter will proceed to the 2^nd stage of determination on the merits of the appeal, I have refrained from making further comments on the substance of the appeal, save for stating the reasons why I considered that the threshold of “at least open to serious doubt” was met on the relevant questions of law.

52.The costs of the application for leave will be in the cause of the appeal.

Mr Peter Clayton SC, instructed by Pinsent Masons, for the plaintiffs

Mr Philip Boulding QC and Mr James Niehorster, instructed by Haley Ho & Partners, for the defendant