Costain International Ltd and Another v. Attorney General

HCMP001898/1982

Headnote

Arbitration - P.W.D. Civil Engineering Contract, 1977 Edition - Clause to effect that, generally, disputes to be arbitrated only after the completion of the works, but exception to this, permitting arbitration during the currency of the works, in the case of disputes "as to the withholding by the Engineer of any certificate" - Dispute on a point of principle between Engineer and Contractors during the currency of the works as to extension of time for the completion of the works, the Contractors claming 92 works and the Engineer by a written order declaring the Contractors were only entitled to 64 days - Issue whether the Engineer's written order was a species of "certificate", entitling the Contractors forthwith to call for the appointment of an arbitrator - Held,  the Engineer's written order was a "time certificate" so that the Contractors were entitled to have an arbitration opened during the currency of the works.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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Coram: Hon. Rhind, J. in court

Date: 21 January 1983

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JUDGMENT

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1. The plaintiff companies ("the Contractors"), whose business is civil engineering, combined together in a joint venture to enter into a contract with the Hong Kong Government ("the Government") for the construction of works known as the Hong Kong Island Eastern Corridor, Stage I, on the latter's behalf, at a cost of HK$485,400,686.47. In the present proceedings, the Attorney General represents the Government as nominal defendant, in the usual way.

2. Another entity which looms large in the present proceedings, though not joined in as a party, is the firm of Maunsell Consultants Asia ("M.C.A."), consulting engineers, who were appointed "The Engineer" under the contract.

3. The works comprise the construction of a section of elevated highway and related slip-roads between Victoria Park, Causeway Bay, and Healthy Street West, North Point. When built, the works will form part of a highway  intended to ease the current notorious traffic congestion in the Kings Road area.

4. As is usual with the Government's engineering contracts, this one consisted of articles of agreement, a form of tender, drawings, specifications, bills of quantities and the Government's Conditions of Contract. The actual date of the articles of agreement signed by the parties was 16th December 1980.

5. Under the contract, the works were to be executed in three years, so that, the works having commenced on 13th January 1981, they were due for completion by 12th January 1984.

6. At the Victoria Park end of the works, they have to be executed on reclaimed land, whilst between Victoria Park and Healthy Street, the carriageway is being built over the sea.

7. A significant part of the works consists of piling. For present purposes, the piling falls into three categories, namely,

8. It was all along recognized by all concerned that some obstructions and rubble mounds, which, I am given to understand, are old sea walls, would be encountered during piling operations.

9. In the bills of quantities, figures were shown for the anticipated volume of obstructions and rubble mounds to be overcome in respect of both the reclamation land piling and the marine piling. Moreover, a rate was shown for both of them, namely $546.51 per linear metre. However, the bills of quantities were silent on the topic of overcoming obstructions and rubble mounds in connection with the main structure land piling.

10. Included in the General Conditions of Contract, which are the 1977 edition, are provisions about the Contractors' entitlement to payment under monthly interim certificates as the works proceed. I will set out those provisions and related provisions.

11. On 13th March 1982, by when the works had been underway for some fourteen months, the Contractors sent M.C.A. a letter, as follows:-

12. That letter was followed up by an application from the Contractors to M.C.A. at the end of April 1982 for an interim certificate of payment including a claim for approximately $121 million in respect of additional works arising from the excessive quantities of obstructions and rubble mounds which the Contractors had encountered while piling.

13. M.C.A. excluded that item of approximately $121 million for additional works in the interim certificate it issued for April 1982. Likewise, cumulative claims which the Contractors lodged on the same basis in each succeeding month were also rejected.

14. By the 27th July 1982, which is the date at which the Contractors' claim has crystallised for the purpose of the present proceedings, it had grown to $154,500,000.

15. It can be discerned, too, from the Contractors' letter dated 13th March 1982, as set out above, that the Contractors considered themselves entitled to an extension of time. That they crystallised at 92 weeks by the 27th July 1982.

16. Unlike the claim for additional payment of $154,500,000, which M.C.A. has disallowed in its entirety, M.C.A. has now granted the Contractors an extension of 64 days, a figure which the Contractors describe as "derisory".

17. According to the Contractors, their claim for more money and for a longer extension of time all stem from the same cause, namely, the excessive obstructions and rubble mounds which have been encountered while piling.

18. As the Contractors would have it, the obstructions and rubble mounds encountered during the reclamation land piling and the marine piling have been so out of proportion to the quantities allowed for in the bills of quantities as to trigger off the operation of General Condition 74(4) which allows a new rate to be fixed for "additional works". I will set out the whole of General Condition 74.

19. In purported reliance on 74(2), M.C.A. considers the Contractors entitled to no more than the previously specified rate of $546.51 per linear metre for obstructions and rubble mounds in excess of the quantities specified for reclamation land piling and marine piling in the bill of quantities.

20. For the purposes of exposition of the case before me, neither side found it necessary to go into details of the actual new rate the Contractors have in mind for reclamation land piling and marine piling. All that the parties deemed necessary to draw to my attention was that, according to the Contractors, the total of $154,500,000 for the Contractors claim as at 27th July 1982 is calculated in a way which includes the new rate. I am assured by Mr. Keane for the Contractors that his clients' claim is "historic", which I presume to mean based on their alleged entitlement up to 27th July 1982.

21. Included in the rejected claim, as I understand the position, was an element for overcoming obstructions and rubble mounds in relation to the main structure land piling. As I have already mentioned, no allowance was made for this in the bills of quantities. M.C.A. has offered the same rate for this as the rate specified in the bills of quantities for overcoming obstructions and rubble mounds in relation to reclamation land piling and marine piling, namely $546.51 per linear metre. M.C.A. justifies that approach by reference to General Condition 74(2). However, according to the Contractors' way of seeing things, that figure of $546.51 is no longer applicable even to reclamation land piling and marine piling because of the additional works for which the Contractors' claim under 74(4), so that it cannot form any basis for fixing a suitable rate in respect of the main structure land piling. Deriving from their calculations which they say entitle them to $154,500,000 as at 27th July 1982, the Contractors say that the proper rate they should be paid for main structure land piling is $156,704.55 per linear metre - a not inconsiderable advance on the $546.51 per linear metre offered by M.C.A,

22. According to the Contractors' approach, in the same way that the excessive obstructions and rubble mounds have wrought a disproportionate effect on piling costs by disrupting the whole piling cycle, they have likewise resulted in a disproportionate degree of delay. In contrast with the Contractors' approach, M.C.A. have told them they should take all practicable measures to accelerate the works. In answer to that, the Contractors retort that there is no contractual obligation on them to do so, and they object that this would involve them in additional expense. The differing approaches to the issue of extension of time result in the Contractors calculating their entitlement at 92 weeks, whilst M.C.A. shrink that to 64 days.

23. It is General Condition 65 which deals with extension of time. I now set that out in full:-

24. The actual document by which M.C.A. granted the Contractors this 64 day extension of time reads as follows:-

25. According to the Contractors, that document granting them an extension of time amounts to a type of "certificate" under the contract. In Mr. Keane's words, it can be described as a "time certificate". That expression is to be contrasted with a different type of "certificate" under the contract, namely a "money certificate".

26. It is common ground that the Contractors entitlement to payment for piling falls to be included within a species of "money certificate" under the contract, namely, the interim payment certificates under General Condition 102. However, the Government disputes the notion of "time certificates" under the contract, and denies that the document whereby M.C.A. granted the Contractors a 64 day extension is any type of "certificate" for the purposes of the contract. In due course, I will rule on which side I regard as correct on the issue of whether extension of time under the contract is by "certificate".

27. By under-certifying both for the Contractors' entitlement to payment for piling and for its entitlement to an extension of time as the result of obstruction and rubble mounds encountered up to 27th July 1982, so the Contractors contend, M.C.A. has, in effect, withheld certificates, thus triggering off the provisions of General Condition 120(2) which empower the Contractors to call for the appointment of an arbitrator while the works are still in progress for the purpose of resolving the disputes between the parties over the certificates.

28. General Condition 120 is as follows:-

29. How the Contractors sought to activate the provisions of General Condition 120(2) for the appointment of an arbitrator while the works were still in progress was by serving the Government with a Notice of Arbitration in the following form on 21st September 1982:-

"To : The Government of Hong Kong

Hong Kong Island Eastern Corridor - Stage 1 Main Contract - Healthy Street to Victoria Park P W D Contract No 551/78 (The Contract)  

30. Accompanying that Notice of Arbitration was a claim document (Exhibit "GCT 3" to Mr. Trayling's affidavit of 22nd October 1982), detailing how the Contractors sought to justify their claim for $154,500,000 on the "money certificates" and the extension of 92 weeks on the "time certificate" up to 27th July 1982.

31. Although the Notice of Arbitration fails to make any explicit reference to this, I understood from Mr. Keane that the arbitration which is sought only relates to the Contractors' entitlement up to the 27th July 1982. I have already mentioned Mr. Keane's reference to the Contractors' claim being "historic". This, as I understand the position, means that the Contractors seek an arbitration for rates of payment and an extension of time to be fixed retrospectively up to the 27th July 1982. I do not understand the Contractors to be seeking the fixing of new rates prospectively.

32. The Government having failed to agree to the appointment of an arbitrator within the 28 days specified in the Notice of Arbitration, the Contractors filed the present proceedings against them on the 21st October 1982, seeking declarations that :-

33. That there are genuine differences and disputes between the parties in Relation to the "money certificates" and in relation to the extension of time is accepted by the Government. Precisely when those disputes or differences arose - whether it was before or after the Notice of Arbitration - is a point on which Mr. Nunn takes no issue. Mr. Nunn very fairly did not seek to rely on technical points, his attitude, as I understood it, being that the Government was not playing for time in any way, but seeking  genuine enlightenment whether, on the merits, M.C.A. could be said to have withheld certificates to which the Contractors' claim to be entitled.  I gathered that from the Government's point of view the present proceedings are in the nature of a test case, as there are several  other cases involving similar issues waiting in the wings.

34. In so far as the "money certificates" are concerned, the Government's position before me is, in my opinion, indistinguishable from its position in Aoki Construction Co. Ltd. v. Attorney General ⁽¹⁾ where the provisions of Condition 120(6) of the Government's 1971 Edition of the General Conditions, which was not materially different from Condition 120(2) of the present 1977 Edition, fell to be considered. Aoki was to the effect that the exception of "withholding by the Engineer of a certificate" includes the situation in which a genuine dispute as to whether payment and thus a certificate is due for works executed, the result being that the Contractor could insist on the appointment of an arbitrator before the end of the works. That decision in its turn followed Farr v. Ministry of Transport ⁽²⁾ where a provision indistinguishable from they Government's present General Condition 120(2) was interpreted.

35. Before the learned judge in the Aoki case, Mr. Nunn, who there too appeared for the Government, unsuccessfully contended that the Farr case was wrongly decided.

36. Not only for reasons of comity, but also because I think the learned judge there was right in the conclusion he reached, I propose to follow the Aoki decision. The only point at which I depart from the reasoning of the learned judge in Aoki is that I disagree with his last paragraph at page 875 of his judgment on the topic of whether there is a withholding of a certificate where the dispute is about measurement rather than principle. I side with the views expressed at page 495 of the 10th Edition of Hudson's Building and Engineering Contracts that even where the difference between the Contractor and the engineer which lead to the withholding of a certificate is one of amount only and not principle the Contractor is entitled to have an arbitration opened before the end of the work.

37. This slight difference of opinion between myself and the learned judge in Aoki is of no moment for the purpose of determining whether there has been a withholding of money certificates in the present case, because it is abundantly clear that the present dispute relates to a point of principle, namely whether the Contractors are entitled to have new rates fixed under Condition 74(4) and (5) for "additional works". As a matter of common sense, too, it is inconceivable that parties who were acting bona fide - and before me neither side questions the other side's bona fides - could be as much as $154,500,000 apart in their reckoning unless there was a difference as to principle, bearing in mind that original contract price was $485 m. A disparity of that order of magnitude could not be referable to a disagreement as to mere measurement only.

38. When similar clauses fall to be considered, it would in my opinion be mischievous in the extreme for courts at this stage to start refusing to follow the interpretation adopted in the Farr case. To the best of my knowledge, the Farr interpretation has not been successfully challenged in the twenty odd years since the case was decided. For the courts now to go upsetting the settled expectations of parties who have entered into contracts embodying the same formula would border on the irresponsible.

39. As an alternative to refusing to follow Farr and Aoki, Mr. Nunn submitted that General Condition 77(5), which is present in the 1977 Edition of the General Conditions but did not feature in the 1971 Edition, affords a basis for distinguishing those cases.

40. I set out 77(5) :

"The Contractor shall be entitled to have included in any interim payment certified by the Engineer pursuant to clause 102, such amount in respect of any claim as he may consider due to the Contractor provided that the Contractor shall have supplied sufficient particulars to enable the Engineer to determine the amount due. If such particulars are insufficient to substantiate the whole of the claim, the Contractor shall be entitled to payment in respect of such part of the claim as the particulars may substantiate to the satisfaction of the Engineer."

I frankly do not see how General Condition 77(5) throws any light on the interpretation of General Condition 120, and, more particularly, on whether there is a dispute as to the withholding of a certificate to which the Contractors claim to be entitled.

41. It is not up to me to decide on the merits whether the Engineer has been right or wrong in withholding his certificate: that is for the arbitrator to decide. The Farr case makes that abundantly clear.

42. Mr. Nunn urges me that because, in the Government's view, the Contractors have not supplied M.C.A. with sufficient particulars to determine their claim, the Contractors are precluded by 77(5) from entitlement to a certificate. That is an argument which, in my view, relates purely to merits and is solely of concern to the arbitrator, not the court.

43. Furthermore, Mr. Nunn argues that 77(5) means that the Contractors are entitled to no more in an interim certificate than M.C.A. considers due to them. Clearly, that cannot be right. The Contractors do not have to start off before me by showing they already have an established right to payment; all they need show is that a genuine dispute exists. Whether the Contractors are entitled to more is what the dispute is all about, and it is that which will have to be determined in the interim arbitration. In the face of an overriding arbitration clause like that embodied in General Condition 120, there is no scope for arguing that the Engineer's certificate, whether interim or final, is not open to question before the arbitrator.

44. A further point touched upon by Mr. Nunn, and again, in my view, going as to merits, was whether new rates could be fixed for interim "money certificates for the additional works as at 27th July 1982, bearing in mind this might lead to an over-valuation in the light of all the works once they come to be completed. I do not see this as a problem. It is of the essence of an interim certificate . that it is interim. There is express provision in General Condition 105 for the Engineer to correct previous certificates. It will be a matter for the arbitrator, on the merits, to determine the Contractors' monetary entitlement for the piling work done up to the 27th July 1982.

45. In the light of the Farr and the Aoki cases, which in my view are clearly correctly decided and indistinguishable from the present case in so far as it relates to "money certificates", I regard the Crown's resistance to the appointment of an arbitrator for both types of "money certificate" to which the Notice of Arbitration relates as utterly devoid of all hope.

46. However, the same could not be said of its objections to the proposed arbitration in relation to an extension of time. At least they were of some substance. However here too, the Crown's arguments ultimately did not prevail.

47. What Mr. Keane chooses to characterise as a "time certificate" is not a "certificate" at all within the meaning of that word in the exception embodied in General Condition 120(2), according to Mr. Nunn.

48. There is no definition of "certificate" in the General Conditions.

49. According to Mr. Nunn, there are explicit references to eighteen different types of certificate in the General Conditions. As there is no comparable reference to "time certificates" anywhere, the court was asked to infer that it could never have been intended that extensions of time were to be by certificate. Moreover, the "certifying" function of the Engineer was to be distinguished from his other functions such as "measuring", "valuing" or "deciding". This could be discerned from General Condition 119(1) where each of those functions is separately referred to:

"In measuring, valuing, deciding or certifying, the Engineer is not intended to act as arbitrator but as an engineer acts by his skill and from his knowledge of the facts and incidents connected with the Works and in so far as any facts are not within his own knowledge the Engineer shall be at liberty to inform himself by inquiry of such person or persons as he may consider necessary."

50. Likewise, so the argument continued, the Engineer's function in varying time under General Condition 65(3) by "order" is to be distinguished from "certifying".

51. Against those arguments is the fact the Engineer's order extending time falls squarely within the definition in Hudson (op. cit at 479) of a certificate as "the expression in a definite form of the exercise of the judgment, opinion or skill of the engineer, architect or surveyor in relation to some matter provided for by the terms of the contract". That definition was adopted by the Court of Appeal in England in the case of Token Construction Co. Ltd. v. Charlton Estates Ltd. ⁽³⁾ To my mind, that definition does no more than set out one of the natural meanings of certificate.

52. Moreover, at page 640, the learned author of Hudson indicates that an engineer performs a certifying function when he grants extension of time for delays.  I have added the words in brackets which carry on the sense of the passage at page 639.

"The status of the person nominated to exercise the power (of granting extensions of time for delays), usually, of course, the architect or engineer, is almost invariably that of the certifier namely, quasi-arbitral in character."

53. On balance, I do not think it was intended that the word "certificate" should be interpreted as if it were some term of art in General Condition 120(2), with a meaning confined either to one of the 18 types of certificate referred to elsewhere in the General Conditions or with a meaning which necessarily distinguishes it from words like "decide" and "order". I see no reason why there should not be some overlapping between "certifying" and "ordering" where the circumstances so dictate. There is nothing intrinsically incompatible about "ordering" and "certifying". What could be more natural than saying "By his certificate the Engineer ordered an extension of 64 days?"

54. I am of the opinion that the word "certificate" in General Condition 120(2) should be interpreted in accordance with the definition of "certificate" I have cited from Hudson. I find that an order under General Condition 65(3) extending time comes within that definition.

55. I see no difficulty because the words "Variation Order" appear on that certificate. Courts look to substance, not labels. There is no reason why a document calling itself a Variation Order should not certify how long an extension has been granted.

56. It was urged upon me by Mr. Keane that the purpose of the exception in 120(2) was to ensure that the Contractor could maintain his cash-flow as the works progressed. The withholding of an extension of time could obviously have adverse consequences for the Contractors' cash-flow. The submission was, therefore, made that I should adopt a "purposive" approach to construing "certificate". As, for reasons I have already indicated, I in any event find the ordinary meaning of "certificate" encompasses the Engineer's formal signification of  extension of time, I do not find it necessary to consider whether I am entitled to adopt a "purposive" approach to the interpretation of this word.

57. An alternative argument was advanced on behalf of the Government as to why a "time certificate" did not come within the ambit of the exception in General Condition 120(2). Instead of the plain words of the exception which are ".... except as to the withholding by the Engineer of any certificate or the withholding of any portion of Retention Money under clauses 102 and 104 to which the Contractor claims to be entitled ..... " the Crown wants them interpreted as if they read " ..... except as to the withholding by the Engineer of any certificate under clause 102 or the withholding of any portion of Retention Money under clause 104 to which the Contractor claim to be entitled ..... ". In other words, instead of the word "certificate" being unlimited in the exception, it would be limited to the type of certificates covered by clauses 102 and 104, namely, ''money certificates".

58. I could see no justification for doing violence to the language of the exception in Clause 120(2) in the way the Crown invited me to. I find it inconceivable that any draftsman would have set about expressing his intention in such an obscure way. Mr. Nunn argued that his suggested interpretation avoided the problem of having to suppose that there could ever be a withholding of a portion of Retention Money under Clause 102. For my part, I cannot see any incongruity in having to consider the withholding of a portion of Retention Money in the context of Clause 102, and even if I could, it would not incline me to opt for the bizarre rearrangement of words entailed in the Crown's suggested interpretation.

59. A further reason why the Crown's suggested interpretation of the exception in Clause 120(2) is unlikely in the extreme is that obviously the draftsman was following the same basic formula as the one employed in the contract under consideration in the Farr case. There the clause was:-

"Such reference except as to the withholding by the engineer of any certificate or the withholding of any portion of the retention money under clause 60 hereof to which the Contractor claims to be entitled ..... shall not be opened until after the completion or alleged completion of the works unless with the written consent of the employer and the Contractor."

60. In interpreting that provision, it was held that the words "the withholding by the engineer of any certificate" were not qualified by the words "under clause 60" but were unrestricted in their context and apt to apply wherever the circumstances were such that the engineer should have given a certificate.

61. Any draftsman preparing the 1977 General Conditions must, surely, have been aware of Farr's case, and by adopting the same basic formula for Clause 120(2), he clearly must have intended to signal that the words "any certificate" were unrestricted in their context.

62. In the face of Farr's case, with its simple and sensible approach to treating the words "any certificate" as unqualified, I do not think for one moment that the draftsman of the Government's 1977 General Conditions regressed to the type of opacity which the Crown's present contention involves.

63. Unhesitatingly, I hold "any certificate" in General Condition 120(2) to be unqualified by the words "or the withholding of any portion of Retention Money under clauses 102 and 104".

64. Already, I have ruled that a "time certificate" can come within. General Condition 120(2). As to whether there is a dispute or difference leading to withholding, exactly the same arguments apply to the "time certificate" as to the "money certificates". The dispute as to the withholding of the "time certificate" is just as much on a point of principle rather than mere measurement as the dispute relating to the "money certificates".

65. My ruling is that the Contractors are equally entitled to have an arbitration opened during the currency of the works for the "time certificate" as they are for the "money certificates".

66. The Notice of Arbitration having been served on the 21st September 1982, the Arbitration (Amendment) Ordinance 1982 was brought into effect on 15th October 1982. I see no impediment to a judge accepting an appointment under what is now the new section 13A(1) of the Arbitration Ordinance as an arbitrator in the arbitration which I am going to order in relation to the present proceedings. Further, for the removal of doubt, I expressly state that I regard such appointment as being under the provisions of the Arbitration Ordinance section 12, including all the amendments introduced by virtue of the Arbitration (Amendment) Ordinance 1982.

67. In view of the foregoing, the Contractors are now entitled to an arbitration on the matters raised in paragraphs 1, 2 and 3 of the Notice of Arbitration. I accordingly make declarations in terms of paragraphs l(a) and (b) of the Summons.

68. I understand that Hunter, J. will be available to conduct this arbitration and that he is agreeable so to act. I accordingly appoint Hunter, J. as the arbitrator.

69. Costs follow the event, and I grant a "counsel certificate" for two counsel.

(1)    1980 HKLR 872

(2)    1960 1 W.L.R. 956

(3)    1973 1 B.L.R. 48

Representation:

Mr. D. Keane, Q.C. and Mr. Clayton (McKenna & Co.) for plaintiffs

Mr. Nunn and Miss Plumptre (Legal Department) for defendants