Hsin Chong Construction Co Ltd v. The Hong Kong and Kowloon Wharf and Godown Co Ltd
Read the full judgment text of HCA 283/1984 on BabelCite. This High Court CFI judgment was delivered on 1 May 1984.
1. This is an application for summary judgment under Order 14. I have been referred to a mass of paper and the argument has occupied four days. But I think this is a case where speed should prevail over quality, and having formed a clear view is to what my judgment should be, it is right that I should now express it, rather than taking time to put it in more orderly form in writing.
Cited by 1 case
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HCA000283/1984
On an application for summary judgment under Order 14 based upon a "final" certificate under a building contract held: -
IN THE SUPREME COURT OF HONG KONG HIGH COURT _______ BETWEEN
______ Coram: The Hon. Mr. Justice Hunter in Chambers Dates of Hearing: 25 to 30 April 1984 Date of Delivery of Judgment: 1 May 1984 __________ JUDGMENT __________ 1. This is an application for summary judgment under Order 14. I have been referred to a mass of paper and the argument has occupied four days. But I think this is a case where speed should prevail over quality, and having formed a clear view is to what my judgment should be, it is right that I should now express it, rather than taking time to put it in more orderly form in writing. 2. The plaintiffs are the main contractors under a contract dated 29th August 1979 for the construction of what is perversely called "Phase 3" of Harbour City. I say perversely because it was the first residential area to be constructed and it was built before Phase 1. The defendants are the employers under that contract. The work was carried out by the plaintiffs and a certificate of practical completion was given by the architect on 2nd September 1981. This was eventually followed on 25th November 1983 by what is called under the contract a maintenance certificate. It might also be called for the purposes of the contract a final certificate. By the terms of the contract this triggered the release of the retention monies 45 days after the issue of such a certificate. Those retention monies totalled just over $12.763M. Accordingly that sum prima facie became due shortly before the writ was issued on 13th January. 3. But the claim is not for that sum, because by an earlier certificate given on 28th December 1981, the architect certified that the works should have been completed by 14th April 1981. This meant that under the provisions of the contract the plaintiffs were late in their completion, and were liable in liquidated damages in a sum totalling $4.2M. The claim in this case which they advance is therefore $12.7M minus $4.2M i.e. $8.563M. The plaintiffs contention is that when they have allowed the liquidated damages as a set off there is no other arguable defence to this claim; that they should receive judgment for that sum; and that all the other disputes which in fact exist between the parties can be referred to the arbitrator who has already been appointed under the contract. They urge me to follow the approach suggested in the decision of the Court of Appeal in Ellis Mechanical Services Limited v. Wates Construction Limited 1978 1 LLR 33 and say that $8.5M is "indisputably due". 4. Now in answer to that Mr. Keane for the defendants takes four points. He says that there are four triable issues in this case which stand in the way of any summary judgment. First he says that the architect at the time he issued this certificate was functus officio because a dispute relating to a maintenance certificate had already been referred to arbitration. 5. Secondly he says that the maintenance certificate was wrongly issued by the architect because there were outstanding at the time material defects, that he can challenge the issue of that certificate, and that is another subject matter of arbitration. 6. Thirdly he says that on the true construction of clause 90 of the contract there were outstanding claims at the time the certificate was issued which prevent the contractors having any entitlement to any retention money. Fourthly he says that the defendants have a set off and counterclaim which they can raise against this claim and this constitutes a defence. The set off and counterclaim falls into two parts. First it is said to amount to $6.69M in respect of delay; and secondly it is said to amount to $5.307M in respect of defects, plus some unquantified claims. What I propose to do is to deal in turn with each of those contentions. 7. The first contention that the architect was functus officio really stems from the events of last year. Following the certificate of practical completion on 2nd September 1981, certain works were down, and no doubt there were list of defects details of which have not been put before me. The result was that on 19th November 1982, the architect said that he was satisfied with the work that had been done by the main contractor and the bulk of the nominated subcontractors, but he was not then satisfied with the work that had been done by the mechanical and engineering subcontractors. It was delays over the completion of their work which substantially held up final completion. The real reason for that, which only emerged in the course of the hearing, was that the employers had put themselves in a remarkable conflicting contractual position in this case to which I shall have to refer hereafter. The main contractors became more and more impatient with the architect's failure to issue his maintenance certificate. After various requests for a decision, ultimately on 27th October 1983, they referred to arbitration under cl.105(3) of the contract an issue which they formulated thus: "whether as at 15th April 1983 the maintenance certificate should have been issued". 8. What is said about that is this. The functions of the architect and the arbitrator are quite distinct. Once that request for arbitration was made it was for the arbitrator and only the arbitrator to decide whether a maintenance certificate should have been issued as at the 15th April. That did not leave the arbitrator only with the duty to decide that question. He had to decide the question of date, and questions of date and issue of maintenance certificates are inseparable. This meant that the only person thereafter who could issue a maintenance certificate at any time was the arbitrator and not the architect. The effect of this reference was to discharge the architect from his duty under the contract to issue the maintenance certificate, and to substitute for the architect, the arbitrator. Those submissions I am quite unable to accept. 9. The contract in this respect is quite specific. By cl. 93 it is the architect who is required to issue a maintenance certificate "within 28 days after the expiration of the period of maintenance", when "the work have been completed and maintained to his satisfaction". It is essentially a personal function of the architect. There is no way, as I see it, that he can be displaced from the performance of that function. All that the arbitration clause does is to empower the arbitrator under c1. 105(4) "to open up review and revise any decision opinion direction or certificate of the architect". It does not even in my view entitle the arbitrator to issue the maintenance certificate. The sole effect of the reference of 27th October was to refer the question raised, namely whether the maintenance certificate ought to have been issued on 15th April, and no more. So I reject the view that that first point constitutes a triable issue. 10. The second point is rather more complicated, but in the ultimate analysis in my judgment at least, it is simply another way of putting the counterclaim for defects. Let us assume for a moment that the contention is factually correct: that this maintenance certificate was wrongly issued because there were outstanding defects at the time of the issue which the architect should have ascertained and called the contractor back to rectify; and that this matter then comes before the arbitrator who arrived at that decision. It seems to me that there is only one possible thing that the arbitrator can do. That is to award damages to the employer in respect of that event. He cannot put the clock back. He cannot say that this certificate never has been issued. He cannot say, now the contractor must come back on site to put those defects right years after the event. You cannot simply ignore the fact that this certificate was issued. It seems to me it is only possible to compensate the employer in those circumstances by an award of damages. I reach that conclusion by two different routes. 11. The first is that under this contract it is quite apparent that it is the architect whose duty it is to decide on the quality and sufficiency of the contractors' performance. This can be seen from many provisions of the contract itself. One can start with c1. 14(1) which says:
He is put in the overriding dominant position. Having regard to a submission that was made by Mr. Keane I think I should say first the word "reasonable" does not appear there, and secondly there is authority for the view (per Devlin J. in Minster Trust v. Traps 1954 1 WLR 963, 973) that reasonable cannot be read into a provision like this. That has got to be coupled with the provisions of cl. 66 which give the architect very wide powers to vary the provisions of the contract. The scheme of the contract can be seen from cl. 47 which says: "All materials and workmanship shall be of the respective kinds described in the contract and in accordance with the instruction of the architect and shall be subjected from time to time to such tests as the architect may direct". 12. Then one can go on to cl. 49(1) which deals with covering up, and cl. 51 which deals with the removal of improper materials. Indeed the whole scheme of the contract is that throughout the job the work shall be done, tested and checked to make sure that it is to the satisfaction of the architect. This is the only quality standard in this contract. 13. Then one comes on to cl. 62 which says: "As soon as in the opinion of the architect the works shall have been substantially completed, and shall have satisfactory passed any final test which may be prescribed by the contract, the architect ..... shall issue a certificate of completion". That is the certificate of practical completion which as I have said goes back to September 1981. The matter is made crystal clear when one looks at cl. 63 which says:
It is an unusual clause which postively assumes that at the start of the period of maintenance the works are to be in a good and perfect condition. It then goes on to provide for work to be done during the period of maintenance, which is twelve months, and to be completed during that period or shortly thereafter. There is a proviso to that which also emphasises the dominance of the architect under this contract. It allows the employer to give direct instructions in respect of urgent work, provided that those instructions are confirmed in writing by the architect within 7 days. 14. Then finally one comes on to cl. 93 which provides for the maintenance certificate. This says:
It has to be coupled with the preceding clause 92 which is in the terms that:
15. So that the whole scheme of the contract is that these works are going to be supervised from start to finish by the architect, and completed and maintained to his satisfaction. Now if he finds something in the maintenance period which is wrong it is his duty under the contract to call the contractor back. The work will then be put right. The maintenance certificate will only be issued when that work is put right. But we are all human, we all make mistakes (perhaps especially judges) and the architect may err too. But if he does there was no way, as I see it, in which you can in practice put the clock back, or remedy that situation other than by an award of damages. There is no way that a court, or still less an arbitrator, can issue an order of certiorari to quash the maintenance certificate, because that is what this proposition really comes down to. 16. Secondly I arrive at exactly the same conclusion on a consideration of two cases which were looked at quite closely in the course of the argument; Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. which was given in the Court of Appeal in England on 17th February 1984 of which a transcript was put before me, and Gilbert Ash Northern Limited v. Modern Engineering (Bristol) Limited 1974 A.C. 689. 17. Now in Crouch the Court of Appeal decided that the courts, under a common form building contract such as the one before me, do not have the same jurisdiction as arbitrators. In particular the court does not have the jurisdiction given by this contract to the arbitrator under cl. 104 (5), to which I have already referred i.e. "to open up review and revise any decision, opinion, direction, certificate or valuation of the architect". That court held that the court's duty is to determine the rights of the parties. It has no jurisdiction to modify them; and that is the effect of this provision - the jurisdiction which is granted to an arbitrator. 18. Now Mr. Keane for the defendant first of all invited me not to follow this decision. This was a somewhat bold submission because I think it scarcely behoves a judge of first instance in Hong Kong, not to follow a Court of Appeal decision which goes to the jurisdiction of the court. Secondly it was not simply the decision of that court. What that court was doing, was following and approving dicta of such highly distinguished jurists as Lord Salmon, Lord Wilberforce and Viscount Dilhorne. Thirdly it is apparent that the decision must be right unless the view expressed by Lord Pearson in East Ham B.C. v. Sunley 1966 A.C. 406 can prevail, namely that a term can be implied into this contract which gives the court the same jurisdiction as arbitrators. All I can say there, is that like all those who have gone before me, I can see no sort of basis for implying a term in the contract before me. In my judgment there is simply no substance in the criticisms which Mr. Keane sought to direct to the validity the decision in Crouch. 19. At the same time I think one should understand the limitations of the Crouch decision, because it is not to every architect's certificate that it applies. It must by definition apply to a certificate which modifies contractual rights. The most obvious example of that is a certificate given under cl. 59 of this contract, which extends the time for the performance of contractual obligations. It does not necessarily apply to any certificate of satisfaction, or certificate which has the effect of requiring an employer to pay money, because certificates in this form are open to challenge if common law remedies are available to the employer. That emerges, it seems to me with crystal clarity from the opinion of Lord Diplock in the Northern Engineering v. Gilbert Ash at p.720C where he pointed out that the effect of the existence of a remedy of counterclaim and set-off enables the party, by the exercise of those common law rights, to that extent to challenge the certificate. 20. So it seems to me the position really comes down to this. Whenever you have a certificate which is sought to be challenged, the first question you have to ask yourself is: Does that certificate purport to exclude common law rights? Quite a lot of certificates issued under the express provisions, of quite a lot of common form contracts in fact now do this. If it does exclude common law rights, then the certificate will be conclusive, and the certificate is likely to have that effect either before the courts or before the arbitrators. If on the other hand the certificate by the terms of the contract does not purport to exclude common law rights, then the certificate in substance will be open to challenge, if a counterclaim is available, and if that counterclaim also operates as a set-off, against the sum certified in such certificate. 21. So applying those principles to this case, there is an argument as to whether or not cl. 92 of this contract makes the certificate conclusive. That is not an argument which I can resolve under Order 14. I must therefore assume that the argument fails for the purposes in this application. So putting that argument on one side, this maintenance certificate does not exclude the common law rights. It is therefore open to challenge by any set-off or counterclaim which may be available. So that by two routes I arrive at the conclusion that this second point adds nothing to Mr. Keane's fourth. 22. So I go on to the third point which is that on the true construction of clause 90 there were "outstanding claims". C1. 90 is in these terms:
Now this is a cumbersome, somewhat ill-drafted clause. It starts really with a paraphrase of c1. 93, and a totally unnecessary paraphrase that. It would, I suggest, have been better if the draftsman had said, "when the architect shall issue a maintenance certificate", and leave the matter to be covered by cl. 93, because that is the effect of the words used. So that the retention monies become due when the architect issues a maintenance certificate, "unless" and the argument turns on and has been directed to the words which follow that word. For some considerable time in the course of the argument I was oppressed by the apparent generality of these words and was minded to look at various constructions which might be open which would give them a more sensible meaning. I was attracted to the view that the phrase might relate to claims arising under the contract, and possibly quantified claims. Then I was met by Mr. Keane's submission that the words are there; they cannot be cut down; and they cover any claim made in good faith for any amount however small, subject to the principle of de minimis. He is quite right in saying those are the words which are there. The clause says "an outstanding claim" without any qualification, and in particular without the qualification which limits the phrase to the amount of the claim. If one gives full force to the words here, the conclusion is irresistable that a claim for $1,000 entitled the employer to withhold the entire retention fund of $12M which is what Mr. keane was submitting. 23. The short answer to this provision in my judgment is to be found also in the speeches of their lordships in Gilbert Ash, where their lordships, I think for the first time, applied the old laws as to penalty to these sort of provisions in a building contract. Their lordships were there concerned with two different clauses in the building contract before them. One of these gave a general power to withhold, without reference to any amount, which is precisely the effect of the words of this clause. Lord Reid said this, p.698D:
Now those words seem to me to apply mutatis mutandis to the clause before me. Lord Salmon's view was to the same effect because at page 723G he said this:
In that case their lordships were invited to read into that clause some limitation as to the fair amount of the claim. They declined to do so. It seems to me that that tells me exactly how I should look at this clause. I shall likewise decline to read in a limit which saves the clause from being a penalty and pronounce the clause to be penal. 24. Now three points were taken by Mr. Keane intended to divert me from that conclusion. He takes first a verbal point under the clause, that the phrase "shall become due unless" saves him from the penal consequences. In my judgment the law of penalty turns on substance not form. 25. Secondly he says that if I were come to that conclusion I would be striking down the whole retention fund provisions. I do not agree at all. It seems to me that totally different considerations apply to the position before the maintenance certificate, if the architect is using his power to withhold the certificate to make the contractor finish their job; and the situation after the maintenance certificate when the architect is satisfied, and then the employer is seeking to use claims to withhold the whole sum. And thirdly this is said to be a genuine pre-estimate. This was an exceedingly bold submission, if I may say so, because it is perfectly obvious if it had been, the words "limited to the amount of the claim" would have been in this clause, and then the point would never have arisen at all. So that in my judgment the words from "unless" ..... to "contractor" in clause 90 are penal and unenforceable. 26. So I then come on to point 4 which was the counter-claim. The first arises on delay. As I have already said, this goes back to an architect's certificate of 28th December 1981 in which he extended the time to 15th April, and upon that extension the sum of $4.2M is payable by way of liquidated damages and has already been deducted from the claim. Now that decision has been challenged by both sides. The plaintiffs assert that they should have a longer period of extension beyond 15th April. The employer on the other hand said that the architect has gone too far, and that he should not have extended the time beyond 22nd January. That is the basis of their figure of $6.6M. 27. Now it is necessary here to come back, first of all, to the obligation. This is found in 61(1)(b) of the contract which says: "if the contractor should fail to complete the whole of the works within the prescribed time or any extension thereof granted under clause 59", he shall pay the named sum by way of liquidated damages. No one is suggesting here that this contractor should have completed the whole of the works within the prescribed time. The only question is whether he should have completed it within some extended time. The only extension of time so far granted is that I have already referred to and that was granted under clause 59. That was granted by the architect and on the direct application of the Crouch principles it can only be reviewed by the arbitrator and not by this court. 28. What is then the position? In my judgment the plaintiffs here are right. I have got here a certificate for $12.7M, I have got here an existing extension by the architect. There is no evidence that the architect has misdirected himself in granting that extension. There is no way in which that extension can be challenged before the court on the principles enumerated by Brown Wilkinson L.J. in Crouch. It seems to me that the court has no option here but to treat that matter as correct. There is no basis for going further: anything else it could do would be pure speculation. It has not got any basis on which to speculate. It has not got any basis for saying first that the arbitrator will make any alteration in that certificate; and still less has it has got any basis for speculating on what that alteration will be if it is made in favour of one or the other. It seems to me the court has no option but to treat both parties equally i.e. to treat the existing extension as binding for the purposes of this action. 29. Secondly I think you can arrive at exactly the same conclusion by a slightly more technical route, which is this. I am concerned with an application for summary judgment in this action. No stay has been sought. In this action this cross-claim for liquidated damages cannot be advanced, because this court has no jurisdiction to alter the architect certificate. Therefore there can be no question of any common law set-off arising in this action at all. The matter can only be one of equity. You then have to ask yourself this: Has equitable set off ever extended to a claim which can only be advanced in another action. I know of no such case. I have reminded myself of the test enunciated by Morris L.J. in Hanak v. Green 1958 2 Q.B. 9 at page 25, where he said that the cross claim can be regarded as a set-off "if it would have been regarded by a Court of Equity as the basis for equitable set-off or for giving protection on equitable grounds to a defendant". I can see no sort of basis for giving effect to that for the reasons I have already given, because the court simply has no idea who is going to win this argument when the time comes before the arbitrator. 30. So I then come to the last, and I think it is probably the most difficult point in the case which is the defects counter-claim. Now let me get out of the way at the out-set certain submissions which were advanced by the plaintiff which I am unable to accept. First, as part of the construction of cl. 90, they were seeking to argue that "outstanding claims" for defects were limited to claims outstanding on the 25th November. This might have been true of clause 90, but it cannot extend to cover any set-off or any attempt to use common law rights. 31. Secondly, as I have already indicated, I am assuming for this purpose that the cl. 92 argument will not prevail because it is not so clear that I can give effect to it under Order 14. Thirdly the defendants are not, in my judgment, clearly out of time. I had an interesting argument addressed to me as to the meaning and effect of cl. 105. It seems to me that that position is arguable, and I cannot under Order 14 find that this claim is out of time. 32. Fourthly for reasons that I have already indicated, on my reading on Crouch this maintenance certificate is not final in the sense that it cannot be challenged before the court. 33. I have got to look to see, what the real issues are on these defects; whether they constitute a real defence or whether they are in the classic word used so often under Order 14 "shadowy" i. e. insufficient to discharge the onus thrown by 0.14 r.3 upon a defendant. Now the time table here is instructive. The maintenance certificate was given on 25th November, and the 45 day period expired very early in January. The writ claiming specifically $8.563M i.e. allowing the liquidated damages deduction, was issued on 13th January. The first response to that was a letter of 16th January which, with the expected expressions of horror of litigation, asserted a liquidated damages claim of "at least $4.23M, and the defects claim which was on "preliminary estimate" is said to amount to $7.7M. It is instructive that no such claim had ever been advanced until that moment. 34. The next stage in the story is ten days later: a letter of 26th January which, referred first of all, to the need for an in-house team and to the time for investigation. It goes on: "quite clearly if we are unable to resolve matters between us, we shall have to consider legal advice which we have received and that is to join all sub-contractors and our professional consultants in the proceedings commenced by you. However, we arranged to meet you at 4.30 p.m. on Friday, 27th January and before this meeting it is only right that you should be appraised of matters so far revealed in our investigation". 35. Two things emerge from that. First this was being sent as a first step in some meeting to "resolve" differences. The architect's certificate is being put on one side. This is the start of what I am minded to call a negotiating stance. Secondly it is coupled with an ill- concealed threat - the threat to join all sub-contractors and our professional consultants in the proceedings commenced by you". It is perfectly apparent that both parties knew that this is what the defendants had recently done in another aspect of this very development. It is notorious in this sort of case that the threat of litigation and the expense of litigation can lead sometimes to favourable, and sometimes to unsatisfactory settlements. The fact that this claim is being advanced at this time, and in that way, I regret to say I regard as instructive, because I think it means that the court has to look at it with very grave circumspection. 36. Then one looks at the form of the document. That frankly if anything fans my suspicion. Accompanying the document was something like 42 pages of schedule. Now that 42 pages of schedule consists of something over 35 pages of particulars of uncompleted work, alleged departures from the specification, failures to do the job in accordance with the specification. The author of that document nowhere says: "I make these allegations having considered not only the work as it exists and the specification, but all the (I suspect numerous) various orders issued in the course of this work". That requirement seems to me fundamental and obvious where you have got a contract which empowers the architect to vary his specification (he is the likely author of the original specification) in any way he wishes in the course of the work. Now I ask myself this question: Why was it done in this way? Is this someone seriously advancing defects which he feels that he can make good, or is he firing the first shot in an negotiating exercise. I have little doubt that it is really the second that he was doing. One adds to that two things. First of all the author of the document is quite unknown; secondly his standard is unknown. He nowhere states how he was attempting to judge this work. 37. One ends up with a claim in the letter of $6M. So the figure on 16th January of $7.7M comes down to $6M in the letter. How that figure was arrived at we know not, except that it was short lived, because 4 days later a Defence and Counterclaim was filed. This was also of massive proportions; a hundred and something pages including pages after page of departures from specification to which precisely the same comments apply. That had a schedule attached to it totalling $5.3M. This is now the figure which is relied upon as constituting the counterclaim before me. That was priced by someone unknown in a way to which I will have to refer again in a minute. 38. The final stage came, when quantity surveyors were brought in between 13th and 20th February to cost defects. Their covering letter says this: "Further to your request we attach our approximate estimate for making good defects which you have pointed out to us as requiring repair". Then having given the figures it goes on over the page "Please note the following points in relation to the attached approximate estimates (1) The defects recorded are those which were pointed out to us by your staff as being in need of making good". It seems to me transparently obvious that the author of this document is distancing himself as far as he was able from the substance of the allegations of defects. The defects he costs are what are pointed out to him. Quite clearly he has making no comment upon them as defects at all. Now this is a highly unusual and, in my judgment, a highly unsatisfactory position, because those coatings are done on a totally different basis to the coatings which are the basis of the claim, and which were attached to the schedule. So in very rare instances it is possible to make a comparison between the two documents. 39. Now what is said here by Mr. Keane is this. These are the figures. This is order 14. I must accept this, as prima facie valid and allow the set-off for the full amount of this claim. My problems do not stop at my doubts about the formulation of the claim. I have got to put this in context. They increase when one puts this claim in its context; first in the context of the main contract itself. 40. The certificate of practical completion goes back to September 1981. The maintenance period expired 12 months later, and was followed on 19th November 1982 by the architect's expression of his satisfaction with the work of all but the M. & E. sub-contractors. Events dragged on for some time. He was being pressed in 1983 to issue the maintenance certificate, and he was holding it up because of the M. & E. sub-contractors. We now know that with effect from 1st June 1983 they had got certificates from another source to which I will come in a moment. In those circumstances the employers wrote to the architect on the 26th July objecting about a number of matters and particularly asserting defects in the main contractor's work. Those defects were particularised in a schedule attached to that letter. There were four items in that schedule. Only one, as far as I can see, directly involved the main contractor, that was sub-standard workmanship on woodwork. Another referred to leaking pipes in concrete, which was one of the specialist sub - contractors. The second is air-conditioning in the lift lobbies which is another specialist sub-contractor. The fourth was the Plasteel doors on verandahs which is another specialist sub-contractor. Now those matters were all considered by the architect and rejected by him at the time he issued his maintenance certificate. The contrast between the paucity of the complaints then and the enormity of the complaints which followed the writ is overwhelming. It is even odder that all these relate to patent defects. There is nothing here which could possibly have escaped the attention, either of an examining architect of an examining consultant. If there is any substance in the present complaints there has been a positively massive failure by the architect to do his duty under the contract, and by the employer himself to make complaint at the appropriate time. 41. In reality the problems do not stop there, because in the course of the argument it emerged that the party's rights are not solely governed by the main contract and the nominated sub-contractors contract forms, both of which are the defendant's own drafts. There is a third series of contracts entered into between the defendants and the nominated sub-contractors direct and called Side Agreements. The species which is most significant here is that which is entered into by the M. & E. specialist sub-contractors. 42. Now this starts off with a warranty which fits the main contract provisions. Cl. 2 and 3 likewise do not raise any serious conflict; they complement the main contract provisions. Then cl. 4 requires the sub-contractor (if required) to enter into a maintenance contract). It is cl. 5 which is remarkable. It starts by-saying: "the stipulations and provisions set out in the Schedule hereto shall override any conflicting provisions contained in the main contract and the sub-contract". When one turns to the schedule one finds this. A consultant is appointed for the supervision of the specialist sub-contractor. Then 2(a) "The sub-contract works shall not to be deemed to be practically completed until the sub-contractor has demonstrated to the satisfaction of the consultant that the sub-contract works have performed in accordance with sub-contract specifications". A very important provision that the works are not practically completed until their performance has been demonstrated to the satisfaction of the consultant. 43. Then there are a number of parallel provisions including (h): "Subject to sub-paragraph (f), from the date of practical sub-contract completion to the date of final sub-contract completion, the sub-contractor will be responsible for correcting at his own expense any failure, breakdown or other defect which may arise in the sub-contract work". Then one comes on to 3. (a) "Until the issue of the certificate of final sub-contract completion the contractor will at his own expense and to the satisfaction of the consultant repair, replace and renew all such defects in the sub-contract works as may arise". I pass over the rest of that clause. Then (b) "The consultant shall before the issue of the certificate of final sub-contract completion satisfy himself that the sub-contract works are in all respects in good order and condition and in accordance with the sub-contract specification". I emphasise that phrase "the sub-contract specification" in view of what has later been said. So that you have there some very strict terms requiring the sub-contractor to do his work and to demonstrate due performance to the consultant under that contract. 44. Then I go back in the contract to clause 5. First to 5(d): "The retention money so retained shall be paid by the employer to the sub-contractor upon the issue of the certificate of final sub-contract completion as provided for in the schedule". Pausing there, no one seems to have thought how these provisions were ever going to be reconciled with the provisions of the other contracts. You have two different consultants, different persons put in personal charge because the work has to be done to his personal satisfaction; different forms of certificates; different period of inspection; and different consequences on retention money. How this ever came to be brought about is quite beyond me. 45. Then you come on to 5(e): "The issue of the certificate of final sub-contract completion provided for in the schedule will be conclusive that the sub-contractor has duly performed all his obligation in respect of the sub-contract works save and except for"; and then there are four different categories. Now the only category which it is said may arise here is (iii): "Any matters in respect of which arbitration notices have been given under either the provisions of this contract or under the provisions of the main contract". Now that seems to me plainly to mean arbitration notices which "have been given" before the certificate is issued. It is common ground that there was no such notice given before the 1st June which, (at a very late stage in the argument I was told and the documents were all produced) was the date upon which all the relevant sub-contractors in fact received from the consultant named in their side agreement a certificate of final sub-contract completion. 46. There are a number of extraordinary features about this. The first is, that anyone could have entered into these conflicting contractual provisions; secondly that massive complaints of departures from specification should have been alleged against these various sub-contractors months after they got their certificates; and thirdly that these allegations are raised in the action against the main contractor and that none of these other certificates or of the provisions of the Side Agreements were ever put in evidence at all, and only emerged in the course of the hearing. So that one has here a very very odd situation indeed. 47. One has got first of all as against these sub-contractors' massive complaints which ignore the consultant's certificate, and ignore the function of that consultant. They are largely massive complaints of departure from specification made without reference to any of the variation orders. The complaints are formulated and costed by some unknown employee of the defendant who has not explained what he has done and how he done it. Likewise against the main contractor and the other sub-contractors we have got massive complaints of patent defects, none of which were referred to at the relevant time, all apparently were obvious, but all apparently were overlooked by everybody including the employers until the writ is issued. 48. I have to ask myself did these matters really come to light at this time. I have to look at the method by which these complaints were advanced, the documentation relied upon, the confusing way in which the whole thing has put forward, and the difficulty one has in trying to get to the bottom of it. I have to ask myself eventually is this serious? Is this half puff and a negotiating ploy? What substance has it really got underneath it all? 49. Now the way I approach the matter is this. I start with the existence of a valid certificate which giving proper effect to the liquidated damages discount, produces net the sum of $8.563M. Secondly I have a counterclaim for defects nominally put at $5.307M. Thirdly it said that there is a yet further claim for an unquantified sum. I say straightaway that I take no notice of unquantified counterclaims at this juncture. It is really going too far, two and a half year after completion and some nearly two months after these matters were originally formulated, that was still no quantification, if there is substance in any other complaint. I think I have to ask myself two questions. Making full allowance for the imposed limitations of any Order 14 investigation can I be sure first that the counterclaim for $5.3M must fail for that sum. Secondly, if so, can I be sure that the counterclaim must fail beyond any other fixed sum. 50. I am proposing to base myself upon what was said by the Court of Appeal in Ellis v. Wates Construction. First of all that court repeatedly used the phrase "indisputably due". They were saying that not in the sense of indisputable as between the parties (they may dispute anything) but of indisputable in the assessment of the court. What Lord Denning M.R. said there among other things was: "In most cases it can be said with certainty that $x (I substitute $x) is due. In such a case the court gives judgment for that and leave to defend as to the balance ..... It gives judgment for such sum as it is reasonably seen is due". Later he said that you have to look at the matter "in broad outline". The same approach, with particular criticism of the potential abuse in these circumstances was adopted by Lawton L.J. who said this: "The ordinary practice is that there must be some real basis not a shadowy basis for showing that there is an issue worthy of investigation by the courts". This is the way for a defendant raising a counterclaim to satisfy the court that there is an issue to be tried under 0.14 r.3. 51. I do not think that there is anything in the later decision in Associated Bulk Carriers Ltd. v. Koch shipping Inc. 1978 2 All E.R. 254 which in fact conflicts with that. Lord Denning M.R., in the minority in that case, summarised his reading of the decision in the Ellis case in these words: "the court ought to give judgment for such sum as appears to the court to be indisputably due and refer the balance to arbitration". The majority in that case I do not think were throwing any doubt upon the validity of that approach in the appropriate case. They could not follow it in the Bulk Carriers case for two reasons: One because there was no certificate, no quantified claim at all; and secondly because they were faced with the mandatory provisions of the 1975 Arbitration Act. I notice for example that Lane L.J. (as he then was) at page 265 said this: "It (that is the Ellis case) therefore fulfilled all the necessary conditions for a typical Order 14 payment". 52. So that is my approach and with that I return to the claims enumerated on page 1 of the schedule of damages. I am taking first the claims 2, 3, 4, 5 and 8, all of which concern sub-contractors, all of whom have received certificates of final sub-contract completion under their Side Agreements with effect from 1st June. I have already said that those certificates are conclusive in that sub-contractor's favour that he has "duly performed all his obligations in respect of the sub-contract" unless one of the exceptions applied. I have already said that the only possible exception does not apply to any of those contractors. 53. It therefore follows in my judgment that those certificates are binding as between the employer and that sub-contract. I agree that they form no part of the main contract, and that they form no part of the contract between the plaintiff and any of these sub-contractor. Therefore under terms of those contracts the employer is free to claim against the plaintiff and then the plaintiff is free to claim over against that sub-contractor. If that were to be permitted the employer would in fact be nullifying the effect of the final certificate which his consultant has given to that sub-contractor. The employer would be nullifying a certificate which that sub-contractor has earned by his work: a certificate of obvious value to that sub-contractor; and it may well be a certificate upon reliance of which the sub-contractor has subsequently entered into or been exercising maintenance obligations likewise under that side agreement. It seems to me perfectly plain that in law these employers cannot do indirectly as against these sub-contractors what they cannot do directly; and that if the court were to permit them to advance these claims against the main contractor, in the certain knowledge that the main contractor could then pass on that claim to the sub-contractor, the court would be permitting the employer to commit what I regard as a plain and obvious breach of contract. 54. When I put this proposition to Mr. Keane he reacted with total horror. He said that this has not been advanced by any of the sub-contractors. Of course it has not, because they do not yet know the risk they are in. Indeed that may take them some time having regard to the fact that these matters are in chambers and then going to arbitration. Secondly, he said that this would be unprecedented. I can see nothing unprecedented or strange in the court not permitting one party to act in obvious breach of its contractual obligation. So that is the first reason in my judgment for totally disregarding the claims against these sub-contractors. Equally I regard them as so thin on the facts that they merit no weight being given to them at all. I have already read those very stringent terms of that side agreement. I have already referred to the existence of those certificates under that side agreement. I have already referred somewhat critically to the way in which these complaints have been advanced. I do not believe that complaints advanced in that way in total disregard of the realities and the background, and in total disregard of any variation order should be given any weight by the court on an application like this. 55. So I pass over those and come back to the remaining contractors. Now it is very much more difficult to deal with those. I am going to take Fortress first as an example because it does seem to be a revealing example of the defendants methods. 56. The first complaint about Fortress, which appears to be a nominated sub-contractor for the supply of kitchen equipment, is to be found in one of the pages in the letter of 26th January. It is called "Brief report on general defects : contractor - Fortress Limited. Fortress equipment are generally faulty both in relation to its installation and durability". An allegation of such generality is totally worthless. "There are many complaints relative to door hinges. In a recent survey many of the apartment revealed problems of this nature". No other particulars than that. "The appliances have caused problems and Fortress Limited have remedied this at a cost to tenants". That does not look like any very satisfactory basis for a claim. So one ends with a general allegation of complaints about door hinges, and a reference to some unspecified survey. 57. Stage II is then the counterclaim. The first page of the schedule shows this. Against the fifth sub-contractor actual expenditure on repairs it is said to be $650 plus an estimated cost of remedial work of $60,000. The figure is totally unspecified, and has no apparent basis. I then come on to the quantity surveyor's investigation and find this reference to work which can be attributed to Fortress. Under the general heading of "Making Good Defects in Apartments - Defect No. A-6 kitchen, $80 per apartment". Multiply by 113 apartments and this produces a figure of $9,040. When one looks into the costing of that, one finds that it is based upon the assumption of four pairs of loose hinges and replacement needed at $20 a pair in each apartment: a total $80 an apartment. One then goes to the survey of the apartments themselves, and one finds that four pairs of hinges were not needed in any apartment out of the ten apartments that have been inspected. A total of 17 hinges only were called for. 17 hinges out of 10 apartments, extended to 113 apartments, produces 192 hinges at $20 a pair, a sum of just under $1,000. Assume that I have misread the survey and that I should read the figure as not 6 hinges but 6 pairs: double the figure and you get $2,000. So from a starting figure of $60,000 one gets a maximum claim of $2,000. Now I have singled this one but because it is one of the rare occasions in this case where one can trace the complaints through from the original complaint to the costing, and one finds it out by a factor of 30. It does not give one any sort of confidence in way this work has been done. 58. The second contractor is Plasteel and the claim in respect of them is now said to be $732,650. They figured originally in the complaint of the 26th July. The complaint was then of doors and this complaint about doors is still found wrapped up in the quantity surveyor's schedule. But to that there has been added a massive new complaint. What is said is that there are leaking windows and penetrations of damp on the plaster which have to be put right in every single apartment. A more obvious defect one could hardly imagine. One really finds it very difficult to accept that something as serious as this has escaped everybodies' attention for this period of time. 59. The next contractor is Kuen Lee and the complaint in respect of him is costed at $31,220. This is a total mystery because if one looks again at the letter of 26th January, all I am told about this contractor in that under his specification he agreed to provide invisible access trays and it is said that 66 access traps have been looked at, and all found to be visible with gaps showing. That alone is said to justify, without more, $31,220. 60. Then I come back to the main contractor himself where the claim is $1.4M odd. Now this claim self-evidently goes very much further than anything that has been said before, and very much further than anything that was asserted in the original schedule of 26th July. It is all patent. It has all just been discovered. The claim of $1.4M contrasts with an actual expenditure of $132,774. There has been no attempt to explain how this has happened; no attempt to explain how the plaintiff been judging the matter. It has been no coherent formulation of the claim because of the differences between the letter, the schedule now relied upon, and the quantity surveyor's calculation. The schedule starts (this is the pleading) with two large sums; nearly $600,000 for making good plaster cracks and $300,000 repair and making good joinery work including external doors. This is the only reference as far as I can find to external doors, I have not found one since. Two comments on that. Vast sums are outstanding on plaster cracks. Again it is very difficult to believe this to be the position two and a half years after the event. Likewise a large sum is due, as it transpires, on repolishing internal woodwork. There must be, I would have thought in any event a very large question mark as to the exclusiveness of the contractor's responsibility for those defects even assuming they exist. 61. Then one comes to the quantity surveyor's formulation. It takes this form. One finds a summary of "making good detects in apartments". These are then called speciment defects in apartments. They are really nothing the sort. To go back to the survey sheet (such as we have) it shows that every alleged defect found anywhere is included in this summary. If you look at the survey sheet there is not a single flat, as far as I can see, that actually has them all. The method is to assume that they are all in one flat, when they are not, and then to multiply the product by 113 apartments and assume that they are everywhere. This is self evident rubbish as far as I can see; I am sorry to use that word but this simply does not begin to withstand investigation. It is said that, well this has to be done in a hurry, and there was no time for further investigation, therefore this is a justifiable assumption to make. This investigation was done in January and February. It is now 1st May. There was in fact ample time to produce some coherent figures, sworn too by someone who said, I have surveyed every single flat, and I have found these errors, and I say they are errors attributable to these builders because (1), (2), (3), (4). That has simply not being done. One gets the impression that this was done in the hope that it was going to be sufficient to start negotiations and stave off this application. I suppose that if it fails before me it will be done before the matter is put back before the Court of Appeal. 62. I am driven to the conclusion that everything about these figures leaves cause for doubt. I am left in the gravest doubt as to whether there is any real substance in these complaints at all. It is unnecessary for me to rehearse all the matters I have already commented on; the professional certificates; the timing; the way in which the matter was first put forward; present manner of presentation, the inadequacy of a number of the matters which can be proven on the documents and so on. 63. I then come back to the two questions I put. Am I satisfied that the counterclaim for $5.3M will fail? Yes, beyond question. Secondly, can I be sure that it will not succeed from more than some other figure? My answer to that is yes, and my figure is $750,000. That is not a calculated figure for obvious reason. If you take out the M. & E. sub-contractors for the reasons which I have already given, one is left with a balance of $2.27M. My figure exceeds one-third of that. There is no single individual claim which seems to me on generous estimation to be worth more than a third; some are worth much less. Secondly, this figure exceeds by a factor of four, the actual expenditure. There is some substance in the rough and ready approach sometimes adopted in the Queen's Bench corridor of years ago when some Masters would say: "Mr. So and So I am concerned with actual expenditure that costs money; I am much less concerned with estimates, they cost nothing". 64. So in my judgment this claim is made out for the $8.5M claim made, less a discount of $750,000 in respect of a prospective set off and counterclaim for defects. This means on my calculations that judgment ought to be entered in the sum of $7,813,026.
Representation: Mr. N. Kaplin, Q.C., Miss J. Spruce instructed by Denton, Hall & Burgin for Plaintiff. Mr. D. Keane, Q.C., Mr. G.A. MacKay instructed by McKenna & Co. for Defendant. |
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