Leon Engineering & Construction Co Ltd v. Ka Duk Investment Co Ltd

HCA007588/1983

1983, No. A7588

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H E A D N O T E

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Where, first, there is adequate machinery under the contract between the employer and a contractor to enforce the contractor's rights thereunder and, secondly, there is no good reason at tender stage to suppose that such rights and machinery would not together provide the contractor with an adequate remedy, then, in general, a certifying architect or engineer does not owe to the contractor a duty in tort coterminous with the obligation in contract owed to the contractor by the employer.

1983, No. A7588

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Bokhary, J (Hearing in Chambers; delivery of judgment in open court at the request of the parties)

Dates of hearing: June, 5-6, 1989

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J U D G M E N T

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1. This matter arises out of a building contract dated August 18, 1982, pertaining to the construction of the basement of an hotel in Shatin.

2. The Plaintiff - a company now in liquidation - was the Main Contractor. In 1983 it commenced the present action against the Employer, the patty with whom it entered into the contract, a bilateral one. Now it seeks to join - as a second defendant - the Architects, who were nominated by the Employer under the contract but are not themselves party thereto.

3. Such joinder is the principal thing with the Main Contractor seeks to achieve by its summons dated March 16, 1989, which comes before me as a result of it having been adjourned by the Master to a Judge in Chambers.

4. It is in the tort of negligence that the Main Contractors propose to sue the Architects. The case it seeks to make against them is, shortly stated, as follows: They, as the certifying architects under the contract, owed it a duty of care to give proper, timely and impartial consideration to its claims, and to issue all certificates in strict accordance with the terms of the contract. But they negligently failed to perform that duty. And, as a result, it has been kept out of moneys to which it was and remains entitled.

5. The contract, I should mention, incorporated the conditions of the Stardard Form of Building Contract Private Edition with Quantities 1976 Edition (May 1979 Revision).

6. Mr Scott, who appears on behalf of both the Employer and the Architects, opposes the application for joinder on the ground that the Architects did not owe the Main Contractor the duty which is essential to liability in the tort of negligence. He relies first and foremost on the recent decision of the Court of Appeal in Pacific Associates v Baxter [1989] 2 All E R 159. The ratio of the case, as stated in the headnote (at p 159f-h) is that:-

"Where an engineer was employed or retained by a person, such as a building owner, to oversee the work of a contractor in circumstances where the engineer was under a duty to the employer to exercise care and skill in overseeing the contractor's work and was liable to the employer if the employer was sued by the contractor for economic loss which the contractor had suffered as the result of the engineer's negligence and where there was no direct contractual relationship between the contractor and the engineer or any assumption by the engineer of direct responsibility to the contractor for economic loss caused to the latter, the engineer owed no duty of care directly to the contractor coterminous with the contractor's rights against the employer."

To this statement must be added the caveat that it remains necessary to consider the actual terms and surrounding circumstances of the contract in each case. That is not to deny the wide implications of the decision. This is how Ralph Gibson, L.J. put it (at p 183b-e):-

"The professional firms engaged in construction work as architects or engineers or surveyors, and the companies which carry out such work, are concerned to know whether in the relationships between contractor, employer and engineer under a contractual relationship like that set out in this contract, but ignoring the disclaimer clause, the law imposes a duty of care on the engineer to the contractor not to cause economic loss to the contractor in the process of certifying and of accepting or rejecting claims under the contract. Of course, each case will depend on its own facts and circumstances and on the particular provisions of the relevant contract (see Sutcliffe v Thackrah [1974] 1 All ER 859 at 876, [1974] AC 727 at 752 per Lord Morris) but it is likely that a large number of contracts are placed for construction or engineering works in which the contractual relationship of contractor and employer and the contractual duties of the engineer are substantially similar to those present in this case; and it should be possible to determine whether in general a duty of care does or does not arise in such a case."

7. The case arose out of a contract for certain dredging and reclamation work in Dubai. Under the contract between the employer and the contractor be latter, would only be paid sums on account when they were certified by the engineers retained by the former. The contract also provided that the contractor would be entitled to additional payment if in the course of dredging it encountered hard material not reasonably foreseeable by even an experienced contractor. The repeated claims for such additional payments made by the contractor in the course of the work were consistently rejected by the engineers on the ground that the hard materials encountered were reasonably foreseeable. Eventually, the contractor sued the engineers alleging that they had acted negligently, or were in breach of their duty to act fairly and impartially in administering the contract, by their continual failure to certify its claim for additional payments for hard materials and their final rejection ion of those claim. The issue whether or not the contractor could recover damages from the engineers assuming the facts pleaded by the former was tried as a preliminary issue. The Official Referee decided the issue against the contractor and struck out the claim. His decision was upheld by the Court of Appeal.

8. The basis of the Official Referee's decision is the negative answer he gave to the question he set for himself as to "... whether it accords with good sense for the law to interest in a commercial relationship like this to impose on the agent of one party to the contract a duty of care towards the other party to the contract in respect of administrative acts for the consequences of which its principal would in any case be liable under the contract." (See p. 167f-g). In the present case, Mr Lewis, who appears on behalf of the Main Contractor, accepts that the duty which he submits that the Architects owe to the Main Contractor is coterminous with the Main Contractor's rights against the Employer under the contract.

9. Purchas, L.J., who delivered the first judgment in Pacific Associates v Baxter (supra) expressed his conclusion (at pp. 179j-180a) in these terms:-

"I have come to the conclusion, for the reasons already stated, that no liability can be established in tort under which the engineer owed a direct duty to the contractor in the circumstances disclosed in this case. I emphasise, however, that in coming to this conclusion it does depend on the particular circumstances of the case not the least of which were the contractual provisions in the contract which afforded an avenue enabling the contractor to recover from the employer. I see no justification for superimposing on this contractual structure an additional liability in tort as between the engineer and the contractor "

10. Ralph Gibson, L.J., the second member of the Court of Appeal, also attached importance to the arbitration on clause by which the contractor was able to enforce his rights against the employer - rights conterminous with the duty which he argued that the architects owed him. The learned Lord Justice said (at p.187b-c):-

"The fact that most contractors are in ordinary circumstances sufficiently protected by recourse to the contractual obligations of the employer does not wholly preclude the risk, in a small number of cases, of a contractor suffering severe loss as a result of the sort of conduct of which the engineer is here alleged to have been guilty. Nevertheless, in agreement with Purchas L.J., it seems to me to be neither just nor reasonable in the circumstances of the contractual terms existing between the contractor and the employer (absent the disclaimer clause) to impose a duty of care on the engineer to the contractor in respect of the matters alleged in the statement of claim, naively the alleged failure to certify and final rejection of the plaintiff contractor's claims. So to do would be to impose, in my judgment, a duty which would cut across and be inconsistent with the structure of relationships created by the contracts, into which the parties had entered, including in particular the machinery for settling disputes."

11. Equal importance was attached to the arbitration clause by the third member of the Court of Appeal, Russell, L.J., who said (at p.191b-e):-

"In the event of non-certification or undercertification the contractor was entitled to arbitrate along the well-defined processes to be found in cl 67 of the general conditions (GC67). Although for the reasons given by Purchas L.J. in his judgment the engineer is not able to claim immunity from suit as a result of any arbitral or quasi-arbitral role under the terms of the contract, in my judgment the presence of GC67, freely accepted by the contractor and agreed to by it without stipulation that the engineer should be a party to the contract or to any arbitration pursuant to the clause, does not merely define the ambit of the duty owed; it goes to its very existence.

In my opinion the following question is worthy of being posed. Given the contractual structure between the contractor and the employer, can it be fairly said that it was ever within the contemplation of the contractor that, outside the contract, it could pursue a remedy against the engineer? I do not believe that any representative of the contractor would have thought so for one moment, nor do I believe that from an entirely objective point of view the answer could be anything other than in the negative. The contractor in reality had its rights adequately protected by the terms of its bilateral contract with the employer. If it had thought not, then it was at liberty to insist on a tripartite contract before embarking on the work.

The very existence of GC67 in the form in which it is drafted is, in my judgment, sufficient to dispose of this appeal in favour of the engineer."

12. The arbitration clause in that case empowered the arbitrator to '… open up review and revise any decision opinion direction certificate or valuation of the Engineer...' (see p 163d-e). In the case before me, the arbitration clause clause 35 - confers similar powers on the arbitrator. It empowers him to '... open up, review and revise any certificate, opinion, decision, requirement or notice...'.

13. The material circumstances of the present case a so akin to those in Pacific Associates v Baxter (supra) that it is, in my view, impossible to avoid the application to this case of that one by distinguishing it. Realistically, Mr Lewis recognises this. Boldly, however, he invites me not to follow Pacific Associates v Baxter (supra). He supports that invitation by an able submission in the course of which cited a number of authorities and developed a number of points. Naturally, I have given anxious consideration to everything which he has advanced. He will, I trust, forgive me for not analysing all of it here.

14. Among the most formidible matters relied upon by Mr Lewis are a dictum of Lord Salmon in Arenson v Casson Beckman Rutley & Co [1977] AC 405 at p 438 and Hunter, J. 's judgment in Shui On Construction Co. Ltd v Shui Kay Co. Ltd. (1985) 1 Const L.J. 305.

15. The casein which Lord Salmon made the observation in question was, of course, the one in which the House of Lords held that mutual valuers did not enjoy the immunity from liability for negligence which the law accorded to judges and arbitrators. It had been argued that public policy required that such an immunity be accorded to mutual valuers so as to prevent them from being exposed to the danger of being 'shot at from both sides'. In the course of rejecting that argument, Lord Salmon said (at p 438):-

"In spite of the remarkable skill with which this argument was developed, I cannot accept it. Were it sound, it would be just as relevant in Sutcliffe v Thackrah as in the present case. The architect owed a duty to his client, the building owner, arising out of the contract between them to use reasonable care in issuing his certificates. He also, however, owed a similar duty of care to the contractor arising out of their proximity: see the Hedley Byrne case. In Sutcliffe v Thackrah the architect negligently certified that more money was due than was in fact due; and he was successfully sued for the damage which this had caused his client. He might, however, have negligently certified less money was payable than was in fact due and thereby starved the contractor of money. In a trade in which cash flow is especially important, this might have caused the contractor serious damage for which the architect could have been successfully sued. He was thus exposed to the dual risk of being sued in negligence but this House unanimously held that he enjoyed no immunity from suit."

16. It goes without saying that nothing said by Lord Salmon can be ignored. But that dictum of his was drawn to the attention of the Court of Appeal in Pacific Associates v Baxter (supra); and the Court of Appeal nevertheless decided as it did. Purchas L.J., after citing what Lord Salmon said, continued (at p.175b-g):-

"However, in Sutcliffe v Thackrah [1974] 1 All ER 859 at 882; [1974]AC 727 at 759 Lord Salmon concentrated on the position of the architect qua the employer :

'No one denies that the architect owes a duty to his client to use proper care and skill in supervising the work and in protecting his client's interests. That, indeed, is what is paid to do. Nevertheless, it is suggested that because, in issuing the certificates, he must act fairly and impartially as between his client and the contractor, he is immune for being sued by his client if, owing to his negligent supervision (or as in the present case) other negligent conduct, he issues a certificate for far more than the proper amount, and thereby causes his client a serious loss.'

During the-remainder-of his speech Lord Salmon dealt in considerable detail with the position of valuers and others in the context of arbitral immunity. He referred to the 'trilogy of cases' by which the majority of the Court of Appeal in Chambers v Goldthorpe [1901] 1 KB 624 [1900-3] All ER Rep 969 were so influenced but did not return specifically to consider the question of a duty arising between the architect and the contractor in circumstances akin to those prevailing in Sutcliffe v Thackrah. In referring to Stevenson v Watson (1879) 4 CPD 148, the third case of the trilogy, however, Lord Salmon said ([1974]1 All ER 859 at 886, [1974]AC 727 at 763-764):

'Under the very special terms of the contract in Stevenson v Watson "all questions or matters in dispute which [might] arise during the progress of the works or in settlement of the account" had to be left to the architect "whose decisions [were to be] final and binding upon all parties". It seems to me that this architect may well have been put in the position of an arbitrator under the exceptional terms of the contract. Moreover, since there was no contractual relationship between the architect and the builder, it is difficult to see how any action based on a duty of care could be got up on its feet against him; in those days, the law of negligence was in a very early stage of its development'.

With great deference to Lord Salmon the reference to his view of the position which would have arisen in Sutcliffe v Thackrah, had there been undercertification rather than overcertification, may not be of such compelling authority as if it had been a central matter for consideration when delivering his speech in the earlier case."

17. Not even a judgment of the Court of Appeal can remove the diffidence I feel in questioning anything said albeit obiter, by Lord Salmon. But I am bound to say this: A refusal to accord an architect immunity from suit at the instance of his client - with whom he is by definition in contractual relations - is one thing. It is, however, a far stronger thing to hold that the architect owes a contractor - with whom he has not entered into any contract - a duty in tort coterminous with his contractual duty to his client. I can readily see why, in fairness to the client, the courts should refuse the architect immunity from his contractual liability, whether that would or would not leave the architect exposed to being 'shot at from both sides'. That is not to say that a certifying architect or engineer is invariably so exposed. Depending on the circumstances, he may or may not be. If he enter into a tripartite contract to which the contractor is party, then - subject to the terms of the contract and its surrounding circumstances - he may well be. What, if any duty, is owed by an architect or engineer to a contractor with whom he is in contractual relations would depend on the construction, in its factual matrix, of the contract. Where the contractor is not in contractual relations with the architect or engineer the approach to the question is necessarily different.

18. In Shui On Construction Co Ltd v Shui Kay Co Ltd (supra) Hunter, J. - who took the view that certifying architects owed duty of care in tort to contractors- said ((at p 306) :-

"The claim is framed in neglience. Therefore it seems to me that I have to start, in the same way as every court has started, to my knowledge, since 1978, with the two questions posed by Lord wilberforce in Anns v. Merton London Borough Council [1978] A.C. 728 at 751. He says this :-

'First one has to ask whether as between the alleged wrongdoer and the person who has suffered damage, there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former carelessness on his part may be likely to cause damage to the latter in which ease a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative or to reduce or limit the scope of the duty."

19. Since then, however, Lord wilberforce's two-stage test - against which criticism had been mounting steadily - has been considered by the Privy Council in an appeal from Hong Kong, Yuen Kun Yew v Attorney General [1988] AC 175. Lord Keith of kinkel, delivering the advice of the Board, said (at p 194E) that :-

"In view of the direction in which the law has since been developing, their Lordships consider that for the future it should be recongnised that the two-stage test in Anns v Merton London Borough Council [1978] AC 728, 751-752, is not to be regarded as in all circumstances a suitable guide to the existence of a duty of care."

In one sense at least, this development of the law is a vindiction of Hunter, J. Although he considered the guidance given by Lord Wilberforce's two questions to be the best available at the time, he did (at p.307) express his doubts as to the ultimate adequacy of such guidance.

20. In my judgment, there is much to be said for the approach favoured by Brennan, J. in the High Court of Australia in Sutherland Shire Council v Heyman [1985] 59 ALJR 564. He said (at p 588):-

"It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable 'considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed.'"

This is not to deny for one moment the accuracy of the statement by which Lord Atkin introduced the 'neighbour' principle in Donoghue v Stevenson [1932] A.C. 562, namely, that there '... must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances'. (p 580). There most certainly is such a general conception. That is why the Common Law develops by analogy. As can be seen, Brennan, J. uses the term 'analogy'. He also speaks, as can be seen, of 'categories'. Properly approached, proceeding by way of analogy and resorting to categories does not stultify the development of the law. Rather it ensures that such development will be orderly. The very concept that the categories of negligence are never closed recognises the existence of categories.

21. There is another material respect in which the law has been clarified since Hunter, J's judgment in Shui on Construction Co Ltd. v Shui Kay Co Ltd (supra) - a judgment to which tribute was paid in Pacific Associates v Baxter (supra) although the Court of Appeal ultimately reached a different conclusion as to the law. Hunter, J. said (at p.307):-

"Now there have been a number of cases where the courts have held that legal proximity arises out of a relationship which is basically contractual or pre-contractual. In the immediate wake of the decision of Hedley-Byrne v Heller [1964] A.C. 464 I think the courts were reluctant to allow the tortious principles of that case to intrude into the contractual scene. That reluctance was dissipated substantially by the decision of the Court of Appeal in Esso Petroleum Ltd. v Mardon [1976] QB 801. There are a number of other examples of legal proximity arising out of contract. We considered a lot of them in a fairly recent banking decision in Hong Kong Tai Hing Cotton Mill v Liu Chong Hing Bank [1984] H.K.L.R. 95. The banking contract may create by that contract alone a proximate relationship and a duty on the bank."

The banking case referred to went on further appeal to the Privy Council. That appeal succeeded. Lord Scarman, delivering the advice of the Privy Council in that case (Tai Hing Cotton Mill Ltd v Lit Chong Hing Bank [1986]AC 80) said (at p.107) that:-

"Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship."

In arriving at its decision in Pacific Associates v Baxter (supra) the Court of Appeal had the benefit of considering Hunter, J.'s judgment, and it had the added benefit of being able to consider it in light of the way in which the relevant law has developed since then by way of a number of decisions, including the two decisions of the Privy Council on appeal form Hong Kong to which I have referred.

22. After a review of all the authorities, the Court of Appeal adopted this approach to the determination of whether or not a duty of care existed: The duty exists if - but only if – three requirements are fulfilled. Foreseeability and proximity are the first two. The third is that it would be just and reasonable to impose the duty.

23. What I have to decide is whether or not the Main Contractor should be allowed to amend to plead a claim which depends on the existence of a duty of dare owed to it by the Architects. That requires me to take a view on the question of the duty's existence. Both counsel have invited me to treat that question as if were before me as a preliminary issue. Thus treating it, I would have no hesitation in holding that the Architects did not owe the Main Contractor any duty such as the one it asserts, and refusing joinder accordingly. Nor - I should add - would I arrive at a different result approaching the matter oh the basis that joinder should be permitted unless the argument that the duty exists is plainly and obviously one which cannot succeed. Had Hunter, J. and the Court of Appeal arrived at opposite conclusions at the same time and therefore at the same stage of the law's development, it might have been difficult for anyone to suggest that the view taken by Hunter, J had no chance of prevailing. However, as I have noted, that is not the situation. The principle which I extract from the Court of Appeal's decision in Pacific Associates v Baxter (supra) is one which I would state in these terms: Where, first, there is adequate machinery under the contract between the employer and a contractor to enforce the contractor's rights thereunder and, secondly, there is no good reason at tender stage to suppose that such rights and machinery would not together provide the contractor with an adequate remedy, then, in general, a certifying architect or engineer does not owe to the contractor a duty in tort coterminous with the obligation in contract owed to the contractor by the employer. The present case comes, in my judgment, fairly and squarely within that principle, and is concluded thereby.

24. On this question of whether or not a duty exists, I refuse the Main Contractor's application to join the Architects.

25. It is unnecessary, therefore, to decide whether or not the Main Contractor's claim against the Architects would be time - barred (if it existed).

26. As I have heard full argument on limitation, however, I will deal with it. In my judgment, it is at least arguable that the Main Contractor could avoid a defence of limitation by relying on the last certificate issued by the Architects, which is one dated August 24, 1983, and seems to supersede all the earlier certificates, each of which were issued more than 6 years before today.

27. Having disposed of the question of the Architects being joined, I turn to the Employer's objections to the proposed amendments. The Employer has no objection to the substance of the proposed amendments shown in that part of the draft Amended. Statement of Claim which ends at paragraph 16. Thereafter, the Employer contends, the proposed amendments advance a new cause of action after the expiration of the period of limitation for the same. Without accepting this, the Main Contractor says that the matters set out in paragraph 17 onwards of the draft Amended Statement of Claim are already in the Reply. It does not seem to concern the Main Contractor whether or not those matters also go into the Statement of Claim as against the Employer.

28. In any event, it is accepted by the Main Contractor that if I am against it on joinder, the summons before me must be dismissed. It is of course at liberty to prepare another draft Amended Statement of Claim including matters contained in the draft Amended Statement of Claim accompanying the present Summons but not adjudicated upon by this judgment. Both counsel felt that there was a reasonable chance that such fresh amendments could be made by consent. If not the matter can be brought before the Court for determination.

29. Although the matter was heard before me in chambers, I am - at the request of both. counsel - delivering judgment in open court a question of considerable importance to the building industry is involved.

30. Before parting with the case, I would like to express my indebtedness to both counsel for their assistance.

31. In the result, the Main Contractor's summons is dismissed. I will now hear counsel on costs and any ancillary matters which may arise.

[Argument as to costs]

Court: Costs of the summons and the hearing thereof, including those of today, to the Defendant and the proposed Defendant.

Representation:

Mr K. Lewis for Official Receiver

Mr J. Scott (McKenna & Co.) for Defendant & Proposed Defendant