Aoki Construction Co Ltd v. Attorney General

Case No.HCMP 994/1980

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCMP000994/1980

IN THE HIGH COURT

	Miscellaneous Proceedings
	1980 No. 994

	IN THE MATTER of the Arbitration Ordinance, Cap. 341
	and
	IN THE MATTER of an Arbitration between Aoki Construction Company Limited and The Attorney General
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BETWEEN
	AOKI CONSTRUCTION COMPANY LIMITED	Plaintiff
	and
	THE ATTORNEY GENERAL	Defendant

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Coram: Liu, J. in Chambers.

Date of Judgment: 2nd December, 1980

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JUDGMENT

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1. By a PWD contract No. 413 of 1977 dated 20th December, 1977, the plaintiff company undertook to construct a railway tunnel through Beacon Hill with a view to providing double tracking for the Kowloon-Canton Railway. Construction was to be completed in about 2 ½; years, and the whole project would involve over $78,000,000. The PWD contract incorporated what is known as the standard Conditions of Contract for Civil Engineering Construction (1971 edition) which is taken from the I.C.E. General Conditions of Contract. The relevant clauses of the General Conditions in the PWD contract are set out below:

"101. (1) The Contractor shall submit to the Engineer after the end of each month a statement showing the estimated contract value of the permanent work executed up to the end of the month, if such value shall justify the issue of an interim certificate, and the Contractor will be paid, monthly on the certificate of the Engineer -

(a)

the amount due to him on account of the estimated contract value of the permanent work executed up to the end of the previous month.

	104. The Engineer may by any certificate make any correction or modification in any previous certificate which shall have been issued by him and shall have power to withhold any certificate if the Works or any part thereof are not being carried out to his satisfaction.
	118. (1) In the case of any question arising as to any of the following matters (hereafter called "the excepted matters") -

	(a)	as to the true intent and meaning of the Drawings, Specification and Bill of Quantities;
	(b)	as to the quality of materials and workmanship;
	(c)	as to the method of means (including any questions as to what Constructional Plant should be provided and used by the Contractor) by which the Works or any part thereof should be executed;
	(d)	as to the measurement of the Works,

	the Engineer shall state his decision thereon in writing and the Engineer's said decision shall be final and binding upon the parties; provided that the Engineer shall have power to cancel any such decision (whether made by him or his predecessor as Engineer) and to substitute any other decision therefor.
	120. (1) If any dispute or difference shall arise (save only as to excepted matters as defined in clause 118) between Government or the Engineer and the Contractor in connection with or arising out of the Contract or the carrying out of the Works, whether during the progress of the Works or after their completion and whether before or after the termination, abandonment or breach of the Contract, it shall be referred to and settled by the Engineer who shall state his decision in writing and shall give notice of the same to Government and to the Contractor.
	(2) Such decision in respect of every matter so referred shall be final and binding upon Government and upon the Contractor until the end of the Period of Maintenance and shall forthwith be given effect to by the Contractor who shall proceed with the Works with all due diligence whether or not notice of dissatisfaction is given by him or by Government as hereinafter provided.
	(3) If the Engineer shall fail to give such decision for a period of ninety days after being requested to do so or if either Government or the Contractor is dissatisfied with any such decision of the Engineer then and in any such case either Government or the Contractor may within ninety days after receiving notice of such decision or within ninety days after the expiration of the first named period of ninety days, as the case may be, require that the matter shall be referred to the decision of a single arbitrator in accordance with and subject to the provisions of the Arbitration Ordinance or any statutory modification thereof for the time being in force and any such reference shall be deemed to be a submission to arbitration within the meaning of such Ordinance but if the Engineer has given a decision and has given notice thereof as aforesaid within a period of ninety days as aforesaid and no notice of dissatisfaction has been given, either by Government or by the Contractor, within a period of ninety days from receipt of such notice thereof the decision of the Engineer shall remain final and binding upon Government and the Contractor.
	(4) Such arbitrator shall have full power to open up review and revise any decision, opinion, direction, certificate or valuation of the Engineer and neither party shall be limited in the proceedings before such arbitrator to the evidence or arguments put before the Engineer for the purpose of obtaining his decision above referred to.
	(5) The award of the arbitrator shall be final and binding on the parties.
	(6) Such reference except as to the withholding by the Engineer of any certificate or the withholding of any portion of the Retention Money under clauses 101 and 103 to which the Contractor claims to be entitled or as to the exercise of the power of the Engineer to give a certificate under clause 109 shall not be opened until after the completion or alleged completion of the Works unless with the written consent of Government and the Contractor:
	Provided always that -

	(a)	the giving of a certificate of completion under clause 66 shall not be a condition precedent to the opening of any such reference; and
	(b)	no decision given by the Engineer in accordance with the foregoing provisions shall disqualify him from being called as a witness and giving evidence before the arbitrator on any matter whatsoever relevant to the dispute or difference so referred to the arbitrator as aforesaid."

2. After the commencement of work on the 3rd January, 1978, six water mains were located near the North Portal to the tunnel some three metres below ground level. Subsidence was detected, and the safety of these water mains responsible for the supply of all the drinking water for Kowloon was threatened.

3. In November, 1978, work stopped so as to avoid causing further deflection of these water mains. Differences arose between the Engineer and the plaintiff contractor. Remedial and protective measures were designed. Between the 29th November, 1978 to the 17th March, 1979, six written instructions were issued by the Engineer to the plaintiff contractor who was thereby ordered to carry out the remedial and protective works. The works so ordered by the Engineer took several months to complete and allegedly incurred some $20,000,000.

4. By a letter to the Engineer dated the 30th March, 1979, pursuant to Clause 120(1) of the General Conditions the plaintiff contractor referred the liability for and quantum of these remedial and protective works to the Engineer for his decision in the following terms

"Is the Engineer entitled to withhold certificates of payment for all or any part of the works which you have instructed us to carry out in your letters dated 29th November 1978 (Ref. 62 in R728 VII), 19th December 1978 (Ref. 94 in R738 VII), 8th February 1979 (Ref. 34 in R738 VIII), your memorandum dated 9th February 1979 (Ref. (15) North in R73804), 16th March (Ref. 83 in R738 VIII) and 17th March 1979 (Ref. 85 in R738 VIII)?"

5. On the 24th March, 1980, the Engineer gave his decision, whereby most of the plaintiff contractor's claims to payment certificates for the value of the remedial and protective works ordered were rejected. The plaintiff contractor had persisted in including the value of these works in the monthly payment applications, but the Engineer had continued to exclude these items from the payment certificates with equal determination.

6. Being dissatisfied with the Engineer's decision, by a letter dated the 6th June, 1980 the plaintiff contractor required the Director of Public Works to refer the dispute to arbitration. Government refused to give its consent to arbitrate before the completion of the entire PWD contract.

7. Works under the PWD contract are not expected to be wholly completed before April, 1981. It is common ground that there is a substantial and genuine dispute between the parties within the ambit of Clause 120(1) and that ultimately the plaintiff contractor may refer the matter decided by the Engineer to arbitration. The only issue in these proceedings is whether the plaintiff contractor is entitled to have the matter arbitrated as of now without the written consent of Government prior to the completion of the PWD contract; in another words, whether the dispute falls within one of the exceptions in Clause 120(6) of the General Conditions.

8. By these proceedings, the plaintiff contractor sought a judicial interpretation of Clause 120(6), two consequential declarations and the appointment of an arbitrator pursuant to section 12 of the Arbitration Ordinance.

9. There are other proceedings which, by consent, will abide by and be disposed of in accordance with the determination on the plaintiff's originating summons in these proceedings.

10. Mr. Nunn on behalf of the defendant submitted that on the proper construction of the PWD contract, the plaintiff contractor was not entitled to payment and had shown no right to a certificate; hence there had been no withholding of any certificate as there was no certificate due to the contractor.

11. Mr. Tang for the plaintiff contractor relied heavily on the case of A.E. Farr Limited v. The Ministry of Transport⁽¹⁾. Counsel directed my attention to the very fact that identical arguments advanced before Buckley, J. in the Farr case were rejected. The Farr case is, in my judgment, directly in point. It was an action for the construction of a similar clause in a building contract in I.C.E. form for the excavation of a vehicular underpass. Disagreement arose in which the contractors claimed to be entitled to payment for excavation not only of the space to be occupied by the retaining walls of a tunnel but also of the necessary working space. It was contended by the employer that the contractors could not refer the dispute to arbitration under a similar clause, Clause 66, until the works had been completed. Clause 66 in that building contract is identical in terms with our Clause 120(6) and reads as follows:

"Such reference except as to the withholding by the engineer of any certificate ......... 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."

12. Buckley, J. was unconcerned with the merits. Having emphasized that interim certificates were subject to final adjustments in the usual provisions of the I.C.E. General Conditions of Contract, the learned judge observed that "a bona fide difference of opinion between the engineer and the contractor about measurements" could hardly be a matter for and was in fact not referable to arbitration. Such dictum does not find favour with the learned editor of Hudson's Building and Engineering Contracts 10th Edition⁽²⁾. That observation of Buckley, J. was obiter and can be of no assistance to us in these proceedings. However, the criticisms so unhesitantly made in Hudson's may not be wholly justified, particularly when an employer's decision on measurements must be accepted as final under a clause in the I.C.E. form equivalent to Clause 118 of our PWD contract in this case. I have been assured by counsel of the existence of such an equivalent.

13. The oblique reference to "withholding of a certificate" in cases involving dissimilar clauses in building contracts offers little real guidance. In F.R. Absalom Limited v. The Great Western (London) Garden Village Society⁽³⁾, the question of withholding a certificate was never directly in issue. It seemed to have been only too readily assumed that if ever the contractor was right on his figures (i.e. the employers were wrong on theirs), a certificate had been withheld. R.B. Burden Limited v. Swansea Corporation⁽⁴⁾ is a case in which the focal point was whether a local authority as employer had interfered with or obstructed the issue of any interim certificates.

14. At p.966 in Farr case, Buckley, J. addressed himself to the issues before the court from more standpoints than one:

"I have already indicated that I should be disinclined to reach the conclusion that, if the engineer, acting in good faith and on proper principles, were to consider that the contractor was not entitled to a certificate to which the latter claimed to be entitled, or to a certificate for the whole amount so claimed, the engineer in acting on that view could be said to be withholding a certificate. In such a case when refusing a certificate or giving a certificate only for a lesser sum, he would, in my view, be discharging his proper function under the contract and could not (at any rate when certifying for a lesser sum) be properly described as withholding anything. But suppose that the engineer, being satisfied that the contractor is entitled to a certificate for, say, a sum of £20,000 claimed by the contractor, for some inadmissible reason (as, for instance, that he knows the employer to be in financial difficulties) refuses a certificate altogether, or refuses to certify for more than £15,000: he would, in the one case, manifestly be withholding a certificate, and in the other he would, in my judgment, be withholding his certificate in respect of £5,000 worth of certifiable work. Suppose again that the engineer, acting in good faith but in accordance with mistaken principles, because he has misdirected himself about the law, refuses a certificate altogether or refuses to certify more than £15,000 of a proper claim to £20,000: he would again, in my judgment, in the one case be withholding a certificate, and in the other be withholding a certificate in respect of £5,000 worth of certifiable work."

15. The learned judge was stating the obvious. Granted that if good faith and the principles applied are not impugned, no employer can be accused of withholding a certificate where clearly none is due. Incidents of this kind must be rare, and evidently Buckley, J. must have been highlighting the simplest of the strict measurement cases. But if, for ulterior motive, an employer either refuses a certificate altogether or refuses to certify the proper amount, he must then be withholding a certificate. If an employer, acting on wrong legal principles, refuses a certificate altogether, or refuses to certify the proper amount, he must again be withholding a certificate.

16. At p.967, the learned judge continued:

In my judgment, any dispute or difference which relates to something in consequence of which a certificate has been refused, which on one view of the question ought to have been given, is a dispute or difference as to the withholding of that certificate.

Whether the certificate has or has not been rightly withheld is a matter to be arbitrated. It therefore cannot be a question for me in the present case whether the plaintiff company's view as to their right to payment on interim certificates for excavation of working space is correct or not. They contended that under the contract they should be paid for this work on monthly certificates over and above what they are entitled to be paid on a cubic capacity basis for excavation of the space required for the actual structure. The engineer has refused to certify for this work. This is the subject-matter of the dispute or difference. Rightly or wrongly he has withheld a certificate so far as the excavation of working space is concerned. This has given rise to what is, in my judgment, a dispute or difference as to the withholding by the engineer of a certificate. The fact that in the event the engineer may be held rightly to have withheld the certificate does not make it any less such a dispute. Only if it were perfectly clear that the contractor's view could not be upheld, could there be said to be no genuine dispute about the withholding of the certificate."

17. It is conceded that there is a genuine and substantial dispute between the parties as to the remedial and protective works. It is alleged by the plaintiff contractor that the Engineer had misdirected himself about the law as to the true nature of the contractor's claim. The refusal of the Engineer to certify the balance must therefore, in my view, be a withholding of a certificate within the meaning of Clause 120(6).

18. Mr. Nunn submitted that the judgment in the Farr case was plagued with contradictions and should be perused with sustained caution. It was charged that no clear guiding principle evolved from a mass of inconsistencies and that the decision should not be accorded its usual respect. On a fair reading of the judgment, I am unable to draw myself close to Mr. Nunn's misgivings. Counsel further contended that on a proper construction of Clause 120(6), no "withholding" could arise except in a case of an established right to payment. If a claim for payment and thus a certificate had been conclusively substantiated, the refusal to issue a certificate would have been blatently wrong. On Mr. Nunn's suggested interpretation, Clause 120(6) would become meaningless as hardly any arbitration need be initiated for an entitlement already proven.

19. As Buckley, J. categorically stated at p.967:

"Whether the certificate has or has not been rightly withheld is a matter to be arbitrated."

20. It is quite unnecessary for me to consider if the clause "to which the Contractor claimed to be entitled" also qualifies the first exception in Clause 120(6).

21. In my judgment, the exception of "withholding by the Engineer of a certificate" in Clause 120(6) of the General Conditions in the PWD contract must include the situation in which a genuine dispute has arisen as to whether payment and thus a certificate is due for works executed.

22. Subject to the deletion of the words "to which the Contractor claims to be entitled" which are unnecessary for my decision, I would and do grant the declarations sought. I would appoint Mr. Severn as arbitrator if he consents to act. Costs must follow the event in favour of the plaintiff contractor. The summons of the defendant in High Court Action No. 4250 of 1980 be accordingly disposed of in terms supplemental to this decision.

	(B. Liu)
	Judge of the High Court

Representation:

(1) [1976] 1. W. L. R. 956

(2) See p. 495

(3) [1933] A. C. 592

(4) [1957] 1 W. L. R. 1167