Chinney Construction Co Ltd v. Po Kwong Marble Factory Ltd
Read the full judgment text of HCCT 76/2005 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 16 February 2006 before Hon Reyes J.
Construction Law — Arbitration — Interpretation of Sub-Contract and Main Contract clauses concerning certificates — Whether an arbitrator has jurisdiction to review Architect's Final Certificate (CF 31) — Power to open up and review certificates — Final Certificate under cl. 30(6) Main Contract — exceptions under cl. 30(7) for fraud, latent defects or computational error — Effect of arbitrator treating CF 31 as conclusive and final decision — Estoppel by prior acceptance of jurisdiction — Leave to appeal granted due to serious doubt on arbitrator’s construction and approach. Chinney as Main Contractor subcontracted marble and granite work to Po Kwong, disputes arose over payments certified under interim and final certificates. Arbitrator held no jurisdiction to review CF 31 and awarded $2 million to Po Kwong. Court found serious doubt whether CF 31 was properly considered final and binding, notably the failure to consider exceptions under cl. 30(7) and estoppel, and granted leave to appeal. Costs and consequential orders reserved.
Legal issues: Whether CF 31 a “Final Certificate” · Whether CF 31 a final and binding decision · Whether Arbitrator misconstrued proviso to cl. 22 · Whether Po Kwong estopped from denying Arbitrator’s jurisdiction
Outcome: Leave to appeal against the Award granted to Chinney.
Cites 1 case
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HCCT 76/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 76 OF 2005 ____________
____________ BETWEEN
____________ Before: Hon Reyes J in Court Date of Hearing: 16 February 2006 Date of Judgment: 16 February 2006 ______________ J U D G M E N T ______________ I. Introduction 1.Chinney was the Main Contractor for a Tseung Kwan O project. Great Land (HK) Ltd. as Employer nominated Po Kwong to supply and install marble and granite for the project. Chinney entered into a Sub-Contract with Po Kwong for those marble and granite works. 2.Disputes arose between Chinney and Po Kwong over the final account for the Sub-Contract works. The disputes were referred to Mr. Leung Hing Fung as arbitrator under cl. 22 of the Sub-Contract. 3.Po Kwong claimed that Chinney had not paid sums due under Interim Certificates Nos. 29 (Rev) and 30 (respectively, IPC 29 and 30) issued by the Quantity Surveyor. Po Kwong said that Chinney had also failed to pay sums due under Certificate No. 31 (Final) (CF 31) issued by the Architect. 4.Chinney claimed that the certificates did not represent the value of Po Kwong’s actual work done. Chinney alleged (among other things) that the certificates contained computational errors; failed to take account of latent defects in workmanship; or had been procured by “fraud, dishonesty or fraudulent concealment”. 5.More specifically, Chinney said that certain work had been defective or left “unexecuted”, while other work had been omitted altogether. Chinney calls this line of defence a plea of “abatement”. 6.Chinney also raised set-offs. In particular, Chinney counterclaimed for expenses incurred in rectifying work which Po Kwong allegedly had failed to do or had not done properly. 7.Chinney said that in all the circumstances it had overpaid Po Kwong by some $4 million. 8.The Arbitrator published his “Final Award – Save as to Settlement of Costs” on 3 November 2005. 9.In the Award, the Arbitrator concluded that he did not have jurisdiction to review CF 31. The Arbitrator dismissed Chinney’s claim of overpayment. Instead, he awarded some $2 million to Po Kwong. 10.Chinney now seeks leave to appeal against the Award. 11.Chinney contends that the Arbitrator went wrong in holding that he lacked power to review CF 31. Chinney says that, because of the Arbitrator’s conclusion on jurisdiction, he wrongly dismissed Chinney’s allegations as to the erroneous nature of the 3 certificates. 12.Po Kwong argues that the grounds for which Chinney seeks leave to appeal are irrelevant to the Architect’s decision to award $2 million to Po Kwong. Po Kwong says that, in his Award, the Arbitrator effectively considered all of Chinney’s complaints substantively and dismissed them for lack of evidence. 13.There would be little point (Po Kwong asserts) in granting leave to appeal. If Chinney succeeded on appeal, the matter would merely be remitted to the Arbitrator for further deliberation. At that point, the Arbitrator could legitimately point out (Po Kwong argues) that he had already found in the Award that Chinney’s allegations were groundless. II. Discussion A. What must be shown for the grant of leave 14.The Main Contract adopted the General Conditions to be found in the “Agreement and Schedule of Conditions of Building Contract for Use in Hong Kong, Standard Form of Building Contract (Private Edition – Without Quantities), First RICS (HK Branch) Edition 1986”. 15.The General Conditions of the Sub-Contract were the “Sub-Contract Conditions for use where the Sub-Contractor under the Standard Form of Building Contract for Hong Kong, First RICS (HK Branch) Edition 1986”. 16.The Main Contract and Sub-Contract are standard form contracts widely used for construction work in Hong Kong. 17.The present application concerns the interpretation of General Condition cls. 30 and 35 of the Main Contract and General Condition cl. 22 of the Sub-Contract. Chinney in essence says that the Arbitrator went wrong because he misconstrued the combined effect of those provisions. Chinney suggests that, properly understood, those clauses conferred a power to review Architect’s Final Certificates 18.In light of the above, I accept that the present application is not a one-off matter. The question whether (and in what circumstances) an arbitrator has power to review certificates frequently arises in construction disputes. A substantive decision by this Court in this matter is therefore likely to be of some significance within the construction industry. 19.Following Swire Properties v. Secretary for Justice [2003] 6 HKCFAR 236, this means that to qualify for leave to appeal, Chinney need only establish that there is serious doubt as to the correctness of the Arbitrator’s decision. B. Whether Arbitrator’s decision in serious doubt 20.Mr. Michael Thomas SC (appearing for Chinney) submits that the Arbitrator erred in the following respects:-
B.1 Ground 1: Whether CF 31 a “Final Certificate” 21.Sub-Contract cl. 22 is in the widest terms. It empowers the Arbitrator to determine any dispute or difference “in regard to any matter or thing of whatsoever nature arising out of this Sub-Contract”. 22.But cl. 22 is subject to two provisos, the second of which states:-
23.Main Contract cls. 30(6)-(8) concern the issue of a Final Certificate by the Architect. 24.Clause 30(6) stipulates that the Architect shall issue the Final Certificate:-
25.Clause 30(6) goes on to provide that the Final Certificate “shall” state the sum of all amounts previously certified, the contract sum adjusted as necessary, and the difference between the latter two amounts expressed as a balance due from Employer to Main Contractor or vice versa as the case may be. 26.Clause 30(7) provides that, in the absence of a reference to arbitration before issue of the Final Certificate, the latter document:-
27.However, cl. 30(7) is subject to an exception where any sum mentioned in the said certificate is erroneous by reason of:-
28.Clause 30(8) then states that:-
29.Mr. Thomas submits that CF 31 could not have been the Architect’s Final Certificate referred to in cl. 30(6). This is because CF 31 appears to have been issued outside of the time frame set by the clause. Further, CF 31 does not comply with all of the formal requirements stipulated in the clause. 30.Mr. Thomas points out that under Sub-Contract cl. 11(g) it is open to the Architect in some circumstances to issue a provisional Final Certificate. Mr. Thomas suggests that CF 31 may have been just such a certificate. 31.Assume that Mr. Thomas is correct in suggesting that CF 31 does not strictly comply with cl. 30(6). Even then, it is still possible that CF 31 was intended by the Architect to be the Final Certificate and CF 31 was so regarded by all parties concerned. 32.The Architect may have, by carelessness, inadvertence or other reason, failed to comply with the formalities imposed by cl. 30(6). But no one seems to have taken the point prior to the present application for leave, that CF 31 was not a Final Certificate within the terms of cl. 30(6). 33.On the material before me, it appears to have been taken for granted by the parties to the arbitration that CF 31 was a Final Certificate. Thus, for instance, paragraph 13 of Chinney’s Amended Defence and Counterclaim seems to assume that CF 31 was a Final Certificate. The paragraph pleads that the certificate was nonetheless erroneous and not binding due to one or more of the exceptions set out in clause 30(7). 34.The status of CF 31 as a Final Certificate does not seem to have been an issue before the Arbitrator. Had it been, presumably factual evidence could have been called to see whether all concerned (including Great Land, Chinney and the Architect) regarded it as such, notwithstanding a failure to comply with the niceties of clause 30(6). Evidence might have been canvassed, for example, to determine whether by CF 31 the Architect was simply meaning to issue a provisional Final Certificate within the terms of clause 11(g). 35.I am unable to say that the Arbitrator may have gone seriously wrong on a matter that does not appear to have been squarely raised before him. Consequently, I reject this first ground as a basis for leave. B.2 Ground 2: Whether CF 31 a final and binding decision 36.The Arbitrator held that CF 31 was a “decision” by the Architect under the Main Contract which was “final and binding” on the Main Contractor. Applying the second proviso to Sub-Contract cl. 22, the Arbitrator concluded that it was not open to him to review CF 31. The Arbitrator stressed that Chinney, upon whom CF 31 was final and binding as a decision, had not challenged the Architect’s certificate in arbitration proceedings with Great Land under the Main Contract. 37.Mr. Thomas queries the characterisation of CF 31 as a “decision”. Even if it were a Final Certificate, Mr. Thomas submits that CF 31 would be nothing more than “certification”. There is nothing in CF 31 that could sensibly amount (Mr. Thomas says) to a “decision”. 38.By way of example, Mr. Thomas suggests that a statement in a Final Certificate of amounts previously certified could not be a decision, as opposed to a mere recital of fact. Mr. Thomas accepts that determinations of the amounts stated under earlier interim certificates may be decisions of the Architect. But those would be determinations made at the time of the certificates based on the Architect’s then estimates of the value of work apparently executed. The certification of the final balance due would not amount to a decision either. That balance simply follows as a matter of arithmetic from the amounts set out in the certificate. 39.I am not persuaded by this first limb of Mr. Thomas’ argument. 40.An arbitrator might reasonably regard the matters certified within a Final Certificate as confirmation by the Architect of views previously signified. 41.In some cases, a Final Certificate may contain revisions. The Architect may (for instance) have spotted errors in previous interim certificates and corrected them by his Final Certificate. The Final Certificate would then confirm the revised figures. 42.Given that a Final Certificate may reasonably be regarded as a confirmation by the Architect, it could in normal English usage be described as a “decision” by the Architect. I am thus unable to say that in treating CF 31 as a “decision” the Arbitrator went seriously wrong. 43.But there is a second limb to Mr. Thomas’ argument. 44.Assume that CF 31 constitutes a “decision” by the Architect. It does not follow that CF 31 is “final and binding” for all purposes. Plainly, it cannot be so. Main Contract cl. 30(7) sets out 3 exceptional situations (fraud, latent defect (including omission) and accidental error) when a Final Certificate will not be regarded as conclusive. 45.The Arbitrator however reasoned otherwise. He thought that, because CF 31 was a decision which had not been challenged under the Main Contract, it was conclusive evidence of the matters stated therein. There was no possibility (the Arbitrator held) of reviewing CF 31. In consequence of this view, the Arbitrator rejected Chinney’s case that the amounts certified in CF 31 were erroneous by reason of fraud, latent defect or computational error. Mr. Thomas submits that in so doing the Arbitrator fell into error. 46.I believe that Mr. Thomas may be right on this point. For instance, the Arbitrator does not appear to me to have dealt with Chinney’s case on latent defect, fraud or computational error on the merits. The Award ought to have done so for the reason just explained, even if the Arbitrator was correct that CF 31 constituted a decision. 47.I think then that on this second limb of Mr. Thomas’ argument there are grounds for serious doubt as to the correctness of the Arbitrator’s decision. 48.I should stress that my conclusion should in no way be taken to mean that I believe that there is substance in Chinney’s allegations of latent defect, fraud or computational error. There may or may not be. At this stage, I can only say that, insofar as the Arbitrator wished to treat CF 31 as conclusive against Chinney, he would have first had to examine the extent (if at all) to which Chinney had valid complaints on latent defect, fraud or other error. The Arbitrator apparently did not do so. Such failure casts serious doubt on the validity of his Award. B.3 Ground 3: Whether Arbitrator misconstrued proviso to cl. 22 49.I do not think that this ground adds much to what has been discussed in relation to Ground 2. If he wrongly treated CF 31 as conclusive evidence for all purposes, the Arbitrator would inevitably have misconstrued the extent to which CF 31 was “final and binding” within the terms of the second proviso to cl. 22. B.4 Ground 4: Whether Po Kwong estopped 50.It is apparent, from correspondence and statements passing between the parties’ solicitors and among the parties and the Arbitrator before the arbitration hearing, that everyone assumed that the Arbitrator had the power to review CF 31. 51.Indeed, the Arbitrator made an interlocutory Order No. 16 on 7 January 2005 that was premised on a letter dated 31 December 2005 from Po Kwong’s legal representatives acknowledging that he had the relevant power. Po Kwong’s representatives wrote:-
52.It was not until 15 September 2005, after the hearing of evidence and closing submissions from the parties, that the Arbitrator by letter invited the parties to make submissions on the question of law:-
53.In response, Po Kwong wrote that CF 31 could not be reviewed by reason of the second proviso to Sub-Contract cl. 22. Chinney, on the other hand, argued (among other things) that Po Kwong was estopped from going back on its former position. 54.At first impression, it would seem on those facts unfair to Chinney for the Arbitrator to have allowed Po Kwong to resile from its position that CF 31 was reviewable. At the very least, the Arbitrator should have explained in his Award, why despite Po Kwong’s previous acceptance of a jurisdiction to review, he could nevertheless proceed on a contrary footing. 55.The Arbitrator noted Chinney’s submission of estoppel. But he did not address it substantially in the Award. I think that this omission casts serious doubt on the correctness of his conclusion on the final and binding nature of CF 31. B.5 Conclusion 56.For the foregoing reasons, I think that there must be serious doubt over the correctness of the Arbitrator’s holding that CF 31 was final and binding. C. Whether Chinney’s intended appeal relevant 57.Mr. Pow SC (appearing for Po Kwong) submits that Chinney’s proposed appeal is irrelevant. He submits as follows:-
58.Mr. Pow says that, if he is right, the Court should not grant leave because it would be pointless. Arbitration Ordinance (Cap. 341) (AO) s. 23(4) requires that leave should only be granted where the determination of the relevant question of law “could substantially affect the rights of one or more of the parties”. That condition (Mr. Pow suggests) would not apply here. C.1 Argument 1: Pointless because Award based on IPC 29 and 30 59.Sub-Contract cl. 11(b) provides that Chinney shall pay Po Kwong against any certificate (including interim certificates) within 14 days of Chinney receiving payment from Great Land in respect of such certificate. 60.The Arbitrator found that Great Land had paid Chinney under IPC 29 and 30, but that Chinney had not received payment on CF 31. He therefore held that Po Kwong was only entitled to Sub-Contract Works amounts certified in IPC 29 and 30. 61.It is for this reason that Mr. Pow suggests CF 31 must be irrelevant. 62.I do not agree with Mr. Pow’s point. 63.Assume (as Chinney submits) that the Arbitrator wrongly held that CF 31 was not susceptible to review. Assume further that on an appeal Chinney establishes that CF 31 was wrong in a number of significant respects. 64.In that case, it is hard to see how IPC 29 and 30 which CF 31 incorporates and on which CF 31 is based in part, could stand. In finding error in CF 31, the Arbitrator would implicitly be saying that IPC 29 and 30 were unreliable. He would not be able to make an award on the basis of those 2 certificates without more. This would especially be so given Main Contract cl. 30(8). 65.In fairness to Mr. Pow, I believe that he acknowledged in the course of his oral submissions that this argument (which he called a “pleading point”) was more a consequence of his Argument 2, than a free-standing objection to Chinney’s application. C.2 Argument 2: Pointless because Arbitrator considered merits 66.Mr. Pow contends that Chinney’s claim for abatement is merely the obverse of its claim to set-off expenses incurred in rectifying alleged omissions or defective work by Po Kwong. 67.This is because (Mr. Pow says) there was no dispute among the parties that the relevant work was done. The only issue was who did the work. According to Mr. Pow, Chinney claimed that it had done the work and denied that Po Kwong had done the same. Po Kwong took the opposite position. 68.But the Arbitrator expressly found that there was no evidence that Chinney had done the relevant work. It must follow from this by implication (Mr. Pow reasons), that the Arbitrator thought Po Kwong had done the work. 69.If so, there would be no point in going back to the Arbitrator. Even if CF 31 were re-opened and reviewed, the Arbitrator would only conclude that, Po Kwong having done the work, Chinney was not entitled to any abatement. 70.In response, Mr. Thomas points out that, as far as work which Chinney says Po Kwong failed to do is concerned, the Arbitrator repeatedly stated that he could not look into such issue because in his view CF 31 was conclusive evidence. 71.It is true that the Arbitrator goes into the evidence of set-off by Chinney for alleged expenses incurred in rectification. But the rejection of Chinneys case on set-off (Mr. Thomas says), does not automatically imply that Chinney’s case on abatement fails. 72.In my view, Mr. Thomas is right. I do not regard the abatement and set-off claims by Chinney as two sides of the same coin. The claims may overlap, perhaps substantially, but they are not identical. It particularly difficult to see the 2 claims as being the same in light of admissions by Po Kwong in its pleading that it did not do certain relevant work. 73.It may be that Chinney failed on set-off because of a lack of evidence that it did rectification work. But that does not mean, given Po Kwong’s admissions as to non-execution of work, that Po Kwong did all the work certified by CF 31. If CF 31 is not the conclusive evidence that the Arbitrator supposed it to be, he would still have to assess the substance of Chinney’s case on abatement. 74.It may be (as Mr. Pow suggests) that the incidence of probative and evidentiary burdens will loom large in the Arbitrator’s assessment of abatement. But at the very least the Arbitrator would have to explain why there should not be abatement in respect of work which Po Kwong has admitted it did not do. 75.It is conceivable then that, on a remission following appeal, the Arbitrator may find that the parties’ respective entitlements are substantially affected, even if only in respect of the work which Po Kwong has admitted not doing. I think that the condition for the grant of leave in AO s. 23(4) is present here. 76.For that reason, I reject Mr. Pow’s Argument 2. III. Conclusion 77.Leave to appeal against the Award is granted to Chinney. 78.I will now hear the parties on costs and consequential orders.
Mr Michael Thomas SC and Mr Charles Manzoni, instructed by Messrs Wong & Fok, for the Applicant Mr Jason Pow SC and Mr Victor Dawes, instructed by Messrs Ho & Wong, for the Respondent |
Cases cited in this judgment
Further hearings and rulings under HCCT 76/2005