China Harbour Engineering Co (Group) v. The Secretary for Justice of the HKSAR
Read the full judgment text of HCCT44/2004 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 6 March 2006 before Hon Burrell J.
Construction contract tender dispute — Pricing condition SCT-2 requiring the price of the Central Wanchai Bypass (CWB) works to be at least 33.7% of the total price — Whether SCT-2 is mandatory or confers discretion — Court held SCT-2 confers discretion due to use of 'may' allowing acceptance of non-compliant tenders. Awarding contract to Leightons, non-compliant with SCT-2, was lawful. Tender process contract principles applied as per Blackpool & Fylde Aero Club v Blackpool Borough Council. WTO GPA Article XIII compliance considered; no breach found as pricing condition not essential requirement. Implied terms of equal and fair treatment upheld; defendant properly considered tenders. Note C1 on bid challenges did not form part of the contract, so no breach found regarding refusal to meet. Review Body on Bid Challenges findings are non-binding and differ from court framework. Claim dismissed with costs order nisi. Appeal dismissed (CACV138/2006).
Legal issues: Construction of clause SCT-2 pricing condition · Compliance with Article XIII of WTO GPA · Breach of implied terms on fair treatment of tenders · Whether Note C1 of Notes to Tenderers formed part of the contract and was breached
Outcome: China Harbour’s claim dismissed
Cited by 1 case
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HCCT44/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO.44 OF 2004 ------------------------- BETWEEN
---------------------- Before : Hon Burrell J in Court Dates of Hearing : 21–23 February 2006 Date of Judgment : 6 March 2006 ---------------------- J U D G M E N T ---------------------- 1.In late 2002 the plaintiff (“China Harbour”) was one of five tenderers who had pre-qualified for tendering for a very large construction project involving the reclamation works in the Hong Kong Harbour between Central and Wanchai. In these proceedings they claim damages for breach of contract arising out of the fact that the contract was not awarded to them. It was awarded to a company I shall refer to as “Leightons”. 2.It is agreed between the parties (represented by Mr John Scott SC on behalf of China Harbour and Ms Teresa Cheng SC on behalf of the defendant) that a contract in law exists in these circumstances. The defendant is bound to consider all valid tenders properly. Both parties agree the law is as stated by Bingham LJ in Blackpool & Fylde Aero Club v. Blackpool Borough Council [1990] 1 WLR at p.1202 :
This has been referred to as a “process contract”. The construction contract 3.It is important in this case to summarise, at the outset, what the tenderers were bidding for. To simplify matters I shall refer to three parts of the works. The Government was seeking tenders to carry out, inter alia :
4.Only (a) was guaranteed to the successful bidder. (b) and (c) could be excised from the works at a future date. The tenders had to include prices for all three. All tenderers knew that (b) and (c) may never go ahead, or at least, not be performed by the successful bidder. The “excisable” status of (b) was of particular significance because it formed a substantial part of the overall works. In very round terms the entire project was worth about $3.7 billion and (b) was worth about $1.00 billion out of the entire sum. 5.It was common knowledge at the material time that there was a real risk that item (b) would not go ahead. The Government was therefore concerned to avoid price manipulation in the tenders. If there was a risk that (b) would not go ahead it would be tempting to a contractor to under-price (b) and load (a) so that they would be in a win-win situation. If (b) was excised the loaded price for (a) would remain; if it was not excised their entire sum would still be genuine. 6.The Government therefore included SCT-2 in the tender. This set out a formula whereby the price for (b) was (in general terms) to represent at least 33.7% of the overall price. SCT-2 stated as follows :
The total of Bill Nos. A2, N1 and N2
7.The construction of this clause is the first and key issue in this case. 8.It transpired that of the five tenders, China Harbour’s was the only one which complied with the above arithmetic. It was the only one which had priced the CWB works above 33.7%. The others were below 33.7%, the lowest being 28.27%. Leightons’ was 30.32%, China Harbour’s was 34.21%. 9.Mr Scott’s primary contention was that, as China Harbour was the only compliant tender it should have been awarded the contract. He submitted that the use of “shall” and “is” in the first part of SCT-2 made the clause mandatory and that all non-compliant tenders were invalid. He submitted that the word “may” in the second half of SCT-2 should be read to mean “must”. 10.Ms Cheng, on the other hand, submitted that the Government, because of the word “may”, had a discretion not to invalidate non-compliant tenders. The clause, read as a whole, she submitted, simply meant that a tenderer who chose not to comply with the stated arithmetic ran the risk of having its tender disqualified without further ado and with no chance of appeal or complaint. Those tenderers who complied with the arithmetic ran no such risk. For reasons which follow I have concluded that Ms Cheng is plainly right in her argument. 11.First however, I will complete the factual background as I find it to be. The Government had engaged the firm of “Atkins” as consultants to advise on the tenders. Prior to the production of their report, on 28 January 2003, they had been advised by the Territory Development Department (“TDD” ) the Government department responsible for this contract, that “any tender that did not comply with the pricing condition in SCT-2 should not be recommended”. Thus, on this advice, Atkins had no choice but to recommend the only compliant tender, that of China Harbour. 12.It is necessary to set out the key parts of the report as follows :
(The “Balfour Beatty” figures are “blacked out” throughout the report for reasons of confidentiality. They being the only one of the four losing bids who did not make a complaint to the “Review Body on Bid Challenges” (the “Review Body”).) 13.The report continued :
14.The following facts emerge from this recommendation :
15.Following the report two meetings of the Central Tender Board (“CTB”) were held on 30 January and 6 February 2003. It was the CTB’s responsibility to decide which tender should be accepted. The Deputy Secretary for Financial Services, Ms Elizabeth Tse Man Yee was a member of the CTB and gave evidence to the court. I should say in passing that all five of the witnesses who gave evidence in this case (three for the plaintiff and two for the defendant) were witnesses who endeavoured to give honest and helpful evidence. Ms Tse however as a witness of integrity and reliability was particularly impressive. 16.I will set out extracts from the minutes of the two meetings to demonstrate why Leightons was awarded the contract ahead of China Harbour. Although it was always a “close run thing” China Harbour had been the front runner on 30 January but Leightons, for a specific reason, emerged the winner after the 6 February meeting. The specific reason being the status of the CWB works at the material time. 17.The extracts are as follows :
18.Ms Tse confirmed the accuracy of these minutes. Put simply they amount to this : firstly, the best bid on the basis that the CWB works would go ahead was preferred because, at the material time, it had not been excised and, as Ms Tse confirmed in her evidence, it was desirable for both the Government and the successful contractor that the same contractor would, if possible, do all the works and secondly, SCT-2 was not a mandatory provision, it gave the procuring entity a discretion to award the contract to a non-compliant tender. 19.In my judgment, for the reasons which follow, I have concluded that :
Reasons 20.(a) I am not persuaded that in the context of this contract “may” means “must”. Read as a whole, if “may” means “must”, the final sentence serves no purpose and should have been omitted. It was included for a reason. On a simple reading the message is obvious. The message to tenderers is — do your sums according to this equation, if you do not you run the risk of being disqualified however good the rest of your bid is. 21.That this is a clear and unambiguous meaning is endorsed by the fact, inter alia, that every tenderer except China Harbour read it and interpreted it the same way. China Harbour took a cautious approach which guaranteed getting past first base. All the others risked early disqualification. 22.In my judgment the words of Lord Hoffmann in ICS Ltd v. West Bromwich Building Society [1998] 1 WLR at 912 and 913, when applied to SCT-2 achieve such a result :
23.(b) To use Lord Hoffmann’s expression nothing went “wrong with the language” in this case. There was no secret or mystery about the rationale behind SCT-2, namely that it was because of the uncertainty surrounding the CWB works. 24.In November 2002 it was apparent that all tenderers were having difficulty complying with the 33.7% provision. It was even proposed at a meeting of the Hong Kong Construction Association Ltd that a letter was sent out on behalf of all tenderers stating that 33.7% could not be complied with (i.e. because it was too high) and seeking confirmation from the TDD that bids below 33.7% would not be invalidated. In the event the letter was not sent out. Ms Cheng rightly pointed out that if China Harbour were genuinely unsure they could have sent such a letter on their own behalf. They did not and neither did any other contractor. 25.Moreover, the TDD, through Atkins, issued a Tender Query which provided the answer again. If “may” was to mean anything other than “may” they would surely have said so. The Tender Query was as follows :
26.Mr Scott described this response as “unhelpful”. On the contrary, I regard it as helpful in the sense that it reiterates the unambiguous and clear meaning of SCT-2. The only question that would face a contractor at the time of tendering would be — shall we risk being disqualified by reason of non-compliance or shall we not? 27.(c) Not only should SCT-2 be read as a whole but it should be read in the context of the entire process contract, namely all the tender documents. There are many other examples of the tenderer being directed that they “shall” do something and, in the same clause, being told that if they do not their bid “may” be disqualified. Ms Cheng has listed them in her written submission. They are as follows :
28.It is obviously desirable that, even though some of the above “failures” may be regarded as more serious than others, the word “may” in each case should consistently mean the same thing. It would be confusing for “may” to mean “may” in all but one case, where it should there mean “must”. 29.By the same token, there are many examples in the tender documents of mandatory provisions where non-compliance will have an inevitable consequence. The words used are consistently clear. Again Ms Cheng provided examples :
30.(d) I also take heed of the fact that all the tenderers in this case are big players in the Hong Kong construction industry. They are highly experienced and regular bidders for Government contracts. To argue that China Harbour was misled and was not allowed to play on a level playing field is, in my judgment, somewhat disingenuous. The reality is that they alone chose a conservative approach to the bidding process. I do not criticise their caution but in this instance it did not serve them well. Consistent with this cautious approach they chose to price the CWB slightly higher than the 33.7% threshold, at 34.21%, to provide some “room for errors” as stated by Mr Kenneth Lau, China Harbour’s senior quantity surveyor. Other issues 31.Mr Scott rightly contends that even if the primary issue concerning the construction of SCT-2 is against China Harbour the matter does not end there. 32.(1) Firstly, allied to the primary issue but worthy of separate consideration is the question of whether the Government followed Article XIII of the World Trade Organization Agreement of Government Procurement (“GPA”). The relevant extracts are as follows :
33.Whether or not Article XIII governs the process contract in issue is a separate matter. Even on the assumption that it does, I am satisfied that my findings in relation to the primary issue are such that it can only follow that the Government were not in breach of Article XIII. The answer to the issue turns on what is meant by an “essential requirement”. In my judgment, it follows automatically that if the word “may” gave the procuring entity a discretion not to invalidate tenders which did not comply with SCT-2, then the pricing formula in SCT-2 did not constitute an “essential requirement”. There has therefore been no breach. To be “essential” a requirement must be mandatory. Put another way, a tender which did not comply with the equation in SCT-2 could still be a valid tender, if the discretion was exercised and therefore become a conforming tender worthy of further consideration. 34.(2) Secondly, even if SCT-2 gives the Government a discretion, Mr Scott submits, that there have been breaches of implied terms as set out in paragraph 7 of the Statement of Claim. It is pleaded that :
35.Mr Cheng concedes that (a) and (b) apply to this case but submits there has been no breach. I agree. (a) has been complied with because all tenderers got the same documents at the same time and all were faced with the same commercial decision whether to risk invalidation due to non-compliance with SCT-2. All had been told twice that their tender might be invalidated if it failed to do so. 36.Paragraph 5 of the Form of Tender also reminded all bidders that :
37.As it turned out the bidder with the highest overall score for the combined works of the guaranteed reclamation works (“CRIII”) and “CWB” and “40m EOT” was awarded the contract. 38.The contention that China Harbour was not playing on a level playfield is simply not made out. 39.Implied term (b) was also not breached. The defendant did properly consider the only bid which was compliant with SCT-2. That does not mean it had to be awarded the contract. It also considered it against other tenders which were deemed to be “conforming” tenders once the discretion had been properly exercised. The Government’s obligation is limited to giving all conforming tenders proper consideration which, by reference to the notes of the meetings on 30 January and 6 February 2003 and by reference to Ms Tse’s evidence, they plainly did. 40.The implied term at paragraph 7(c) is not admitted by the defendant. I agree that such a term cannot be implied for three reasons. Firstly, it would negate the discretionary nature of SCT-2. Secondly, it would mean that if there was only one compliant tender the Government would be compelled to accept it regardless of the actual total amount of the bid and the overall score of the bidder. Thirdly, it would mean that if there were no compliant bids the Government would be compelled to award it to no-one and re-tender rather than select the best non-compliant bid. 41.(3) Thirdly, China Harbour make an alternative claim which is a discrete issue. Paragraph 19 of the Statement of Claim reads as follows :
The factual background is contained in the above pleading. 42.Later the Review Body heard the complaint and published its report on 14 July 2003. In short it found that CTB has acted with undue haste in awarding the contract to Leightons and that there should be (or should have been) a re-tendering exercise. 43.Before proceeding to consider this matter as a separate issue in China Harbour’s claim in this court, I should consider the relevance of the Review Body’s report in this action. Ms Cheng submits that it is inadmissible. Mr Scott submits it is admissible, relevant and persuasive. Both agree it is not binding on this court. I do not think it is a question of admissibility. It is a question of weight. The report was in the trial bundle. The written submissions made references to it. I read it. 44.However, for a number of reasons I consider it unwise to attach too much, if any, weight to its findings. Firstly, the two hearings are different in nature. The Review Body is a complaints procedure. The complaint is considered within the framework of the WTO GPA. The writ action however is governed by pleadings (which were not before the Review Body) and is to be determined within the framework of Hong Kong domestic law. Secondly, the material before the Review Body and the court has been different. The Review Body did not see the correspondence concerning the proposed letter from the Hong Kong Construction Association Ltd. It did not see over 30 pages of China Harbour’s tender and alternative tender. The Review Body did not hear three of the witnesses who gave evidence before this court and did hear one witness who did not give evidence before this court. Thirdly, Ms Cheng submits that the Review Body report contains factual and legal errors. Of course, I do not know if that submission could be made good. It is nonetheless significant that it is claimed to be in error in important ways. Finally, as it is non-binding, no question of issue estoppel arises. 45.I now return to paragraph 19 of the Statement of Claim. It relies primarily on Note C1 in the Notes to Tenderers. The reliance on this specific note reinforces the differences between the Review Body and the court. The Review Body, being unbound by contract law and pleadings, would be entitled to attach whatever weight it considered appropriate to Note C1. Not so the court. 46.Note C1 is as follows :
It comes from the “Notes For Tenderers” which is headed with the following statement :
47.In my judgment, this heading makes it clear that the “Notes” do not form part of the process contract which is at the heart of this action. There is nothing contractual in the language used in the Notes. They are what they say they are — a guide. Thus, for the second time in this case Mr Scott has attempted to persuade the court, valiantly and tenaciously but unsuccessfully, that words should be given a meaning other than that which appears on a clear and sensible reading. 48.If Note C1 does not form part of the process contract there can be no breach arising from it. If it does form part of the contract, all it does is provide a machinery for going to the Review Body, which is what happened in any event, leading to a non-binding opinion. On any view, Note C1 does not assist China Harbour. 49.Finally, Mr Scott submits that if the Government had not acted with such haste and had they waited for the Review Body’s decision China Harbour would have got the contract. I do not agree that this follows. 50.It is true that China Harbour would have re-tendered without feeling constrained by SCT-2. It is true that their alternative tender at the time (not complying with SCT-2) was for $80 million less. However re-tendering would have produced new bids from everyone, the process contract is still governed by the principle in the Blackpool case (supra) and clause 5 applies throughout. An element of risk, gamble and commercial judgment cannot be eliminated. Such factors are the same for everyone and so do not upset the level playing field. 51.After the meeting on 6 February 2003 the CTB had a stark choice. It was important not to waste time. If it had waited for the Review Body’s report the delay would have been for an unknown period, the outcome would have been unknown, the ramifications would have been uncertain. For example, the contractor ultimately awarded the contract might have had a claim for being given the site late and that their bid was calculated on a commencement date in late 2002 not mid or late 2003. The contract documents provided for a handover of the first part of the site on 1 March 2003. Failure to comply with this date would have led to problems such as having to amend parts of the contract and/or renegociating with the successful bidder. It is thus fair to say that overall the reasons for proceeding with the award in early February 2003 far outweighed those for not doing so. 52.In short, I do not think the CTB can be criticised for taking a decision which was both expeditions and certain. 53.China Harbour’s claim is dismissed with a costs order nisi to the defendant.
Mr John Scott, SC and Mr Timothy Haynes, instructed by Messrs Lovells, for the Plaintiff Ms Teresa Cheng, SC and Mr Douglas Lam, instructed by Department of Justice, for the Defendant Appeal dismissed: see CACV138/2006 dated 23 January 2007 | |||||||||||||||||||||||||||||||||||||||||||||||
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Further hearings and rulings under HCCT44/2004