Court considers whether subcontractor gave proper notice for a “likes right” claim

11 November 2020, Construction, Newsletter, by Joseph Chung,

In our previous article, we reported on the Court of First Instance (CFI) judgment in Maeda Kensetsu Kogyo Kabushiki Kaisha & Anor v Bauer Hong Kong Ltd [2019] HKCFI 916, in which the Plaintiffs, the Joint Venture (JV), had successfully appealed on one of two questions of law arising out of the arbitrator’s 2nd Interim ‍Award, namely whether there was compliance with conditions precedent to give notice under clauses 21.1 and 21.2 of the Subcontract between the JV and Defendant (Bauer). The CFI held that Bauer had failed to give proper notice under clause 21.2, and that the arbitrator’s decision to the contrary was wrong in law. Bauer now appealed to the Court of Appeal against that judgment and the appeal turned on the proper construction of clause 21.2.1 of the Subcontract.

Arbitration proceedings

To recap, the JV was the main contractor under two contracts entered into with the Employer, MTRC, for the construction of tunnels for the Hong Kong to Guangzhou Express Rail Link. The JV entered into subcontracts with Bauer for diaphragm wall works.  Disputes arose between the JV and Bauer, which led to the arbitration proceedings.

In the arbitration, Bauer claimed to be entitled to additional payment for certain works because (i) unforeseen ground conditions gave rise to a variation of the scope of works under the subcontract or (ii) alternatively, it had a “like rights” claim under clause 21 of the subcontract (i.e. a claim by a subcontractor against the main contractor arising from circumstances which also entitle the main contractor to make a claim against the employer).   

The arbitrator held that there was no variation, as there was no change in the scope of works or any instruction on variation. The arbitrator then considered whether Bauer had duly made a “like rights” claim. Under Clause 21 of the subcontract, before Bauer could make such claim, it had to give (i) a First Notice, showing an intention to make a claim within 14 days after the event/occurrence/matter giving rise to the claim became apparent to it (Clause 21.1) and (ii) a Second Notice, stating “the contractual basis together with full and detailed particulars and evaluation of the claim” within 28 days after the First Notice (Clause 21.2).

The arbitrator found that Bauer had complied with the notice provisions, despite the fact that it had made its claim in its Second Notice on the basis of a variation and not on a “likes right” basis. The arbitrator’s reasoning was that as long as the JV knew of the factual basis of Bauer’s claim to enable it to assess it and decide what to do, the notice provisions were satisfied. He said that it was unrealistic to expect a party to finalise its legal case within a relatively short period and to be tied to that case through to the end of the arbitration and it followed that Bauer was not precluded by Clause 21.2 from pursuing a different basis of claim in the arbitration.

CFI ruling

The JV appealed the arbitrator’s decision, arguing that Clause 21.3 demanded strict compliance with the notice provisions. The Court agreed, holding that Clause 21.2 was clear and unambiguous and required Bauer to submit “the contractual basis” of the claim it wished to pursue in the Second Notice. Service of the notices of claim in writing referred to in Clauses 21.1 and 21.2 were conditions precedent and must be “strictly” complied with, and failure to comply would have the effect that Bauer would have no entitlement and no right to any additional or extra payment, loss and expense. Accordingly, Bauer had failed to give proper notice under Clause 21.2 and the arbitrator’s decision to allow Bauer’s “likes right” claim was wrong in law. Accordingly, the JV’s appeal on the question of law on notice compliance was allowed.  

Question before the Court of Appeal

In this appeal, the Court was concerned with a “like rights” claim for which notice under clause 21.1 of the intention to claim was given by one or more letters. There was no dispute that for a “like rights” claim, the notice provisions in 21.2 must be strictly complied with as conditions precedent to any entitlement to a claim for additional payment under clause 21. Under clause 21.2, the notice in clause 21.2.1 would need to be given within 28 days after the giving of notice under clause 21.1. In the notification served by Bauer within that period, Bauer made its claim on the contractual basis of a variation or subcontract variation under clause 21.1.6 and there was no mention of a “like rights” claim, which is a different contractual basis under clause 21.1.1. The question was on the proper interpretation of clause 21, whether Bauer was precluded from amending or substituting the stated contractual basis by making its claim on a different contractual basis outside the 28 days of the relevant notice given under clause 21.1.

Court of Appeal ruling

The Court dismissed the appeal, holding:

(1)     According to the plain wording of clause 21.2.1, the notice or submission required to be given within 28 days of the notice of intention to claim must cover three things: the contractual basis, full and detailed particulars and the evaluation of the claim. In respect of the latter two – full and detailed particulars and the evaluation of the claim – clause 21.2.2 allows for submissions to be made at subsequent periods, where an event, occurrence or matter has a continuing effect or where the subcontractor is unable to determine if an event, occurrence or matter will be continuing, such that it is not practicable to comply with clause 21.2.1. By clause 21.2.2, the developing understanding of the factual causes or events is permitted to have an impact only on the provision of full and detailed particulars and evaluation of the claim. The allowance there to make subsequent submissions, clearly does not extend to the obligation to state the contractual basis.

(2)     The wording of clause 21.2.1 is clear and unambiguous. Within the stipulated time, the subcontractor is required to give notice of the contractual basis, not any possible contractual basis which may turn out not to be the correct basis. The reference to “the contractual basis” would not preclude identifying more than one basis in the alternative or stating more than one basis in the notice or serving more than one notice, each stating a contractual basis.  

(3)     There is no justification for giving clause 21.2.1 a narrow construction or strained interpretation. All the tools of linguistic, contextual, purposive and common-sense analysis should be deployed to establish the proper construction of the provision. Only if that approach results in ambiguity in the meaning of the exclusion clause, may it have to be resolved by a preference for a narrower construction.  In construction contracts, exemption clauses should be seen as part of the contractual apparatus for distributing risk and there should be no pre-determined mind set to cut them down.  The modern view “is to recognise that commercial parties … are entitled to make their own bargains and that the task of the court is to interpret fairly the words they have used. The contra proferentem rule may still be useful to resolve cases of genuine ambiguity, but ought not to be taken as the starting point.”

(4)     There was no ambiguity in clause 21.2.1 that needed to be resolved by invoking the contra proferentem rule. Regarding the timeframe of 42 days to state the contractual basis of the claim, the arbitrator had not made a finding of fact that this was unrealistically short. If the subcontractor is genuinely uncertain about the contractual basis, it is open to him to state more than one basis or serve more than one notice.

(5)     In respect of the unforeseen ground conditions, Bauer did give notice in August 2011 stating the contractual basis as variation or subcontract variation under clause 21.1.6. On the same factual basis, it could have given notice of a “like rights” claim under clause 21.1.1, whether alternatively or cumulatively, within the stipulated time, and there was no finding of the arbitrator to the contrary. Under clause 21.1, the period of 42 days only commences “after the event, occurrence or matter giving rise to the claim became apparent or ought reasonably to have become apparent to the Subcontractor.” If notice had been given of a “like rights” claim, it would mean that interim payments would be dealt with differently, as provided in clause 21.8.  The contention premised on a developing understanding of the factual events was not a valid argument.

(6)     As for the commercial purpose for identifying the contractual basis within the stipulated period, there would appear to be two other purposes apart from providing the factual basis for the claim so that the contractor can investigate in time. One is finality, to ensure that claims are made in such time as to allow the recipient to assess their validity at a time when the facts giving rise to such claim are still fresh. The other commercial purpose is that in a chain contract situation, the contractor would wish to know whether the subcontractor’s claim would need to be passed up the line.  If the claim is based on other matters, such as breach of the subcontract by the contractor (clause 21.1.2), it would not need to be. The arbitrator’s interpretation may prejudicially affect this commercial purpose as well.

(7)     As regards the contention that a party should not be precluded from advancing a claim after the expiry of a time bar merely because it placed a different legal label in the notice, if the only purpose were to inform the contractor of the factual basis for the claim so it can investigate the claim in time, clause 21 would be worded in a similar way to clauses 82.1 and 82.4 of the Main Contract. These clauses provide for the situation where the contractor fails to give notice of claim for additional payment (stating the intention to claim and the clause or clauses pursuant to which the claim is made) within 28 days of the happening of the event giving rise to the claim, and it is stated that the contractor shall not be entitled to any payment in respect of such claim save only to the extent that the engineer is satisfied that the engineer has not been substantially prejudiced by such failure in conducting his investigation and if the engineer is so satisfied, he shall certify for payment to the contractor such sum in relation to the claim as appears to him fair in all the circumstances. But that is not how clause 21 was worded. It is not permissible to interpret clause 21.2.1 in such a manner as to re-write the plain language of the provision.

(8)     In this particular situation, the proper interpretation of clause 21.2.1 is a question of law, not a mixed question of fact and law. It is readily distinguishable from the situation in The Mathew (where the question was which of two events constituted the proximate cause of the claimant’s loss) or in MC v SC [2020] HKCFI 2337 (where the question was whether the breach found by the arbitrator was repudiatory in nature). Please see our article above on the judgment in MC v SC. It is not appropriate to adopt the approach whether the arbitrator’s determination was outside the permissible range of solutions available to him.

Comments

This judgment clarifies the following which are often misunderstood, even by experienced lawyers:-

(1)     The so called contra proferentem rule is only applicable when there is a genuine ambiguity in the meaning of the provision in question. Following the recent English authorities, the contra proferentem rule is now seldomly applicable. Rather, the English Court emphasizes the importance of business common sense in interpreting a contract. Please see Polypearl Ltd v. E. On Solutions Ltd reported in our previous newsletter.

(2)     In an appeal on a pure question of law, the Court will only consider whether the arbitral tribunal is either right or wrong in law. The “permissible range of solutions” which only refers to the application of law to the finding of facts by the arbitral tribunal is only relevant when the question of law under consideration is mixed with a question of fact.