Court considers proper approach for re-rating under GCC 59(4)(b)

Every now and then, disputes arise in civil engineering contracts because the Contractor claims a new rate for a substantially increased quantity executed, but the Engineer insists on an obviously underpriced BQ rate on the ground that the additional work is of a similar nature. Sometimes, though not often, the Contractor is happy to stick to the original rate, but the Engineer wants a re-rating. Clearly an authoritative ruling by the court would assist the industry know where parties stand in similar situations.

In 1997, such a dispute was before the court in The Secretary for Justice v Sun Fook Kong (Civil) Limited (1997, Con No. 94). The court in upholding the arbitrator's award found no substance in the Government's argument that the substantial increase in the rock excavation of itself had rendered the three disputed BQ rates (which were high rates) unreasonable or inapplicable, there being no evidence of Sun Fook Kong adopting any change in the method of construction or of any saving in costs.

More recently, the Court of Appeal had the opportunity to consider a similar dispute in the case of Maeda Corp v The Government of the HKSAR (CACV 230/2011). The Court of First Instance had dismissed Maeda's application for leave to appeal against an arbitrator's ruling and Maeda applied to the Court of Appeal against the dismissal of that application. The main issues before the Court of Appeal revolved around clause 59(4)(b) of The Government of Hong Kong General Conditions of Contract for Civil Engineering Works (1999 Edition) (“GCC”), which provides :

“Should the actual quantity of work executed in respect of any item be substantially greater or less than that stated in the Bills of Quantities…and if in the opinion of the Engineer such increase or decrease of itself shall render the rate for such item unreasonable or inapplicable, the Engineer shall determine an appropriate increase or decrease of the rate using the Bills of Quantities rate as the basis for such determination and shall notify the Contractor accordingly.” (emphasis added)

The Sun Fook Kong case concerned an identically worded clause.

The Court of Appeal's judgment is redacted, with all commercially sensitive information removed for confidentiality reasons. There are two main points in the Court of Appeal's judgment that can have far reaching consequences beyond the decision on the dispute itself, namely:

1. For a BQ rate covering more than a single work activity, it is not necessary to involve any change in the work activities in order to trigger a re-rating under clause 59(4) (b); and
2. It is permissible for the Engineer to have regard to the manner in which a BQ rate is built-up in order to decide what the rate includes.

Maeda's argument that it was impermissible to have regard to the contractor's build-up of the relevant contract rate seems to accord with the general approach that pre-contractual material is inadmissible evidence in the construction of a contract. Unfortunately, the Court of Appeal rejected the argument, mainly on the ground that such approach is not applicable where a rate is being examined for its reasonableness, in accordance with GCC 59(4)(b).

Maeda also relied heavily on Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2000] BLR 247, a case often quoted for the principle that rates in a construction contract are “immutable” or “sacrosanct”. The Court of Appeal distinguished it from the Maeda case on the basis that in Henry Boot, the English Court of Appeal was dealing with valuation of variation and a known error in a BQ rate, which could not be rectified, as expressly provided in the contract in question.

Maeda's application for leave to appeal to the Court of Final Appeal was dismissed.

It will be interesting to see whether contractors stuck with a bad BQ rate can benefit from the Court of Appeal's decision and successfully seek re-rating (at least for a BQ rate covering a number of activities) whenever there is any substantial increase in quantity, by including back any fixed cost or lump sum which they had transferred to another item of work during the tender stage.