In Maeda Kensetsu Kogyo Kabushiki Kaisha & Anor v Bauer Hong Kong Ltd  HKCFI 916,the Court of First Instance dealt with an appeal against an interim arbitral award on questions of law involving interpretation of contractual terms in a construction contract and valuation of variation works.
In our previous article, we reported on the Court’s decision, on 30 August 2018, granting the Plaintiffs leave to appeal the arbitral award on two out of four questions of law raised by the Plaintiffs. On 9 April 2019, the Court made its decision (discussed below) in relation to the appeal on those two questions of law.
To recap, the Plaintiffs were the main contractors, with the MTRC as the employer, to construct tunnels for the Hong Kong to Guangzhou Express Rail Link. The Plaintiffs subcontracted the diaphragm wall works to the Defendant. Disputes between the Plaintiffs and Defendant were submitted to arbitration. The Plaintiffs appealed the Second Interim Award made in the arbitration proceedings on two questions of law:-
|(1)||Whether there was compliance by the Defendant with Clause 21 of the contract to give notice for its “ground conditions claims”; and|
|(2)||The valuation of variation works under the sub-contract.|
Proper notice of the claim given?
The Defendant claimed that it was entitled to additional payment for certain works because (i) unforeseen ground conditions gave rise to a variation of the scope of works under the sub-contract or (ii) alternatively, it had a “like rights” claim under Clause 21 of the sub-contract. A “like rights” claim is a claim by the sub-contractor 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 the works or any instruction on variation. The Arbitrator then considered whether the Defendant had duly made any “like rights” claim. Under Clause 21 of the sub-contract, before the Defendant can make such claim, it must give:-
|(1)||a First Notice showing an intention to make a claim within 14 days after the event or occurrence or matter giving rise to the claim becomes apparent to it (Clause 21.1); and|
|(2)||a Second Notice stating “the contractual basis together with full and detailed particulars and the evaluation of the claim” within 28 days after the First Notice (Clause 21.2).|
The Arbitrator found that the Defendant had complied with the notice provisions, despite the fact that the Defendant had made its claim in its Second Notice on the basis of a variation and not on a “like rights” basis. The Arbitrator’s reasoning was that as long as the Plaintiffs knew of the factual basis of the Defendant’s claim so that it could 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 be tied to that case through to the end of the arbitration. It followed, he said, that the Defendant was not precluded by Clause 21.2 to pursue a different basis of claim in the arbitration.
The Plaintiffs appealed against the Arbitrator’s ruling, arguing that Clause 21.3 demanded strict compliance with the notice provisions. The judge agreed. He said that Clause 21.2 was clear and unambiguous and required the Defendant to submit “the contractual basis” of the claim which it wished to pursue in the Second Notice. There could be no dispute, and no ambiguity, the judge said, from the plain and clear language used in Clause 21, that the service of 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 the Defendant would have “no entitlement” and “no right” to any additional or extra payment, loss and expense. Accordingly, the judge concluded that on a proper construction of Clause 21, the Defendant had failed to give proper notice under Clause 21.2 and the Arbitrator’s decision to allow the Defendant’s claim of “like rights” was wrong in law. Accordingly, the Plaintiff’s appeal on the question of law on notice compliance was allowed. The Defendant was granted leave by the same judge to appeal her own decision to the Court of Appeal. Please see our article below in respect of the court’s judgment in the leave application.
Valuation of variation works under the sub-contract
The Arbitrator also found that the Defendant had carried out variation works, required to be valued at a “fair commercial rate” under Clause 19 of the sub-contract. The Arbitrator adopted a “costs plus overhead and profits” approach, and included in the valuation the value of the Defendant’s claim for standby plant and equipment for the diaphragm wall works, which was not actually used. The Arbitrator held that in valuing the variation, it is the “cost” in terms of what it would cost which is relevant and not whether a party has or has not paid for a piece of plant.
The judge held that, on a review of the authorities, it could not be said that the Arbitrator had misdirected himself in law, or that his decision was outside the permissible range of solutions which were open to him. Accordingly, the Plaintiff’s appeal on the question of law on variation valuation was dismissed.
This case is a good reminder to parties to construction contracts that they should strictly follow all condition precedents when exercising their rights thereunder. For example, a party making a claim for additional payments should ensure that it has served notices in compliance with the relevant provisions, if necessary. Deviations might lead to the court rejecting the claim.
Furthermore, parties should bear in mind that with a valuation clause, valuation of works is a contractual entitlement and does not usually require proof of loss, such as the actual costs incurred.
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