SECRETARY FOR JUSTICE v. SUN FOOK KONG (CIVIL) LTD.

1997 No. Con 9

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION LIST

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J U D G M E N T

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1. The question which arises in this appeal is whether, under the form of remeasurement contract used by the Government, a contractor can win on both the swings and roundabouts. Put another way, has the Government made a bad bargain?

2. The question arises this way. The Government's tender documents include Bills of Quantities (BQ) which ultimately become part of the contractual documents with the successful tenderer. The tenderer completes BQ to produce a "grand total" which normally constitutes his tender. Under the General Preambles to the BQ, however, a tenderer may increase or decrease the grand total by a lump sum of up to 10% of that total depending whether he wishes to put a premium on his services or to make his tender more competitive. That lump sum is known as an Adjustment Item (AI). A lump sum addition is known as positive AI; a deduction is known as negative AI.

3. Clause 10 of the General Preambles (GP10) provides

"(A) A tender may insert a lump sum addition or deduction which shall not exceed 10% of the total of the Bills of Quantities before the addition or deduction of that lump sum against the Adjustment Item given in the Grand Summary.

(B) For the purposes of Clause 79 of the [GCC] additions or deductions on account of the amount, if any, of the Adjustment Item shall be made by instalments in interim certificates in the proportion that the amount referred to in Clause 79(1)(a), (b), (c), (d) and (e) of the [GCC] bears to the total of the Bills of Quantities excluding the Contingency Sums and the Adjustment Item.

(C) Such interim additions or deductions shall be made before deduction of the Retention Money and shall not exceed in the aggregate the amount of the Adjustment Item.

(D) Any balance of the Adjustment Item outstanding after interim additions or deductions shall be added to or deducted from the final payment.

(E) For the avoidance of doubt, the effective value referred to in Clause 89 of the GCC shall include all sums payable in respect of the Adjustment Item."

4. The lettering there is introduced for convenience. In the original there is no lettering and (A) - (D) comprised one paragraph. (E) stands separately.

5. The Respondent availed itself of GP 10. Against a grand total of $101,313,630.00, it inserted an AI of $2,695,612.00 resulting in a tender sum of $98,618,018.00. That tender the Government accepted.

6. Subsequently, a dispute arose between the parties as to the quantum of payment under the Engineer's monthly certificates. Provision for the calculation of the amount of such payments and for payment of the sum calculated is contained in Clause 79 (1) of the General Conditions of Contract (GCC 79).

"(1) Within 21 days (unless otherwise stated in the Contract) of the date of delivery to the Engineer of the Contractor's statement in accordance with Clause 78, the Engineer shall value and certify and within a further 21 days the Employer shall pay to the Contractor after deducting previous payments on account, if any, and any other sum deductable by the Employer under the Contract the sum which in the opinion of the Engineer is due, based on the rates in the Contract where appropriate, in respect of the followings:-

(a) the estimated value of the permanent work executed, and

(b) the estimated value of any Temporary Works or preliminary item for which a separate sum is provided in the Bills of Quantities or Schedule of Rates, and

(c) the estimated value of materials for inclusion in the permanent work and not being prematurely delivered to and being properly stored on the Site, and

(d) the estimated sums payable in respect of Nominated Sub-contractors, and

(e) any other estimated sum to which, in the opinion of the Engineer, the Contractor is entitled in accordance with the Contract.

Provided that the total certified sum shall be adjusted by the Engineer to take into account:-

(i) the retention of the percentage stated in the Contract until the sum retained reaches the limit of Retention Money stated in the Contract; and

(ii) any adjustment to be made for fluctuations in the cost of labour and materials in accordance with Clause 89."

7. Clause 89 (GCC 89) there referred to comes under the heading "Fluctuations". As amended by Clause 23 of the Special Conditions of Contract (SCC 23), it provides

"(1) The sum payable in any interim or final payment certificate [certified] by the Engineer as being due (other than sums due under this Clause) shall be increased or decreased in accordance with the provisions of this Clause if there shall be any changes in the Index Figures listed in the "Index numbers of the costs of labour and selected materials used in Government Contracts" compiled by the Census and Statistics Department of the Government of Hong Kong and applicable to those items included in the "Schedule of Proportions".

The net total of such increases and decreases shall be given effect to in determining the Final Contract Sum."

8. Sub-clause (2) of SCC 23 defines the various index figures. It is unnecessary to set them out. It is sufficient to say that they provide the basis for the Engineer to ascertain whether there have been any increases (rarely, decreases) in the cost of labour or materials since the tender. GCC 89 as amended continues at sub-paragraph (2)(d).

"(d) The "Effective Value" in respect of the whole or any Section of the Works shall be the difference between:-

(i) the sum (exclusive of any increases or decreases made in accordance with this Clause) which in the opinion of the Engineer is due to the Contractor under Clause 79(1) of the General Conditions of Contract, before deducting retention and before deducting previous payments on account, less all sums in respect of Nominated Sub-contractors including profit thereon and less all sums for items based on actual cost or current prices; and

(ii) the sum calculated in accordance with sub-clause (2)(d)(i) of this Clause and included in the last preceding interim payment certificate issued by the Engineer.

Provided that in the case of the first certificate the Effective Value shall be the sum calculated in accordance with sub-clause (2)(d)(i) of this Clause.

(3) The increase or decrease in the sums otherwise payable in an interim or final payment certificate pursuant to sub-clause (1) of this Clause shall be calculated by multiplying the Effective Value by a Price Fluctuation Factor which shall be the net sum of the products obtained by multiplying each of the calculated proportions given in column 7 of the "Schedule of Proportions" by a fraction the numerator of which is the relevant Current Index Figure minus the relevant Base Index Figure and the denominator of which is the relevant Base Index Figure.

Provided that if all the appropriate Current Index figures have not been published prior to the due date for any payment certificate, the increase or decrease in the sum payable in respect of that certificate will be provisionally calculated and added to or deducted from the sum payable in the certificate by the Engineer using the latest published Current Index figures and shall be corrected in the next Engineer's certificate following the publishing of the relevant Current Index Figures.

(4) the "Schedule of Proportions" shall (irrespective of the actual constituents of the work) be "the Schedule of Proportions to be used in calculating the Price Fluctuation Factor" submitted with the Tender and with the calculations duly completed."

9. It is also not necessary to consider the Schedule of Proportions in detail. In essence, the contractor must identify the percentage of contract value for given items, such as labour, in the Schedule. An element is then assigned to each item for plant. The resulting figures are then factored down so that only 85% of the Effective Value will be subject to price fluctuation.

10. There is one other General Condition which needs mention. Clause 5 (GCC 5) insofar as it is relevant reads:

" CONTRACT DOCUMENTS

(1) Save to the extent that any Special Condition of Contract provides to the contrary the provisions of these General Conditions of Contract shall prevail over those of any other document forming part of the Contract.

(2) Subject to the foregoing the several documents forming the Contract are to be taken as mutually explanatory of one another ...."

11. The Government contended that under GCC 89 (2)(d) as amended, interim deductions referable to AI should form part of the calculation of Effective Value. The Respondent disagreed. The parties resorted to arbitration in which the Respondent as claimant sought a declaration

"that, when operating SCC 23 in the context of the sum payable in any interim or final payment certificate certified by the Engineer as being due, the Engineer was and is not entitled to take into account the negative Adjustment Item."

12. It was agreed that two issues fell to be determined by the Arbitrator

"(i) whether under the Contract interim adjustments referable to the Adjustment Item provided in the Summary to the Bills of Quantities should form part of the Effective Value for the purpose of Contract Price Fluctuations and, if so:

(ii) whether where the Adjustment item is negative it should be taken into account in the calculation of fluctuations under the Contract?"

13. In an interim award, issue (i) was decided in favour of the Government; issue (ii) in favour of the Respondent which was granted the declaration it sought. Against that award, with leave, the Government now appeals, the appeal being directed to issue (ii). By Respondent's notice, the Respondent seeks to affirm the award, although in substance, it is an appeal against the decision in relation to issue (i).

Issue (i)

14. I have read the written submissions made to the Arbitrator by each party. I have read the substantial skeletons provided for me by counsel. I listened attentively to the commendably brief oral submissions made to me by counsel. Those submissions were brief because of the reading I had done; and because at bottom the opposing arguments although elaborately expressed were short and simple. In effect, each party asserted that there was a plain and obvious construction of the various clauses so that no other construction can be contemplated.

15. For the Respondent, Mr. Clayton's argument was and is that unless the Government can establish a link necessarily consistent between GP 10 and GCC 79 as amended, then in accordance with GCC 5 the general conditions shall prevail. Further, GCC 79(1) provides no basis for the Engineer to make any adjustment to the amount he is required to certify under paras.(a)-(e) on account of AI. Adjustment is only for retention and fluctuations. The calculations and adjustments to be made in relation to AI are a separate and distinct exercise to be carried out by the Engineer pursuant to GP 10. Further, GP 10(E) is inconsistent with the plain wording of GCC 89(2)(d) as amended. The wording "for the avoidance of doubt" is clarificatory and does not purport further to amend para.(2)(d).

16. Mr. Nigel Aiken, S.C. for the Government, submitted that the various provisions are complementary and, in the words of GCC 5(2), "mutually explanatory." He said they fitted together without difficulty and are susceptible of a straightforward construction that gives effect to the intention of the parties. That intention was that where a contractor opts to introduce AI, it should have effect on the Effective Value. The contractor will benefit from a positive AI; the Government from negative AI.

17. Mr. Clayton did not accept that intention. It is more appropriate to deal with this point, however, under issue (ii).

18. As far as the operation of the various provisions is concerned, Mr. Clayton contended that the Engineer should take a number of steps. Step 1: pursuant to GCC 79(1), the Engineer is required to value and certify the sum which in his opinion is due in respect of paras.(a)-(e).

19. Step 2: The Engineer in accordance with GP 10(B) separately calculates the adjustment to be made for AI, using the equation to be derived from that sentence. The equation is agreed.

Amount calculated under Step 1	X A1
Total sum less Contingencies

(An alternative equation propounded by the Government's expert to try and incorporate AI within GCC 79(1) paras.(a)-(e) is so complicated and would do such violence to the language of the provisions that, as I said at the hearing, would necessarily mean that the Government's approach is doomed to failure. It was not in any event relied upon)

20. Step 3: Pursuant to GCC 79(1), proviso (i), the Engineer calculates the retention sum by deducting the result of Step 2 from Step 1.

21. Step 4: Under proviso (ii), he calculates any adjustment for fluctuations pursuant to GCC 89 as amended.

22. Step 5: As a matter of practice and convenience for the Government as employer, the Engineer may, although he is not required to do so under the contract, adjust the total derived from Steps 1, 3 and 4 by making a deduction for negative AI as a "sum deductable" under GCC 79(1) or by an addition for positive AI to which the Government is entitled under GP 10.

23. The Government is then required to pay the contractor. This calls for payment of two separate sums, i.e. AI under GP 10 and the sum calculated by the Engineer under GCC 79(1). In practice, however, there would only be one payment, the Engineer having combined the two in what I have called Step 5.

24. Mr. Aiken was critical of this methodology. He said it either ignores GP 10(E) or gives it an unreasonable meaning never intended by the parties. It also disregards the function of the Engineer under GP 10 to make an addition or deduction on account of AI and the fact that the Engineer has to make that adjustment before adjustment for retention. Further, it artificially requires the Engineer to calculate but not adjust for AI. It also assumes that the Engineer's certification is confined to an assessment of the items in BQ but not AI. Inconsistently, it takes AI into account for retention but not for fluctuations. And it strains the contractual provisions in seeking for the Government a power to deduct and a duty to add on account of AI when making payment, contrary to the culture of these contracts in which the Engineer holds the financial balance between the Government and contractor.

25. As far as methodology is concerned, Mr. Aiken parted company with Mr. Clayton after Step 2. He said the Engineer then, pursuant to GP 10(B) and (C), must bring in his AI calculations in order to arrive at a total certified sum under GCC 79(1). The Engineer then goes on to adjust for retention and fluctuations.

26. Mr. Clayton had a number of complaints about this approach. He said that the Engineer is required under GP 10 to determine the sum certified under GCC 79(1)(a)-(e) before he calculates the interim addition or deduction for AI. The Engineer cannot therefore have added or deducted that interim adjustment for AI prior to having calculated what it is. If the interim adjustment for AI forms part of the "total certified sum" under GCC 79(1), there would be no need for GP 10 to instruct deduction or addition of it prior to the deduction of retention money. It would already have been taken into account.

27. I reject that argument. First, when a contractor has opted to introduce AI, GCC 79(1) cannot be looked at in isolation from GP 10. Second, GP 10(B) simply provides a formula. It has to be read with (C) and (E).

28. Next, Mr. Clayton said that even if it is possible for the Engineer to add or deduct AI adjustment from the sum assessed prior to certification, he has no power to do so under the contract. Neither in GCC 79(1) nor in GP 10 is he mandated to carry out such an exercise which is contrary to what is instructed to be done.

29. I also reject that argument. It assumes that GP 10 cannot be construed consistently with the other provisions.

30. Then, Mr. Clayton argued that what the Engineer has authority to do is to value under GCC 79(1) where appropriate "based on the rates in the contract" not on prorated rates or based on rates with deduction of AI adjustment. There is no power or instruction under GCC 79(1) to deduct or add for AI adjustment in the certification process. No other provision seeks to amend GCC 79 to provide such power. Mr. Clayton said that the Engineer is mandated in GCC 61 to value variations at contract rates. It follows therefore, in the language of GCC 79(1), that it is appropriate for him to value at that rate in GCC 79 and not with a reduction for AI adjustment.

31. As I see it, that is exactly what the Engineer does. He values items (a)-(e) in GCC 79(1) in accordance with contract rates. Whether or not he is then required to bring in an adjustment for AI depends upon whether or not GP 10 can be linked consistently with GCC 79. If it can, and the Arbitrator found that it can, then the Engineer is following the overall requirements of the contract.

32. Mr. Clayton then argued that by a combination of GCC 79(1)(d) and GCC 69(2), if the Government's methodology is correct, nominated sub-contractors would be likely to be paid less than their contract rates which could not be right. I find some difficulty in following that point because GCC 69(2) requires the contractor to pay nominated sub-contractors "the sum certified in (the Engineer's interim certificate) as due in respect of work carried out or materials or services supplied by such nominated sub-contractor". That sum will be apparent on the face of the Engineer's certificate, whether or not he has made an additional adjustment for AI. There is no reason why the nominated sub-contractor should not be paid in full by the contractor albeit that the contractor may not have received as large a payment from Government as he might have hoped for.

33. A similar objection can be made to Mr. Clayton's point that, under GCC 79(1)(e), the Engineer is to value and certify other sums "in accordance with the contract." Such a sum would arise, for example, under GCC 63 for disturbance. According to Mr. Clayton, the Engineer is not empowered to value such other sums under GCC 79(1) any differently. That I accept. But again, the Engineer will value in accordance with his mandate and that valuation or estimation will appear independently in his certificate. It will be taken into the reckoning in its entirety. It is not that individual estimation but the overall total which may be reduced if there is negative AI.

34. Then Mr. Clayton argued that GP 10 states that AI is a lump sum and that additions or deductions on account of that lump sum shall be made in instalments by interim additions or deductions which are not to exceed in aggregate the amount of AI. If AI is to be taken into account in the calculation of fluctuations, then the addition or deduction in respect of AI will exceed the total amount of that lump sum. I see the force of that argument but it seems to me that there is a difference between prohibiting deductions or additions which will exceed the total lump sum of AI and providing for it to be used in calculating a different component which the Engineer has to consider.

35. In his reasons for his interim award, the Arbitrator concluded

"I hold that GCC 5 in the context of the Adjustment Item provides that the GCC and SCC relating to certification and clause GP 10 from the Bill of Quantities relating to the Adjustment Item are to be read together. I hold that GP 10, with its several provisions including the more recent sentence (E), must be read as a whole and that the respective sentences including the final paragraph, are of equal weight. The link to the GCC is contained in Sentence (B). It is to GCC 79, the certification clause. In turn, GCC 79 refers to GCC 89, replaced in the Contract by SCC 23, in which "Effective Value" is defined. And the final paragraph of GP 10, commences with the phrase "For the avoidance of doubt,...." and continues "the effective value referred to in Clause 89 of the General Conditions of Contract (1985) shall include all sums payable in respect of the Adjustment Item."

I hold the above clauses contain clear provisions to the effect that the Adjustment Item, introduced through GP 10, becomes part of the processes governed by GCC 79, in accordance with the link between GP 10 and the GCC described above. And then, in accordance with GCC 79 (1)(ii), the Adjustment Item interim adjustments become part of the "Effective Value", defined in GCC 89 / SCC 23 and processed therein. I hold that the foregoing provisions, albeit complex, are clear and unambiguous. I agree with the (Government). I hold that the Adjustment Item is to be included in the Effective Value for the purposes of contract price fluctuations."

36. I agree. There is force in some of the criticisms of the Government's methodology. Although the Government is appellant, however, the onus lies upon the Respondent to show that, on the balance of probabilities, the Arbitrator was wrong in his holding on this issue. GP 10 only comes into play if a contractor exercises his option to adjust. Necessarily, the combined provisions which seek to give effect to this option will be somewhat complex. The terms of GP 10, however, particularly (C) and (E) are clear. They dove-tail with GCC 79 and 89 without violence. They complement and do not contradict. The combined provisions admit of a straightforward and practical operation. In my view, the Arbitrator cannot be faulted in his holding.

Issue (ii)

37. Here, I fear the Arbitrator can be faulted.

38. The Arbitrator seems to have taken the view that the Government's sole defence depended on its plea that there was, by necessity, an implied term that AI is to be included for determining Effective Value in order to give business efficacy to the operation of the contract including GP 10.

39. Mr. Aiken complained that the Government's principal argument was one of pure construction of GP 10(E), the implied term being very much a fallback position. By concentrating on that term, the Arbitrator must have failed to give sufficient attention and weight to the Government's primary argument.

40. It does appear that the Arbitrator overlooked the Government's primary case or, at least, failed to indicate why he thought it had no merit.

41. The Arbitrator then focused on the word "payable" in GP 10(E) and said in his reasons

"Based on my knowledge and experience of the construction industry, including more than twenty years in Hong Kong, I hold that the word "payable" which, the Respondent pleads, should be interpreted as "accountable," has but one meaning and that the Claimant is correct in that it connotes payment due by the Employer to Contractor. I hold that the meaning is clear; that "payable" cannot be interpreted to include a meaning such as "accountable," as the Respondent contends or "both payable and deductible". I hold that such interpretation would be contrary to common usage in the construction industry."

42. The Arbitrator went on to reject the implied term.

43. Mr. Aiken complained that there was no evidence of common usage in the industry and that in any event the parties had no notice of the Arbitrator's view.

44. An arbitrator may make use of his professional experience and knowledge. It is one reason why parties go to arbitration - a person who understands their particular field will better understand their dispute and dispose of it more effectively and quickly. However, if an arbitrator wishes to use his knowledge as a reason, as opposed to a tool, for deciding the dispute he must make this known to the parties and give them an opportunity to address the point.

45. On these grounds alone, I might have been minded to allow the appeal, the Arbitrator having misdirected himself. The Arbitrator's decision on this issue is, however, untenable and the Government must succeed in its appeal.

46. On reading GP 10(E), it never occurred to me that "payable" was anything other than a somewhat loose way of bringing into account, for the purpose of Effective Value, all sums calculated in accordance with GP 10. The Government's suggestion that "accountable" is an appropriate interpretation seems to me as good a way of expressing the position as any.

47. First, it must be said that there is some inconsistency in the Arbitrator's reasons. If, as he found in relation to issue (i), "the Adjustment Item interim adjustments become part of the Effective Value", it is difficult to see why GP 10(E) should exclude negative AI. Basing his decision as he did on "payable", the Arbitrator in my view was flying in the face of the earlier provisions of GP 10 which provide for both additions and deductions for AI. GP 10(E) would need clearly and expressly to exclude negative AI in order to reverse such provisions. It does not. Had the intention been to exclude negative AI, words of exclusion or words confining (E) to positive AI would have been required. "Payable" is plainly referable to "additions or deductions" in (B) and (C).

48. The Government's argument was that it would be unreasonable and uncommercial to interpret (E) as contended for by the Respondent and as found by the Arbitrator. The effect would be that the Respondent would get an increase in Effective Value for the purpose of fluctuations but would suffer no diminution where he had seen fit to make himself more competitive by opting for a negative AI. In other words, he would win on both the swings and roundabouts.

49. According to Mr. Clayton, it is not a question of the Respondent's interpretation being unreasonable or uncommercial. He said that what has happened is that the Government has simply made a bad bargain. There was never an intention that positive and negative AI should receive even - handed treatment or that BQ rates should be affected, and certainly not reduced, by bringing negative AI into the calculation of Effective Value. Mr. Clayton said that a contractor asked about GP 10 would not have viewed it otherwise.

50. I find some difficulty in discerning why positive AI should be singled out for special treatment. I also have difficulty in accepting that a contractor, who has already put a premium on his services, would expect to derive an additional benefit in relation to fluctuations; while, if he had made himself more competitive, would expect Effective Value to remain unaffected.

51. Once it is established as the Arbitrator held, in my view correctly, that AI adjustments become part of Effective Value, I can see no warrant for then differentiating between positive and negative AI. "Payable" certainly does not justify such differentiation.

52. "Payable" is not a term of art: Latilla v. IRC [1943] AC 377 at p.384. In the context in which it is used here, I am satisfied that the strict interpretation put on "payable" by the Respondent is unjustified.

53. It is not in the circumstances necessary for me to deal with the Government's arguments in relation to implied term and contra proferentem. I content myself with saying that I can see no necessity for implying such a term into the contract. GP 10, not being in the nature of an exclusion or exception clause, it would, if necessary, be construed against the Government which was responsible for drafting it.

54. In the circumstances, I allow the appeal. As agreed between the parties, I remit the interim award to the Arbitrator with my opinion, as expressed in this judgment, so that he may deal appropriately with these and other pending arbitrations which involve the same point.

55. I make an order nisi that the Respondent pay the Appellant's costs of this appeal.