KIM HUNG CONSTRUCTION & ENGINEERING CO. LTD v. STANDARD REFRIGERATION & ENGINEERING CO. LTD

HCCT 37/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION LIST NO. 37 OF 2012

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JUDGMENT

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1.  This is an application of Kim Hung Construction & Engineering Co Ltd (“Kim Hung”) made by originating summons for leave to appeal against the Interim Award Save as to Costs dated 23 August 2012 (“the Interim Award”) in its arbitration with Standard Refrigeration & Engineering Co Ltd (“Standard”).

2.  It is trite law that, in considering whether to grant leave to an applicant to appeal against an arbitral award, the court needs to consider the merits of the appeal itself.

3.  In the oral hearing on 5 March 2013, I have raised the question that, if the court were to grant leave to appeal, whether the court should proceed to determine the substantive appeal in the same hearing.  By that time, both counsel indicated to the court that there had prepared the submissions on the basis that it was a leave application only, and so they were not prepared to treat the hearing as the substantive appeal if leave to appeal were to be granted.  However, having considered the submissions of the parties, it is clear that the merits of the appeal would depend very much on the construction of the terms in the various contractual documents.  As the court has to determine the meanings of these terms in any event, it would be more convenient, time and costs efficient and desirable for the court, in the case that leave to appeal is granted, to deal with substantial appeal in the same hearing. The parties were therefore invited to make further submissions on the proposal and whether they would like to present further evidence and submissions on the substantive appeal.  After considering the further submissions of the parties, I decided to conduct the appeal in the manner as proposed.  For the substantive appeal, both parties did not file additional evidence but they did make further written submissions to the court (“the Further Submissions”).

BACKGROUND

4.  The present dispute arose out of a programme implemented by the Hospital Authority (“HA”) to improve the ventilation systems in various public hospitals after the outbreak of SARS in Hong Kong in 2003.

5.  On or about 7 December 2005, Kim Hung (the Main Contractor) entered into a contract with HA (the Employer) to undertake construction works for the improvement of infection control provisions for autopsy facilities in 11 public hospitals.  One of the construction works was the upgrading of the Mechanical Ventilation Air-Conditioning System which was sub-contracted to Standard (the Sub-Contractor).

6.  The sub-contract between Kim Hung and Standard (“the Sub-Contract”) was based on the Hong Kong Construction Association’s Standard Form of Domestic Sub-contract 1994 Edition (“SFDSC”) as supplemented and modified by Standard’s letter dated 3 April 2006 and Kim Hung’s subsequent letter also of the same date.  By this subsequent letter of Kim Hung, the terms and conditions of the main contract between HA and Kim Hung (“the Main Contract”), i.e. the Hong Kong Standard Form of Building Contract with the General Conditions amended by para 7.03 of the Specification Preliminaries (“SP”), were applied to the Sub-Contract on a “back-to-back” basis.

7.  Disputes subsequently arose between HA, Kim Hung and Standard.  Standard commenced arbitration proceedings against Kim Hung on 22 July 2010 (“the Arbitration”), and Kim Hung also commenced arbitration proceedings against HA on 9 September 2010.

8.  In the Arbitration, Standard claimed against Kim Hung for:

(i) additional expenditure in the sum of $1,067,824 incurred by Standard for Kim Hung’s delay in giving possession of the Sections 2 and 3 Hospitals as defined in the Schedule in SP 6.02 of the Main Contract and in the Schedule of Tentative Date for Possession and Handover annexed to the said letter of Kim Hung dated 3 April 2006 (“the Delay Claim”);

(ii) variation of CCMS Operation Modes in the sum of $604,190 (“the CCMS Variation Claim”); and

(iii) variation due to the omission of the MVAC Works at the Prince of Wales Hospital in the sum of $1,081,680 (“the Omission Claim”).

9.  On the other hand, Kim Hung counterclaimed Standard for loss and damage in the sum of $2,572,670 suffered as a result of the negligence on the part of Standard in failing to replace an old air duct at the North District Hospital, and as a result the contractually required fresh air intake and air pressure were not attained.

10.  After the arbitral hearing, the Arbitrator made and published the Interim Award in the following terms:

(i) Kim Hung is liable to Standard for the Delay Claim in the sum of $1,143,144.06 together with interest thereon;

(ii) Kim Hung is liable to Standard for the CCMS Variation Claim but the quantum assessed for this claim is nil;

(iii) Kim Hung is not liable to Standard for the Omission Claim; and

(iv) Standard is liable to Kim Hung for the Counterclaim in the sum of $428,301.95 together with interest thereon.

11.  The intended appeal by Kim Hung is related to both the Delay Claim and the issue of liability under the CCMS Variation Claim.  However, since the quantum assessed for the CCMS Variation Claim is nil, Kim Hung is not pressing for the appeal in respect of such claim.

PRINCIPLES ABOUT THE GRANTING OF LEAVE TO APPEAL AGAINST ARBITRAL AWARD

12.  The Notice of Arbitration of this Reference was issued on 22 July 2010 and hence the Reference is governed by the Arbitration Ordinance (Cap 341).  The Arbitration Ordinance (Cap 341) was repealed and replaced by the new Arbitration Ordinance (Cap 609) which came into operation on 1 June 2011. However, according to para 1 of Schedule 3 of the current Arbitration Ordinance (Cap 609), this application for leave to appeal is a set of proceedings related to the Reference which should be governed by the repealed Ordinance.

13.  Further, by virtue of s 110 of the current Arbitration Ordinance (Cap 609), the repealed O 73 of the RHC (Cap 4A) continues to apply to this application for leave to appeal.

14.  Under the repealed Arbitration Ordinance (Cap 341), s 23(2) provides that an appeal shall lie to the court on any question of law arising out of an award made on an arbitration agreement, and on the determination of such appeal the court may by order: (a) confirm, vary or set aside the award; or (b) remit the award for reconsideration by the arbitrator together with the court’s opinion on the question of law.

15.  S 23(2) of the repealed Arbitration Ordinance (Cap 341) provides that an appeal must be brought with the consent of all the other parties to the reference or with the leave of the court.  As no consent has been given by Standard, the present appeal requires the leave of the court.

16.  S 23(4) of the repealed Arbitration Ordinance (cap 341) further provides that the court shall not grant leave to appeal unless it considers that, having regard to all the circumstances, the determination of the question of law concerned can substantially affect the rights of one of more of the parties to the arbitration agreement.

17.  Apart from the consideration as expressly stated in s 23(4), the following additional requirements have been laid down in the Court of Final Appeal’s decision in Swire Properties & Ors v Secretary for Justice (2003) 6 HKCFAR 236 in granting leave to appeal against an arbitral award:

(i) where the question is one of general public importance or the construction of a standard clause is involved, there is at least serious doubt as to the correctness of the award; or

(ii) where the construction of a “one-off” clause is involved, the arbitrator’s construction appears to be obviously wrong.

18.  In Penta-Ocean Construction Co Ltd v CWF Piling & Civil Engineering Co Ltd [2007] 3 HKLRD 233, A Cheung J (as he then was) held the following at paras 4 to 12 of the judgment:

(i) insofar as the construction of a standard clause and a clause contained in a letter of acceptance is concerned, it is or is very near to a standard clause situation and the clause does not turn the case into a “one-off” case; and

(ii) while amendments made by the parties to a standard form contract might be “one-off”, the question what is the effect of the amending words on the standard form is a general one.

19.  In the present case, I do not find it necessary to determine whether the construction is one involving a standard clause or a “one-off” clause, as I take the view that the Arbitrator has clearly made a mistake in his construction of the relevant clauses in the Main Contract and the Sub-Contract.

20.  Although Kim Hung has advanced 6 grounds of appeal, the dispute between the parties can be narrowed down to the following two issues:

(i) whether there had been contractual delay on the part of HA in giving possession of the hospital sites resulting in corresponding contractual delay on the part of Kim Hung in giving possession of the hospital sites to Standard (“the Delay Issue”); and

(ii) whether the payment by Kim Hung to Standard was on a “pay-when-paid” basis, i.e. Kim Hung would only be contractually liable to pay Standard conditional upon receipt of the payment from HA (“the Payment Issue”).

21.  I will deal with these two issues in turn.

THE DELAY ISSUE

(a) The relevant contractual provisions

22.  The Delay Issue involves the construction of the following terms in the Main Contract and the Sub-Contract.  Firstly, SP 6.02 of the Main Contract provides the following:

“The Main Contractor shall be given sectional possession of the Site in groups as stated in the Appendix to the General Conditions of Contract and shall return these groups to the Employer on or before the relevant Date for Handover as stated below or a date which may be notified by the Architect in writing, whichever is the later:

[a table providing for Tentative Dates of Possession, Tentative Dates of Handover to Hospitals, and Time for Completion of the Works for 3 groups of hospitals: Sections 1 to 3 Hospitals]

The Main Contractor shall note that the possession dates given above are tentative dates only and the Main Contractor is deemed to have allowed in his tender for all extra costs and expense that may be incurred due to early or delayed possession of any of the Site and the Main Contractor shall not be entitled to claim any extension of time or loss and expense in the event that the actual dates are different from the above.

For the avoidance of doubt, the Time for Completion of the Works shall be calculated from the first date of possession of the Areas outside Mortuary.

The actual possession dates for each Section will be notified in writing by the Architect.

… … …”

23.  Further, SP 7.02 provides that the dates for site possession of all Sections 1 to 3 Hospitals are “to be notified by the Architect”.

24.  In the letter of acceptance from Kim Hung dated 3 April 2006, Kim Hung provided a schedule of Tentative Date for Possession and Handover of each hospital to Standard.

25.  In advancing the Delay Claim, Standard relies on the following contractual provisions.  Clause 10.2 of the Sub-Contract provides:

“The Sub-Contractor shall have equivalent rights to payment for complying with or as a consequence of an instruction of the Employer’s Representatives or other event as the Contractor has under the Main Contract.”

26.  On the other hand, clause 11(4) of the Supplementary Condition of Contract (“SCC”) of the Main Contract (which amended clause 21 of the Main Contract) stipulates the following:

“If upon written application having been made by the Main Contractor to the Quantity Surveyor, the Quantity Surveyor is of the opinion that the Main Contractor has been involved in additional expenditure by reason of the progress of the Works or any part thereof having been materially affected by the failure of the Employer to give possession in accordance with this Clause then the Quantity Surveyor shall ascertain the cost incurred and shall certify in accordance with Clause 30 of these Conditions.”

27.  The Main Contract provides for the completion of works in stages.  After the completion of works in Section 1 Hospitals, the sites in Section 2 Hospitals would be handed over to the Main Contractor and the Sub-Contractor, and so on.  The Delay Claim relates to the alleged delays in handing over sites of Sections 2 and 3 Hospitals.

28.  Standard submits that Kim Hung is entitled to claim additional expenditure when the Employer had delayed in giving possession of sites pursuant to SCC 11(4), and accordingly Standard has the same right for payment under clause 10.2 of the Sub-Contract.

29.  On the other hand, Kim Hung claims the following:

(i) the dates provided for in the Main Contract and the Sub-Contract were tentative dates only, and the actual dates for possession of the sites would be notified by the Architect;

(ii) SP 6.02 expressly provides that the Contractor had to make allowance for any delay in gaining possession of the sites without any claim for compensation; and

(iii) SCC 11(4) would only be applicable if the Employer did not give possession of the sites to the Main Contractor or the Sub-Contractor after the Architect had issued the notifications of possession of sites.

(b) The decision of the Arbitrator

30.  In reaching the decision, the Arbitrator proceeded on the basis that there was a conflict between the provisions in SP 6.02 and SCC 11(4).  In paras 27 to 30 of the Reasons for the Interim Award (“the Reasons”), the Arbitrator said the following:

“27. Apparently, there was conflict between SP 6.02 and SCC 11(4) in respect of the entitlement to the claim.

28. I FIND that SP 6.02 and SCC 11(4) have to be read together. SP 6.02 is a general provision and is subject to the specific provision of SCC 11(4) which allows the claim of additional payment in situation when there is delay in giving possession by the Employer.

29. Cheung J in Penta Ocean Construction Co. Ltd v CWF Piling & Civil Engineering Co Ltd [2007] 3 HKLRD 233 stated that … … … Applying to the present case, the supplementary provision of SCC 11(4) must prevail over the general provision SP 6.02.

30. In the present situation, I FIND that the Employer caused the delay in giving possession of the hospital sites.  [Kim Hung] therefore was entitled to claim payment under SCC 11(4).  Pursuant to Clause 10.2 of the Sub-Contract, [Standard] should have the equivalent right for payment as [Kim Hung] had under the Main Contract.”

31.  The Arbitrator also relied on the admissions made by Kim Hung in finding that there was delay on the part of the Employer in giving possession of the hospital sites to Kim Hung and its sub-contractor Standard.  The Arbitrator said the following in the Reasons:

“12. [Kim Hung] admitted that the Employer was late in giving possession of the sites for section 2 hospitals. There was delay of at least 3 months for the possession of Section 2 hospitals but there was no delay for Section 3 hospitals.

13. [Standard] disagreed and argued that such delay caused a delay in giving possession of Section 3 hospitals because works could only commence after the sites of Section 2 hospitals were handed back to the Employer. This delay caused financial loss to [Standard].

… … …

16. I FIND as a FACT that there was delay in possession of all 11 hospitals for the 3 sections. For Section 1 hospitals (Nethersole Hospital, Kwong Wah Hospital, United Christian Hospital), the delay of possession was all one odd month (deferred from 16 November 2005 to 23 December 2005). For Section 2 and Section 3, there were longer periods of delay.

… … …

30. In the present situation, I FIND that the Employer caused the delay in giving possession of the hospital sites.  [Kim Hung] therefore entitled to claim payment under SCC 11(4).  Pursuant to Clause 10.2 of the Sub-Contract, [Standard] should have the equivalent right for payment as [Kim Hung, wrongly stated as Standard in the Reasons] had under the Main Contract.”

32.  Further, as Kim Hung had all along maintained that there was a cause of action against the Employer for the Delay Claim, the Arbitrator also relied on such admission in finding that there was delay on the part of the Employer in giving possession of the sites to Kim Hung.  In this regard, the Arbitrator said the following:

“31. It is relevant to note that during the execution of the works, [Kim Hung] all along maintained that there was a cause of action against the Employer for the delay claim. This was supported by the following [Kim Hung’s] correspondences to the Architect or the QS: … … …

32. I FIND as a FACT that [Standard] is entitled to claim against [Kim Hung] by reason of delay in delivering site possession by the Employer.”

(c) Merits of the Delay Claim

33.  With respect to the learned Arbitrator, I cannot agree with his reasoning.

34.  Firstly, I do not see any conflict between SP 6.02 and SCC 11(4).  To me, the meaning of SP 6.02 is more than clear.  It expressly stipulates that:

(i) the dates of possession of the sites of the 11 hospitals were all tentative dates only;

(ii) by the tentative nature of the dates of possession, the Main Contractor was deemed to have allowed in his tender for all extra costs and expenses that might be incurred due to early or delayed possession of any of the sites and the Main Contractor shall not be entitled to claim any extension of time or loss and expenses in the event that the actual dates were different from the tentative dates; and

(iii) the actual possession dates for each Section would be notified in writing by the Architect.

35.  The fact that the dates of possession were tentative which had to be notified by the Architect in writing is actually supported by the Arbitrator’s own finding.  In para 22 of the Reasons, the Arbitrator said the following:

“At the time [Kim Hung] accepted [Standard’s] offer on 3 April 2006, postponement of the “tentative dates” for possession of all the sites had already occurred. In the Hearing, Sam Chow ([Standard’s] project manager) gave evidence and agreed that the actual dates of possession had to be notified in writing by the Architect because the dates of possession at that period were bad in the building industry.”

36.  The tentative nature of the dates can also be illustrated by one instance.  The tentative dates of possession of Alice Ho Miu Ling Nethersole Hospital, Pamela Youde (Nethersole Eastern) Hospital, Kwong Wah Hospital and United Christian Hospital were all before the date of the letter of acceptance by Standard dated 3 April 2006.  If Standard’s argument is correct, Kim Hung would be liable to pay damages to Standard once the Sub-Contract was made, as some of the tentative dates were actually before the making of the Sub-Contract.  This simply cannot be right.  Hence in my judgment, the dates of possession stated in SP 6.02 were all tentative dates only.  As specified, the Main Contractor had to make allowance in his tender for all extra costs and expenses that might be incurred due to early or delayed possession of any of the sites and the Main Contractor shall not be entitled to claim any loss or expenses in the event that the actual dates were different from the tentative dates.

37.  On the other hand, SCC 11(4) would govern the scenario if the Employer did not give possession of the hospital sites to the Main Contractor after the notification issued by the Architect, then the Main Contractor is entitled to lodge a delay claim against the Employer.  There is therefore no conflict between SP 6.02 and SCC 11(4).

38.  I also agree with Mr Chong, counsel for Kim Hung, that the Arbitrator had wrongly relied on the alleged admissions made by Kim Hung in finding that there was actionable delay on the part of the Employer or Kim Hung in giving possession of the hospital sites to Standard.

39.  Apparently, the Arbitrator was relying on the admission made by Kim Hung in para 8 of the Defence and Counterclaim in the Arbitration proceedings.  In that paragraph, Kim Hung was simply referring to para 11 of the Statement of Claim, which spelt out the respective “periods of delay” for Sections 2 and 3 Hospitals with reference to the tentative dates of possession set out in SP 6.02 of the Main Contract and the actual dates of possession.  It was therefore right for Kim Hung to admit that there was such a lapse of time in the tentative dates and the actual dates as a matter of fact, but this cannot be taken as an admission of contractual delay on the part of the Employer or Kim Hung.  Further, it was made clear in the opening and final submissions of Kim Hung’s counsel in the arbitral hearing that contractual delay was a disputed issue in the proceedings, and so the Arbitrator had erred in law in just relying on these so-called “admissions” in finding that Standard has a valid delay claim in law against Kim Hung or HA.

40.  Similarly, the Arbitrator also should not have relied on the “admissions” of Kim Hung in its correspondence with the Architect and the Quantity Surveyor in finding that there is a valid delay claim in law. It is clear that the Sub-Contract was made on a back-to-back basis with the Main Contract.  Under SFDSC 10.3, Kim Hung as the Main Contractor had a duty to submit the delay claim to the Employer on behalf of Standard, and Kim Hung shall take all reasonable steps to secure from the Employer the contractual benefits in respect of any such claim by Standard.  Kim Hung therefore had to present the delay claim on Standard’s behalf, and in so doing, Kim Hung had to make an assertion to the Employer that the delay claim was a valid one.  Under such circumstances, such assertion by Kim Hung should not be regarded as an admission that there is a valid contractual delay claim in law vis-à-vis Kim Hung and Standard.

41.  In the Further Submissions, Ms Lam, counsel for Standard, has also raised the following arguments:

(i)   as the Architect had not issued formal notifications for the possession of sites, the tentative dates for possession should be regarded as the actual possession dates;

(ii)   a sensible and businesslike interpretation of the Main Contract and the Sub-Contract would support a finding that the dates set out in SP 6.02 were the actual dates for possession; and

(iii)  the ambiguity arising from the terms in SP 6.02 and SCC 11(4) should, by reason of the contra proferentum rule, be resolved in favour of Standard.

42.  I cannot accept these arguments.  Firstly, whether the Architect had issued notifications for possession of sites was not an issue raised in the Arbitration, and that was why the Arbitrator had not dealt with such issue anywhere in the Reasons.  As I see it, the meanings of SP 6.02 and SCC 11(4) are clear.  The actual possession dates for each Section would be notified in writing by the Architect.  If it is Standard’s case that, because of the lack of formal notifications, it was the understanding of the parties that the tentative possession dates were to be regarded as actual possession dates, then the matter had to be expressly raised in the Arbitration proceedings so that both parties would have the opportunity to adduce evidence on the issue.  In any event, the Reasons do not contain sufficient materials to support Ms Lam’s argument in this regard, and hence the Interim Award relating to the Delay Claim should not be allowed to stand.

43.  Secondly, it is not open to the court to rewrite a contract on the ground of commercial fairness.  Standard did have the opportunity to look at all the terms of the Main Contract before committing itself to the project.  Further, the terms of SP 6.02 are clear.  Any risk of additional expenditure being incurred by reason of the difference between the actual dates of possession and the tentative dates should be within the contemplation of Standard, and it was always open to Standard to reflect such risk in the tender price.  As the court cannot turn a blind eye to the clear language of the relevant clauses, there is no room for the court to disturb such allocation of risks between the parties as clearly expressed in the Main Contract and the Sub-Contract.  Further, as commercial fairness was not an issue canvassed in the Arbitration proceedings, the court should not jump into any conclusion about the commercial fairness of a particular arrangement agreed by the parties.

44.  Finally, I do find that there is any ambiguity in the terms contained in SP 6.02 and SCC 11(4), and so there is no room for the application of the contra proferentum rule.

45.  As I have mentioned above, the Arbitrator’s construction of the relevant terms in the Main Contract and the Sub-Contract is clearly wrong.  No matter whether the relevant contractual terms are standard or “one-off” clauses, the court should grant leave to appeal against the Arbitrator’s finding on the Delay Claim.  Further, adopting the dicta of A Cheung J in Penta-Ocean, supra, theses clauses are very much standard clauses or very nearly standard clauses, and the construction of these clauses would have considerable impact as to how the parties can allocate their risks resulting from the change of dates in the handing over of construction sites, leave to appeal should therefore be granted in any event.  I therefore so order.

46.  I also proceed to deal with the substantive appeal.  As the Arbitrator had erred in the construction of the relevant contractual provisions, I allow the appeal and set aside the Interim Award relating to the Delay Claim.

47.  My opinion on the Delay Claim should have been sufficient to dispose the appeal.  However, in case I am wrong on the Delay Issue, the Payment Issue would become relevant and so I also give my opinion on such issue.

THE PAYMENT ISSUE

(a) The relevant contractual provisions

48.  In opposing Standard’s claim, Kim Hung argues that payment by Kim Hung to Standard under the Sub-Contract was on a “pay-when-paid” basis, i.e. Kim Hung would only be contractually liable to pay Standard conditional upon receipt of payment from the Employer.

49.  As submitted by Mr Chong, the commercial purpose of “pay-when-paid” clauses is to share a proportion of the loss suffered by the main contractor with the sub-contractor in the event that the employer becomes insolvent or fails to pay the main contractor (see: Chitty on Contracts – Hong Kong Specific Contracts (3 ed), para 5-140 and Construction Law and Practice in Hong Kong (2 ed), para 15-070).

50.  Kim Hung accepts that sufficiently clear wording must be used in contractual provisions to express a “pay-when-paid” agreement (see: Wo Hing Engineering Ltd v Pekko Engineers Ltd, unreported, HCA 5561/1996, 7 September 1998, at para 47, Honeywell Ltd v Kin Ming E&M Works Ltd and Anr, unreported, HCCT 76/2001, 5 May 2004, at para 23, Massford (HK) Ltd v Wah Seng General Contractors Ltd [2006] 1 HKC 58, at paras 62H-63A, Chitty on Contracts – Hong Kong Specific Contracts, supra, para 5-140).

51.  The question whether there was a “pay-when-paid” agreement in the Sub-Contract between Kim Hung and Standard involves the construction of a number of provisions in the letter of acceptance dated 3 April 2006 from Kim Hung, the Sub-Contract (based on SFDSC) and the Main Contract.

52.  Firstly, clauses 1 and 2 of the letter of acceptance dated 3 April 2006 from Kim Hung apply all terms of the Main Contract to the Sub-Contract on a back-to-back basis.

53.  Secondly, under SCC 11(4) of the Main Contract, Kim Hung has a contractual right to lodge a delay claim for additional expenditure if the Quantity Surveyor ascertains the costs incurred and certifies the same in accordance with the Main Contract.  Further pursuant to SCC 11(4) and 11(6) as well as SCC 4 of the Main Contract, all variations required by the Architect and the direct loss and expenses thereof shall be measured, valued and ascertained by the Quantity Surveyor.

54.  Thirdly, SFDSC 10.3, which is a sub-clause under the heading “Notices and Claims”, provides the following:

“Subject to the Sub-Contractor complying with Clause 10.1, the Contractor shall take all reasonable steps to secure from the Employer such contractual benefits, if any, as may be claimable in accordance with the Main Contract for any circumstances that may affect the execution of the Sub-Contract Works and the Sub-Contractor shall in sufficient time afford the Contractor all information and assistance that may be requisite to enable the Contractor to claim such benefits. On receiving any such contractual benefits from the Employer, the Contractor shall within fourteen (14) days of receipt of such benefits, in turn pass on to the Sub-Contractor such proportion thereof as may in all the circumstances be fair and reasonable, subject to any deductions allowable under the provisions of the Sub-Contract. Upon written request, the Contractor shall supply the Sub-Contractor with a copy of any valuation of additional payment due to delay and/or disruption received from the Employer or his consultants in respect of the Sub-Contract Works. Save as aforesaid, the Contractor shall have no liability to the Sub-Contractor in respect of any condition, obstruction or circumstance that may affect the execution of the Sub-Contract Works and the Sub-Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Sub-Contract Price to cover the provision and doing of all things necessary for the performance of his obligations under the Sub-Contract.

Provided always, that nothing in this Clause shall prevent the Sub-Contractor from claiming extensions of time and/or damage, loss and expense for delays in the execution of the Sub-Contract Works caused by the act or default of the Contractor.”

55.  Fourthly, SFDSC 15 is a clause with the heading “Payment”. SFDSC 15.1 to 15.4 provide the procedures as to how the Sub-Contractor could claim for payment for the works done by it under the Sub-Contract.  In short, the Sub-Contractor would provide a statement of the value of works to the Main Contractor, who would then submit the statement to the Employer and make an application for payment.

56.  The remaining part of SFDSC 15 reads as follows:

“15.5 Within forty-nine (49) days of the Specified Date or otherwise as agreed but subject as hereinafter provided, there shall be due to the Sub-Contractor in respect of the value of the work and materials if included in a valid statement payment of a sum calculated in accordance with the rates and prices specified in this Sub-Contract, or by reference to the Sub-Contract Price, as the case may require, but subject to a deduction of previous payments and of retention monies at the rate(s) specified in the Third Schedule hereto until such time as the limit of retention (if any) therein specified has been reached.

15.6(a) Subject to Clauses 3.4, 10.4 and 17.3 and as hereinafter provided and without prejudice to any rights which exist at Common Law, the Contractor shall be entitled to withhold or defer payment of all or part of any sums otherwise due pursuant to the provisions hereof where :-

… … …

(iii) the amounts or quantities included in any valid statement are not certified in full by the Employer’s Representatives, providing such failure to certify is not due to the act or default of the Contractor;

(iv) the Contractor has included the amounts or quantities set out in the valid statement in his own statement in accordance with the Main Contract and the Employer’s Representatives have certified but the Employer has failed to make payment in full to the Contractor in respect of such amounts or quantities, or

(v) a dispute arises or has arisen between the Sub-Contractor and the Contractor and/or the Contractor and the Employer involving any question of measurement or quantities or any matter included in any such valid statement.

(b) Any payment withheld under the provisions of Sub-Clauses (a)(iii), (iv) or (v) above shall be limited to the extent that the amounts in any valid statement are not certified, not paid by the Employer or are the subject of a dispute as the case may be.

(c) In the event of the Contractor withholding any payment, he shall notify the Sub-Contractor of his reasons in writing as soon as is reasonably practicable but not later than the date when such payment would otherwise have been payable.

(d)The provisions of this Clause with regard to the time for payment shall not apply to the amounts or quantities in any valid statement by the Sub-Contractor which are included in the Contractor’s statement of final account to the Employer under the provisions of the Main Contract. In respect of any such amounts or quantities, payment shall be due seven (7) days after receipt by the Contractor of any payment which includes a sum in respect of such amounts or quantities.

… … …

15.7(a) Within forty-nine (49) days of the issue by the Employer’s Representatives of a certificate including an amount in respect of payment to the Contractor of the first half of the retention monies or where the Main Works are to be completed by sections for any section in which the Sub-Contract Works are comprised, the Contractor shall pay to the Sub-Contractor the first half of the retention monies under this Sub-Contract.

(b) Within seven (7) days of the Contractor’s receipt of any payment under the Main Contract which is by way of release of the second half of the retention monies, the Contractor shall pay the Sub-Contractor the second half of the retention monies under this Sub-Contract.

15.8 Within three (3) months after the Sub-Contractor has finally performed his obligation under Clause 13 (Maintenance and Defects), or within fourteen (14) days after the Contractor has recovered full payment under the Main Contract in respect of the Sub-Contract Works, whichever is the sooner and provided that one (1) month has expired since the submission by the Sub-Contractor of his valid statement of final account to the Contractor, the Contractor shall pay to the Sub-Contractor and the Sub-Contract Price and/or any other sums that may have become due under the Sub-Contract, less such sums as have already been received by the Sub-Contractor on account.

… … …”

(b) The decision of the Arbitrator

57.  As seen above, the Sub-Contract contains quite elaborated provisions governing the time for payment.  In rejecting Kim Hung’s argument that the payment under the Sub-Contract was on a “pay-when-paid” basis, the Arbitrator relied on the terms in SFDSC 15.8.  In the Reasons, the Arbitrator said the following:

“63. I hold that the effect of Clause 15.8 is that [Standard] should be paid by [Kim Hung] if either of these two conditions were satisfied:-

(a) [Standard] had finally performed the obligation which is sooner than [Kim Hung] has received payment; and

(b) 1 month had expired since the submission of valid statement of final account.

64. I FIND that Clause 15.8 clearly illustrates that payment to sub-contractor is not on a ‘pay-when-paid’ basis.

[The Arbitrator then dealt with the authorities in Hong Kong] … … …

70. Unlike the Massform (HK) Limited case, there was absence of clear contractual provision that payment was on a ‘pay-when-paid’ basis. I FIND that [Kim Hung] was liable to pay [Standard] despite the fact that [Kim Hung] was not paid by the Employer. [Kim Hung] was liable to pay [Standard] after a reasonable time had elapsed after payment claim had been made by [Kim Hung] to the Employer.

71. [Kim Hung] first submitted the delay claim to the Architect on 18 November 2006. Despite the [Quantity Surveyor] refused the claim on 19 March 2008, the contemporaneous documents indicated that [Kim Hung] had not taken any further action to chase the Employer for the payment for 2 odd years. There had been inaction and an inordinate delay of [Kim Hung] in pursuing the claim against the Employer. [Kim Hung] only commenced arbitration proceedings against the Employer late on 9 September 2010. This was after [Standard] had served the Notice of Arbitration to [Kim Hung] on 22 July 2010.

72. [Kim Hung] explained that arbitration proceedings could only commence after the issuance of the final payment certificate and therefore there was no delay in instituting action against HA. The final payment certificate was issued on 27 August 2010. I reject this explanation. I hold that the ‘arbitration’ clause [Clause 35 of the Main Contract] did not forbid [Kim Hung] to commence arbitration proceedings before the issuance of the final payment certificate.

73.       I FIND that [Kim Hung] had failed to take reasonable steps to secure the contractual benefit for [Standard] and [Kim Hung] should be liable for additional expenses incurred by [Standard] in respect of the delay in possession of the hospital sites.”

(c) The court’s opinion on the Payment Issue

58.  As I see it, the SFDSC contains very detailed provisions relating to the requests for payments by sub-contractor and when those requests were due for payment.  So far as SFDSC 15 is concerned, it refers to a “valid statement” by the sub-contractor setting out the value of the work properly done under the sub-contract and of all material delivered to the site for incorporation in the sub-contract works.  The main contractor would then submit the “valid statement” to the employer for payment.  Under SFDSC 15.5, it provides the due date for the payment of the sums specified in the “valid statement”, but the main contractor is entitled to withhold payments under the circumstances specified in SFDSC 15.6.  Under SFDSC 15.8, the main contractor has to pay to the sub-contractor the sub-contract price and “any other sums that may become due under the Sub-Contract” within 3 months after the sub-contractor has fully performed his obligations relating to maintenance and defects, or within 14 days after the contractor has recovered full payment under the main contract, whichever is the sooner, subject to the provisio that 1 month has expired since the submission of the “valid statement of the final account” to the main contractor.

59.  Both parties concentrate on the interpretation of the provisions contained in SFDSC 15, and so I have to proceed on the basis that SFDSC 15 governs the procedure for the lodging of the Delay Claim, and Standard had properly included the Delay Claim in a “valid statement” as defined in SFDSC 15.

60.  Mr Chong submits that there is an apparent conflict between the provisions in SFDSC 15.6(d) and 15.8.  As SFDSC 15.6(d) is expressed to apply to the whole SFDSC 15, SFDSC 15.8 should be read subject to SFDSC 15.6(d).

61.  Construction contracts may provide for works to be completed in stages and sub-contractor may submit “valid statements” to the main contractor from time to time.  SFDSC 15.8 deals with the specific scenario that the sub-contractor has completed all the works under the sub-contractor and submitted the “valid statements of final account” to the main contractor.

62.  To me, the main point here is whether the payment under the Delay Claim is a sum due under the Sub-Contract under SFDSC 15.8.  After construing the relevant provisions in the contracts, I find that the amount claimed under the Delay Claim has yet been due for payment.

63.  SFDSC 15.5 actually provides for the due date for the payment of the value of work and materials if included in a “valid statement”, which is 49 days after the Specified Date as defined.  Despite such provision, SPDSC 15.6(a) provides that the Main Contractor is entitled to withhold payment under certain circumstances, and it is common ground that those circumstances are applicable in the present case (i,e. the Delay Claim has not been certified by the Architect, Kim Hung has not received the payment for the Delay Claim and there is a dispute between the Employer and Kim Hung relating to the Delay Claim).  Further, SFDSC 15.6(d) specifically provides that the amounts or quantities in any valid statement by the Sub-Contractor which had been included in the Main Contractor’s “statement of final account” to the Employer would only be due 7 days after receipt by the Main Contractor of any payment which included a sum in respect of such amounts or quantities.  Under such circumstances, the payment for the Delay Claim simply has not been due for payment under the Sub-Contract.

64.  Further support can also be found in the wording of SCC 11(4) of the Main Contract.  SCC 11(4) forms the basis of Standard’s Delay Claim against Kim Hung and the Main Contractor.  However, the said provision requires the payment to be certified by the Architect.  In such circumstances, the Delay Claim would not have been due for payment under the Main Contract before certification by the Architect.  As the  terms of the Main Contract were applied to the Sub-Contract on a back-to-back basis, the Delay Claim has yet been due for payment under the Sub-Contract.

65.  In this respect, the present case is similar to Massford (HK) Ltd v Wah Seng General Contractors Ltd, supra.   In that case, the terms were slightly different, which read:

“20% deposit upon signing this Letter of Acceptance to be paid within 14 days after honouring of Architect’s Payment Certificate by the Employer.

80% Balance upon delivery of goods, submission of invoice, and to be paid within 14 days after honouring of Architect’s Payment Certificate by the Employer.

Terms of Payment are on a back to back basis. i.e. your invoice/payment application should be submitted to us on time which will be included in our (Main Contractor) payment application and your application is subject to Architect’s Payment Certificate and the honouring of Payment Certificate by the Employer.”

66.  I agree with the dicta of Roger JA in Massford that every case would have to be determined according to its own facts.  In Massford, the terms used might be clearer.  However, SFDSC 15.6(a)(iii)-(v) and 15.6 expressly provide that, Kim Hung, as the Main Contractor, was entitled to withhold or defer payment to the Sub-Contractor under certain circumstances.  Further, SFDSC 15.6(d) specifically provides that the amounts or quantities in any valid statement by the Sub-Contractor which had been included in the Main Contractor’s “statement of final account” to the Employer would only be due 7 days after receipt by the Main Contractor of any payment which included a sum in respect of such amounts or quantities.  Construing all these provisions as a whole, I find that the payment for the Delay Claim has yet been due under the Sub-Contract and so Standard cannot ask Kim Hung for such payment under SFDSC 15.8.

67.  As I see it, the payment term for a delay claim was that it required certification by the Architect.  Under the Main Contract, the arbitrator in the arbitration proceedings would have the power to review the decision of the Architect.  If Standard seeks to make a delay claim under SCC 11(4), it first has to submit such a claim to Kim Hung.  Kim Hung, under the provision in SFDSC 10.3 or an implied term under the common law, has a duty to pursue such claim against the Employer perhaps in arbitration proceedings.   If the arbitrator disagrees with the decision of the Architect and allows the delay Claim, the Employer has the obligation to make such payment to Kim Hung who would in turn be obliged to make the payment to Standard.  After construing the provisions in the Main Contract and the Sub-Contract, I find that this was the arrangement agreed by the parties relating to the payment term for a delay claim under SCC 11(4).

68.  I would also add one more observation.  Whether the payment for a delay claim is on a “pay-when-paid” basis and whether Kim Hung had taken reasonable steps to secure the contractual benefit for Standard are two distinct issues.  To a certain extent, these two issues are mutually exclusive.  If the payment is not on a “pay-when-paid” basis, there is simply no reason to require Kim Hung to take reasonable steps to secure such payment for Standard, as Standard can always pursue such claim directly against Kim Hung.  Apparently, the Arbitrator has mixed up these two distinct issues in the Reasons.  According to the Arbitrator, there was inaction on the part of Kim Hung in taking any further action to chase the Employer for payment after the submission of the claim by Standard.  However, this has nothing to do with the question as to whether, under the terms of the Sub-Contract, the payment arrangement for the delay claim is one on “pay-when-paid” basis.

69.  For the above reasons, insofar as a delay claim is concerned, I find that the agreed payment arrangement between the parties is one on a “pay-when-paid” basis.

CONCLUSION

70.  I have dealt with the two main issues raised by the parties in this appeal, both in favour of Kim Hung.  Given the court’s construction of the relevant terms in the Main Contract and the Sub-Contract, I grant leave to Kim Hung to appeal against the Interim Award relating to the Delay Claim.  I also allow the appeal and set aside the Interim Award on the Delay Claim.

71.  Without the opportunity of hearing further submissions from the parties, I am not sure whether I should proceed to dismiss Standard’s Delay Claim right the way or to remit the case back for reconsideration by the Arbitrator together with the court’s opinion on the question of law.  I am also not certain whether I would need to resolve other issues for the purpose of this appeal.  I therefore direct the parties to fix another hearing before myself with an estimated time of 2 hours to deal with these matters.  If the parties think that the time estimate is incorrect, they should write to the court to provide their time estimate for the hearing.

72.  I will also deal with the issue of costs in the next hearing.