XCHRX THE ATTORNEY GENERAL v. SHIMIZU CORPORATION

Photocopying of this Headnote is not allowed

1993, No.M.P.3071

H E A D N O T E

Argument on costs following the plaintiff's decision not to proceed with an originating summons seeking declarations that a judgment of Kaplan J. who had decided matters of law in sub-contracts between the defendant and nominated sub-contractors relating to arbitration proceedings was not binding in respect of the main contract between the plaintiff and the defendant where arbitration proceedings had been commenced. The declarations did not relate to a dispute between the parties and were not determinative of the plaintiff's rights and obligations.

Costs were awarded to the defendant.

1993, No. M.P.3071

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(MISCELLANEOUS PROCEEDINGS)

____________

J U D G M E N T

1. On the 13th May 1985 the Hong Kong Government entered into a contract (the main contract) with Shimizu Construction Co. Ltd., now known as Shimizu Corporation (the defendant) as the main contractor for the construction of the Stage 2 extensions and improvements to the Queen Mary Hospital. The work was certified as being substantially completed in January 1991. Disputes have arisen between the parties to the main contract which have been referred to arbitration pursuant to the provisions of condition 115 of the main contract.

2. Apart from the main contract, the defendant entered into sub-contracts with a number of nominated sub-contractors which contain arbitration clauses. Disputes have also arisen between the defendant and the nominated sub-contractors but before the facts had been established and instead of referring matters of law to the arbitrator appointed under the agreements, the nominated sub-contractors instituted with the consent of the defendant declaratory proceedings in the High Court for preliminary points of law to be decided by the court. These proceedings have been described by the plaintiff as "friendly proceedings" but this has been denied by the defendant who state that those proceedings were vigorously contested. Government was invited to participate in the proceedings but declined to do so. In fact Government objected to the procedure adopted by the defendant and the nominated sub-contractors on the ground that the arbitration clauses were circumvented.

3. Kaplan J. heard the proceedings between the nominated sub-contractors and the defendant and handed down two judgments on the 22nd December 1992 and 10th March 1993 described as "the judgment and supplementary judgment".

4. At page 3 of his judgment Kaplan J. described the matter of law in issue as follows:

"...Can a Nominated Sub-contractor in addition to obtaining an extension of time for delay not his fault also claim against the Main Contractor for any loss and expense suffered as a result of such delay? Put in shorthand the cognoscenti would ask "Can a Succession under this form of Sub-contract get money as well as time?"

From the agreed facts, Kaplan J. had this to say at pp.9 and 10:

"The four Plaintiffs have each claimed payment from the Defendant for the loss, expense and damage suffered as a result of the prolongation and disruption of their respective Sub-contract works. These claims have not been paid to them by the Defendant.

The Defendant has commenced arbitration proceedings against the Government concerning, inter alia. the events which are the subject of these proceedings. The Plaintiffs have also referred their claims against the Defendant to arbitration. However, in view of the fact that the same issues of legal principle would arise in all arbitrations commenced by the four Plaintiffs against the Defendant in connection with this Project and also in view of the fact that a resolution of the legal issues in dispute in advance of a detailed investigation of the factual circumstances surrounding each of the four Plaintiff's claims on this complex Project would save a considerable amount of time and cost, the four Plaintiffs have referred the said legal issues to this Honourable Court for a decision which will be binding upon an arbitrator considering these issues during the course of any arbitration proceedings arising out of this Project."

5. On pages 11 and 12 Kaplan J. described the reasons for the adoption of the procedure for determination of the matters of law by the High Court in the following words:

" One of the reasons why this procedure was adopted without objection was because it was felt that an arbitrator would be greatly assisted in having the court's view on the legal position in advance of the arbitration. But perhaps the strongest reason was that both sides generally felt that a decision of the court, one way or the other, would be dispositive of many of the disputes resulting from the Sub-contracts.

It will be noted that the Government is not a party to these proceedings and made no application to be joined. If the Plaintiffs succeed in some or all of their declarations it may well be that the Government will take a different view of their stance to date, namely. that the Defendants cannot add on to their claims against the Government anything representing the loss and expense suffered by its Sub-contractors for the same cause."

In respect of the construction argument, Kaplan J. at page 62 said:

" It is clear that under clause 76 of the Main Contract, the Defendant can be compensated 'for direct loss and/or expense for which he would not be re-imbursed by a payment made under any other provision in the Contract by reason of the regular progress of the works or part thereof having been materially affected by' one or more of 5 specified grounds. The relevant grounds for this case are late instructions, delay by others engaged by the Government and late delivery of material or plant."

6. In construing certain provisions of the sub-contracts, Kaplan J. said that the sub-contractor can get extensions of time but no monetary compensation while the main contractor could obtain both time and compensation under clause 76 of the main contract.

7. During the course of the submission by counsel on behalf of the nominated sub-contractors, Kaplan J. was invited to incorporate into the sub-contracts certain conditions of the main contract in order to fill identified lacunae. However, he considered that although the contracts are clearly connected, they are separate and integral contracts so that he declined this invitation.

8. Kaplan J. concluded that if the defendant is in breach of contract, the claims of the nominated sub-contractors paid by the defendant will have to be reimbursed to the defendant by Government on the grounds that the delay was the fault of Government.

9. After the judgments of Kaplan J. were handed down, Government contended that the declarations granted purported to be determinative of some of Government's rights and obligations under the main contract as the declarations stated that the defendant would be able to recover from Government sums paid to the nominated sub-contractors either under specific contractual clauses or by way of damages for breach of the main contract. Accordingly the plaintiff's solicitors wrote to the defendant's solicitors in their first letter of the 23rd June 1993 as follows:

"Re	Shimizu Corporation v. The Attorney General
	Queen Mary Hospital, Hong Kong
	Extension & Improvements Stage II

We refer to the Judgment and Supplementary Judgement of Mr Justice Kaplan dated 22nd December 1992 and 10th March 1993 respectively. We shall refer to these judgments and the declarations therein, collectively, as 'the Judgment'.

Having considered the Judgment carefully, it appears to the Respondent that the Claimant may seek to argue that the Judgment is binding on both the Government and the Arbitrator in this Arbitration.

The Respondent's position is that neither the Government nor the Arbitrator is bound by the Judgment. Government was not, of course, a party to the High Court proceedings and for it to be argued that the Judgment is determinative of Government's rights and obligations under the Main Contract is, in the Respondent's submission, wrong in law. Further, such an argument would undermine the Arbitration clause in the Main Contract by virtue of which it is the appointed Arbitrator who is vested with the power to determine such rights and obligations, unless both parties agree otherwise. The Respondent has never agreed otherwise.

In these circumstances, the Respondent requests the Claimant's unequivocal statement that it agrees that neither the Government nor the Arbitrator in this Arbitration is bound by the Judgment. Unless the Respondent receives such a statement, we are of the view that there exists a fundamental issue in dispute between the Claimant and the Respondent on this matter which should be resolved immediately. However, before considering how that issue should be resolved, we look forward to receiving your reply and, hopefully, the assurance which the Respondent seeks.

Bearing in mind that the Claimant has been a party to the High Court proceedings which commenced on 8th January 1992, we assume that this point will already have been considered by the Claimant. We very much hope that the Claimant will therefore be able to set out its position with regard to the Judgment within seven days of this letter. We await your reply."

The defendant's solicitors replied on the 9th July 1993 as follows:

"SHIMIZU CORPORATION V THE ATTORNEY GENERAL QUEEN MARY HOSPITAL, HONG KONG EXTENSIONS & IMPROVEMENTS STAGE II

We refer to your first letter of 23 June 1993. ......

Throughout the course of this Contract, the Nominated Sub-Contractors ("the NSCs') submitted claims for extensions of time and extra costs to Shimizu. Shimizu claimed the NSCs' delay and disruption costs as part of its damages suffered due to acts or omissions of the Government and their agents. These claims were therefore passed by Shimizu to the Surveyor, whose obligation is of course to measure and value the Works, including the Sub-Contract Works. With respect to the NSCs' claims for delay and disruption arising from the said instructions, acts or omissions, the Surveyor, with the exception of delay costs arising from variations/instructions directly affecting the NSCs' works, refused to make any assessment or valuation. As far as we are aware, the Surveyor did not take the view that he had no obligation under the Main Contract to assess and/or value the NSCs' delay and disruption costs. Rather, the reason why the Surveyor refused to make any assessment or valuation was a legal objection that the relevant Sub-contracts did not contain any clause giving the NSCs a right of recovery of delay and disruption costs, and therefore Shimizu owed no monies to the NSCs, and Government in turn owed nothing to Shimizu.

In due course, the NSCs issued arbitration notices against Shimizu. Shimizu has issued an arbitration notice against Government in respect of each of the NSCs' claims. In view of the fact that similar issues of legal principle would arise in all arbitrations commenced by the NSCs against Shimizu, and in view of the fact that a resolution of the legal issues in advance of a detailed investigation of the factual circumstances surrounding each of the NSCs' claims would save a considerable amount of time and cost, it was decided to seek a decision from the High Court. Enquiries were made to Government whether they wished to take part in the proceedings but they declined, on the grounds that any disputes between Shimizu and the NSCs were not of their concern. It is noted that in his Supplementary Judgment, Mr Justice Kaplan stated 'I wish to add that the Hong Kong Government who are clearly interested in this matter as the possible ultimate payer, were invited to join these proceedings but declined. I cannot help but observe that this decision was unhelpful and ill advised. They will now have to accept whatever consequences arise from the result of this case and the terms of the declarations made' and 'it will be noted that the Government is not a party to these proceedings and made no application to be joined. If the Plaintiffs succeed in some or all of their declarations, it may well be that the Government will take a different view of their stance to date, namely that the Defendants cannot add on to their claims against the Government anything representing the loss and expense suffered by its Sub-contractors for the same cause'.

From Shimizu's point of view, the judgments of Mr Justice Kaplan will be relied upon in the arbitration. and we will be arguing the Arbitrator is bound by the same. No doubt the Government will argue to the contrary. All arbitrators are bound by Hong Kong law but can decide for themselves the applicability of any judgment in light of the facts of each case and submissions made by the parties. Agreed facts were submitted to Mr Justice Kaplan in the Court case and his judgments were based upon them. In his first judgment, he referred to the fact that different factual circumstances would arise in this and other cases and stated 'I believe the spirit of this Judgment is clear and that any arbitrator will be faithful to it if a new factual situation arises during the course of this or any other arbitration.".

We fail to comprehend how our client's position undermines the Arbitrator's, as suggested by you. No doubt the Government are unhappy with Mr Justice Kaplan's judgments, and wish they had taken part, but are free to raise any argument as to the applicability of the decision with the Arbitrator at the hearing.

We do not agree with the suggestion that the law, as represented by the Judgments of Mr Justice Kaplan, should be dealt with in any other way than it usually is, at the hearing of the substantive issues."

10. The plaintiff's solicitors wrote to the defendant's solicitors in reply on the 26th August 1993 which where relevant reads:

"We refer to our First Letter dated 23rd June 1993 and your reply contained in your First Letter dated 9th July 1993.

We note that the Claimant declines to give the assurance sought in our letter and now confirms that it will indeed rely upon the Judgments of Mr Justice Kaplan as binding on both the Arbitrator and the Respondent in this Arbitration. We would respectfully suggest, however, that you have failed to address the fundamental point raised in our letter viz: the Judgements purport to be determinative of Government's rights and obligations under the Main Contract but that this is clearly in conflict with the Arbitrator's appointment since it is he alone who is vested with powers to determine the parties' rights and obligations under the Main Contract.

Due to the clear impasse which exists between the parties, and after careful consideration, we put you on notice that the Respondent has now commenced proceedings in the High Court seeking declarations to the effect that neither the Respondent nor the Arbitrator is bound by the Judgements of Mr Justice Kaplan. The declarations which the Respondent will seek are set out in the Originating Summons served on your client today. A further copy of the Originating Summons is annexed to this letter."

As mentioned in this letter, the plaintiff's solicitors had issued an originating summons seeking the following declarations:

"1. The judgments given and the orders made by Mr Justice Kaplan in Construction List No.1 of 1992 are not binding upon either the Government or the Arbitrator appointed to determine the disputes existing between Shimizu Corporation (the Claimant) and the Attorney General (the Respondent) arising out of the Main Contract dated 13th May 1985 under which the Stage 2 extensions and improvements works to the Queen Mary Hospital ('the Works') were carried out.

2. In the said arbitration proceedings, the Government is free to argue for and the Arbitrator is entitled, if so minded, to reach conclusions in respect of the true construction and meaning of the said Main Contract which are different from the conclusions reached in these respects in the judgements and orders given by Mr Justice Kaplan.

3. In particular, in the said arbitration proceedings the Government is entitled to argue for and the Arbitrator is entitled, if so minded, to conclude, that pursuant to the terms of the Main Contract, the Claimant is not entitled to seek to pass on to the Respondent claims made against the Claimant by nominated sub-contractors for the Works in respect of alleged breaches by the Claimant of express or implied terms of the nominated sub-contracts in respect of the Works."

11. The plaintiff contended that the defendant will in the arbitration seek to rely upon the judgments of Kaplan J. as binding upon the plaintiff and the arbitrator. As a result the plaintiff will not be free to argue to the contrary so that the arbitrator will not be able to reach a different conclusion from that of Kaplan J.

12. After the present originating summons had been issued, a lengthy correspondence took place between the parties' solicitors with regard to the status and effect of the judgments. Eventually leading counsel for the plaintiff Mr Richard Fernyhough, Q.C. wrote to the defendant's leading counsel Mr Michael Thomas, Q.C. on the 4th March 1994 which where relevant reads:

".... The Government is considering whether or not it is desirable to proceed with the hearing at the end of March at all. If your clients take the view that the ratio decidendi of Mr Justice Kaplan's judgment is restricted to his decision on the nominated sub-contract only, then the Government may very well consider that the continuance of the proceedings is unnecessary. On the other hand, if your client's view is that the true ratio of the judgments involves a necessary linkage between the rights of recovery under the sub-contract and the rights of recovery by the main contractor under the main contract, then my clients might very well take a different view. Thus what your clients' case is upon the ratio of the decision is absolutely crucial. Accordingly I am inviting you to clarity this to me directly so that I can pass it on to my clients.

I am writing to you personally because of the impasse reached between solicitors....."

Mr Thomas replied on the 16th March 1994 explaining the defendant's position in the following words :

"Shimizu's position has always been that the ratio decidendi of Mr Justice Kaplan's Judgments relates and can only relate to his decision on the construction of the Nominated Sub-contracts. The entire correspondence makes this clear. When Denton Hall served the Originating Summons on Bateson Starr on 26th August 1993, they suggested that the fundamental point at issue was that 'the Judgments purport to be determinative of Government's rights and obligations under the Main Contract'. On 10th September 1993, Bateson Starr wrote to Denton Hall indicating that they did not understand what it was that Denton Hall believed would bind the Arbitrator in coming to a conclusion on an interpretation of the Main Contract. The position was further debated in correspondence between our respective instructing solicitors culminating in Bateson Starr's letter of 5th November 1993, when Bateson Starr consistently took the line that the Judgments were only binding upon the Government in so far as they affected the rights of Shimizu and the Nominated Sub-contractors under the Nominated Sub-contracts.

........"

13. Following the correspondence between the two leading counsel, the plaintiff's solicitors wrote to the defendant's solicitors on the 18th March 1994 which where relevant reads:

"We are extremely grateful to Mr Thomas and yourselves for the reply which is a direct response to our direct query concerning Shimizu's position as to the ratio decidendi of the judgments of Mr Justice Kaplan. In particular, we note your Leading Counsel's statement that :-

'The ratio decidendi of Mr Justice Kaplan's judgments relates and can only relate to his decision on the construction of the Nominated Sub-contracts.'

As you rightly say, the Government has consistently maintained that nothing in the judgments of Mr Justice Kaplan is binding on either the Government or the Arbitrator in relation to the Main Contract. As we have also previously stated, the declarations and order clearly link recovery under the Sub-contract to the rights of recovery by the Main Contractor under the Main Contract. We have always sought clarification from you as to the distinction Shimizu draws between the effect of the judgements regarding the Main Contract and the Sub- contract respectively. We have, in particular, sought clarification of Shimizu's contentions concerning the ratio decidendi of the judgements since Shimizu relies on that ratio and will do so before the Arbitrator.

With respect, it is only now that you have considered it appropriate to inform us that Shimizu's position is that the ratio decidendi is confined to the construction of the Nominated Sub-contracts. Clearly then, Shimizu's position must be that Mr Justice Kaplan's comments concerning breach of contract and the effect of the Main Contract were obiter and not binding.

On the basis that Shimizu's position before the Arbitrator will be that set out in the passage quoted above, the Government is now willing to discontinue the proceedings and thus avoid further costs.

As to the costs which have already been incurred we consider the Government has strong grounds for arguing that costs should be paid by Shimizu to Government. We say this because it is clear from the correspondence that Shimizu's position has changed considerably since these proceedings were initiated and its stance now is radically different to that set out in your first letter dated 9th July 1993 which, of course, was prior to the commencement of the proceedings. However, we would inform you that Government is willing, as a compromise, and to avoid further costs, to agree to an order that there be no order as to costs."

However, the defendant's solicitors replied to the effect that the proceedings should either be stayed on the ground that the issue should have been referred to the arbitrator or should be dismissed as being frivolous, vexatious or an abuse of the process of the court under O.18, r.19 of the Rules of the Supreme Court. In the alternative, if leave is granted to the plaintiff to discontinue the proceedings, it should be upon payment of the defendant's costs.

14. Mr Thomas submitted that the court's jurisdiction to declare a party's private legal rights or obligations extends only to cases where the applicant is alleging that there is, or has been, an infringement or threatened infringement of his private rights or he has sustained either actual or prospective special damage. In this respect, my attention was drawn to Zamir & Woolf: The Declaratory Judgment 1993, 2nd edn., paras 2.25 and 3.012 - 3.016, London Passenger Transport Board v. Moscrop [1942] AC 332 at 345 and 351, Rediffusion (Hong Kong) Limited v. Attorney General of Hong Kong [1970] AC 1136 at 1158 and Gouriet v. Union of Post Office Workers [1978] AC 435 where Lord Wilberforce at 483 had this to say :

"....Since, as I understand, others of your Lordships intend to deal fully with this argument and with the authorities, I shall content myself with saying that, in my opinion, there is no support in authority for the proposition that declaratory relief can be granted unless the plaintiff, in proper proceedings, in which there is a dispute between the plaintiff and the defendant concerning their legal respective rights or liabilities either asserts a legal right which is denied or threatened, or claims immunity from some claim of the defendant against him or claims that the defendant is infringing or threatens to infringe some public right so as to inflict special damage on the plaintiff....."

Lord Diplock in the same case summarised the position as follows at 501 :

" The only kinds of rights with which courts of justice are concerned are legal rights; and a court of civil jurisdiction is concerned with legal rights only when the aid of the court is invoked by one party claiming a right against another party, to protect or enforce the right or to provide a remedy against that other party for infringement of it, or is invoked by either party to settle a dispute between them as to the existence or nature of the right claimed. So for the court to have jurisdiction to declare any legal right it must be one which is claimed by one of the parties as enforceable against an adverse party to the litigation, either as a subsisting right or as one which may come into existence in the future conditionally on the happening of an event.

The early controversies as to whether a party applying for declaratory relief must have a subsisting cause of action or a right to some other relief as well can now be forgotten. It is clearly established that he need not. Relief in the form of a declaration of right is generally superfluous for a plaintiff who has a subsisting cause of action. It is when an infringement of the plaintiff's rights in the future is threatened or when, unaccompanied by threats, there is a dispute between parties as to what their respective rights will be if something happens in the future, that the jurisdiction to make declarations of right can be most usefully invoked. But the jurisdiction of the court is not to declare the law generally or to give advisory opinions; it is confined to declaring contested legal rights, subsisting or future, of the parties represented in the litigation before it and not those of anyone else."

15. The court will not make a declaration relating to an issue which is properly the subject of legal proceedings as in this case before an arbitrator.

Indeed, the arbitrator has exclusive jurisdiction by virtue of s.3 of the Arbitration Ordinance. The court will only entertain an application if the parties and the arbitrator agree that a preliminary point of law should be determined under s.23A of the Arbitration Ordinance and provided that it will produce a substantial saving in costs. Indeed, the consent of the defendant and the arbitrator was not obtained. For these reasons alone, the defendant would be entitled to a stay of these proceedings.

16. However, it is abundantly clear from the stance taken by the plaintiff that Kaplan J. had decided without the plaintiff being heard that the arbitrator was bound by his judgment in declaring that any sum found to be due from the defendant to the nominated sub-contractors would have to be reimbursed by the plaintiff. Having elected not to be joined as a party to the proceedings before Kaplan J., the plaintiff was not happy with the outcome which resulted in the letter from their solicitors to the defendant's solicitors of the 23rd June 1993. That letter contended that the defendant may seek to argue that the judgment was binding on both the Government and the arbitrator but went on to express the opinion that it was not bound, nor was it determinative of the plaintiff's rights and obligations under the main contract. An assurance was sought from the defendant to allay the plaintiff's fears in this respect. In reply, the defendant's solicitors stated that they would argue that Kaplan J.'s judgment was binding on the arbitrator and that no doubt the plaintiff will argue to the contrary. The defendant's solicitors went on to make the obvious assertion that the arbitrator is bound by Hong Kong law, but can decide upon the applicability of a judgment in any particular case. Reference was also made to the plaintiff's right to raise any argument before the arbitrator as to the application of Kaplan J.'s judgment. The defendant's solicitors did not say in their letter that the plaintiff or the arbitrator was in any way bound by that judgment as contended. Indeed the plaintiff's solicitors in their letter had interpreted the law correctly. The correspondence between the parties is merely concerned with the interpretation and effect of Kaplan J.'s judgment upon which the plaintiff appears to have misunderstood the view of the defendant. The contention that there was an impasse between the parties as suggested by the plaintiff was patently absurd. Nevertheless, the plaintiff issued the present originating summons seeking orders in respect of self-evident propositions upon which there can be no dispute. The defendant has at no time disputed any of these matters nor can any of them be said to be determinative of the plaintiff's legal rights.

17. The issue of proceedings in effect seeks an opinion from the court. No relief could therefore be granted to the plaintiff so that the originating summons was doomed to failure. Even if there had been any merit in the declarations sought, the rights and obligations of the plaintiff should have been referred to the arbitrator who was himself not a party to these proceedings. The judgment of Kaplan J. will no doubt have persuasive authority upon a decision that the defendant is obliged to make payments to the nominated sub-contractors but the plaintiff may raise such arguments as it thinks fit against his conclusion. The arbitrator is not bound by the judgment with regard to the dispute between the plaintiff and defendant on the main contract. The issue is entirely a matter for the arbitrator to determine.

18. The institution of the present proceedings was quite extraordinary for they are totally devoid of any merit. Indeed I would endorse the sentiments expressed by Kaplan J. with regard to the failure of the plaintiff to be joined as a party in the proceedings before him.

19. Accordingly, the plaintiff's application for leave to discontinue will be refused and there will be an order for the proceedings to be struck out. The defendant is therefore entitled to an order for costs with a certificate for two counsel.