EMPLOYER v. CONTRACTOR

HCCT 22/2023

[2023] HKCFI 2911

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 22 OF 2023

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D E C I S I O N

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Background

1.  This is an application made by the Plaintiff (and the Respondent in the Arbitration) for leave to appeal against the First Partial Award dated 26 January 2023, corrected on 22 February 2023, and interpreted and further corrected on 24 March 2023 (“Award”) of the arbitrator, on questions of law identified in the Originating Summons issued on 23 March 2023 (“OS”). The Award was made pursuant to an arbitration agreement contained in a civil engineering contract executed on 15 December 2008 (“Contract”) between the Plaintiff as the Employer and the Defendant (which was the Claimant in the Arbitration) as Contractor under the Contract.

2.  The Arbitration was described as a final account dispute, relating to disputes as to the Defendant’s entitlement to payment for a number of items of work, the amount that should be paid in respect of those items, and quantum disputes for work in respect of which entitlement was not in dispute. Of the 24 disputes covered in the Arbitration, two are now the subject matter of the application for leave to appeal under section 6 of Schedule 2 (“Schedule”) to the Arbitration Ordinance (“Ordinance”). It is not disputed that the Schedule is applicable to the Contract and the Arbitration.

3.  Under section 6(1) of the Schedule, an appeal to the Court on a question of law arising out of an award may not be brought by a party to arbitral proceedings except with the leave of the Court. Leave to appeal is to be granted only if the Court is satisfied that the decision of the question will substantially affect the rights of one or more of the parties, that the question is one which the tribunal was asked to decide, and that, on the basis of the findings of fact in the award, the decision of the tribunal on the question is obviously wrong, or the question is one of general importance and the decision of the tribunal is at least open to serious doubt (section 6(4)).

4.  The tests for the grant of leave by the Court are as set out in section 6(4)(c)(i) and (ii) of the Schedule. The meaning of “obviously wrong” and “open to serious doubt” is clear, on their face. In Chun Wo Construction & Engineering Co Ltd v Hong Kong Macau (Asia) Engineering Co Ltd [2019] HKCA 369, the Court of Appeal confirmed in no uncertain terms the tests which are applicable.

5.  In the OS, 7 questions of law were identified for 2 disputes in the Arbitration, namely Dispute 9 and Dispute 27. They concern the proper construction of General Conditions of Contract (“GCC”) 61(1)(b) and (c), GCC 63, and GCC 50, and whether the arbitrator had erred in law, firstly, in determining that the armored cables of certain sizes should be valued at $5,573,706, which was the valuation made by the Defendant’s expert, and was based on the contract rates. The Plaintiff further claims that the Arbitrator had erred in law in finding that GCC 63(d) did not preclude the Defendant from claiming for costs arising out of “additional” utility diversion work, and should have found that the clause excludes from entitlement delays caused by a utility undertaking, including the time taken for any additional work. The Plaintiff also claims that the work on the common trenches for utilities diversion works could not have materially affected the progress of the works under the Contract to entitle the Defendant to claim prolongation costs, and that in any event, extension of time granted to the Defendant under GCC 50(1)(b)(ix) should be deemed to be in full compensation and satisfaction for any loss associated with the delays.

6.  The Plaintiff claims that GCC 61, 63 and 50 are all standard form contract provisions found and used in the local construction industry, such that questions on their interpretation are matters of general importance to the industry, and that the relevant test for the grant of leave to appeal should be “at least open to serious doubt”.

7.  It has been emphasized (see, for example, Maeda Kensetsu Kogyo Kabushiki Kaisha and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited [2020] HKCFI 2979, at paragraph 10) that for both the criteria of “obviously wrong” and “open to serious doubt”, the threshold is high and it has to be demonstrated to the Court, quickly and easily, without meticulous argument on the application for leave to appeal, that the decision of the tribunal cannot be right, or that there are serious doubts as to its correctness. It is to be borne in mind that under section 6(3) of the Schedule, the Court “must” normally determine an application for leave to appeal without a hearing, and hence, decision on these questions must be based on what is readily apparent on the face of the award and the limited papers filed.

8.  In this case, I consider that the determination of the questions of law as identified in the OS turn essentially on the application of the relevant clauses to the facts and the evidence on the relevant works executed in the project in question. Even on the face of the submissions filed by the parties for the application for leave in this case, the meaning of the relevant clauses is not the subject of serious dispute or substantial legal arguments. In my judgment, the relevant test is whether the decision of the arbitrator in this case can be said to be “obviously wrong”.

9.  I repeat the observations made in A and others v The Hong Kong Housing Authority [2018] HKCFI 147, at paras 12 and 13:

“12.  Whether the appropriate test to be applied is “obviously wrong”, or “open to serious doubt”, the threshold is high. It is not sufficient for it to be shown that the decision of the tribunal is arguably wrong, or that it is arguable that the decision is open to some doubt. The decision has to be clearly seen to be obviously, or demonstrably, wrong, or that the correctness of the decision is seriously in doubt. Leave to appeal would only be granted in exceptional cases, where it can be demonstrated that the arbitrator was plainly wrong.  As Lam VP indicated in Maeda Kensetsu Kogyo Kabushiki Kaisha (also known as Maeda Corporation) and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited HCMP 1342/2017, 4 September 2017, the assessment of whether the decision of the tribunal is at least open to serious doubt can be subjective, and different judges can reasonably come to different views. In a matter concerning the construction of a contractual document, the Court dealing with the application for leave to appeal may have a different view as to the possible meaning of a provision, but it does not follow from that, that the meaning ascribed by the tribunal to that provision was “obviously wrong”.

13.  What has to be demonstrated to the Court, quickly and easily, without meticulous legal argument, is that the decision of the tribunal simply cannot be right, or that there are serious doubts as to the correctness or reasoning of the Award.”

10.  The provisions of sections 5 and 6 of the Schedule, and the high threshold for the grant of leave to appeal against an award, are consistent with the approach of the Courts, of respecting the autonomy of the tribunal and the finality of arbitral awards. The policy of minimal curial intervention includes not only the recognition of the autonomy of the arbitral process, but also of the fact that parties who opt for arbitration acknowledge and accept the attendant risk of having only a very limited right of recourse to the courts. This consistent theme of minimal curial intervention means also that the Court would not be combing through an award to look for possible faults, and an award should be read by the courts generously, remedies being granted only if there are obvious and blatant errors, open to serious doubt or plainly wrong, or meaningful breaches of the rules of natural justice, which cannot be overlooked. As the Courts have emphasized, an arbitral award should be read in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it (Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14). In R v F HCCT 32/2011, 3 August 2012, the Court pointed out the importance of reading and understanding an award in its proper context, in particular as to how the relevant issues had been argued before the tribunal.

11.  It is with these overriding principles in mind that I approach the application for grant of leave to appeal on the questions identified in the OS.

Dispute 9 Armoured Cable

12.  Under the Contract, the valuation of cables (and other works) not included within the bills of quantities (“BQ”) is governed by GCC 61, which provides as follows:

“61. (1) The Engineer shall determine the sum which in his opinion shall be added to or deducted from the Contract Sum as a result of an order given by the Engineer under Clause 60 in accordance with the following principles:

(a) Any item of work omitted shall be valued at the rate set out in the Contract for such work.

(b) Any work carried out which is the same as or similar in character to and executed under the same or similar conditions and circumstances to any item of work priced in the Contract shall be valued at the rate set out in the Contract for such item of work.

(c)  Any work carried out which is not the same as or similar in character to or is not executed under the same or similar conditions or circumstances to any item of work priced in the Contract shall be valued at a rate based on the rates in the Contract so far as may be reasonable, failing which, at a rate agreed between the Engineer and the Contractor.”

13.  In summary of the dispute, there were variations to the sizes of some of the cables used in the project, in that 25 mm² cables shown in the Contract drawing had been omitted from the BQ. In the Award, the arbitrator found that the valuation of the relevant work should be based on the provisions of GCC 61(1)(c), accepted the valuation of the armored cables made by the Defendant’s expert, and valued the work at $5,573,706.  The original reference (at paragraph 192 of the Award) to the governing provision of GCC 61(1)(b), was corrected to GCC 61(1)(c).

14.  In gist, the Plaintiff contends as follows.

15.  First, it claims that the arbitrator had found that there was “unchallenged evidence as to the similarity of conditions and circumstances” of the work carried out, and as such, the varied work involving the different sized armored cables should be based on GCC 61(1)(b), but the arbitrator stated by his Interpretation Letter of 24 March 2023 that the valuation should be based on GCC 61(1)(c) instead, and this demonstrates a serious doubt as to the correctness of his valuation.

16.  Secondly, as neither of the 2 experts had made valuation of the cables on the basis of GCC 61(1)(b), at the BQ rates, the Plaintiff contends that the arbitrator should simply have ruled that the Defendant as Claimant in the Arbitration had failed to discharge its burden of proof in respect of the quantum of the work, and should have dismissed the claim.

17.  Instead, the arbitrator was (it is contended) obviously wrong in finding (at paragraph 195 of the Award) that as the valuation of the Defendant’s expert (Mr O’Neill) was the only valuation on the Contract rates, his valuation of $5,573,706 should be accepted.

18.  The Plaintiff claims that the arbitrator was obviously wrong in finding at paragraph 193 of the Award that the valuation of the Plaintiff (Mr McIver) was not based on the Contract rates, and that he had totally misunderstood the stance and methodology adopted by Mr McIver, who did in fact apply and base his valuation on the BQ rate in the Contract.  Mr McIver had in his valuation compared the item of work in the BQ with a corresponding item of the ASD Schedule of Rates (“ASD rate”) published and publicly available in Hong Kong, established a relationship between the BQ rate and the ASD rate, and then made an allowance for building services price escalation, to come up with an uplift ratio of 2.4060, and then applied that ratio to the corresponding items in the ASD rate, to arrive at the rates in his valuation. The Plaintiff argued that the arbitrator was wrong when he stated (at paragraph 193 of the Award) that Mr McIver had “not provided an alternative valuation for the work based on the contract rates”. By misunderstanding and ignoring Mr McIver’s valuation, the Plaintiff contended that the arbitrator had not given proper weight to the evidence, and had wrongly concluded that he should accept Mr O’Neill’s valuation as the only one based on the Contract rates. It was an error of law in the interpretation of the Contract provision, or in the misunderstanding of the evidence, or an error of law buried beneath conclusions ostensibly of fact.

19.  Finally, the Plaintiff contends that whereas the arbitrator had observed that Mr O Neill’s valuation, of a simple pro rata approach based on the cross-sectional area of the cable, had “somewhat erred on the side of generosity”, and that neither expert had attempted to provide a valuation with breakdowns of the tendered rate into the costs of labour, materials, plant etc and then make adjustments as appropriate, the arbitrator failed to make reasonable adjustments to Mr O Neill’s valuation, nor did he invite the parties to make further submissions, such that this constituted an error.

20.  The analysis and findings of the arbitrator should be considered as a whole, as reflected from paragraphs 172 to 195 of the Award.

21.  The arbitrator referred to the evidence of Mr O’Neill and Mr T, as to the types of the work in question. He pointed out that Mr O’Neill had recorded the evidence of Mr T, to the effect that “the cables which were not measured and included in the BQ were of the same type as those which were included”, and that according to Mr T, “the work was similar in character and executed under similar conditions to that measure”. What Mr T said in his witness statement in the Arbitration was that the new cables which were introduced by way of variation were “in the same type” of cables as per BQ items, and were similar in character to and executed under the same or similar conditions as the work for which there were rates in the BQ. Mr T pointed out however in his witness statement that the cables were different in size/cross-section area and in the number of cores, and that he “used the Contract rates as a starting point”.  The fact that the Contract rates had been used by Mr T as a starting point was noted at paragraph 179 of the Award.

22.  The arbitrator then put forward the position of the Defendant in the Arbitration (at paragraphs 176 and 177):

“176. The Claimant submits that the correct approach is to value based upon rates which are priced within the BQ, contending that there are such applicable rates which can form the basis of the new rates. The Claimant considers that the rates for the work “should be based pro-rata to existing rates in the BQ having regard to the size of the varied cables i.e. under the first limb of GCC 61(l)(c) (‘Rule 2’)” in other words, at a rate based on the rates in the Contract.

177.  It is the Claimant’s position that this approach is correct since (as Mr. T puts it), the new cables were in effect the same type as those included in the BQ and therefore similar in character and executed under similar conditions to work for which there were BQ rates.”

23.  The position of the Plaintiff and its expert, and the Defendant’s response, were stated at paragraphs 178 to 181 of the Award:

“178. The cables differed in cross section area and their number of cores however, and Mr. Mclver is of the view that it is not appropriate to value relatively large diameter cables (120mm² cross sectional area) based upon rates for cable only 10mm² in area. In the parlance of the contract, his professional opinion is that valuing that work based upon the rates in the contract would not be reasonable. In the absence of an applicable BQ rate Mr. Mclver has, in common with the Engineer, adopted rates which are given in the ASD Schedule of Rates.

179. His rationale for not using BQ rates appears at paragraph 200 of his report where he says that it seems “unlikely” that the material cost of 120mm² cables would be 12 times greater than the cost of 10mm² cable. Nor, he says, will “tool and plant costs” be proportional to the cross sectional area of the cable. Based upon this, it appears, Mr. Mclver carries out his valuation by scaling up the ASD Schedule rates by a factor to reflect the pricing level of the BQ.

180. The Claimant is critical of this Schedule as a basis, nothing that the ASD Schedule is intended for use in Term Contracts where there are, usually, many relatively small items of work to be carried out. The Schedule of Rates contains a note that the rates it contains are intended for that type of work only and not for other types of work. These points have been noted by Mr. Mclver in his report. After reviewing the basis of the ASD Schedule of Rates, and the way it is used in practice Mr. Mclver concludes [paragraph 207] that:

‘I do not think the SOR rotes can be used in the way used by the Engineer. However, I think that the ArchSD SOR can be used on this contract to value the changes in the cable’s provided that a relationship between the claimant’s BQ rates and the SOR can be established an allowance made for the price escalation took place in building services works [since] the date of publication (October 2006) and the Contract award date.’

181.  His reasons for this are that the Schedule of Rates is the only published and publicly available such schedule in Hong Kong; is comprehensive, is widely used, and covers the specific types of cable that were in fact used. Mr. Mclver’s valuation proceeds by way of seeking to establish a relationship between the BQ rate and the SOR rate, and in addition he adds an uplift to take account of price escalation since publication of the Schedule of Rates.”

24.  In resolving the opposing contentions submitted by the parties in the Arbitration, the arbitrator referred to Henry Boot v Alstom [1999] BLR 123. He referred to the judgment of HH Judge Lloyd in that case, setting out the extract thereof at paragraph 189 of the Award:

“The words ‘executed under similar conditions’ do not of course refer to economic or financial conditions or considerations (a point which I understood Mr Ter Haar to accept). Intrinsic profitability or otherwise of the rate or price is not therefore a relevant consideration to be taken into account in the application of the principle set out in clause 2(1)(a) (ie, that call Rule 1 in the arbitration). The work is not executed under dissimilar conditions simply because the applicable rate may result in the Contractor being paid markedly more or less than that which might be regarded as ‘fair’, eg more or less than actual or reasonable cost plus profit and overheads. Neither the Engineer nor the arbitrator had therefore authority to apply any other method unless he is of the opinion that the work does not qualify to be valued under Rule 1.

In my judgment, the same approach must apply to Rule 2, for that is no more than a continuation of Rule 1 to deal with the position where the factors mentioned in Rule 1 are not present - similarity of work or conditions. If the varied work is work of a dissimilar character or to be executed under dissimilar conditions then the contract clearly maintains the principle that a valuation ought to be made if there is a contract rate or price applicable or which could be used as a basis for valuing the variation. The fact that the result of the use of the contract rate or price might not be reasonable is as irrelevant as it is under the first principle. In terms of the language used in clause 52(1)(b), the reason is simple: the contract rate or price is already unreasonable before the variation is ordered; it is not made unreasonable by the execution of the variation. The word ‘reasonable’ in clause 52(1)(b) refers only to the extent to which it is feasible to use a given contract rate or price as the basis for the valuation, irrespective of its amount. Thus if the effect of the variation was the work took 25% more effort to carry out then one might normally expect there should be little difficulty in using the original contract rate or price and adjusting it to make appropriate allowances for the fact that the labour and plant elements included in it were or might be affected. Elements of the price unaffected by the extra effort would not be changed.” (Emphasis added)

25.  At paragraph 191, the arbitrator accepted the approach of Judge Lloyd in Henry Boot, and concluded that the same approach is applicable to the Contract, namely: “It is only if a contract rate cannot be used as a basis that pricing of a variation is to depart from the use of such rates as a basis for valuation”.  After such a conclusion, the arbitrator stated at paragraph 192 that valuation of the relevant work should be based on the provisions of GCC 61(1)(c) (as corrected) “given the unchallenged evidence as to the similarity of conditions and circumstances”, and that the Contract “BQ rates are to be used as the basis”.

26.  On the face of the Award, it is firstly, clear beyond peradventure that as corrected, the arbitrator’s finding is that the works were to be valued under GCC 61(1)(c), rather than “Rule 1” in GCC 61(1)(b).  It is also sufficiently clear that the reason for the arbitrator so finding was his acceptance of the analysis made in Henry Boot v Alstom: if the varied work is of a dissimilar character or to be executed under dissimilar conditions, then the contract maintains the principle that a valuation ought to be made if there is a contract rate or price applicable or which could be used as a basis for valuing the variation.  As the arbitrator had expressly pointed out at paragraph 191, it is only if a contract rate cannot be used as a basis that pricing of a variation is to depart from the use of such rates as the basis.

27.  The “unchallenged evidence” to which the arbitrator had referred at paragraph 192 of the Award, as to the “similarity of conditions and circumstances”, has to be read in the context of the evidence produced to the arbitrator and to which he had referred. Although Mr T had referred to similarities in the type of the cables, and in the character and conditions of the work, it was his evidence that he only used the “Contract rates” (in the plural, as the Defendant emphasized) as a starting point, which can only be consistent with the application of Rule 2 in GCC 61 (1) (c), and also in line with the evidence and approach of Mr O’Neill, who adhered to the philosophy of GCC 61(1) by using the Contract rates as far as possible. The arbitrator noted that the Plaintiff had given no factual evidence in contradiction to what Mr T had said.

28.  As Counsel for the Defendant pointed out, there was in fact no pleaded case on GCC 61 (1)(b) specifically, no submissions had been made by either party under GCC 61(1)(b), and neither expert had in their evidence considered the application of GCC 61(1)(b) to the case.  The Plaintiff had pleaded a valuation of $636,802.58 based on the ASD rates, and Mr McIver had applied adjustments thereto to produce a figure of $1,587,247.

29.  I would agree with Counsel for the Defendant, that a valuation under GCC 61(1)(b) was not a question which the tribunal had been asked to decide in the Arbitration.

30.  In any event, I also agree with the submissions of the Defendant, that a degree of similarity is required under Rule 2 (of GCC 61(1)(c)) for its application, and the arbitrator had to consider the similarities and dissimilarities of the different cables and work in this case, when deciding on the relevant provision to apply, and at paragraph 192, he was referring to the evidence on these limited similarities, and differences.

31.  At paragraph 192, the arbitrator found and clearly stated that the BQ rates in the Contract should be used “as the basis” of the valuation.  It was not a case of applying any particular rate set out in the Contract for any particular item of work (as provided for in GCC 61(1)(b)).

32.  It may be said that the arbitrator may not have expressed himself clearly, when he explained from paragraph 193 why he preferred the expert evidence of the Defendant to that of the Plaintiff, in accepting the valuation of the cables in question.  On behalf of the Plaintiff, it was contended that he was obviously wrong in stating (at paragraph 193 of the Award) that Mr McIver’s valuation was not based on the rates in the Contract or the BQ, and that only Mr O’Neill’s valuation was based on the Contract rates, such that he accepted the latter’s evidence, despite its being “erring on the side of generosity”.

33.  The Plaintiff has endeavored to explain that Mr McIver’s valuation was indeed based on the Contract rates. The Plaintiff pointed out that in his report, Mr McIver had stated that he had compared the relevant BQ item with the ASD rates, to establish a relationship between the BQ rate and the ASD rate, made an allowance for building services price escalation and then applied that ratio to all the new items. After such calculations, Mr McIver then came up with an uplift ratio, and applied this in his valuation.

34.  The arbitrator had referred to Mr McIver’s rationale for not using the Contract rates, and had also referred to the Defendant’s criticism of Mr McIver’s approach, noting that the ASD Rates were intended for use in Term Contracts with many relatively small items of work to be carried out, and that the ASD rates were intended for that type of work only and not for other types. At paragraph 181 of the Award, the arbitrator did acknowledge that Mr McIver’s valuation sought to establish a relationship between the Contract rate and the ASD rate, but pointed out that Mr O’Neill’s approach was said by the Defendant to adhere to the philosophy of GCC 61(1), that the rates in the Contract should apply as far as possible, and only to be departed from in exceptional circumstances.  The arbitrator further pointed out at paragraph 183 that the Plaintiff had not attempted to explain why the Contract rates were unreasonable to use as a base.

35.  Pertinently, the Plaintiff does not contend in this case that the arbitrator was wrong in law in applying the Henry Boot approach, or how this construction of GCC 61 is wrong in law.  It is only contended that the arbitrator has misinterpreted or misunderstood the evidence of Mr McIver and has ignored it on that basis.

36.  I do not agree that the arbitrator can be fairly criticized as having ignored Mr McIver’s valuation approach. On reading the relevant parts of the Award, it seems reasonably clear that the arbitrator had rejected Mr McIver’s valuation upon his finding that, following the Henry Boot approach, it is only if a contract rate cannot be used as a basis that the pricing of a variation should depart from the use of the contract rates as the basis. The arbitrator obviously considered that overall, Mr McIver had substantively used the ASD rates and that his valuation was in substance based on the ASD rates rather than the Contract rates, and he therefore preferred the valuation of Mr O’Neill whose approach was more consistent with the philosophy of GCC 61.  In my judgment, this was what the arbitrator was entitled to do.

37.  Bearing in mind the high threshold required for leave to appeal to be granted, I am not satisfied that the arbitrator’s finding can be said to be obviously wrong, or (if the lower threshold should be applicable) open to serious doubt.

38.  On the arbitrator’s construction of GCC 61, and the evidence available to him from the 2 experts, I do not agree that the arbitrator was bound to apply his own discounts or to make his own adjustments to the figures submitted, in order to come to a decision on the quantum of the valuation. Despite the view expressed that the valuation of Mr O’Neill tended to be generous, the arbitrator was entitled to accept the valuation when he did not accept the basis of Mr McIver’s valuation.  His approach cannot be considered to be obviously wrong, or open to serious doubt.

Dispute 27

39.  The questions of law identified for Dispute 27 are framed to relate to the proper construction of GCC 63(d) and GCC 50(5). GCC 63 concerns disturbance to progress of the Works under the Contract, and the Engineer’s certification of the cost involved, in the event of the Contractor claiming that it has been or is likely to be involved in expenditure by reason of the progress of the Works under the Contract having been materially affected, inter alia, by any variation ordered in accordance with GCC 60 of the Contract (under GCC 63(b)), or (under GCC 63(d)) by “delay caused by any person or any company, not being a utility undertaking, engaged by the Employer in supplying materials or in executing work directly connected with but not forming part of the Works”.

40.  GCC 50 deals with extensions of time for completion, and GCC 50(5) states:

“Except as provided elsewhere in the Contract, any extension of time granted by the Engineer to the Contractor shall be deemed to be in full compensation and satisfaction for any loss or injury sustained or sustainable by the Contractor in respect of any matter or thing in connection with which such extension shall have been granted and every extension shall exonerate the Contractor from any claim or demand on the part of the Employer for the delay during the period of such extension but not for any delay continued beyond such period.”

41.  In gist, the Plaintiff contends that upon a proper construction of GCC 63(d), the arbitrator should have held that the Defendant was precluded from claiming the cost allegedly incurred and arising out of delay caused by a person or company unless such person or company was engaged by the Plaintiff and not being a utility undertaking, regardless of whether the there was any “additional” utility diversion work involved. Essentially, the Plaintiff’s case is that under GCC 63 (d), delay caused by any execution of utility or utility diversion work or by utility undertakings should be excluded from any claim for costs.

42.  The Plaintiff further contends that upon the proper construction of GCC 63, the progress of the Works would not have been materially affected by a variation to carry out the common trenches for utilities diversion works, which was required to mitigate delays in the project, and that accordingly, the Defendant is not entitled to any prolongation costs under GCC 63, as any variation found by the arbitrator could not have “materially affected” the progress of the Works.

43.  Finally, the Plaintiff contends that on a proper construction of GCC 50(5) and GCC 63, extensions of time granted to the Defendant pursuant to GCC 50(1)(b)(ix) in respect of events of delay due to variations and delays on the part of the utility companies were in full compensation and satisfaction for any loss associated with such events of delay, regardless of whether the delays were unforeseen, or the utility diversion works involved were additional, or not.

44.  The background of the dispute and the circumstances in which claims were made in the Arbitration have to be considered before the contentions made by the Plaintiff can be understood.

45.  As reflected in the Award, in order to execute the Works required under the Contract, it was necessary to avoid clashes with existing utilities in and around the location of a new footbridge. The location of the site, the relevance of the utilities and the dispute between the parties in relation to the common trenches for the utilities, are explained at paragraphs 121 to 131 of the Award:

“121. Inherent in a contract of this nature was the need to avoid clashes with existing utilities in and around the location of the new footbridge. The site is located in an older part of urban Hong Kong, and the need to divert, or in some other way avoid, such existing utilities was referred to specifically and understood by the parties in making the contract.

122. Less well understood was the extent and detail of this work. This is an inherent uncertainty given that the utilities in question are underground, and may have been put in place by the various utility companies many years ago. Information was supplied to the Claimant (and other tenderers) at the tender stage as to what was known about such utilities, but this information was qualified so as to emphasise the lack of certainty over this information. Ms. L lists out in her witness statement the drawings by which the relevant information was provided.

123. Ms. L accepts that such of the utilities as were shown on the Contract Drawings as requiring diversion were to be accommodated within the Claimant’s programme of work. The work involved in the diversions themselves was in the hands of the relevant utility companies however, meaning that electric cables must be diverted only by the electric company and so on. The time needed for such work was in that sense not under the Claimant’s control.

124. The PS for the Contract contained a specific provision relevant to this work at PS 1.25(15) which Ms. L paraphrases as requiring the Claimant to ‘hand over the areas to the utility undertakers at about formation level’. To the Claimant's understanding, this does not include any obligation to excavate trenches to accommodate the utilities, this being the responsibility of the utility companies themselves.

125. This is a controversial understanding as between the parties because the Respondent’s case is that the Claimant was indeed responsible for the trench excavations. Mr. C explained this in his witness statement, and while he was not on site at the time the relevant work was carried out, his evidence nevertheless summarises the Engineer’s understanding of the contract provisions (paragraphs 5.4-5.7 of his witness statement). I return below to which construction of the contract is correct.

126. As work proceeded, the Engineer made observations to the effect that the Claimant’s programme allowance for this diversion work was “far too optimistic”, suggesting thereby that more time would be needed for these activities than had been provided. In due course the Engineer was to be proved right in this.

The Evidence as to Diversions

127. Ms. L has set out in considerable detail the diversions to utilities that were required by reference to each pile cap affected. That evidence was the subject of comment by the Respondent in an appendix to its closing submission. (Appendix 1)

128. Notwithstanding the detailed comments made by the Respondent, I do not understand the basic facts of this claim to be in dispute, although the Respondent (and its witnesses) take issue with descriptions such as that the utilities were in “different locations” or were in some sense “additional”. Mr. C points out, correctly, that the Contract Drawings were explicit that the locations of the existing utilities and diversions needed were tentative only, with actual work to be determined as work proceeded, and as agreed by the Claimant with the Engineer and the utility undertakings.

129. It is clear that the diversion works were complex and involved various different companies. It is also not in dispute that, as the Claimant put it, ‘utility companies do not collaborate with each other when it comes to combining their respective services in the same trench, [being] committed to installing services only within their own trenches’.

130. The process of organising and arranging the necessary diversions of utilities took considerable time and effort (bearing out the Engineer’s suggestion that the programme allowance was optimistic). There were many continuing discussions between the Claimant and the utility companies in meetings referred to as ULG (Utility Liason Group) meetings. The Engineer’s Representative took part in those meetings and in due course the utility companies were persuaded to divert their utilities via common trenches if these were provided to them by the Claimant. This, of course, greatly reduced the time needed for trench excavation and allowed some parallel working to take place.

131.  Common trenches were ultimately adopted in many locations having been discussed in the ULG meetings but, in summary the Respondent takes the view that this fell within the scope of the Claimant’s ‘original’ obligations, and in any event was a solution voluntarily adopted by the Claimant to mitigate the delay that would have arisen had individual trenches been used. Such delay could, on the face of things have been remarkable, with PCCW proposing a period of 3-4 years for some work, and the gas company 2 years for work. Those statements may have to be taken as negotiating positions rather than realistic estimates, but are indicative of the potential for substantial time to be needed for some of the diversion work.”

46.  From the above, it can be seen that:

(1)  the Defendant/Claimant’s programme of work had to accommodate the diversion of the utilities which work was undertaken by the utility companies themselves;

(2)  there was a dispute as to whether the Defendant’s work under the Contract required it to excavate the trenches to accommodate the utilities and/or the related work;

(3)  it was necessary to organize and arrange the necessary diversion works, which were complex and involved various different companies;

(4)  ultimately, it was decided that common trenches were to be provided to the utility companies by the Defendant, in order to reduce what would have been remarkable delay, in terms of years, in the completion of the Works.

47.  It also appears to be relatively clear from the background stated in the Award that common trenches were eventually adopted in many locations, when the Contract drawings made it clear that the locations of the existing utilities and diversions required were only tentative, and that actual work was to be determined only as work proceeded, and as the agreed by the Defendant with the Engineer and the utility undertakings.

48.  Pertinently, the arbitrator found (at paragraph 139 of the Award) that the Defendant was not under any obligation under the Contract to carry out the excavation of the trenches. He had considered PS 1.25, and the Plaintiff’s contention that the Defendant should provide reasonable provisions for the utility undertakings to carry out utility works, but agreed with the Defendant that the Defendant’s work was confined to investigating and locating the location of the utilities, and that it was for the utility companies to carry out the rest of the work.

49.  It also appears to me to be clear that the arbitrator found that the instruction for the provision of common trenches constituted a variation from the original contract requirements, and that there were changes in the position of the utilities as compared to the drawings, and changes in the routing of the relevant diversions, and that the discovery and relocation of the utilities not shown on the drawings all constituted variations. The arbitrator’s findings and analysis are set out at paragraphs 140 to 151 of the Award. At paragraph 151 of the Award, the arbitrator expressly stated that the common trenches were the answer found to deal with the necessary diversions and to maintain progress, and that the Engineer was wrong in his belief that there was no variation involved. His finding at paragraph 151 was: “The common trenches were required for the timely completion of the work, and were a variation from the original contract requirements.” I therefore do not accept the Plaintiff’s submission, that there was no finding that the common trench work was a variation causing delay.

50.  The Plaintiff accepts at least that the arbitrator had granted an extension of time of 376 days to the Defendant, as a result of variations and delays on the part of the utility companies (paragraph 630 of the Award). At paragraph 630, the arbitrator pointed out that the 376 days are as a result of what he considered to be variations under GCC 50(1)(b)(iv), and delays on the part of the utility companies, with reference to GCC 50(1)(b)(ix). GCC 50(1)(b)(ix) entitles the Defendant as Contractor to extension of time for completion, if delay is caused to the progress of the Works by “any utility undertaking failing to commence or to carry out in due time any work directly affecting the execution of the Works”.

51.  On the basis of the extension of 376 days for delay, the arbitrator allowed (at paragraph 672 of the Award) prolongation costs of $13,000,305.28, using a daily rate.

52.  The Plaintiff had argued in the Arbitration that the Defendant is not entitled to any financial compensation for delay caused by utilities diversions - including what the Arbitrator referred to as “charted” and “uncharted” diversions. In the present application, I understand the Plaintiff’s contention to be that delay caused by utilities undertakings are excluded from claims for costs, regardless of whether they were “additional” or “unforeseen” utility diversion work. So long as the claim for costs arise out of any utility diversion work, the Plaintiff contends that the Defendant is precluded from making such a claim.  At paragraph 36 of the Submissions made for the Plaintiff, Counsel took objection to the arbitrator’s rejection of the Plaintiff’s submissions, that the Defendant should be precluded from its claim for prolongation costs arising out of “additional” utility diversion work. It was argued that GCC 63(d) makes no distinction between “unforeseen” utilities and other utilities.

53.  The Plaintiff argued further that the language of GCC 63(d) required proof by the Defendant that the delay as alleged by it was caused by a person or company engaged by the Plaintiff, which the arbitrator failed to require.

54.  The Plaintiff drew attention to paragraphs 650 and 654 of the Award, arguing that the arbitrator was wrong in restricting delay under GCC 63(d) to “dilatory” performance by a utility undertaking, but not delay due to the scope of the work of the utility undertaking being different.

55.  On behalf of the Defendant, it was pointed out that in its Amended Defence and Counterclaim, the Plaintiff’s pleaded case was that the causes of delay for which the Defendant’s claims were made were the Defendant’s own failure and delay in commencing or completing its relevant works, and in the alternative, that the delaying events were inclement weather and utility related, such that there was no entitlement under GCC 63(d). It was also highlighted that the Plaintiff’s expert did not identify specific delays by the utility undertakings.

56.  Counsel for the Defendant pointed out that arguments on GCC 63(d) were raised by the Plaintiff in the Arbitration for the general proposition that anything relating to the utility undertakings was at the risk of the Defendant as Contractor, whether as an obligation to perform or in respect of additional payment. At paragraph 650 of the Award, this contention was rejected by the arbitrator, who observed on the operation of GCC 63(d) as follows:

“So far as this GCC provision is concerned, I agree with the Claimant that the clause is not sufficiently wide to make the Claimant responsible for all utility related delay, including in particular what might be described as ‘additional’ such work. In terms GCC 63(d) refers to an exclusion of entitlement in respect of delay caused by a utility undertaking engaged by the Employer executing work connected with, but not forming part of the Works. Although typically unhelpfully worded, it seems to me to be clear that the operative provision relates to such delay as has been caused by a utility undertaking, not delay which has been caused by executing utility diversion works. In other words, the intention expressed appears to me to be that dilatory performance by a utility undertaking is at the Claimant’s risk, whereas the scope of work to be performed by utility undertakings is not, and therefore at the risk (in this sense) of the Respondent.

There is a potential practical difficulty in the application of this construction, in that the time required for the performance of diversion work is very much in the hands of the utility undertakings themselves, and no baseline is offered against which delay on the part of the utility undertaking can be measured. Furthermore, the extent of utility diversion work in a project of this nature is, inevitably, only hazily understood prior to work commencing, and determining what is “additional” is not necessarily straightforward.

The Respondent submits that it is only “unforeseen” utility work that qualifies for the grant of an extension of time by virtue of SCC 55, but even for utility work of that nature there is ‘no corresponding inclusion in GCC 63’ enabling the Engineer to ascertain relevant associated Cost. A better view of this, it appears to me is that GCC 63 treats such ‘unforeseen’ utilities no differently to other utilities.”

(Emphases added)

57.  What the arbitrator therefore found and concluded on was that the delay caused by the relevant works (of providing and excavating the common trench, and the additional work carried out by the Defendant as a result of the revised routing of diversions, etc) was due to variations, for which prolongation costs were allowed under GCC 63(b), and that the expenses or costs were not excluded or precluded by GCC 63(d). There is no question of requiring the Defendant to prove that its claim falls under GCC 63(d), as contended by the Plaintiff.  As Mr Barrett pointed out in his Submissions, the arbitrator referred to the contractual basis for the prolongation claim at paragraph 637 of the Award, as being GCC 48(2) as amended, 63(a) and 63(b), namely variations.

58.  The parties had disputed in the Arbitration whether the delays had been caused by utility undertakings (as the Plaintiff sought to argue), or by additional work which arose from changes to the locations and layouts of utilities as indicated in the drawings, which were variations.

59.  Before the arbitrator’s findings can be criticised, the utility works involved have to be understood.

60.  The expert evidence on delay, causes and effect was referred to and analyzed in the Award, when the arbitrator considered the claims for extension of time and damages. As explained in the witness statement of XXXXXXXXXXX, the Engineer, the Defendant’s EOT Claims 12 and 14 related to utilities works. Claim 12 related to delays alleged by the Defendant to have been caused by the requirement to provide common trenches for the slewing of PCCW cables at 3 grids, and Claim 14 related to delays caused by the additional requirement to provide a common trench for the diversion of the twin gas mains and water mains at the 3 grids. The Defendant’s claim in the Arbitration was that the provision of the common trenches should be valued as variation works, and according to the expert Mr Adams, the slewing of the PCCW cables caused a combined critical delay of 158 calendar days, whereas the common trenches for utility diversions work which those trenches facilitated caused 124 days of critical delay.

61.  Claims 12 and 14 were analyzed from paragraph 592 to 601 of the Award, from which paragraphs the Works affected by the utilities and the extent of the delay can be seen. The arbitrator stated that the Works under the Contract were delayed as a result of the requirement to provide common trenches for the slewing of PCCW cables at the relevant grids, and that work could not commence until after completion of the diversion of other utilities. The relevant diversions of gas and water mains were completed on 18 June 2010 and the slewing of the cables could commence, but piling could not commence until after the PCCW cable ducts were relocated. For Claim 14, the arbitrator pointed out that there were delays caused by the additional requirement to provide a common trench for the diversion of the twin gas mains and water main at the grids in question. He referred to the evidence of Ms L, to the effect that numerous conflicts between the existing underground services and the piles and pile caps had been discovered. The Engineer subsequently issued instructions to revise the layout of the piles and pile caps to mitigate the conflicts, including the revision of the pile and cap layout for 3 grids. In addition to that, a common trench was instructed to be excavated in order to divert certain existing utility services around the pile caps. According to Mr Adams, the common trenches for utility diversions caused 124 days of critical delay.

62.  On a a more careful review of the Award and the findings made, it is clear that when the arbitrator accepted and adopted Mr Adams’ evidence and assessment, and found that the Defendant was entitled to an extension of time of 376 days as a result of variations and delays, and to prolongation costs over the period of time, he had in mind the additional work required of the Defendant, in excavating and providing the common trenches, and the slewing work in which the Defendant had (on its evidence) participated, as well as the delay to the progress of works including piling as a result of the utilities diversion work, and the changes made to the utility provisions and layout. This is made clear in the Interpretation Letter, when the arbitrator responded to the query made by the parties as to the way variations would have been causes of any delay to the progress of the Works, or would have materially affected the progress of the Works, by stating:

“This Request does not therefore clearly identify an element of the (Award) that requires clarification. As I understand the Request it is directed at the delay events 12 and 14 both of which involved the “common trenches” for utility diversions. The Request however appears to be made on the basis that the only relevant cause of delay was the requirement for common trenches, which is not what I have held to be the position…

I further note that the delay events in question were approached by both parties on what may be said to have been a ‘global’ basis. The (Defendant) analyzed delay by reference to the construction activities affected by the combination of additional utility services, revised routing of diversions, and the common trenches that were ultimately used to mitigate the overall delay. The (Plaintiff) did likewise, albeit attributing the cause of delay in the relevant locations to other factors. The ‘mitigation’ element in regard to the common trenches was part of the combined effect of the changes to the utility provisions and layout.” (Emphases added)

63.  It is clear therefore that the clear findings made by the arbitrator were that the extension of time and prolongation costs were allowed on the basis of delay and that the Defendant’s Works had been materially affected by the variations ordered. Findings of fact made by the arbitrator, as to whether any work had been carried out by the Defendant, and disrupted, as a result of the variations, and the changes made in the position, dimension, line and level of the Works involved, are not subject to review by this Court.

64.  What the arbitrator found, at paragraph 650, was that GCC 63 is not sufficiently wide to make the Defendant responsible for “all utility related delay”, and that the operative provision does not relate to delay “caused by executing utility diversion works”.

65.  I do not accept the Plaintiff’s contention, that utility diversion works do not form any part of the Works to be performed by the Defendant under the Contract, and that as such, they cannot constitute variations for the purpose of GCC 63(b). The findings of fact made by the arbitrator were that the Defendant had carried out excavation of the common trenches, which were not part of their contractual obligations, and that there were variations from the original contract requirements and specifications. The simple fact was that the Defendant was not required to carry out excavation under the Contract, but had been instructed to do so and did carry out that work and work related to it, which the arbitrator found on the facts had resulted in delay and for which the Defendant was entitled to costs under GCC 63(b). On the findings of fact made, I am not persuaded that the arbitrator’s construction of GCC 50 and 63 has been shown to be obviously wrong, or even open to serious doubt. As Counsel for the Defendant pointed out, there is nothing within GCC 60 or GCC 63(b) which bars work on utilities as variations. GCC 63(b) and (d) are separate provisions, and the Contractor may claim for and be allowed costs under either of them.  Even in this application, the Plaintiff has not identified any provision in the Contract which excludes the work of executing utility diversions as a variation.

66.  In support of the arbitrator’s findings on variations and delays caused by variations, Counsel for the Defendant referred to GCC 19(2). GCC 19 provides for the Defendant’s responsibility as Contractor for the setting out of the Works in relation to original points, lines and levels of reference shown on the Drawings or any schedule supplied by the Engineer. Under GCC 19(2), the rectification of any error in the position, level, dimensions or alignment of any part of the Works which is based on incorrect data shown on the Drawings or any documents supplied to the Contractor by the Engineer “shall be treated as a variation ordered in accordance with (GCC 60)”. I agree that this shows that the arbitrator’s treatment of the changes relating to the utilities and which affected the Works as variations is correct.

67.  The Plaintiff highlighted the fact that at paragraph 652 of the Award, the arbitrator considered that GCC 63 treats “unforeseen” utilities no differently to other utilities. In my view, this makes no difference to the arbitrator’s finding that there were variations made for additional work to be carried out by the Defendant, to fall within GCC 63(b).

68.  Even if, purely for the sake of argument, the arbitrator’s construction of GCC 63(d) is either open to serious doubt or is obviously wrong, in the present circumstances when the arbitrator has actually made a finding that the Defendant is entitled to costs by reason of the progress of the Works having been materially affected by a variation ordered, as provided for in GCC 63(b), the alleged error concerning GCC 63(d) cannot be said to “substantially affect the rights of one or more of the parties” within the meaning of section 6(4)(a) of the Schedule. It makes no difference to the ultimate decision of the arbitrator in this case.

69.  The Plaintiff sought to argue that the tribunal made no finding that the common trench work itself (including excavation and reinstatement of trenches for utilities diversion) was a variation causing delay. In this respect, I accept the arguments made for the Defendant, and it has not been shown, that the arbitrator had been requested to distinguish between the time for the utility undertakings carrying out additional utility work and the work of the Defendant in the common trenches. Nor can I see this as necessary. The arbitrator accepted on the evidence that not only did the Defendant excavate the common trench but it had, amongst other things, carried out slewing, ie the moving of the relevant cables, in conjunction with the utility undertakings installation work, and had provided constant attendance. At paragraph 630 of the Award, the arbitrator had obviously considered the combined effect of the work of the Defendant and of the utility companies, when he ruled on the 376 days of extension of time as a result of both variations and utility diversion delays which stemmed from changes to the utility provisions and layout, and on the Defendant’s entitlement to prolongation costs. This was what the arbitrator was entitled to do.

70.  It is the Plaintiff’s contention that because the common trenches were found and accepted by the arbitrator to have been a way to shorten the period of the utility works, it cannot be said that progress of the Works had been delayed or “materially affected” by the utilities diversion work, and the arbitrator’s decision to allow prolongation costs was obviously wrong. This can be dealt with shortly. The effect of the arbitrator’s findings was that the substantial delay caused by the need to accommodate the utilities was mitigated by the final decision to provide trenches to accommodate the utilities, and by the Defendant being instructed to (inter alia) excavate the trenches. The delay was reduced, but it does not mean that there could have been no material effect on the progress of the Works. The finding of whether there was material effect or impact on the progress of the Works, the extent of such impact, the period affected, and the costs and expenses resulting therefrom, are matters of fact to be investigated and determined by the arbitrator. There has been no evidence as to how and why his finding was erroneous, and how the decision was wrong at all.

71.  Finally, GCC 50(5) is relied upon by the Plaintiff in contending that any extension of time granted to the Defendant should be in full compensation and satisfaction for any loss or injury sustained by the Defendant in respect of any matter in connection with the extension granted, and that the arbitrator was in error in allowing prolongation costs in addition to the time extension.  GCC 50(5) is expressly stated to apply, “except as provided elsewhere in the Contract”. GCC 63 of the Contract sets out the Defendant’s right to apply to the Engineer to certify the expenditure or cost incurred, if it can be shown that the progress of the Works had been materially affected by (inter alia) any variation or the matters identified in GCC 63(d). I do not accept that the arbitrator was in error in allowing prolongation costs under GCC 63, and GCC 63 is an exception to GCC 50(5).

Disposition

72.  In conclusion, it has not been established to my satisfaction that the decision of the arbitrator on the questions identified can be said to be either obviously wrong, or giving rise to “serious doubt”. The application is accordingly dismissed, with the order nisi that costs (including all costs reserved) are to be paid by the Plaintiff on indemnity basis, with certificate for Counsel.  Such order shall become absolute unless application for variation is made within 14 days.