ZEN PACIFIC CIVIL CONTRACTORS LTD. v. WELLEAD CONSTRUCTION & ENGINEERING CO. LTD.

HCCT16/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.16 OF 2001

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J U D G M E N T

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1. The respondent ("Wellead") and the applicant ("Zen Pacific") were parties to an arbitration in which Wellead claimed, as a sub-sub contractor approximately $130 million from Zen Pacific, the sub-contractor arising out of a major construction project in which "Aoki" was the main contractor and the MTR Corporation the employer. At the conclusion of the arbitration, the arbitrator, Mr John Luk, awarded approximately $12 million to Wellead. Zen Pacific now seek leave to appeal that award. There is no cross appeal.

2. In the Notice of Originating Motion Zen Pacific raise nine issues to be determined by this court. The reasoned award which was made in January 2001 is a long and comprehensive document, over 600 pages. Counsel's final submissions after a lengthy arbitration were also thorough. The issues on appeal however are relatively narrow and can be dealt with briefly.

3. The main issue in this appeal concerns the arbitrator's interpretation of the word "claim" in a supplementary agreement between the parties. The correctness or otherwise of the interpretation is directly relevant to issues 1, 3, 4, 5, 7 and 8. As such these are all "one-off" issues as defined in the "PT Dover" case. The applicant must demonstrate that the arbitrator was plainly wrong in his decision and must be able to do so quickly and without elaborate argument.

4. Issue 2 concerns the decision by the arbitrator to imply certain terms into the contract. This is not a one-off issue but Mr Ronny Tong, SC, counsel for the applicant, does not pursue this issue. At his request I make no ruling on it. In passing, he also does not pursue issue 3.

5. Issue 6 is a separate "one-off" issue.

6. Issue 9 concerns the rate of interest awarded. On the PT Dover scale it is more towards the other end of the scale where the applicant must show a strong prima facie case that the arbitrator was wrong before leave will be granted.

7. At the conclusion of a "leave only" hearing on 21 June 2001, I granted leave on issues 2, 6 and 9 and adjourned part heard the remaining issues.

8. Although not a qualified lawyer, Mr John Luk is an arbitrator with considerable experience. He has over 30 years' experience as an architect, a civil engineer and a structural engineer. He is the Project Manager of the Sun Hung Kee Real Property Group and has been chairman of the Hong Kong Engineers Association. He was chosen by the parties.

Issue 1

9. In order to understand this and many of the subsequent issues it is necessary to set out the Supplementary Agreement, entered into on 12 April 1996. It is recorded in a letter of 23 April 1996 as follows :

(references to SOCCL are "Shui On", Zen Pacific's predecessor in title)

"1. Deduction of Fixed Lump Sum of $38,000,000 from the Sub-contract Account

Pursuant to Clause 3 of the Special Conditions of Sub-contract, a fixed sum of $38,000,000 will be deducted from the remeasured part of the Sub-contract Final Account comprising the following scope of works based on certified amounts from Aoki.

1.1 Original Scope of Sub-contract Works

a) Seawall from CH-40 up to CH861;

b) Reclamation below +2.5m PD using import filling material;

c) Filling above +2.5m PD including the formation of surcharge mound using import filling material;

d) Trimming and preparation the final formation levels; and

e) Formation of surcharge mound at Siu Ho Wan using import filling material.

1.2 Eastern Seawall Instructed during the Progress of the Sub-contract

a) Eastern seawall extension from CH861 up to Phase I existing seawall;

b) Reclamation below +2.5m PD using import filling material within the eastern seawall extension; and

c) Filling above +2.5m PD using import filling material up to the final formation level within the eastern seawall extension.

Any works not included in the above scope and any claims/variations (definition of claims and variations see paragraphs 2 and 3 below) initiated or not initiated by Wellead will be subject to the payment methods as stated in paragraphs 2 and 3 below.

Variation works Instructed during the progress of the Sub-contract

Any works instructed either in writing or verbal by MTRC via Aoki or by Aoki itself but not included within the scope of works defined above are classified as variation under the Sub-contract.

The said variation works are subject to 5% deduction by SOCCL from amounts certified and paid for by Aoki to cover its management expenses. Any works instructed under Daywork will be applied in similar circumstances.

Up to date there have been two variation works instructed by Aoki and the deductions regarding thereto are agreed and settled as follows :

2.1 Spread and compact excavated material

Wellead agrees to accept the unit rate of $8.17/cu.m. to carry out and complete the spreading and compaction of excavated material provided by Aoki to make up the formation within the whole reclamation site.

It was further agreed that if SOCCL could claim a higher rate than $8.6/cu.m. for this variation work, 70% and 30% of the extra income would be to SOCCL's and Wellead's account respectively.

2.2 Removal of armour rock from existing Phase I seawall

Wellead agrees to accept the unit rate of $33.5/cu.m. or the rate certified by Aoki with 5% deduction, whichever is the lower, to carry out and complete removal of armour rock from existing Phase I seawall.

For variation works to be instructed by MTRC and/or Aoki in future, the general procedure is to agree between Wellead and SOCCL a rate for same before its formal submission to Aoki for acceptance. The final rate to be certified to Wellead by SOCCL will be either the said agreed rate or the certified rate by Aoki with 5% deduction, whichever is the lower.

If Wellead considers that Aoki's certified rate for any variation work is unacceptable and arbitration proceedings should be taken, in such circumstances Wellead shall bear all expenses for the proceeding and the extra income achieved after 5% deduction by SOCCL, shall be all to Wellead's account.

3. Claims arising out of or in connection with Wellead's Sub-contract work

It is agreed that all income from claims by SOCCL will be to SOCCL's account.

For the avoidance of doubt as to the definition of claims, it is hereby agreed to be defined as workdone and/or additional costs incurred and/or extra income on top of B.Q. rates which will not be automatically certified by Aoki and/or MTRC without the initiation, putting forward argument and further substantiation by SOCCL to justify its entitlement."

10. At the core of many of the issues in the arbitration was what was meant by the word "claims" in paragraph 3. If there had been a "claim", the income derived therefrom was to go to Zen Pacific. If there was no claim Zen Pacific was not entitled to the income. The importance of the word was apparent to the parties at the time of the agreement because the agreement concludes with the paragraph commencing "For the avoidance of doubt as to the definition of claims ...". Unfortunately, doubt was not avoided. The parties had very different opinions as to the meaning and intent of paragraph 3.

11. It was clearly incumbent on the arbitrator to make a ruling. It was a crucial issue, the parties were in dispute as to the meaning, it was the arbitrators' task to resolve that dispute.

12. The passage from the award which deals most specifically with this issue is as follows :

"2.4.50 Under Paragraph 3, the definition of 'Claim' is 'Workdone and/or additional costs incurred and/or extra income on top of BQ rates which will not be automatically certified by Aoki and/or MTRC without the initiation, putting forward argument and further substantiation by SOCCL to justify its entitlement'.

2.4.51 The line of argument of the Claimant with respect to 'workdone on top of BQ rates' or 'additional costs incurred on top of BQ rates' and/or 'extra income on top of BQ rates, is too artificial and not entirely grammatically correct as it admitted itself, so could not be adopted.

2.4.52 On the statement of 'will not automatically certified by Aoki without the initiation, putting forward argument and further substantiation by SOCCL to justify its entitlement,' the Claimant argues that 'It is a matter of degree, if arguments were exchanges, authorities were each cited, and most clearly arbitration took place one can say Aoki has not automatically certified.'

2.4.53 I agree to this approach of interpretation.

2.4.54 The Respondent in response says 'The Claimant appears to accept that if there is a dispute, then there was no automatic certification. If so, then a fortiori if there was an arbitration or the dispute was only settled before formal arbitration began.'

2.4.55 I find that it would only be reasonable and equitable to take that normal routine checking, additional substantiation, answering enquiry, supply of more data that are basically required in normal business operation not to fall into this highly unreasonable term. The appointment of outside claim consultants and lawyers to handle such disputes or the taking of formal arbitration proceedings to resolve such disputes would suffice.

2.4.56 I find that the Claimant is right that they are the ones who put in the labour and material and it is fundamental that the Claimant should be properly paid for it work. This would be in accordance with sound commercial principle and good business sense. So under para 3 of Supplementary Agreement in the 'initiation, putting forward argument and further substantiation', they must be substantial because of the unreasonableness of the terms of the agreement and the intention of the parties to the Supplementary Agreement was to protect the interest of the Claimant."

13. The applicant submits that this is an arbitrary yardstick which if applied rigidly would lead to unjust results. For example, sometimes an outside lawyer might be consulted very early in the claim procedure and on other occasions there may be months of negotiation about a claim without even consulting an outside lawyer. In reality the first example would not have yet become a "claim" whereas the second one probably would have.

14. Although this submission has some substance it is not sufficient, in my judgment to warrant giving leave to appeal. In my judgment, the arbitrator did not give himself an inflexible yardstick. He recognized there was a need to define "claims". His definition was not rigid. He said, for example, that engaging outside lawyers or consultants "would suffice". Having clarified his approach to the meaning of "claims" he then applied it to each of the many many issues in the case. He considered the facts in each case. It was accepted that the purpose of the supplementary agreement was to protect the rights and interests of Wellead. With this in mind he made a decision on each issue which he considered to be a fair and just result. In the majority of the issues, his decision was in Zen Pacific's favour but on issues 3, 4, 5, 7 and 8 in the appeal he decided in Wellead's favour.

15. Mr Tong for Zen Pacific concedes that a claim only matures into a claim for the purposes of paragraph 3 at some stage along the negotiation process. The question is when and where? In my judgment, the arbitrator's careful and considered approach is comfortably distant from being "plainly wrong" which is the threshold the applicant must cross before leave is granted.

Issue 2

16. As already stated this issue is not pursued by the applicant.

Issues 3, 5, 7 & 8

17. I will deal with these issues together. Issues 4 and 6 merit separate mention and I deal with them below. Issue 3 has been conceded. Having refused leave on issue 1, I think leave must also be refused on issues 5, 7 & 8 without considering them in any detail. They depend on the arbitrator's application of his definition of "claims". Mr Tong submits that his submission on issue 8 is particularly strong. In that case, he submits, there had been protracted negotiations over some time but still, the arbitrator decided it did not fall within the definition of a claim. One of the reasons relied on was the absence of outside lawyers and consultants being engaged. The question however is, did the arbitrator examine each issue on its own facts or did he blindly adopt an inflexible test. I am quite satisfied he did the former. It is clear from a reading of the whole report that he gave each issue careful separate consideration. Moreover, before considering each case, he had carefully considered the wealth of submissions and authorities which had been cited to him. The finality of his decisions on these matters must be upheld.

Issue 4

18. This issue relates to a dispute between Zen Pacific and the main contractor Aoki, over the volume of filling at a particular location. A certain quantity of filling, namely 557,500 cubic metres, had originally been certified by Aoki. However, Zen Pacific made a claim on the rate of payment. The matter went to arbitration with Aoki. At arbitration, Aoki were only willing to certify a lesser volume, namely 315,702 cubic metres. Zen Pacific were successful, the original certification as to volume was restored.

19. In his consideration of this issue, the arbitrator noted firstly that the final volume, 557,500 cubic metres, had originally been certified by Aoki and secondly that Zen Pacific had paid Wellead's sub-contractor based on this volume and deducted the money from Wellead's account. He found, on the particular facts, that it did not fall under paragraph 3 of the supplementary agreement. It is an illustration of his definition of "claims" not being rigid and inflexible. It is an illustration of each issue being considered separately. It is an illustration of the arbitrator endeavouring to reach a just result in each case. It is not an instance where this court should interfere on the basis of the decision being plainly wrong.

20. Mr Jimmy Kwong, counsel for Wellead, summarizes this issue with the following rhetorical question :

"Zen Pacific accepted this volume and paid the subcontractor of Wellead directly without Wellead's approval basing on this volume, deducting the payment from money's due to Wellead. How can Zen Pacific dispute Wellead's entitlement after having accepted it without Wellead's approval and payming it out of Wellead's entitlement?"

Issue 6

21. This is a separate issue which falls outside the "claims definition" argument. After the hearing on 21 June, I gave leave to appeal on this issue. I have come to the conclusion that the arbitrator was in error on this matter. The issue as drafted in the Notice is as follows :

"The Arbitrator was plainly wrong in law in holding that the contractual rate of $28/m3 for Item 21 of the Adjusted Items 'is an extrinsic evidence before the formation of the Supplementary Agreement, even it is admitted it would carry little weight' (paragraph 3.22.6(6)) and that 'the Supplementary Agreement varied the Sub-Contract in clear terms' (paragraph 3.22.6(8)) in that:-

(1) The rate of $28/m3 was a contractual rate agreed and binding on the parties to the Sub-Contract, the validity of which is never in dispute;

(2) The Arbitrator erred in finding that this was 'a piece of extrinsic evidence and that it would carry little weight';

(3) The Arbitrator erred in finding that such rate had been varied by paragraph 1 of the Supplementary Agreement when paragraph 1 thereof merely defined the scope of works to be covered by the deduction of a fixed sum of $38,000,000.00 and set out no variation or amendment as to the rates under the Sub-Contract."

22. In his reasons for award the arbitrator said as follows :

"....

5) The Respondent's position is that $28/m3 was the original contract rate and the Claimant should be paid with this rate and not the new rate under para 1 of the Supplementary Agreement, and that the $1,552,176 should still be contra-charged to the Claimant.

6) the Respondent relies on the original contract rate of $28/m3 which is an extrinsic evidence before the formation of the Supplementary Agreement, even it is admitted it would carry little weight.

7) The Respondent relies on Bob Wilson's concession but the Claimant contends that Bob Wilson cannot concede for the Claimant

8) The Supplementary Agreement varied the Sub-contract in clear terms for this item of claim unless there are good evidence or good reason to show to the contrary, this term of the Supplementary Agreement should be followed. I find there is no such good evidence nor good reason."

23. In my judgment, the error is premised on the assumption that paragraph 1 of the supplementary agreement provides for a revised higher rate than the original contract. I agree with Mr Tong, that it does not. It deals with the deduction of a fixed lump sum of $38 million to Zen Pacific from the sub-contract account. It then lists the scope of the works from which that sum will be deducted. It does not vary the rate. Moreover, as the Siu Ho Wan surcharge (i.e. this issue) was part of the original contract, there was no variation at all.

24. As a result of this part of the appeal being allowed the award to Wellead will be reduced by $2,301,744.00.

Issue 9

25. This also is a separate issue and concerns the rate of interest awarded by the arbitrator. He awarded compound interest at prime plus 1% from July 1998. Zen Pacific's complaint is that compound interest should only be awarded in exceptional cases.

26. Compound interest was claimed by Wellead in its amended Statement of Claim. The Arbitration Ordinance in section 2GH gives the arbitrator a discretion to award such interest. The money awarded to Wellead as a result of the arbitration was money that should have been paid to them well before July 1998 and had been paid to Zen Pacific by Aoki. Zen Pacific had had the benefit of Wellead's money. The arbitrator was fully aware of all the accounts and defaults in payment. He was entitled to award compound interest and his reasons at 8.3 state "after considering all the circumstances of the case ..." In these circumstances, I do not consider it proper to interfere with this part of the award. For the sake of finality however, and because the award is silent on the matter, I direct that the compound interest be calculated annually.

27. In conclusion, on issues 2, 6 & 9 leave to appeal is granted. On issue 2, the application is withdrawn by consent; on issue 6 the appeal is allowed and the award reduced by $2,301,744; on issue 9 the appeal is dismissed. On issues 1, 3, 4, 5, 7 & 8 leave to appeal is refused.

28. I make a costs order nisi that 75% of the costs of the application and the appeal be paid to the respondent by the applicant.