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

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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Background

1. The respondent is a civil engineering contractor. It entered into an agreement with the Drainage Services Department of the government to construct a sewage disposal scheme. Part of this work involved the excavation and removal of rock in various locations. The respondent removed rock encountered which has been measured and amounts to 7,048 cubic metres. The respondent seeks to be paid for this work on the basis of the rates set out in the bills of quantities. However, the engineer has amended these rates downwards so that there is now the difference between the parties of over $31 million. This difference has been submitted to arbitration. The parties invited the arbitrator to decide a number of preliminary issues. The arbitrator has done this in a First Partial award, but the applicant is not satisfied. The applicant now applies for leave to appeal against certain decisions by the arbitrator.

The Contractual Context

2. The relevant provision of the contract is clause 59. It is headed "Measurement, Variations, Valuations and Claims". Clause 59 has the rubric "Bills of Quantities and measurement".

3. The relevant parts of clause 59 read -

The Issues

4. The disputes centre around 7 items in the bills of quantities. The first three of these items in respect of which the respondent was required to gave rates estimated the quantity of rock as 70, 20 and 100 cubic metres. In respect of these items the respondent gave rates of $5,000, $8,000 and $5,000 per cubic metre, respectively. The other four items gave the quantity as one cubic metre, and the respondent gave a rate of $3,000 in respect of each.

5. The issues for the determination by the arbitrator, as far as are relevant to this matter, were stated by him as follows -

6. It is convenient to deal firstly with the first three items.

The First Three Items

7. Regarding the first three items, the arbitrator found that the actual quantity was substantially greater than that stated in the bills of quantities. This finding triggered the operation of clause 59(4)(b).

8. The arbitrator took the view that the precise meaning of "increase or decrease of itself" in clause 59(4)(b) was elusive, but that it was generally understood to apply to a change in quantity which itself changes the method of working or the economics of a working method. He adopted this approach.

9. Mr Scott suggests that this was an unnecessarily narrow interpretation of the clause. He says that all the clause required was that original rate would be "unreasonable or inapplicable", but Mr Scott does not suggest any basis, other than that adopted by the arbitrator, for a finding by the engineer that the original rate was "unreasonable or inapplicable". I cannot think of any that might be appropriate in the circumstances of this case. There may be, in other cases, facts that would justify an opinion by an engineer that an increase or decrease in quantities of itself render a rate unreasonable or in applicable on some other basis, but these facts, on the findings by the arbitrator, are not present here.

10. Accordingly, I can see no basis for an argument that the arbitrator fell into error in this respect.

11. The arbitrator said that, having seen and heard all the evidence in the arbitration, he was not satisfied that it had been established by the applicant that the respondent's method of working changed in any material way from that contemplated at the time of tender. The arbitrator said that, in order to justify a re-rate, the engineer would have to be satisfied that, as a result of the change in quantities, there was a change in the method of working which change itself led to a saving in costs. The arbitrator was, of course, talking about the case before him. He was not purporting to say that, in every contract, this would be the case.

12. The arbitrator's approach seems to me to be the correct one. It could not be argued that, if a change in working methods as a result of a change in quantities led to an increase in costs, this would justify a lowering of the rate.

13. Mr Scott argues that a contractor's method of working includes the deployment of plant and equipment and its economic productiveness as a result of a substantial increase in quantities. He says that the arbitrator was wrong to exclude such topics as economies of scale and effects on overhead costs.

14. I do not think that the arbitrator did exclude such considerations. The respondent's method of working was to use sub-contractors. The arbitrator gave careful consideration to whether the respondent's costs had decreased. He heard the evidence and concluded that they had not. This cannot be challenged in this court.

15. In any event, if, as the arbitrator found, there had been no change in the method of working, it is difficult to see how there could be any change in the economics of a working method that had not itself changed.

16. The arbitrator found that, even if this were a case for a re-rate, it did not seem to him that it could ever be right to alter "the risk figure". The risk figure is the figure that the respondent took into account in determining his rate to cover "risk and contingency and adjustment to estimated direct costs". The arbitrator recorded that both parties agreed that it could not be correct to alter a contractor's profit percentage on a re-rate, and considered that the risk figure was analogous to profit. The arbitrator pointed out that a large part of the increase in the contract price was because this risk figure was multiplied by virtue of the much larger quantity of rock. The arbitrator said - "I find it hard to see how it can be said that the increase in quantity 'of itself' rendered that part of the rate unreasonable or inappropriate (sic).". Nothing turns on the arbitrator's use of the word "inappropriate" instead of "inapplicable". This, in the context of the arbitrator's other findings, must be right. If, in the circumstances of this case, the only legitimate basis for decreasing the respondent's rate was that the increase in the quantity of itself decreased the respondent's costs, then one must look at the respondent's actual costs, not costs that he might occur in the event of a contingency happening. This is clear when one looks at the matter from the other point of view: What chance would a contractor have of having his rate increased following a change in quantities when he could not show that his actual costs had increased by reason of the change in quantities? The answer to that is - none at all. And it would do him no good at all to point to increases in costs because a risk he sought to guard against had occurred. It would be pointed out to him very quickly that the change in quantities of itself that had not rendered the rate unreasonable or inapplicable.

17. Again, I can find no basis on which it might be argued that the arbitrator committed an error of law in his approach on these matters.

The One Cubic Metre Items

18. Regarding the items in respect of which the quantity was given as one cubic metre, the arbitrator said that he was satisfied on the evidence that no one could have intended that those quantities were a genuine estimate of the amount of rock to be excavated. He accepted evidence that one cubic metre was inserted merely for the purposes of obtaining a rate. The arbitrator said that, a rate for one cubic metre having been sought and given, it did not seem to him that it could now be right to subject that rate to a re-rate under clause 59(4)(b). The arbitrator said that, although the actual quantities here were all greater than one cubic metre, he did not consider that in the particular circumstances of the case, it could be fairly said that the work substantially greater. It seemed to him that by putting one cubic metre in the Bill of Quantities a rate was being requested and, although the actual quantities were higher, they were not of such an order as to justify a re-rate under clause 59. He preferred the view that the contractor's rate was intended to cover whatever actual quantity was encountered. He concluded that, in relation to these four items, the Bill of Quantities should remain as it was.

19. The actual quantities excavated under these items was about 59, 20, 20 and 32 cubic metres.

20. Mr Scott argues that no reasonable arbitrator, properly directing himself, could have found that the actual quantity excavated was not substantially greater than one cubic metre. That being the case, clause 59(4)(b) came into operation. I agree with this submission.

21. As I understand the arbitrator's approach, he found that the one cubic metre inserted into the bills of quantities was not "genuine" estimate at all. This is probably right, but I do not think that this makes any difference to the operation of clause 59. Clearly, the parties expected the respondent's work in respect of these items to be measured. They could have been measured only under clause 59. Once they are measured under clause 59, and found to be, as they should have been, substantially greater "than that stated in the Bills of quantities", clause 59(4)(b) came into operation.

22. It does not follow. However, that the applicant should have leave to appeal on this point. The amount involved in comparatively small; about $140,000 in comparison with the total difference of over $31 million. Under the law, I may not grant leave unless I consider that the determination of the question of law concerned "could substantially affect the rights of one or more of the parties". This, I believe, is not the case here. If I were to grant leave to appeal, and the appeal were successful, the matter might be remitted to the arbitrator. In that event, the only course the applicant could hope for is that the arbitrator would then consider the one cubic metre items in the same way as he considered the first three items. If he were to do so, the inevitable result is that they would suffer the same fate. The applicant would be no better off. So, in my view, the determination of the question of whether or not the arbitrator was correct in his approach to the one cubic metre items would not substantially affect the rights of the parties.

23. I refuse to grant leave to appeal on this point.

Result

24. In the result, the application for leave to appeal is refused. There seems no obvious reason why costs should not follow the events. I make an order nisi that the applicant pay the respondent's costs.