ATTORNEY GENERAL v. KO HON MAU, t/a KO'S CONSTRUCTION CO

Headnote

    On the true construction of two competing termination clauses in the Hong Kong Government Public Works Maintenance Contract, a notice given under clause 120 had interim specific validity and was not neutralized by a later notice given under clause 107.

IN THE COURT OF APPEAL

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J U D G M E N T

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Hunter, J.A. :

1. This is the judgment of the court.

2. This appeal raises a short but important question on the true construction and interim effect of two competing termination provisions in the 1972 edition of the Hong Kong Government Public Works Highways Maintenance Contract.

3. Certain basic facts are not in dispute. The contract in question was entered into between government and the respondent Ko Han Mau, who trades as Ko's Construction Company, on 26th March 1987. It was expressed to run for two years from 1st April 1987. We are concerned with certain plant vesting and termination provisions and in particular the following :-

(i) Clause 77

"All Constructional Plant, Temporary Works and the materials owned by the Contractor .... shall when brought on to the Site .... immediately be deemed to become the property of Government".

(ii) Clauses 82 & 83 which deal with the revesting of plant in the contractor upon removal from site with consent or upon completion.

(iii) Clause 107

".... if the engineer shall certify in writing to the Director that in his opinion the Contractor :- ....

(f) has failed to proceed with the Works with due diligence, then the Director, after giving fourteen days' notice in writing to the Contractor, may enter upon the Site and the Works and expel the Contractor therefrom .... may use ... so much of the Constructional Plant, Temporary Works and materials which have been deemed to become the property of Government under the provisions of the Contract .... may at any time sell any of the said Constructional Plant .... and apply the proceeds of sale in or towards the satisfaction of any sums due or which may become due to him from the Contractor under the Contract".

(iv) Clause 120

"(1) In the event of Government :

(a) failing to pay to the Contractor the amount due under any certificate of the Engineer within thirty days after the same shall have become due under the terms of the Contract; or

(b) interfering with or obstructing the issue of any such certificate,

the Contractor shall be entitled without prejudice to any other rights or remedies to terminate the Contract by giving notice in writing to Government.

(2) Upon the giving of such notice the property in all Constructional Plant brought upon the site by the Contractor shall with all revest in him and he shall with all reasonable despatch remove the same from the Site."

(v) Clause 118. This arbitration clause provided for the initial settlement of disputes by the engineer, whose determination generally was decisive until after the expiry of the maintenance period, but which could thereafter be reviewed, amended or reversed by an arbitrator.

4. Neither party was satisfied with the performance of the other under the contract. Inter alia, government complained of delayed performance by the contractor, and asserted a right to deduct sums by way of liquidated damages from some certified payments. The contractor complained of the delays and obstruction in the issue of certificates. Each party denied the validity of the other's claims and arguments, but neither asserted bad faith or that any contention was not genuinely believed.

5. Matters came to a head in the following sequence :

(1) On 9th September the contractor gave notice of termination under clause 120 on the basis of alleged interference and obstruction in the issue of certificates.

(2) On 19th September government gave notice under clause 107 of its intent to re-enter on 6th October. The recited basis for this notice was that "the Engineer has certified in writing .... that in his opinion you have failed to proceed with the Works with due diligence".

(3) On 6th October, government re-entered and took possession of the plant on site.

6. It is common ground between the parties that the ultimate validity of their respective notices can only be determined by the arbitrator whom it is anticipated will shortly embark upon the reference and after full inquiry. The issue is what is to happen to the plant pending suit. The contractor puts its value at HK$1.8m. This he says he wishes to realise to satisfy the pressing demands of his creditors. Government wishes to retain the apparent "security" the plant affords (in addition to that provided by the HK$0.45m performance bond provided under the contract); to use the plant on site; and if necessary to sell it to its advantage. Underneath the rival claims to possession lie the competing claims of creditors between whom hereafter different considerations may apply. For present purposes this court is concerned only with the conflict between clauses 107 and 120.

7. This question could have been brought before the court in a number of different ways including an interim application in an existing arbitration. In fact two originating motions were lodged : one by the contractor claiming the present right (in effect pending suit) to remove the plant from site : the other by government seeking a stay and reference to arbitration. In order to obtain the court's ruling upon the real issue between them at the earliest possible moment, both parties have sensibly and realistically joined in inviting the court to answer that question and they have raised no procedural points. Speed they have achieved. On Thursday 13th October Sears J answered the question in favour of the respondent contractor. On Friday 14th October this court accepted an appeal and that same afternoon heard argument from counsel which was most agreeably helpful, clear and concise.

8. Counsel's rival contentions upon the two clauses can shortly be stated. For government Mr O'Sullivan argued that a notice purported to be given under clause 120 only operated as "such notice" for the purposes of clause 120(2) and revested the property in the contractor, if it was in fact validly given. The condition precedent he asserted to the right to serve any effective notice was entitlement. This only arose after one or other of the factual alternatives in clause 120(1)(a) or (b) were proved or admitted. The facts relied upon here by the contractor were hotly disputed. This clause 120 notice therefore had no effect pending suit, and would only become effective if and when an arbitrator found in the contractors favour. By contrast he argued that a clause 107 notice, and particularly that here served, had immediate interlocutory effect. The condition precedent to the service of such notice was no more than the certificate of the engineer. Although such certificate could hereafter be set aside by the arbitrator it would remain effective for inter m purposes until such event. He did not seek to argue, rightly in our view, that such certificate constituted any interim determination by the engineer for the purposes of clause 118(1).

9. For the respondent contractor Mr. Lewis argued that a notice under clause 120 which was given bona fide and was not a sham as the judge held, took effect as "such notice" for the purposes of 120(2) when it was given. Any other conclusion he asserted, and particularly the construction urged by government, would deprive clause 120 of all content, and emasculate a provision deliberately inserted in the contract for the contractor's protection. In every case where a contractor gives notice under this clause he is bound to stop work and withdraw his men from site. It is clear that what he would regard as justified will be regarded by government disputing that view as an abandonment, or a failure to proceed with diligence it would continue to assert was "due" from the contractor. Whenever government receives a clause 120 notice, the validity of which it disputes, it is almost certain to wish to serve, and in its view would be justified in serving, a clause 107 notice. But if the Government's argument is right service of such notice is not necessary only to protect its position and to mark its disagreement with the earlier notice. The almost inevitable giving of the later notice would deprive the clause 120 notice of any value. This resulted from extending interim validity to the clause 107 notice and denying it to the clause 120 notice. Mr Lewis did not allege that interim validity should not be afforded to the clause 107 notice. He asked for similiar regard to be paid to the clause 120 notice.

10. By way of extension to this argument Mr Lewis suggested that once a clause 120 notice had been given, government could not exercise its right or serve a valid clause 107 notice because phrases like "due diligence" had ceased to have any real meaning in fact. With respect, this confuses fact with asserted fact. The true position in our view is that initially under both clauses a notice can only be based upon asserted fact. Government is under no obligation to accept facts asserted in a clause 120 notice. It is not bound to accept such notice as a valid repudiation, and is prefectly entitled to assert different facts and to embody or recite such facts in a clause 107 notice. We therefore reject this extended argument.

11. The same reasoning leads to an acceptance of both the judge's conclusion and Mr Lewis's first argument. If, as we think, both notices are seen to be equally based upon asserted fact, which may or may not thereafter be established, then upon any reading of the contract which has regard to the practicalities and the need to reconcile conflicting clauses, we think that both should be afforded some and desirably similar interim effect, in the context of interim specific relief. Both notices are provisional in the sense that they will only take final effect at the conclusion of the arbitration. But we can derive or detect no convincing reason in this contract for attributing provisional value to either notice for any lesser period, and still less for treating one notice as practically destructive of the other. Further in the context of the deprivation or loss of plant it is not easy to envisage a situation where a damages award, made in the light of determined fact by the arbitrator, would not be an adequate remedy. This in itself goes far to remove any need for the direct or indirect grant of specific relief, or its equivalent, pending suit, upon the basis of assumed or asserted fact only.

12. The practical problems arising from a refusal to give interim effect to a termination notice under a clause like clause 107 (for which neither counsel contended) were revealed by the decision in Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] 1 Ch 233, and the debate and criticisms which followed in England, New Zealand and Australia eg Mayfield Holdings Ltd v Moana Reef Ltd [1973] 1 NZLR 309 and Hudson Building Contracts (10th edition) p 681 and supplement. These decisions show how important it is not to lose sight of the contractual realities when construing such provisions.

13. For these reasons we conclude, in agreement with the judge, that the contractor is entitled to re-possess and remove the plant which was on site on 6th October last, and we dismiss this appeal.