PENTA-OCEAN CONSTRUCTION CO LTD v. CWF PILING & CIVIL ENGINEERING CO LTD

HCCT 10/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO 10 OF 2007

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J U D G M E N T

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Appeal from arbitral award

1.  CWF Piling & Civil Engineering Co Ltd (“CWF”) was the claimant in a set of arbitration proceedings.  Penta-Ocean Construction Co Ltd (“Penta”) was the respondent.  On 17 January 2007, the arbitrator made and published an interim award on quantum and liability.  In the interim award, Penta was ordered to pay CWF a sum of $1,436,538.14 together with interest to be determined.

2.  Penta sought leave from the court to appeal from the interim award.  Originally, three points were raised but eventually, only two were pursued.  Both related to Penta’s claim for liquidated damages, which had been rejected by the arbitrator.

3.  On 18 May 2007, after hearing counsel, this Court gave leave to Penta to appeal on both points.

Leave to appeal

4.  It is now well-established that leave to appeal should only be granted under section 23(2) of the Arbitration Ordinance (Cap 341) on a question of law arising out of an award if:

(1)  where the question is one of general public importance or the construction of a standard clause is involved, there is at least serious doubt as to the correctness of the award; or

(2)  where the construction of a “one-off” clause is involved, the arbitrator’s construction appears to be obviously wrong.

Swire Properties Ltd v Secretary for Justice (2003) 6 HKCFAR 236, 255-256, paras 43 to 47.

5.  The contract involved was a standard form building sub-contract.  Penta was the main contractor retained by the government as employer to build two schools at Tai Po.  CWF was Penta’s domestic sub-contractor for the design and construction of piling works.  The sub-contract documents comprised a letter of acceptance dated 30 March 2001, a written sub-contract based on the Hong Kong Construction Association’s standard form of domestic sub-contract (1994 edition), other correspondence as well as documents including specifications and bills of quantities.

6.  The relevant liquidated damages clause is found in item 6 of the letter of acceptance, whereas clause 3.4 of the standard form sub-contract deals with the question of damages for Penta’s loss and damage arising from its position as the main contractor.  Clause 2.4 in the standard form sub-contract provides that the conditions of the sub-contract shall prevail over those of any other documents forming part of the sub-contract.

7.  Essentially, the arbitrator rejected Penta’s claim for liquidated damages on the ground that the liquidated damages provisions, which were agreed upon specifically by the parties and set out in the letter of acceptance, were inconsistent with clause 3.4 in the standard form sub-contract, which provided for deduction from the contract price of common law damages, and therefore clause 3.4 “prevailed over” the liquidated damages provisions, as per clause 2.4 in the sub-contract.  The arbitrator also rejected an alternative claim of Penta based on rectification.

8.  I am of the view, based on the evidence that has been placed before the Court, that the standard form sub-contract in question is in wide use in Hong Kong.  The standard form sub-contract, “HKCSAF” in short, is also known as the “blue form”.  It is used where a specialist sub-contractor is employed by the main contractor for jobs in the public sector, in particular for government projects administered by the Architectural Services Department.  For a brief history of the standard form sub-contract, see paragraphs 5 to 9 of the second affirmation of Yim Pui Chuen filed on 21 March 2007.  I should add that according to that affirmation, the Hong Kong Construction Association now has about 320 members representing local and overseas contractors operating in Hong Kong.  Since December 1994, the association has been encouraging its members who are main contractors to adopt HKCSAF for the employment of their sub-contractors.

9.  I have not forgotten that the issues in the present case also concern a liquidated damages clause specifically agreed upon by the parties and included in the letter of acceptance.  That, in my view, does not detract from the fact that one is really concerned with a standard form contract in the present case.  The presence of such a clause does not turn this case into a “one-off” case.  As has been explained by Lord Donaldson MR in Seaworld Ocean Line Co SA v Catseye Maritime Co Ltd [1989] 1 Lloyd’s Rep 30, 32, whilst words of amendment made by the parties to a standard form contract may be “one-off”, the question of what is the effect of the amending words in the standard form is a general one:

“Of course, against that background Mr. Hamblen inevitably tried to argue that this was a one-off case and that, whatever else might be said about the learned Judge’s judgment, it was not plainly wrong.  I agree with him that it was not plainly wrong, but I do not agree with him that this is a one-off case.  It is a case which concerns the application of the inter-club agreement for the apportionment of liabilities in respect of cargo under the notoriously imprecise New York Produce Exchange form of charter-party; and, while it is quite true that the words of amendment used in this particular charter may be one-off, the question of what is the effect of amending words in other charters in this form is a general one, since it would be very difficult, if not impossible, to find a dispute which raised every conceivable form of amendment.  The only way in which you can acquire any knowledge or learning on the effect of this agreement is on a case-by-case basis.  So for my part I would reject the suggestion that this is a one-off case.  The issue raised in this arbitration is of general importance throughout the trade.”

10.  Likewise, this case concerns the effect of a specific liquidated damages clause included in the letter of acceptance, which forms part of the sub-contract documentation, on the clauses in a standard form sub-contract, which also forms part of the same contractual documentation.  The question is a general one.  In my view, this case involves the construction of standard clauses, or at the very least, it is much nearer to that end of the spectrum than to the “one-off” end.

11.  Put another way, this case concerns whether clause 3.4, coupled with clause 2.4, in the standard form sub-contract, prevent the parties from agreeing on the payment of liquidated damages, unless specific amendments are made to the standard clauses in question.  In other words, it raises a general question of construction of the standard clauses in the context of a specific liquidated damages agreement made by the parties and set out in a document also forming part of the contractual documentation.  In my view, it is far from a “one-off” case.  It is or is very near to a standard clause situation.

12.  For reasons that will become apparent when I turn to the substantive questions raised in this appeal, I have taken the view at the hearing of the leave application that there is at least serious doubt as to the correctness of the award on the construction issue (ie the first ground).  In those circumstances, I have given leave to appeal on that ground.

13.  The above is of course said in relation to the first ground of appeal.  In relation to Penta’s second and alternative ground of appeal, namely, rectification, quite plainly, it is a “one-off” situation: Ha Hau Kwan Fong Mary v The Incorporated Owners of Golden Plaza HCCT 9/2002, Ma J (28 May 2002), para 24.  For reasons given below, I have been satisfied that the test relating to giving leave in a “one-off” situation has been satisfied.

1^st ground of appeal: construction of clauses 2.4 and 3.4 and item 6

14.  I now turn to the substantive disputes.  Regarding the first ground of appeal, the question is no longer whether there is any serious doubt as to the correctness of the award; rather it is simply whether the award is right or wrong.

15.  Clauses 2.4 and 3.4 of the standard form sub-contract read as follows:

“	2.4	These Conditions of Sub-Contract shall prevail over those of any other document forming part of the Sub-Contract.  Subject to the foregoing, the several documents forming the Sub-Contract are to be taken as mutually explanatory but in the case of ambiguities or discrepancies, the same shall be explained by the Contractor.  If the Sub-Contractor disputes the Contractor’s explanation, the Sub-Contractor shall nevertheless continue with the Sub-Contract Works in accordance with the said explanation, any such dispute to be resolved in accordance with Clause 18.
	….
	3.4	The Sub-Contractor hereby acknowledges that any breach by him of the Sub-Contract may result in the Contractor committing breaches of and becoming liable in damages under the Main Contract and other contracts made by the Contractor in connection with the Main Contract Works and may occasion further loss or expense to the Contractor in connection with the Main Contract Works and all such damages, loss and expense that are attributable to such breaches are hereby agreed to be within the contemplation of the parties as being probable results of any such breach by the Sub-Contractor.  The Contractor may deduct from any monies due or becoming due to the Sub-Contractor, any such damages, loss, and expense which are incurred and attributable to any such breaches on the part of the Sub-Contractor.”

16.  On the other hand, the letter of acceptance, otherwise known as the letter of intent – nothing turns on this difference, dated 30 March 2001, reads:

“30^th March 2001

CWF Piling and Civil Engineering Co., Ltd.

[etc]

Attention: Mr. George Ng

Dear Sir,

The Construction of A Primary School and A Secondary School in Area 12, Tai Po – Contract No. SS J334
(Programme Nos. 256EP & 238ES)
Re:  Subcontract for the Design and Construction of Piling – Letter of Intent

We refer to your quotation ref. C-00-2249 dated 16^th November 2000 and the subsequent meeting with our Mr. Takedagawa, Mr. T.C. Ying and Mr. Kenneth Kwok on 22^nd March 2001.  We are pleased to confirm that your quotation is accepted by us subject to the following agreed conditions.

1.  The Subcontract Sum shall be Hong Kong Dollars Eight Million (HK$8,000,000.00) for the design and construction of piling works.

2.  The scope of Subcontract Works shall be the design and construction of piling, including piling tests, and the design of the pile cap for the captioned project.

3.  You shall assume and perform in respect to your Subcontract Works all obligations and liabilities of the Main Contractor under the Main Contract.

4.  The form of Subcontract shall be the Standard Form of Domestic Subcontract Conditions 1994 Edition issued by the Hong Kong Construction Association.

5.  The Subcontract Works, including the piling tests, shall be completed not more than 135 days from 1^st February 2001.

6.  The liquidated damages is HK$10,000 per day subject to a maximum of 10% of the Subcontract Sum.

…

Please confirm your agreement on the content of this letter by signing and returning the duplicate letter within 5 days.

We look forward to mutual co-operation for the success of the Project.

Yours faithfully,

For and on behalf of

Penta-Ocean Construction Co., Ltd.

[Signature]

H. Takedagawa

Deputy General Manager

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We confirm our acceptance of this letter.

[CWF’s authorized signature	4 April 2001
with company chop]	Date    ”

17.  The arbitrator takes the view that both clause 3.4 in the sub-contract and item 6 in the letter of acceptance provide for mechanisms, indeed different mechanisms, for the recovery of damages in case of delay in completion.  As they are different mechanisms that are inconsistent with each other, the one provided in clause 3.4 prevails over that provided in item 6, as per clause 2.4.  This is what he says in paragraphs 6.4 to 6.7 of the written reasons for the interim award:

“	6.4	I find that nothing in the HKCASF provides the Respondent a right to deduct LD [liquidated damages] in case of the Claimant’s delay to the completion of the Sub-Contract.  Instead, clause 3.4 of HKCASF allows the Respondent to deduct any monies due or becoming due to the Claimant under the Sub-Contract any damages, loss and expense which are incurred and attributable to any breach of the Sub-Contract on the part of Claimant resulting in the Respondent committing breaches of and becoming liable in damages under the Main Contract.  This should cover the case of the Claimant’s delay to the completion of the Sub-Contract which is obviously a breach.  That means if the Claimant had caused delay to the completion of the Sub-Contract resulting in the Respondent committing breaches of and becoming liable in damages of the Main Contract (i.e. delay to the completion of the Main Contract), the Respondent shall be entitled to recover its actual damages so incurred from the Claimant under the Main Contract.
	…
	6.6	In my view, the HKCASF does provide a mechanism for the Respondent to recover its loss and damage suffered under the Main Contract, in case of the Claimant’s delay to the completion of the Sub-Contract by way of deduction and setting off of its actual damage from payment otherwise due to the Claimant under the Sub-Contract.
	6.7	I note that item 6 of the LOI [letter of intent] contains a provision that “the liquidated damages is HK$10,000 per day subject to a maximum of 10% of the Sub-Contract Sum”, which provides a different mechanism for the Respondent to recover its loss and damage in case of the Claimant’s delay to the completion of the Sub-Contract by way of deduction of LD.  However, this mechanism is in conflict with the mechanism provided in clause 3.4 of the HKCASF:  either the “LD mechanism” or the “actual damage mechanism” shall apply for the Claimant’s delay to the completion of the Sub-Contract.  By virtue of clause 2.4 of the HKCASF, I find that clause 3.4 of the HKCASF must prevail over item 6 of the LOI.”

Principles of construction

18.  There are many cases on the principles of construction of documents and contracts in general.  Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 is one such case decided by our Court of Final Appeal.  In an oft-cited passage at page 296D to I, Lord Hoffmann NPJ has explained the relevant principles thus:

“The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean.  And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.  Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.  Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended.  In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant.  Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words.  If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.  The court is not privy to the negotiation of the agreement – evidence of such negotiations is inadmissible – and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession.  Or one of the parties may simply have made a bad bargain.  The only escape from the language is an action for rectification, in which the previous negotiations can be examined.  But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean.  Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

19.  In the present case, clause 3.4 and item 6, between which the arbitrator has identified an apparent conflict or inconsistency, are found in two different contractual documents, namely, a standard form sub-contract and a signed letter of acceptance specifically drawn up by the parties after negotiation.  As a matter of common sense if not anything else, there must be a natural bias in favour of the specific agreement reached by the parties.  This is so notwithstanding the presence of another general clause in the standard form sub-contract providing that the general clauses in the standard form sub-contract shall prevail over any other terms and provisions in other contractual documents.

20.  Indeed this has been the approach of the Court of Appeal in Secretary for Justice v Sun Fook Kong (Civil) Limited CACV 219/1997, 1 September 1998.  In that case, the contract documents consisted of articles of agreement, containing general and special conditions, and included priced bills of quantities.  General condition 5(1) provided that the provisions of the general conditions of contract “shall prevail over those of any other documents forming part of the contract”. General condition 79 provided for interim and final payments under the contract.  In short, it stipulated a certain timetable for making payments.  However, clause 10 in the general preambles which preceded the bills of quantities gave the tenderer a privilege to insert a lump sum addition or deduction not exceeding 10% of the total of the bills of quantities against the adjustment item given in the grand summary, which on the face of it was inconsistent with general condition 79.

21.  Godfrey JA (as he then was), with whose judgment the other two members of the Court agreed, approached the issue of construction in the following way:

“First, the very general words of Clause 5(1) and (2) are not, as it seems to me, intended to defeat any specific contractual arrangement which the parties may come.  They are intended simply to provide guidance as to the proper approach to the construction of the contract in the case of inconsistency.  The provisions of General Preamble 10 are intended to record the contractual arrangements made by the parties to regulate the position in the event of the tenderer exercising the privilege conferred on him.  Obviously, this produces a variation or modification in the contractual arrangements which would otherwise have obtained; but it does not produce inconsistency.  The deliberate act of the parties, introducing this variation or modification, must on any principle of construction take precedence over the general words of General Condition 5, which were in no way intended to preclude the parties from entering into whatever contractual arrangement as they might want to do which varied or modified what would otherwise have been the applicable provisions contained in the General Conditions or the Special Conditions of Contract.”

Discussion on construction

22.  Returning to the present case, the genesis of clause 3.4 in the standard form sub-contract is not in doubt.  It is essentially a clause designed to overcome any question of remoteness within the rules of Hadley v Baxendale (1854) 9 Exch 341.  Clause 3.4 is quite plainly based on precedent clauses like clause 3(4) of the Federation of Civil Engineering Contractors form of sub-contract used in civil engineering with ICE 5^th & 6^th Editions.

23.  As Eggleston, Liquidated Damages and Extensions of Time in Construction Contracts (2^nd ed) 118 explains:

“The intention in this later clause [clause 3(4)] in bringing all loss within the contemplation of the parties is to ensure that the sub-contractor cannot defend a claim which includes the main contractor’s liquidated damages liability or other sub-contractors’ claims by reference to remoteness within the rules of Hadley v. Baxendale (1854).  If they fail the first test, they have, by express terms, been included as special damages under the second rule; i.e. within the contemplation of the parties.  This is why the sub-contract will normally state the level of liquidated damages in the main contract.”

24.  Similar comments are found in Powell-Smith, Stephenson & Redmond, Civil Engineering Claims (3^rd ed) 275 and Wallace, Further Building and Engineering Standard Forms (1973 ed) 143.

25.  Focusing on clause 3.4 in the instant standard form sub-contract, a number of observations can be made. 

26.  First, it is concerned with any breach by the sub-contractor.  It is not limited to delay in completion only, which is what the present case and item 6 in the letter of acceptance are all about.  It applies to all possible breaches by the sub-contractor.

27.  Secondly, clause 3.4 focuses on the situation where such a breach has resulted in the main contractor breaching the main contract or other contracts made by the main contractor in connection with the main contract works (such as other sub-contracts), thereby resulting in a liability to pay damages under the main contract and/or the other contracts, as well as “further loss or expense” to the main contractor in respect of the main contract works.  In such a case, clause 3.4 provides that “all such damages, loss and expense that are attributable to such breaches [of the main contract and/or other contracts] are hereby agreed to be within the contemplation of the parties as being probable results of any such breach by the sub-contractor”.

28.  In other words, clause 3.4 only concerns itself with the situation where the sub-contractor’s breach has led to a breach by the main contractor of the main contract and/or other related contracts.  Where the sub-contractor’s breach does not lead to such breaches by the main contractor, or where such breaches do not result in any substantial damages being payable by the main contractor under the main contract or other contracts (in which case there cannot be any “further loss or expense”), clause 3.4 has no application. 

29.  However, it does not necessarily mean that in such event, the main contractor has not suffered any loss as a result of the sub-contractor’s breach.  A good example to illustrate my point is where the main contractor has accelerated his own works in mitigation of the sub-contractor’s breach, thereby successfully avoiding any breach of the main contract or other related contracts by itself.  Certainly the main contractor has suffered loss due to the acceleration of works.  But that has nothing to do with the main contract or any other contracts, which have not been breached.  By the acceleration of works, he has avoided breaching those contracts.  The loss the main contractor has suffered must surely be recoverable from the sub-contractor as damages for breach of the sub-contract.  Clause 3.4 has no application in such circumstances.

30.  My third and final observation is this: clause 3.4, in the first place, renders the damages payable by the main contractor for consequential breaches of the main contract and/or other contracts as well as the main contractor’s further loss and expense that are attributable to such breaches within the reasonable contemplation of the sub-contractor for the purposes of the rules in Hadley v Baxendale.  The last sentence in clause 3.4 then provides an easy mechanism for recovery of all such damages, further loss and expense as damages for breach of the sub-contract, namely, by deduction and set off from monies due or becoming due by the main contractor to the sub-contractor under the sub-contract.

31.  Clause 3.4, however, does not provide for how such damages, further loss and expense that are attributable to the consequential breaches of the main contract and/or other contracts, which are to be recovered from the sub-contractor as damages for breach of the sub-contract, should be quantified.  It is silent on the matter.  No doubt, in the absence of anything else, such damages, further loss and expense must be quantified in accordance with general common law principles on quantification of damages for breach of contract.  However, does clause 3.4 by nature exclude quantification by reference to a genuine pre-estimate of such damages, further loss and expense by the parties at the time when they made the sub-contract?  This will lead me to an examination of the true nature of a genuine liquidated damages clause.

A limited conclusion

32.  However, pausing here, I would first reach a limited conclusion based on my second observation, which in itself is quite sufficient to dispose of the first point of law raised in this appeal.  As discussed above, clause 3.4 has nothing to do with the situation where a sub-contractor’s breach, say delay in completion, has not resulted in any consequential breach by the main contractor of the main contract or other contracts, but has otherwise caused the main contractor some loss and damage, such as additional cost in accelerating works.  Likewise, it does not apply even if there is a consequential breach of the main contract or some other contract, provided that it does not give rise to any liability to pay substantial damages for such breach – in which case there is no question of any “further loss or expense” incurred by the main contractor.

33.  In that situation, where clause 3.4 does not even apply, there is of course nothing in that clause to stop the parties from agreeing on a liquidated damages clause in respect of such loss and damage arising from the sub-contractor’s delay in completion.  There is no question of any inconsistency or conflict between clause 3.4 and any such liquidated damages clause.

34.  Item 6 in the letter of acceptance may be legitimately regarded as such a clause.  In other words, item 6 represents a genuine pre-estimate by the parties of the loss and damage that Penta will suffer as a result of CWF’s breach of the sub-contract by delay in completion, provided that the same does not result in any consequential breach of the main contract or other contracts or, where there is such a breach, that no substantial damages are payable for the breach.  Clause 3.4 simply has nothing to do with item 6 as a liquidated damages clause understood in that way. 

35.  This limited way of reconciling and reading clause 3.4 and item 6 is, it should be noted, quite sufficient to dispose of the appeal in favour of Penta on this point.  For the arbitrator has found that no damages for breach of contract are payable by Penta to the employer or other contractors for any loss and damage that are attributable to CWF’s delay in completion.  In those circumstances, as explained above, clause 3.4 does not apply.  The claim for liquidated damages, capped at 10% of the sub-contract price, may be legitimately viewed as a claim in respect of Penta’s own loss and damage arising out of the delay in completion of the sub-contract works – such loss and damage having been pre-estimated by the parties when they made the sub-contract.  This claim must therefore be upheld, subject to all the other issues raised before the arbitrator, irrespective of whether Penta is able to prove any loss and damage.

My preferred approach

36.  However, I would prefer to decide this case on a more general ground.  And in this regard, I refer to the question I raised in making my third and last observation: whether clauses 3.4 and 2.4 combined preclude the making of an agreement on liquidated damages generally.

37.  This is a general question.  In approaching this question of construction, I bear in mind the wise words of Lord Hoffmann NPJ in Jumbo King cited above.  I also seek to move in the same spirit as that of the Court of Appeal in approaching a similar question in Sun Fook Kong already discussed.  In short, the question of construction must be approached with common sense and a bias towards the specific agreement reached by the parties over the general words in a standard form contract.

38.  In my view, clause 3.4 is silent on how damages, further loss and expense are to be quantified as damages for breach of the sub-contract.  Its main focus is on bringing those items within the reasonable contemplation of the sub-contractor, as well as to provide an easy mechanism for recovery of such items as damages, whatever the amount may be, for breach of the sub-contract.  It is not concerned with quantification.  As I observed earlier, if nothing else is provided in the contractual documents, certainly such damages for breach of the sub-contract must be quantified in accordance with general common law principles.

39.  However, in my view, bearing in mind the approach to construction already alluded to above, there is room for the inclusion of a liquidated damages clause.  It must be remembered that liquidated damages simply represents a genuine pre-estimate of loss by the parties at the time of contract.  A true liquidated damages clause does not provide for the payment of a penalty or a sum that bears no relation to the contemplated loss and damage arising from a breach of contract.  Rather, it represents the parties’ agreed estimate, made at the time the contract was entered into, of what such contemplated loss and damage would probably be.  See generally McGregor on Damages (17^th ed) para 13-011 et seq. 

40.  Once item 6 is understood as such, there is really no conflict between that item and clause 3.4.  The first part of clause 3.4 sets out what items of loss and damage that the parties reasonably contemplate will be involved in case of breach.  The latter part of clause 3.4 tells the parties how such loss and damage may be easily recovered.  In between, there is certainly room for the parties to agree on how such loss and damage should be quantified.  And if the parties should choose to pre-quantify such loss and damage by reference to their agreed estimate at the time when they made the sub-contract, I see nothing wrong with it.  In my view, there is nothing “not actual” or artificial about liquidated damages.  They may not be very accurate, being by definition the parties’ genuine pre-estimate only.  However, they are not fictional or artificial and do not contradict the notion under clause 3.4 that only “actual” damages, loss and expense may be recovered.  Viewed from that standpoint, the difference between pre-estimation and post-breach quantification is really a matter of proof and accuracy, rather than principle.

41.  Certainly it is not a case of irreconcilable conflict or inconsistency, which calls for the intervention of clause 2.4.  Put at the highest, it is a situation of “variation or modification”, to borrow Godfrey JA’s phrase in Sun Fook Kong.  In my view, approaching the matter generally, item 6 can live happily together with clause 3.4.

42.  That, in my view, really disposes of the first ground of appeal in favour of Penta.

By the way

43.  For the sake of completeness, I should add very quickly that indeed if necessary, given the approach to construction that I have repeatedly referred to, I would be prepared to construe clause 3.4 in the light of item 6 in such a way that clause 3.4, in this particular sub-contract, does not apply to a delay in completion situation, so as to save item 6 from the operation of clause 2.4.  As I said under my first observation, clause 3.4 applies to all sorts of breaches.  Item 6 applies only to delay in completion (a matter which I will return to later on).  So for this particular sub-contract between Penta and CWF, if it had been necessary to do so, I would be prepared to construe clause 3.4 as not applying to a delay in completion situation, bearing in mind the bias towards the parties’ specific agreement.  Thus construed, there is no conflict between clause 3.4 and item 6, and clause 2.4 has no application.

44.  However, this is only by the way.  It is not my main and primary reason for deciding the first ground of appeal in favour of Penta.

2^nd ground of appeal: rectification

45.  I now move on to deal with the second ground of appeal, namely, rectification.  In light of my conclusion on the first ground of appeal, this second ground, which is really in the alternative to Penta’s first ground of appeal, loses much of its original significance.

Plainly wrong

46.  I will deal with the point briefly.  First, the arbitrator’s rejection of Penta’s alternative case based on rectification is plainly wrong.  This is what the arbitrator has said:

“

6.9

I have considered the parties’ submissions and authorities on the issue of rectification.  I find that the burden of proving common mistake rests with the Respondent who sought rectification, and the hurdles need to be overcome by the Respondent are many.  I am not satisfied that the evidence before me is strong, clear and convincing beyond reasonable doubt that the Sub-Contract documents as they are do not represent the parties’ common intention at the time of entering into the contract.  It does not justify an order for rectification.  The rectification sought by the Respondent is therefore not allowed.”

47.  In my view, on the materials before the arbitrator, particularly the letter of acceptance signed by both parties, there can be only one possible conclusion about the parties’ intention and agreement regarding payment of liquidated damages in case of delay in completion, namely, that such liquidated damages be paid at the rate of $10,000 per day subject to a maximum of 10% of the sub-contract sum.  In other words, item 6 of the letter of acceptance.  The arbitrator has heard uncontradicted evidence from Penta’s witness regarding how that clause came to be agreed by the parties at the meeting of 22 March 2001, which was specifically referred to in the first paragraph of the letter of acceptance dated 30 March 2001.  In fact, it was CWF which proposed the inclusion of item 6 in the sub-contract to be made between the parties, so as to cap CWF’s potential liability to 10% of the sub-contract sum.

48.  That is wholly understandable because a standard form clause like clause 3.4 in the sub-contract could be highly detrimental to a sub-contractor if his works should happen to be on the critical path, for any delay in completion of the sub-contract works would cause delay in completion of the main contract works, the consequences of which would have to be shouldered by the sub-contractor as per clause 3.4.  And where the value of the main contract is much larger than that of the sub-contract, and there is a liquidated damages clause specified in the main contract, any such liquidated damages payable under the main contract may be quite disproportionate to the value of the sub-contract work.  A sub-contractor with some bargaining power would, quite understandably, wish to cap his liability in such circumstances by reference to the value of the sub-contract work: see Eggleston, supra and Powell-Smith, Stephenson & Redmond, supra.

49.  Assuming, for the purpose of deciding this alternative ground based on rectification, that item 6 cannot stand together with clause 3.4 and must be struck down by clause 2.4, this must be a result wholly contrary to the specific agreement and intention of the parties, as has been plainly expressed in item 6 of the letter of acceptance signed by them, which also provides for the using of the standard form sub-contract in question (item 4).  That, incontrovertibly, must have been due to the parties’ mistaken understanding and belief during the drawing up of the relevant contract documents that on the true construction of the standard form sub-contract (including clauses 3.4 and 2.4) and item 6, liquidated damages subject to the 10% cap are payable for delay in completion – when in fact they are not but rather, there is an open-ended liability to pay common law damages.

50.  In short, this is a classic case for rectification.

Question of law

51.  Secondly, and this is a more technical point, under section 23(2) of the Arbitration Ordinance, the court can only review a “question of law”.  In other words, has the arbitrator made an error of law in rejecting Penta’s claim for rectification, or has he only made a mistake on a finding of fact?

52.  Mr Peter Clayton SC, appearing for CWF at the substantive appeal but not at the leave stage, submits that only a finding of primary fact has been involved.  In essence, counsel argues that the arbitrator has not been satisfied that Penta has proven to the requisite standard of proof that the sub-contract documents as they are do not represent the parties’ common intention at the time of entering into the sub-contract.  In other words, he has not been satisfied that the parties have not intended common law damages, rather than liquidated damages, to be payable in case of delay in completion.  That is a finding of primary fact about the parties’ common intention or mistake.  That cannot be disturbed by the court.  He submits that the reliance placed on Edwards v Bairstow [1956] AC 14 by Penta to turn the finding of fact into an error of law is misconceived.  He relies on the detailed analysis made by Mustill and Boyd, The Law and Practice of Commercial Arbitration in England (2^nd ed) 592 to 596 on what are questions of law and what are findings of fact in support of his submission that the Edwards v Bairstow type of mistake of law does not extend to a finding of primary (or secondary) fact.

53.  This is a highly debatable point.  I am not prepared to express a definite view on the matter, and there is no need for me to do so given my conclusion on the first ground of appeal.  Besides, Ms Audrey Eu SC, Mr Thomas Lee with her, appearing for Penta, has not approached the matter from entirely the same viewpoint.  She appears to treat what has been involved as a mixed question of law and fact, as a result of which she does not really go into this question of whether a mistaken finding of primary fact falls within the ambit of Edwards v Bairstow or is otherwise appellable.

54.  Furthermore, I note that even Mustill and Boyd refers to an “exception, or apparent exception, namely that the question whether there was any evidence to support a particular finding of fact made by the arbitrator is regarded as a question of law”: at page 592, see also footnote 1 on that page and page 596.  In other words, there is apparently an exception to the rule that a mistaken finding of primary or secondary fact cannot be disturbed, namely, where the finding has been made “without evidence” – which is indeed what has happened in the present case, given the state of evidence that I have described and the standard of proof which I will turn to shortly.

55.  For these reasons, I do not wish to express any definite view on Mr Clayton’s argument.

Erroneous standard of proof

56.  Having said all that, I will now explain how I approach the matter.  In my view, a mistake of law has been made.  It relates to the standard of proof adopted by the arbitrator.

57.  The arbitrator refers to Penta’s failure to prove that the sub-contract documents as they are do not represent the parties’ common intention by evidence that is “strong, clear and convincing beyond reasonable doubt”.

58.  The arbitrator’s requirement that there be proof “beyond reasonable doubt” is obviously erroneous.  As has been pointed out in Joscelyne v Nissen [1970] 2 QB 86, 98C/D to E/F (per Russell LJ):

“In our judgment the law is as expounded by Simonds J. in Crane’s case with the qualification that some outward expression of accord is required.  We do not wish to attempt to state in any different phrases that with which we entirely agree, except to say that it is in our view better to use only the phrase “convincing proof” without echoing an old-fashioned word such as “irrefragable” and without importing from the criminal law the phrase “beyond all reasonable doubt.”  Remembering always the strong burden of proof that lies on the shoulders of those seeking rectification, and that the requisite accord and continuance of accord of intention may be the more difficult to establish if a complete antecedent concluded contract be not shown, it would be a sorry state of affairs if when that burden is discharged a party to a written contract could, on discovery that the written language chosen for the document did not on its true construction reflect the accord of the parties on a particular point, take advantage of the fact.”

59.  That the requisite standard of proof remains the civil standard of proof has been further explained by Spry, The Principles of Equitable Remedies (6^th ed) 200:

“When it is sought to establish a matter, the requisite degree of cogency of proof may vary with the nature of the facts to be established and the circumstances of the case: “In every case the balance of probability must be discharged, but in some cases that balance may be more easily tipped than in others.”  On this basis it may be said that the more serious the allegation, the clearer the evidence that may be required, but this is not to say that the ordinary rules as to the standard of proof do not apply as much in rectification proceedings as in other kinds of civil proceedings.  As was observed on one occasion by Brightman L.J., “It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties.” ”

60.  On generally how the civil standard of proof should be applied with particular regard to the inherent probabilities or improbabilities of the factual issues in question, see Re H [1996] AC 563, 586C to 587G/H (per Lord Nicholls); followed in Hong Kong in HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336, 361 to 362, paras 70 and 71 (Sir Anthony Mason NPJ).

61.  Mr Clayton has urged upon the Court that the reference of the arbitrator to proof “beyond reasonable doubt”, when read in context, was simply a temporary aberration or a slip of the language used.  It does not reflect any misapprehension of the applicable standard of proof.

62.  I might have been disposed to accept such an argument if the facts had been less straightforward.  As explained, I am of the view that based on the applicable civil standard – bearing in mind the necessary evidential modifications pertinent to a claim for rectification as has been explained in Joscelyne v Nissen and Spry, the only possible finding of fact on the facts of the present case is that the contract documents used by the parties do not correctly reflect the parties’ true and common intention regarding payment of liquidated damages – assuming that the arbitrator’s construction of clause 3.4 and item 6 is correct.

63.  In other words, the only reasonable explanation for his refusal to make such a finding and his conclusion that a case of rectification has not been made out despite the evidence before him is that he has misapprehended the applicable standard of proof, as is evidenced by his express and specific reference to the absence of proof “beyond reasonable doubt”. 

64.  In those circumstances, I am unable to accept Mr Clayton’s argument that what has been involved is merely a temporary aberration or a slip of the language.  A substantial mistake has been made here.  That mistake relates to the standard of proof and is a mistake of law.

65.  In conclusion, I also hold in favour of Penta on this alternative ground of appeal.  In my view, the wrong standard of proof has been applied, resulting in a wrong finding of fact.  The consequential rejection of Penta’s alternative claim for rectification is for that reason also wrong.

Some new points

66.  I now move on to deal with some new points raised by CWF in a respondent’s notice filed on 28 May 2007.  In essence, CWF now argues that item 6 of the letter of acceptance is not on its language a provision entitling Penta to recover liquidated damages for delay in completion of the sub-contract works.  Alternatively, it is now contended that item 6 is a penalty and is therefore unenforceable, as parts of the works have been taken over before completion of the whole works and item 6 does not make any allowance for a reduction in liquidated damages in respect of such partial possession.  Mr Clayton runs several related arguments on the same theme. 

67.  Ms Eu complains that the respondent’s notice has been filed late, in contravention of Practice Direction 6.2, para 2.  She is right.

68.  More importantly, the points have never been pleaded in the pleadings filed in the arbitration proceedings.  They have never been run as such before the arbitrator, who therefore has not determined them.

69.  Moreover, in relation to the first point, both parties, as well as the arbitrator, have had no difficulty in understanding what item 6 is all about, namely, payment of liquidated damages for delay in completion.  It must be remembered that item 5, which immediately precedes item 6, in the letter of acceptance, stipulates for the time of completion of the sub-contract works.

70.  Furthermore, if the brevity of item 6 ever leads to any ambiguities, parol evidence is admissible to resolve them: Chitty on Contracts (29th ed), vol 1, para 12-117 et seq.  It is patently unfair to allow CWF to raise this point at this late stage when such extrinsic evidence, if required, has never been adduced or canvassed properly below.

71.  As regards the second new point (and the related arguments), they are again potentially fact-sensitive and should not be allowed to be run in this appeal.  As Ms Eu has pointed out by reference to Hudson’s Building and Engineering Contracts (11th ed), vol 2, para 10.057, whether a re-entry into partial possession is a full or partial waiver of the right to liquidated damages or simply an understandable wish to reduce the loss or inconvenience caused by the delay in completion without any such waiver depends on the facts.  In other words, the second new point raised by CWF is premised on something that is fact-sensitive.  It is wrong to allow the new point (or any related arguments) to be run in the appeal.

72.  I say all this without prejudice to what the parties might wish to do before the arbitrator after the matter is remitted to him for further consideration following the disposal of this appeal, including an application to amend pleadings. Nothing said here is meant to fetter the arbitrator’s discretion in any way.

Outcome

73.  For the above reasons, the appeal must be allowed and the interim award remitted to the re-consideration of the arbitrator together with the Court’s opinion on the two questions of law dealt with above.

74.  For the sake of clarity, I would summarise my opinion as follows:

(1)

On the proper construction of the sub-contract documents, clause 3.4 does not conflict with item 6 and therefore clause 2.4 does not apply to prevent Penta from claiming liquidated damages pursuant to item 6 for CWF’s alleged delay in completion of the sub-contract works – Penta having through counsel (Mr Thomas Lee) indicated to the Court at the leave stage that it does not pursue any common law damages under clause 3.4 on top of or as an alternative to its claim for liquidated damages under item 6.

(2)

In relation to Penta’s alternative claim for rectification, the applicable standard of proof in making findings of fact on whether the parties have reached an agreement regarding payment of liquidated damages as per item 6 and whether the reason why (ex hypothesi) the provisions of the sub-contract documents do not accord with that agreement is that there has been made a common mistake on the part of the parties regarding what those provisions mean on their proper construction, remains the civil standard of the balance of probability.  In applying the civil standard of proof, sufficient regard must be had to the inherent probability that the sub-contract documents as a whole truly represent the parties’ intention because they are contractual documents signed by the parties.

75.  The parties are in agreement that costs should follow the event.  I award the costs of the appeal as well as that of the leave application to Penta, together with a certificate for two counsel for the hearing of the substantive appeal, to be taxed if not agreed.

76.  I thank counsel for their assistance.