SHUI ON CONSTRUCTION CO LTD v. Y.S. LO AND ASSOCIATED ARCHITECTS AND ENGINEES (a firm)

                Main contractor sued architects nominated under main building contracts on two sites in separate actions claiming damages in tort in negligence. Held, dismissing architect's application to strike out the Statement of Claims in both actions as disclosing no cause of action: -

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Action No. 4426 of 1984

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JUDGMENT

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1. This is an application to strike out the Statements of Claim in two separate actions. They have been taken together because they raise identical issues. To illustrate this I need refer only to the first action which is the hotel action.

2. The plaintiffs in both cases were main contractors on two different building sites. The defendants, a firm of architects, were in each case the architects named in the relevant building contract. The hotel claim relates to a hotel in Tsim Sha Tsui.

3. After pleading by way of recital certain matters one finds this in paragraph 5: -

"The defendants owed the plaintiffs a duty to exercise reasonable skill and care in the performance of their functions pursuant to the contract, and a duty to act fairly and impartially in the performance of those functions."

That is the first crucial paragraph of the Statement of Claim because it is said that neither of these duties exists in 1aw.

4. The second crucial paragraph is the first allegation of breach, it is paragraph 29. It says this: -

"The Defendants wrongfully and in breach of duty disregarded the above facts and matters and acting partially and solely in the interest of the owners purported ....."

5. The last material paragraph is 35 which alleges further breaches. It is in these terms: -

"The Defendants were further negligent and/or in breach of their duty to act fairly and impartially in the performance of their functions pursuant to the contract, as particu1arised hereunder."

The comp1aints particu1arised thereunder relate largely to the administration of the contract.

6. The allegations of duty and breach in the factory action follow a similar form. The only difference there is that because there was no arbitration clause in that contract, the building owners are the 1st defendants in that action and the architects are the 2nd defendants.

7. Now there is no dispute as to the appropriate principles to be applied by the court on an app1ications of this nature. They are to be found in Drummond Jackson v. British Medical Assocation (1970) 1 W.L.R. 688 and in McKay v. Essex Area Health Authority (1982) 1 Q.B. 1166. Very conveniently at page 1176 in his judgment in McKay Stevenson L.J. collects together the various adjectives and epithets that had been used in the earlier cases. For my part I am content to adopt what Lord Pearson said in Drummond Jackson which is that an order for striking out should only be made if it becomes plain and obvious that the claim cannot succeed". I note the fact that it need not become plain and obvious at first sight. The question is what is the state of mind of the court at the end of the argument however long that argument has happened to be. This provoked Griffiths L.J. in that case to suggest that when the court is faced with some prolonged argument, it should not embark upon the inquiry.

8. That is an attractive suggestion but it seems to me easier to say it than to apply it. I have had four days of argument in this case. I may add four days of exceedingly skillful and stimulating argument, and I am most grateful to the counsel on both sides. I do not regret a moment on it. It does mean that at the end of four days I am in this rather perverse position. I have to decide not whether the duty a11eged in the pleading exists, but whether it can plainly be said not to exist. The court is really now under this procedure in a worse state than it was under the old demurrer procedure, if I have correctly understood it. My decision, if I strike out, binds the party; if I do not it becomes purely advisory. It becomes something like a thing "writ in water". This is a somewhat bizarre position after four days of careful legal argument. There is the problem. The solution has eluded me. The only "solution" in this case would have been to have said "your four days estimate is too long; you have too many authorities; I shall not embark upon this at all." I do not see how that is possible without obvious injustice. So the approach that I adopt is - is it plain and obvious that this claim must fail?

9. The claim is framed in negligence. Therefore it seems to me that I have to start, in the same way as every court has started, to my knowledge, since 1978, with the two questions posed by Lord Wi1berforce in Anns v. Merton London Borough Council (1978) A. C. 728 at 751. He says this: -

"First one has to ask whether as between the alleged wrongdoer and the person who has suffered damage, there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former carelessness on his part may be likely to cause damage to the latter in which case a prima facie duty of care arises."

 

"Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative or to reduce or limit the scope of the duty."

10. Oliver L.J. in a recent decision Leigh and Si11ivan Limited v. A1iakmon Shipping Limited in the Court of Appeal in England (1985) 2 W.L.R. 287, pointed out that the guidance given by these two questions is somewhat inadequate. I am constrained to agree, but it is the best that we have, and perhaps as far as the law has yet gone.

11. So I consider first question one. The proximity said to arise in this case is purely the creation of contract. It arose between the two parties when the contractor elected to enter into the contracts; and the architect elected to accept appointment as architect in the hotel case, and as architect and quantity surveyor in the factory case, under those respective contracts. That is what brought the parties together in the context of the construction of these buildings. One of the matters complained of in this case is faulty certifying. It is, I think, self evident that if by a mistake in the architect's office a certificate is issued for $X when in fact it should have been issued for $2X, that that is likely to cause damage to the contractor. The building owner can be expected to pay on that certificate $X, and not (on my assumed facts) the true figure of S2X. Furthermore the damage which is likely to be occasioned to the contractor in such circumstances is financial damage.

12. Now there have been a number of cases where the courts have held that legal proximity arises out of a relationship which is basically contractual or pre-contractual. In the immediate wake of the decision in Hed1ey-Bryne v. He11er (1964) A. C. 464 I think the courts were reluctant to allow the tortious principles of that case to intrude into the contractual scene. That reluctance was dissipated. Substantia11y by the decision of the Court of Appeal in Esso Petroleum Limited v. Mardon (1976) Q.B. 801. There are a number of other examples of legal proximity arising out of contract. We considered a lot of them in a fairly recent banking decision in Hong Kong Tai Hing Cotton Mill v. Liu Chong Hing Bank (1984) H.K.L.R. 95. The banking contract may create by that contract alone a proximate relationship and a duty on the Bank. This is also in line with the decided cases conveniently collected in volume 4 of the Building Law reports. I have in mind Clay v. Cramp and O1dschool v. G1eason where the relationship between architect and contractor in relation to obviously defective plans, and the relationship between architect, contractors and third parties in relation to defective workmanship, have been said to give rise to duties of care. It therefore seems to me that there is a strong probability of this question being answered in the affirmative.

13. I therefore turn to the second question. It is usually here that the problems arise and I think that it is in relation to this question that most of Mr. Lloyd's submissions can properly be dealt with. I accept that there is a semantic argument as to whether policy arises on question one or question two; but I follow Lord Wi1berforce's lead and deal with it entirely at question two.

14. Now the first problem here which the defendants face is the decision in Arenson (1977) A. C. 405. This case reached the House of Lords in the wake of sutcliffe v. Thackrah (1974) A. C. 727. sutcliffe v. Thackrah had decided that an architect owed a duty of care to his employing owner and was not immune from suit by reason of being a quasi-arbitrator. In reaching that decision their Lordships were severely critical of the reasoning of the Court of Appeal in Arenson. As a result of this leave to appeal was given well out of time in the Arenson decision, and it thus reached the House of Lords. It concerned a dispute about the valuation of shares in a private company. It is instructive to note that Lord Salmon opened his speech by pointing out that there was considerable doubt as to who had in fact retained the va1uers, whether was one or other of the Arensons or the company itself. But he said: "I do not think that this matters because since the decision of this House in Hed1ey-Bryne it is quite clear that apart from any contractual obligations the respondents must have owed the duty both to Mr. Archy Arenson and to the appellant to use reasonable care and skill in making their valuation."

15. Later in his speech he turns to deal with the argument of the accountants that they should not be put in a duty situation which would leave them open to be "shot at" from both sides. Lord Salmon goes on to say that he cannot accept this argument. "Were it sound it would be just as relevant in Sutcliffe v. Thackrah as in the present case. The architect owed a duty to his client, the building owner, arising out of the contract between them to use reasonable care in issuing his certificate. He also, however, owed a similar duty of care to the contractor arising out of their proximity, see Hed1ey-Bryne. In Sutcliffe v. Thackrah the architect negligently certified that more money was due than was in fact due. And he was successfully sued for the damage which this had caused his client. He might, however, have negligently certified that less money was payable than was in fact due, and thereby starved the contractor of money. In a trade in which cash flow is especially important, this might have caused the contractor serious damage for which the architect could have been successfully sued."

16. It is apparent, I think, from those remarks that Lord Salmon took the situation of the architect as an obvious example of a professional who was liable to be shot at from both sides from his appointment under a typical common-form building contract. He goes on in fact to distinguish the earlier decision of Stevenson v. Watson 4 CPD 148 not upon the basis that there was no duty, but because the architect there was truly discharging a judicial function. So that Mr. Wa11er for the plaintiffs is able to point to what is admittedly an obiter but in my judgment a plainly considered view of a very distinguished judge in this field. He is also able to point to the views of Lord Denning in Arenson in the Court of Appeal (1973) Ch. 346, where at pages 365 and 366 Lord Denning expresses views which would point to the same conclusion.

17. My first question really is whether I can treat observations from that source not simply as being wrong but as being plainly wrong. I confess I have the greatest difficulty in so concluding. The part that both Lord Denning and Lord Salmon played in the development of this branch of the law, is very well known and very distinguished. Both on more than one occasion expressed views in advance of their contemporaries, if I can imitate Winston Churchill, up with which their contemporaries finally caught. Lord Denning can point to Cand1er v. Crane Christmas and its approval in Hed1ey-Bryne; he can point to Arenson, and he can probably point to Esso v. Mardon. Lord Salmon could point to Woods v. Martins Bank (1959) 1 Q.B. 55, which as long ago as 1959 made new advances in this field; another decision which was approved in Hed1ey-Bryne. Another distinguished contribution of his was Cuckmere Brick v. Mutual Finance (1971) Ch. 949.

18. Therefore my starting point is that I think it is uncommonly difficult to say that anything is p1ainly wrong which has the support of two such distinguished jurists. Nor in fact are they alone in this as I see it. If one looks at the speeches in Arenson of the other Lords of Appeal I strongly suspect that Lord Simon would have come to the same conclusion having regard to what he says at pages 417 and 422. The same might be said about Lord Wheat1ey. It also seems to me that support is to be derived from the earlier decision of the House of Lords in Sutcliffe v. Thackrah. That case concerned the architect and the employer. Lord Reid said in terms that they did not have occasion to consider whether the architect owed any duty to a contractor. But when he came to formulate the duty owed by the architect to the employer Lord Reid said this: "The building owner and the contractor made their contract on the understanding that in all such matters (and he is referring to certifying) the architect would act in a fair and unbiased manner. It must therefore be implicit in the owners contract with` the architect, but he shall not only exercise due care and skill but also reach such decisions fairly holding the balance between his client and the contractor."

19. Those comments of Lord Reid's seem to me to suggest this. First these are two distinct duties albeit closely connected. Secondly there is an obligation to act fairly which can scarcely be expressed unilaterally. It must in almost all cases be mutual. Thirdly in a professional context fairness seems to me to postulate at least a degree of professional care. Those observations suggest to my mind that Lord Reid would have answered the question: Does he also owe a duty to the contractor to act fairly, very firmly and positively "Yes". He might well have gone on to say, "Yes, and that necessarily involves using professional care."

20. The last two observations upon this case are these. First, if as Mr. Wa11er contends a duty in identical terms is owed to the contractor by the architect, there is no possibility of conflict. The second is that Lord Reid made those observations in the context of certifying; Lord Morris put the matter somewhat more widely at pages 740 and 741.

21. Then it seems to me that there is considerable support in principle to be found in other authority. The first I pick out is the speech of Lord Pearce in Hed1ey-Bryne (1964) A. C. 465 at 538 where he put the matter very generally in a way which has been cited repeatedly since. The second general observations which point to that conclusion, I think are in Ministry of Housing v. Sharp (1970) 2 Q.B. 223, by Lord Denning again at page 268, and by Salmon L.J. at page 278. Then there is Megarry V. C. ’s decision in Ross v. Caunters (1980) Ch. 297 and Junior Books v. Veitchi (1983) A. C. 520 in the speeches of Lord Fraser and Lord Roski11. The way in which the duty and the law is put in each of those cases seems to me to suggest the existence of a duty in circumstances such as these.

22. The text book writers all faithfully repeat Lord Salmon. Perhaps they could do nothing else. What is more significant is that his observations are referred to without any criticism. The same might be said of the very distinguished editor of the building law reports who, for this purpose will remain anonymous, who in a note at 4 B.L.R. 18 not simply agreed with Lord Salmon but in fact anticipated his views.

23. One is minded to suspect that the architects will prove to be unable to resist the tide which in the last twenty or thirty years has successively submerged accountants, solicitors, barristers, surveyors and va1uers in the sense that they have all been held to owe duties of care to persons other than their own clients. When one adds that support to the stature of Lord Salmon and Lord Denning, it does seem to me impossible for me to conclude that this case advanced on the pleading is unarguable.

24. I am going to go on, nevertheless, to consider the various points which have been most skillfully put before me by Mr. Lloyd in support of the application, to see if there is anything which seems so decisive as to get him home.

25. The first point that he made was that it is essential here, having regard to the many different functions of the architect under this contract, to draw a distinction between the architect as agent and the architect as certifier. As agent, he suggested that the architect was simply the legal extension of the owner. He was acting on the owner's instruction. He owed a duty only to the owner and a conflicting duty could not be imposed upon him. The owner for his part owed no duty of care at all to the contractor. Therefore, he said, in the non-certifying characteristics and particularly in the case of administering the contract, no sort of duty of care can possibly be owed and paragraph 34 of the hotel action must go.

26. I am not convinced that this argument is well founded. First, I very much doubt whether this distinction is relevant to the existence of a duty, although it would be very relevant to the content of the duty and to its performance. What the architect accepted under these contracts was appointment in one case as architect, in the other case as architect and quantity surveyor. If he is under a duty of care by reason of that situation, I think that his duty arises qua architect, not qua agent, not qua independent contractor, not qua certifier. I think one has got to start with the premise that the duty arises from his professional position and no other. Now it may well be that when you consider the content and effect of that duty, there will be a number of contractual situations where it is scarcely exists at all, because they do not give rise to any opportunity for the exercise of professional judgment and are simply matters of performance under the contract. In other cases the position may be totally different. I do not think it is right to start by splitting up somewhat artificially the man’s function in that way, among other things because he was not appointed in that form and because the dividing line is so difficult to draw.

27. It follows from that first point that the express instructions which he may receive from the employer may well be relevant to the performance of duty. I am far from sure they would necessarily constitute a defence. If he in fact acts in a way which the court finally concludes is negligent, and he does so on the instructions of the employer, I cannot see that that is going to constitute any defence to the architect. Nor can I see any basis for assuming that all the conduct complained of in paragraph 34 was in fact performed at the express instruction of the employer. Finally in this context, it seems to me that Mr. Wa11er is right when he submits that if the duty owed is the same to both parties, and follows the language of Lord Reid in Sutcliffe (which is also the language of the pleading), there is no room for conflict at all. So I am far from sure that that point will succeed at the hearing.

28. The next major premise advanced by Mr. Lloyd took two forms which I think I can take together. First he says that there is no general duty owed by the professional man in these circumstances. In every case any duty which arises can properly be called "particular or special" and it only arises where two situations exist: first where the speaker or giver has information or knowledge unknown to the were the recipient, and secondly where the recipient relies on such knowledge. That is advanced as a general proposition, in support of the view that in absence of those elements no duty to be careful in respect of words arises.

29. Secondly, it is particularly advanced in the context of purely financial loss, where it is said that no duty of care can arise to guard against that sort of loss, in the absence of any damage to person or property. He seeks to put the damages in this case in category 4 of the categories identified by Oliver L.J. in his judgment in Leigh and Si11ivan at page 310.

30. Those two propositions I am minded to think are not well founded. The first seems to me to constitute a misreading of Hed1ey-Bryne, and the second to constitute a misreading of the ambit of Leigh and Sil11ivan. The Hed1ey-Bryne principle is not so limited in the light of more recent authorities. The Leigh case seems to me very special and quite different to that potentially before this court, because it involved financial loss consequent on physical damage, claimed by a person who held the risk but no property in the goods. What answer to that conundrum is given to us by the house of Lords in the future, we shall have to wait and see.

31. I am bound to say I sympathized with the views being advanced upon Hed1ey-Bryne v. He11er because they were very familiar to and once advanced by me. But likewise they were rejected by that court in Ministry of Housing v. Sharp. Cross L.J. in particular said in terms that Hed1ey-Bryne did not lay down "the metes and boundes of the law" in this context. Indeed the submission cannot survive Sharp because there was no reliance there at all. Likewise the submission is inconsistent, it seems to me, with Ross v. Caunters unless one adopts the stance which Mr. Lloyd was advancing which you could have reliance at one stage removed. But if you can have reliance at one stage removed, then you can bring the contractor in at first remove.

32. The more I listened to this argument the more convinced I personally became, that "reliance" as used in the authorities is simply a factor which can lead to proximity and create the duty. If you have got facts which give rise to a proximate relationship you do not need reliance. That is true, as it seems to me, of a large number of the contract cases, where the contractual relationship or the pre-contractual relationship is said to be sufficiently proximate to create the duty. Likewise it seems to be contrary to a number of the general statements in the authorities to which I have already referred.

33. Secondly the submission on financial loss fails again for the same reason as it failed in Sharp. If you answer question 1 by saying that carelessness may be likely to cause damage, and then you further ask what damage. The answer is financial loss. The duty then simply arises to take care that someone else does not suffer financial loss. The risk of damage giving rise to a duty in the case of a professional man will in almost every case be of economic loss. So that that point, if correct, simply denies the duty at all. On authority it is not correct.

34. Next Mr. Lloyd advanced various propositions in relation to damage, and the foreseeabi1ity of damage, arising first out of the remedy in contract which the contractor has against the building owner; and secondly out of the arbitration clause in the hotel contract, and clause 30(8) in both contracts. These were various ways, I think, of expressing the same thought. First, there being an available remedy against the building owner, there was no need for any other duty, and this was a policy consideration against its existence. Secondly the available remedy meant that the duty-ower would not foresee any loss because the loss would be met by another. Thirdly the arbitration clause enabled any error to be put right, and therefore that excluded the prospect of foreseeable loss, unless it was self-induced by non-operation of the arbitration clause.

35. Again I cannot agree with this. First of all there is, in fact, no true overlap between the causes of action in any event. There may be different defences e.g. under the contract, arising between the two claims. You can certainly have different measures of damages. This was made crystal clear in Esso v. Mardon. Likewise you have got different limitation periods. It could be that if you have different tribuna1s dealing with the different cases, you wi11 have different results because one tribunal may not agree with the other. But the fatal objection here seems to me to be that if this point was right it would have prevented the development of parallel remedies in tort and contract at all. But it never succeeded. The remedy in contract was available in Esso v. Mardon but that did not prevent the court saying that there was a parallel remedy in tort. The remedy in contract was available against solicitors and that survived Hed1ey-Bryne for some years. But it was put aside in Midland Bank v. Hett. The same could be said of Lord Salmon's view in Arenson and of the views of the House of Lords in Junior Books. If this was a valid policy objection it must have succeeded in those cases and it did not.

36. The granting of concurrent remedies in this situation does not give rise to double recovery because there are well known principles which ensure, or are intended to ensure, that although judgment may be obtained for the full amount against two different people, execution can only be obtained against one or other for the total limited sum.

37. Next there was what has been called the Crouch point which is based upon the decision of the Court of Appeal in England in Northern Regional Health Authority v. Derek Crouch (1984) 1 Q.B. 644. In that case the Court of Appeal held that the court had no jurisdiction to interfere with certificates under clauses 22 and 23 of that contract, (and indeed of the contract before me) which are the clauses which enable the architect to extend the contractual time for completion. They are the clauses which provide machinery for the variation of the contract rights. The Court of Appeal held that they were operative only by the arbitrator and not by the court. If that is the limit of the decision, as I had previously thought, it may well be that that is a decision which will be followed in Hong Kong. If on the other hand the decision goes a great deal further than that, as has been brought home to me in the course of this course of this hearing by the judgment of H.H. Judge Smout Q.C. in Oram Builders v. Pemberton delivered on 1st February 1985 i.e. that the court has no jurisdiction to reconsider payment certificates, then it seems to me that we in Hong Kong will have to look at the position again with some considerable care.

38. What at the moment, I entirely fail to see is how that can effect the position before me. I do not see why the fact that two parties, the contractor and the building owner have entered into a private arrangement which may curb the powers of the court in certain respect, can operate as a policy defence to an architect. It seems to me, with respect to Mr. Lloyd, a non sequitur. First of all it cannot apply to the factory contract at all because there is no arbitration clause. The same court has both parties before it and will have to deal with the situation. We cannot surely have reached the situation where a duty arises if an arbitration clause exists, but does not if it does not.

39. Secondly in an action against an architect damage is a question of fact. The fact that the building owner and the contractor have chosen some private method of settlement of their own disputes cannot prevent the court from considering the measure of damage. It does not present any sort of impediment or obstacle to the court that I can see. If the dispute between builder and contractor has gone to arbitration, then obviously the court will have to have regard to the result, and to the arbitrator's reasons if it can discover them. That may give rise to problems, I accept, of proof. But if it has not gone to arbitration, and there may be good reason why it has not, the court will have to act upon its own view of the actual damage suffered. I am frankly quite unable to see how this can constitute some policy objection to the existence of a duty in the architect.

40. A very similar point is taken on interest. This is founded on the decision of the House of Lords in La Pintarda (1985) A. C. 104. Paragraph 2 of the head-note says this:

"But since Parliament had chosen to remedy some of the injustices caused by the Common Law Rule as laid down in a previous decision of the House that a Court had no power to award interest by way of damages for detention of debt. (my emphasis) The house was unable to interfere."

At the moment I do not see how this particular rule affects this case. It seems to me that Lord Salmon was totally right in his formulation of the potential damage which a contractor could suffer in these circumstances.

41. First it seems to me that the old Common Law Rule will not even apply between contractor and owner. In the hypothetical situation I have already put of the certificate for $X which should have been $2X, the owner will pay $X, and properly pay $X on the certificate. He will only be liable to pay $2X when an arbitrator says $X is wrong. There will be no question then of detention of a debt. The debt will only be owed after the arbitrator's finding. Whether the arbitrator then awards interest to the contractor will be a matter of his discretion. One reason why the arbitrator may be loath to exercise his discretion against the owner could be, if he felt the architect was the person who was totally to blame for the delay.

42. This simply does not arise as I see it in a claim by contractor against the architect. The law does not apply to anything other than the detention of debt in contract. It does not apply to damages in tort. Again it is a pure question of fact. I cannot see any legal impediment to the recovery of damages against the architect, measured by the amount of interest which the contractor has lost by being kept out of his money.

43. Finally there is the fact that the Statements of Claim plead two duties: The duty of care and the duty of fairness. Lord Reid in the passage I have referred to from Sutcliffe likewise separates the two duties. That second plea of a duty of fairness is supported by a plea of facts, which I must assume to be true, which are claimed to give rise to as inference of partiality, which again I must assume to be true. The only possible way in which that particular part of the Statement of Claim could be struck out is by saying that there are not two duties here but one. Frankly, I do not see how I can reach that conclusion in the face of what Lord Reid said.

44. So for those reasons, which I recognise will have no effect upon the determination of this action at all, I am constrained to the conclusion, without any real difficulty or doubt, that these applications must be dismissed.