THE HONG KONG HOUSING AUTHORITY v. LEIGHTON CONTRACTORS (ASIA) LTD

HCCT 101/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 101 OF 2003

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J U D G M E N T

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I.  Background

1.  The Housing Authority (“the Applicant”) engaged Leighton Contractors (Asia) Limited (“the Respondent”) to construct the housing development known as Fanling Area 49A Phase 3.  The development (“the development”) involved the construction of 41-storey blocks of housing units, a management office and associated and ancillary works.  The written contract (Contract No. 93 of 1996) was dated 31 August 1998.  The conditions of contract were embodied in the Government Standard Form of General Conditions of Contract for Building Works (1993 edition) (“GCC”).  This application concerns the construction of GCC 61.

2.  GCC 61 provides as follows:-

“	(1)	The Surveyor shall determine the sum which in his opinion shall be added to or deducted from the Contract Sum as a result of an order given by the Architect under Clause 60 in accordance with the following principles:-
		(a)	Any item of work omitted shall be valued a the rate set out in the Contract for such work.
		(b)	[Rule 1]
			Any work carried out which is the same as or similar in character to and executed under the same or similar conditions and circumstances to any item of work priced in the Contract shall be valued at the rate set out in the Contract for such item of work.
		(c)	[Rule 2]
			Any work carried out which is not the same as or similar in character to or is not executed under the same or similar conditions or circumstances to any item of work priced in the Contract shall be valued at a rate based on the rates in the Contracts so far as may be reasonable,
			[Rule 3]
			failing which, at a rate agreed between the Surveyor and the Contractor.
		[Proviso]
		Provided that if the nature or extent of any variation ordered in accordance with Clause 60 relative to the nature or extent of the Works or any part thereof shall be such that in the opinion of the Surveyor any rate contained in the Contract for any item of work is by reason of such variation rendered unreasonable or inapplicable then a new rate shall be agreed between the Surveyor and the Contractor for that item, using the contract rates as the basis for determination.
	(2)	In the event of the Surveyor and the Contractor failing to reach agreement on any rate under the provisions of sub-clause (1) of this Clause, the Surveyor shall fix such rate as shall in his opinion be reasonable and notify the Contractor accordingly.”

I have divided up some of GCC 61 into parts prefixed with the headings “Rule 1”, “Rule 2”, “Rule 3” and “Proviso” respectively to reflect the manner in which the parties have referred to discrete principles in the clause.

3.  The dispute concerns a contract variation requiring use of Type B instead of Type A gatesets.  A gateset is a swing door at the entrance to a housing unit in the development.  The parties disagree on the valuation of the variation.  Both types of gateset must be obtained from Named Suppliers identified in the contract documents.  Pursuant to Special Conditions of Contract 14, the parties commenced arbitration in relation to the dispute.  On 14 March 2003 the parties jointly appointed Mr Colin J Wall (“the Arbitrator”), a quantity surveyor, as Arbitrator.

4.  On 18 August 2003 the Arbitrator ruled that there should be submissions on a preliminary issue.  That issue was as follows:-

“Whether on a true and proper construction of [GCC] cl.61(c) or the proviso to it, in valuing the Variation Works at a rate based on the Contract rates ‘as far as may be reasonable’ or ‘using the Contract rates as the basis for determination’, the Surveyor was obliged to:-
(a)	have regard to:-
	(i)	the contractual constraints on the procurement of the gatesets,
	(ii)	the basis on which the Contract rate for Bills of Quantities item 4.6/42/B&C was structured by the Contractor which is, as a result of the said contractual constraints, by applying the lowest rate quoted by a Named Supplier for the supply and installation of the required number of complete gatesets and adding an amount for profit, and
	(iii)	the Standard Method of Measurement,
	and apply the same structure to arriving at a new rate for the valuation of the Variation Works; or
(b)	consider and compare the component parts of the Bills of Quantities item 4.6/42/B&C and the Variation Works and determine a rate for valuation by making adjustments o the Contract rate for Bills of Quantities item 4.6/42/B&C to take into account differences between those component parts.”

The issue was determined by reference to written submissions alone.

5.  The Arbitrator published an Interim Award (“the Award”) on 22 October 2003.  By Notice of Motion dated 12 November 2003 the Applicant sought leave to appeal against the Award.

II.  Discussion

6.  Mr Westbrook SC (appearing for the Respondent) concedes in his Skeleton that “the proper construction of GCC 61 is a matter of some general importance to the construction industry”.  He therefore accepts, following Swire Properties Ltd v. Secretary for Justice [2003] 2 HKLRD 986 (CFA), that leave to appeal should be granted if there is “serious doubt” as to the correctness of the Arbitrator’s decision.

7.  Ms Cheng SC (appearing for the Applicant) as her 1st main ground for leave submits that the Arbitrator misread Henry Boot Construction Ltd v. Alstom Combined Cycles Ltd [2000] BLR 247.  The Arbitrator (Ms Cheng says) took as a principle being laid down by Lord Lloyd in Boot what was no more than part of Lord Lloyd’s summary of the submissions of counsel for the appellant (Lord Neill of Bladen QC) in that case.  Lord Lloyd in fact rejected the submission as a whole.  Ms Cheng then says that “the Arbitrator applied this ‘judgment’ [the principle wrongly attributed to Lord Lloyd] to the assumed fact (namely, the manner Leighton procured the gatesets given the need to use the named suppliers) in construing Clause 61(1)(C)”.

8.  The relevant passage from Boot reads as follows:-

“Turning to Rule 2, Lord Neill argued that it would not be ‘reasonable’ to use a rate contained in the Bill of Quantities if the rate were itself unreasonable.  To use the rate in those circumstances would be an unreasonable use.  The judge had erred by giving too narrow a meaning to the words ‘so far as may be reasonable’.  The language of Rule 2 is unrestricted.  Where the choice lies between rival constructions, one should prefer the construction which produces a sensible commercial result, rather than an arbitrary inflexible and indeed ‘Alice-in-Wonderland’ result.  It followed that the arbitrator was entitled to reject Rule 2, and arrive instead at a valuation under Rule 3.  The judge should not have interfered.”

The italicised words (“the maxim”) are those which the Arbitrator found to be of help, even though he thought that the rest of Boot provided only “general guidance” and “little assistance ... in the determination of this preliminary issue because of the considerable factual differences between that case and the current arbitration”.

9.  Although Lord Lloyd in Boot may have rejected Lord Neill’s submission as a whole, the maxim is an unexceptional statement of a well-established canon of construction.  If the choice is between 2 readings of a term, one of which will produce an absurd result and the other a rational outcome, one prefers the latter over the former.  That the Arbitrator thought the maxim was helpful (whether or not wrongly attributed to Lord Lloyd), can hardly be a serious error of law.

10.  In the course of oral submission before me, what Ms Cheng really appeared to be complaining about was the Arbitrator’s decision to the effect that Type B gatesets should be valued on the basis of the method by which the Respondent calculated its Bill of Quantities (“BQ”) rate for Type A gatesets.  The Respondent calculated its rate for Type A gatesets by taking the lowest price quoted by the Named Suppliers for that type of gateset and adding a 5% profit element.  Ms Cheng submitted that the Arbitrator’s conclusion violated the principle upheld in Boot that BQ rates were “sacrosanct”.  One does not (Ms Cheng said) look at how a contractor put together his BQ rates.  For example contractors might deliberately underprice a BQ item, while overpricing another.  Therefore, whether or not individual BQ rates are reasonable, unreasonable, fair or unfair must be irrelevant to how a variation is to be valued under Rule 2.

11.  For the purposes of this litigation, Ms Cheng accepts that the contractual constraint of having to obtain a gateset from Named Suppliers is not an extraneous matter, but is a relevant factor to be taken into account in the valuation of a variation process.  But (Ms Cheng emphasises) it is one thing to look at the degree of difference between the nature of an original and a varied work when deciding whether a particular BQ rate should be used in arriving at a variation rate, it is another to look at the make up of the BQ rates actually quoted for the original BQ item.  By the same token, it is one thing to take account of the fact that an item must be obtained from a particular supplier, it is another thing to take into account how a contractor prices the item so obtained.  There was no obligation on the Respondent to price its Type A gateset in the way that it did.  So the fact that it did so by a specific structure cannot be of any significance in the valuation of the variation instruction to use Type B gatesets.

12.  The Arbitrator (Ms Cheng suggests) was probably concerned that, in the present case where Type B gatesets from the Named Suppliers cost substantially more than Type A gatesets, a valuation of the variation (as advocated by the Applicant pursuant to its reading of Rule 2) based on the Respondent’s BQ rate for the Type A gateset albeit adjusted to reflect differences in the physical make-up of Type A and B gatesets could lead to a new rate which was significantly lower than the actual wholesale price of Type B gatesets quoted by the Named Suppliers.  The Arbitrator plainly thought that a result which did not accord with commercial reality.  Therefore he applied the maxim to favour a construction of GCC 61 (advocated by the Respondent) which allowed the new rate for Type B to be calculated using the same method as the Respondent applied to arrive at its rate for Type A gatesets.  It follows (Ms Cheng concludes) that the Arbitrator was in serious error in applying the maxim.  He saw an uncommercial result in the actual case and construed GCC 61 to obviate that outcome.

13.  I disagree with Ms Cheng.  It does not seem to me that the Arbitrator’s conclusion was seriously wrong.  It is a commonplace of the legal construction of contracts to test the validity or invalidity of a particular interpretation against hypothetical or (indeed) actual fact situations.  If a particular interpretation leads to a result which does not accord with commonsense, that is a pointer to the interpretation being wrong.

14.  Here the Arbitrator thought that the matter before him was a Rule 2 situation.  Rule 2 requires a Surveyor to value an item of variation work which is not the same as or similar in character to a work or item priced in a contract “at a rate based on the rates in the Contract so far as may be reasonable”.  It seems to me that once it is accepted (as Ms Cheng accepts) that the contract constraint (namely, that gatesets can only be obtained from Named Suppliers) is not an extraneous factor but an element that should be taken into account, one cannot ignore the fact that the Named Suppliers are only prepared to offer a Type B gateset at a particularly high price.  That the contractor need not price a gateset in his BQ in accordance with the price quoted by a Named Supplier does not seem to me to affect the brutal fact that the gateset is only available (as a result of contractual constraint) at a particular price.  If that is not an extraneous factor, but a relevant matter to take into account, a Surveyor may properly feel that it is reasonable in all the circumstances to base the valuation of a variation on the structure of a quoted BQ rate for the original work.  This may be so in the situation where it happens that the contractor has taken the price quoted for the original work by a Named Supplier and simply added a profit cost.

15.  Like the Arbitrator I derive little help from Boot in the circumstances of this case.  In Boot there was an inadvertent mistake in the rate quoted for an item in the BQ.  The English Court of Appeal held by a majority that it was irrelevant that the mistake resulted in a rate which, to the extent it could be used to value a variation, was likely to yield a large windfall to the contractor.  The mere fact that the quoted rate was mistaken, whether inadvertently or not, was not a ground for treating the rate as an unreasonable basis for valuing a variation.  That is not the situation here.  The rate for Type A gateset involved no mistake, whether deliberate or inadvertent.  There is nothing in the wording of GCC 61 which prevents a conclusion that, in all the circumstances of a particular case, it is reasonable to base a variation on a similar rate structure to that used for quoting the rate for the original work.

16.  I am fortified in my view as to the limits of Boot by the observations of Mr I N Duncan-Wallace QC in “Variation Valuation: No Correction of Pricing Errors” [2001] ICLR 207, at 221.  I note that Mr Duncan-Wallace comments (at 236):-

“Judge Lloyd’s and the Court of Appeal’s formulation (that the concept of ‘reasonableness’ in [ICE] clause 52 [similar to GCC 61] applied only to the decision whether or not to use contract rates and prices as a basis of valuation, and not to the resulting rates and prices of such a valuation) is not necessarily valid in all situations, it is submitted.  As expressed, it is a somewhat circular way of saying that, because of the price-based ‘philosophy’ adopted for variation valuation to be deduced from clause 52 and the contract as a whole, it will be unreasonable for a valuer to accept contractor’s internal pricing errors, however genuine, as a reason for rejecting a rate or price as the basis of his clause 52 valuation.  As such, the proposition is unobjectionable.  But it does not, it is submitted, justify disregarding the factor of an unreasonable resulting rate or price if this can be shown to be due to some other cause than an internal contractor’s estimating error...”

Here the difficulties which have arisen are not due to Respondent but to the Applicant’s instruction by its Architect to use Type B (in place of Type A) gatesets.

17.  As her 2nd main ground of appeal Ms Cheng submits that the Arbitrator was inconsistent in respect of whether the Standard Method of Measurement (“SMM”) could be taken into account.  On the one hand, at Award §72, the Arbitrator said:-

“This is dealt with in more detail below, but I would say that overall, the SMM has little influence in the manner in which the works are valued because the Gateset works have not been measured by their component parts but have been measured as an enumerated item.”

On the other hand, Ms Cheng observes that at Award §92 the Arbitrator held that on a proper construction of the GCC 61(1)(c), in valuing variation work “as far as may be reasonable” or “using the Contract rates as the basis for determination”, the Surveyor was obliged to have regard to the SMM.  How (Ms Cheng asks rhetorically) can one have regard to something of little influence?  Ms Cheng also seems to be complaining that in discussing SMM the Arbitrator appears to have rejected the Applicant’s submission that one could value the variation by reference to its component parts pursuant to SMM Principle 9.  If SMM is relevant, why reject the implications of its Principle 9?  These Ms Cheng says are all serious errors.

18.  Again I disagree.  That the Arbitrator thought the SMM was of “little influence” does not mean (as Mr Westbrook points out) that it has no significance at all.  Insofar as it has some influence and for what it is worth, the Arbitrator thought the Surveyor bound to take that factor into account.  I do not see how this conclusion can be exceptional, especially given that GCC 59 explicitly refers to the SMM.  As for the rejection by the Arbitrator of the Applicant’s component part approach, the Arbitrator was called upon to decide the validity of such approach by Question (b) of the preliminary issue.  He took the view that a gateset being an entire product it was unreasonable to value it by the sum of its parts (for example, weight, type of steel grade used, amount of labour used in manufacture, folding and bending capability).  The whole gateset was distinct (the Arbitrator thought) from the sum total of individual components and ought not to be broken down into such.  I do not see how that conclusion can be objected to as seriously wrong.  Nor, for that matter, do I think that the Arbitrator failed to give reasons for his views on the SMM as Ms Cheng suggests that he did not.  The tenor of his remarks at Award §§65-73 where the Arbitrator set out the contentions of the parties was that he favoured the contractor’s reasoning.

III.  Conclusion

19.  For the foregoing reasons, I refuse leave to appeal and dismiss the Applicant’s Notice of Motion.