XCHRX THE ATTORNEY GENERAL OF HONG KONG v. TRAFALGAR HOUSE CONSTRUCTION (ASIA) LTD and Others

1996, No.MP3410

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

--------------------

--------------------

-----------------------

J U D G M E N T

-----------------------

1. On 18 May 1992, and as part of the Lantau Fixed Crossing which is a vital portion of the infrastructure programme associated with the new airport at Chek Lap Kok, the government of Hong Kong contracted with the 1st, 2nd and 3rd defendants ("the Contractors") for the construction of the Tsing Ma Bridge, the larger of the two bridges connecting Lantau Island to the Kowloon Peninsula ("the Contract"). The contract sum was approximately $7 billion.

2. A dispute arose between the government and the Contractors over concrete specifications (Claim No.28), and in March 1996 the matter was referred to dispute resolution procedure by the Contractors pursuant to clause 92 of the Contract. The Contractors' claim was rejected by the Engineer on 1 April 1996. Not being satisfied with the Engineer's decision, the Contractors further referred the dispute to mediation. Mediation was concluded on 24 August 1996 without a resolution of the dispute due to failure of agreement. On 19 September 1996, the Contractors took the dispute another step further and issued a request for adjudication. By the originating summons herein, taken out on 5 October 1996, the government sought declarations impugning on the propriety and scope of the reference to adjudication and an injunction to restrain the 4th defendant from appointing an adjudicator pending determination of the government's application before the court. At a hearing on 18 October 1996, an interim order was made for the request for adjudication to be amended by deletion of claims for damages at common law pending the court's final determination of the propriety of inclusion of such claims in the reference to adjudication. The parties now sought the court's determination on the declaration that the claim for damages at common law contained in the purported notice of adjudication is not referable to adjudication by virtue of clause 92(8)(c) of the Contract.

The Dispute Resolution Procedure

3. Clause 92 of the Contract provided a detail procedure for resolution of "any and all Disputes" : see clause 92(1). The wide definition of "Dispute" makes it clear that the scope of the agreed dispute resolution mechanism is of the most comprehensive kind including all disputes "whether during the execution of the Works or after their completion and whether before or after the termination, abandonment or breach of the Contract".

4. Firstly, parties can refer a dispute to the Engineer for a decision (sub-clause 2). There is no restriction on the kind of dispute to be referred to the Engineer. However, there is also no provision that such decision of the Engineer is binding or has any legal effect upon an unwilling party. If the dispute failed to be resolved by the Engineer, either party can refer the matter to mediation (sub-clause 5). Again there is no restriction on the kind of dispute to be referred to mediation. Likewise, resolution of the dispute is only possible if the parties agreed to accept and give effect to the recommendation of the mediator. If mediation failed to resolve the dispute, parties can then refer the matter to an adjudicator (sub-clause 7(a)). Unlike the previous modes of settlement of dispute, the decision of the adjudicator "shall be final and binding upon the parties and enforceable as such unless and until the dispute is either settled or an award of an arbitration is made" (sub-clause 8(b)). If the dispute was not referred or not referable to adjudication, or if the last certificate of completion had been issued, parties can refer the dispute to arbitration (sub-clause 7(c)). Furthermore, parties can also resort to arbitration subsequent to the adjudicator's decision, or after expiry of time for making such decision (sub-clause 9). As with the first two modes of dispute settlement, there is no restriction on the kind of dispute for arbitration, though no arbitration can be proceeded with until after substantial completion of the Works (sub-clause 10(a)).

5. One unique feature of the adjudication process, non-existent in the other 3 modes of dispute settlement, is the restriction on the type of disputes that can be referred to adjudication.

Restriction on Reference to Adjudication

6. Clause 92(8)(c) provided that:

"(c) A Dispute shall not be referred to the decision of an adjudicator unless it concerns the entitlement of :-

(i) one party to payment by the other pursuant to any provision of the Contract; and/or

(ii) the Contractor to any extension of time pursuant to clause 53."

7. It was submitted by the government that clause 92(8)(c) prohibits the reference of a claim for damages at common law to adjudication. The scope of operation of clause 92(8)(c)(i) depends on the proper construction of : "the entitlement of one party to payment by the other pursuant to any provision of the Contract".

The Plain Meaning

8. "Entitlement to payment pursuant to provision of the contract" usually carries the meaning of exercising a contractual right, founded on mutual agreement, to the payment of a sum of money. It is the carrying into effect in conformity with the contract terms, and performance of the contract that is connoted by the phrase. "Entitlement to payment" is seldom, if at all, used to include general (as distinct from liquidated) damages for breach of contract. An award of general damages only raises when there is a determination on the appropriate remedy consequential upon a finding of a wrong being done. It would be strange to speak of an "entitlement", or indeed even "a right", to damages. Damages is a form of remedy, and not a right to payment, arising from a breach of contract.

9. "Payment" is clearly distinguishable from "damages". Mr Bell readily conceded on the distinction. The books are littered with ample authorities on the issue.

"Damages are the pecuniary recompense given by process of law to a person for the actionable wrong that another has done him."

"Damages distinguished from other kinds of money payment. Damages as defined in the previous paragraph are distinguishable from debt, and from a sum payment under contractual liability to pay a sum certain on a given event (other than breach) ....... Damages are also distinguishable from compensation ..... " (para.1102 and 1103, Halsbury's Laws of England, 4th ed., vol.12).

The learned editor of Emden's Construction Law 8th ed., Binder 1, distinguished the two, in para.753, in the following manner :

"Claims may be divided conveniently into four types :

(a) claims made under the provisions of the contract;

(b) claims for alleged breach of the contract, sometimes called 'common law' claims;"

The importance in drawing the distinction was also explained as follows :

"Claims for breach of contract differ in important respects from claims under the contract. The most significant differences are the following :

(a) there are no procedural steps that need be followed by the aggrieved party as a condition precedent to making a claim;

(b) it is necessary however to establish that a breach of contract has been committed;

(c) the remedy for breach will normally be damages, assessed in accordance with common law principles ..."

Keating on Building Contracts 6th ed., at p.228, also drew a distinction between "Claims under or for breach of the contract".

10. The distinction is so well known to the legal and commercial world that it must be assumed that multi-million dollar construction agreements, in particular international contracts, of such nature and magnitude as the Contract would be prepared by professionals well acquainted with such a distinction. If damages are intended to be included in clause 92(8)(c)(i), it would have been the simplest thing to add at the end of that paragraph the words "and damages".

11. It would also be strange to speak of damages "pursuant to" the provisions of a contract. It was submitted on behalf of the Contractors that in construing the phrase, the court should adopt the modern and not the obsolete meaning of "pursuant to". The New Shorter Oxford English Dictionary provided :

"A adj. ....... 2. With to: consequent and conforming to; in accordance with. Now rare or obs. ........

B adv. With to: in consequence of, in accordance with."

Mr Bell for the Contractors submitted that the court should adopt the meaning of "in consequence of" in preference to the other meanings. He has not, however, explained why he was suggesting that those 2 words were used in clause 92(8)(c)(i) as an adverb, rather than as an adjective to qualify the type of payment. However, that is not really that important. Whether used as adjective or adverb, "pursuant to" clearly suggests a conformity with the contract terms. I do not agree that in construing commercial documents, in particular building and construction contracts, the court should regard the meaning of "consequent and conforming to" as being obsolete and thus not intended by the draftsman. Those 2 words have long acquired an accepted meaning in the legal and commercial world, and the court should be slow to construe them differently in the absence of a clear intention to the contrary.

12. I do not accept the submission that any claim for damages for breach must be "pursuant to" some term of the contract. Such a claim would be for a recompense for a wrong done to the claimant, not pursuant to a term of the contract. Damages would be "in consequence of" the alleged wrongful conduct, not as a consequence of the natural operation of a term of the contract. To adopt the construction of the Contractors would be straining the natural meaning of the words beyond reason. Such abnormal use of the phrase should not be inferred unless the circumstances warranted and necessitated such an inference to be drawn.

Meaning in the context of the Contract as a whole

13. The Contractors also submitted that viewing the Contract as a whole, clause 92(8)(c)(i) must be given a construction that would include the reference of a claim for damages at common law to the adjudicator. Reliance was placed on clauses 53(3), 69(3), 89(1) and 92(1). It was also submitted that clause 92(8)(c) was intended to exclude non-monetary claims only; e.g. claims arising under clauses 77, 78, 87, 91 and 95.

Clause 53(3)

14. It was submitted that a dispute relating to the extension of time under clause 53(3) is clearly referable to an adjudicator pursuant to clause 92(8)(c)(ii). It was thus argued that an extraordinary result would arise if a monetary claim for damages at common law in respect of the same dispute could not be considered by the adjudicator at the same time as the claim for the extension of time. I do not find such a result so extraordinary that it could not have been contemplated by the parties. To the contrary, I find an intent to exclude claims for damages at common law to be more probable than an intent to include such claims.

15. Speed of a determination is the most important objective in the settlement of a dispute over entitlement to extension of time. Such dispute, as distinct from a dispute over liability to recompense for a failure to grant extension of time, would mainly arise in the interim during the course of work. Such a dispute call for an immediate clarification over a matter parties need to know for continued performance of their contractual obligation. Parties would only be able to plan their future conduct in the performance of the Contract if the alleged entitlement to extension of time was clarified. An immediate clarification would be of the utmost importance for the parties. The need for such quick decision to be final and binding was likewise essential to facilitate future performance of the Contract. Adjudication on entitlement to extension of time is an attempt to marry the need for quick guidance for the parties with the evils of rough and ready justice. The higher priority for quick and binding guidance on entitlement to extension of time clearly outweighed the luxury of a well-considered determination not made under pressure of time. On the other hand, claims for damages would not usually involve a clarification of matters parties would need to know for continued performance of the contract. A determination of a claim for damages would seldom provide guidance on further performance of the contract.

16. It is, therefore, clear to me that it was for such considerations that disputes over entitlement for extension of time was agreed to be one of the only two kinds of disputes to be referred for a settlement in a manner that is final and binding notwithstanding the rough and ready mechanism used.

17. The Contractors submitted that cash-flow is very often a critical consideration for building contractors. It was, therefore, submitted that such consideration would justify a rough and ready quick determination of claims for damages at common law. No doubt, it might be important for building contractors to have a quick decision on a monetary claim to ease their cash-flow. However, I do not believe such a consideration would outweigh the obvious inadequacies in the adjudication process. It is hardly appropriate for such damages claims, likely to involve relatively complicated disputes of facts and law, to be decided by rough justice arrived at under pressure of time constraints. The possibilities of injustice resulting from ill-considered decisions in such circumstances would only be too obvious to the parties. Would the parties herein be prepared to be bound, on a final and immediately enforceable basis, by such rough justice? The answer can be no other than "No". I cannot believe, in the absence of clear evidence to the contrary, that such risks were acceptable, and were accepted, by the parties. The probability of huge monetary sums arising under claims for damages at common law in a multi-million dollar construction transaction like the Contract was, in my view, too great for any reasonable party to have agreed to be bound by a final, binding and immediately enforceable determination that would be made in a haste within 42 days after reference (with an addition 28 days by consent) and in the informal manner provided by the Adjudication Rules. More likely than not, the parties would rather have such complicated and substantial disputes settled in a more just and proper manner with no pressure for a quick decision.

Clause 69(3)

18. It was submitted by the Contractors that there was a reference in this clause to "........ damages ............ pursuant to or in connection with the Contract ......" I am satisfied that such a submission was taking the words out of context of the clause. The relevant text in full is :

"....... and in default of compliance the Contractor shall be deemed to have waived all rights, claims and damages to which it might otherwise have become entitled either pursuant to or in connection with the Contract or as a result of any breach of duty by the Employer or the Engineer."

It is clear when read in full context that it was a compound reference to a variety of matters. It could be "rights pursuant to or in connection with the Contract" and "damages as a result of any breach of duty"; or any other combinations of references. I do not find a consideration of this clause of any assistance to the construction of clause 92(8)(c)(i).

Clause 89(1)

19. It was also submitted that the reference in clause 89(1) to "damages (including without limitation to liquidated damages) ......... for which the Contractor is liable to the Employer under any provision of the Contract may be deducted by the Employer from monies due to the Contractor ......", also supported the submission of the Contractors that there could be "damages pursuant to the provision of the Contract". It would not be surprising to find a reference to damages a party may be "liable under" provisions of a contract. "Liable under" provisions of a contract has a wholly different meaning from "pursuant to" provisions thereunder. "Liable under" certainly does not necessarily connote "in conformity with". It is unhelpful if one is not comparing like with like. I do not find a consideration of the reference to "liable under" provisions of the contract of any assistance to the issue in question.

Clause 92(1)

20. It was submitted that the opening paragraph of clause 92 made it clear that "any and all Disputes" shall be settled in accordance with the dispute settlement provided in that section of the Contract. That has never been a matter in dispute. However, that does not assist in understanding which kind of dispute should be settled by which of the 4 modes of dispute resolution schemes provided therein. On the contrary, the definition of "Dispute" clearly indicated that the parties understood the distinct concept of a "breach of the Contract" as different from carrying the terms of the same into effect. This is strengthened by a consideration of the words used in clause 55 when "liquidated damages" are being dealt with.

Conclusion

21. After careful and comprehensive analysis of the alleged relevant clauses, and considering clause 92(8)(c)(i) in the context of the Contract as a whole; I can come to no other reasonable conclusion than to hold that there is nothing to displace the plain meaning clearly dictated by the words used.

Justification for the Restriction in clause 92(8)(c)(i)

22. The plain meaning of the clause is supported by a consideration of why such limitation applies only to an adjudication, and not to any of the other 3 modes of dispute resolution schemes. Adjudication is available only before the issuance of a certificate of completion for the whole of the Works, or before the issuance of the last of the certificates of completion (if there be more than one such certificate for a part of the Works): see the proviso to clause 92(7)(a). As has been observed supra, it was designed to be a quick but final and binding decision. Though Engineer's determination and mediation provided equal or even quicker determination of the dispute (28 days and 42 days respectively after reference), such determination or recommendation does not have any binding effect and could not be enforced at all. There is no obligation to follow an Engineer's decision. The recommendation of the mediator has no effect until embodied in an agreement. The mediator is to be an independent expert and not to be considered as an arbitrator (clause 92(7)(i)). In the premises, there could plainly be no harm for all claims of whatsoever nature, including damages at common law, be considered by an Engineer or a mediator if they agreed to adjudicate upon such claims. Any injustice that may result from a hasty or ill-considered decision due to pressure of time could be avoided by the party prejudiced by simply refusing to abide by such decision. No such safety mechanism is provided in adjudication. To the contrary, the decision of the adjudicator is final, binding and immediately enforceable. Arbitration comes only after every other modes of dispute settlement have been exhausted, or at the completion of the Works. There is no pressure of time and the procedures thereunder are more formal and "proper". Thus, there can be no ground for complaint for the absence of restriction on the kind of disputes to be referable to an arbitrator and for his decision to be binding.

23. It was for such reasons that the only other kind of dispute suitable for adjudication, apart from disputes over entitlement to extension of time discussed supra, would be payments that could be calculated by the application of pre-determined formula provided in the Contract. Only in rare cases would there be a need for fair valuation outside the pre-determined formula. Such disputes would exclude claims for damages at common law that are "pecuniary recompense" to be assessed in accordance with common law principles. A rough and ready, but final and binding, determination would only be suitable for disposal of monetary claims that solely involved simple disputes of facts relating to the satisfaction or otherwise of condition precedents to provisions for payment of fixed-rated compensations. Classic examples are disputes arising under additional work, alteration of work or other form of adjustments (clause 66); or liquidated damages (expressed per day basis) under clause 55. It would not be suitable for claims requiring a determination of liabilities of parties for wrongful conduct, to be followed by an assessment of damages at large, based usually on highly disputed facts and legal principles.

24. The handicap that it is final, binding and immediately enforceable would appear to destroy any justification to include a claim for damages at common law for a rough and ready process like adjudication, in the absence of any other recognisable benefit such an "inferior" mode of settlement of dispute might bring to such a claim. It cannot be disputed that adjudication in the form provided by the Contract is far from being a satisfactory mode of resolution of disputes when a quick decision is not required.

25. In conclusion, I am satisfied that it was the clear intention of the parties as expressed in the unambiguous words in clause 92(8)(c)(i) that claims for damages at common law are not referable to adjudication. In the premises, I do make an order for a declaration that the claim for damages at common law originally contained in the purported notice of adjudication, prior to its amendment pursuant to the interim order of 18 October 1996, is not referable to adjudication by virtue of clause 92(8)(c)(i) of the Contract. I am not aware of any reason why costs should not follow the event, and an order nisi is made for costs to the plaintiff.

(J. Chan)

Judge of the High Court