KIM HUNG CONSTRUCTION & ENGINEERING CO. LTD v. STANDARD REFRIGERATION & ENGINEERING CO. LTD

HCCT 37/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION LIST NO. 37 OF 2012

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DECISION

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1.  This is the resumed hearing of the application of Kim Hung Construction & Engineering Co Ltd (“Kim Hung”) made by originating summons for leave to appeal against the Interim Award Save as to Costs dated 23 August 2012 (“the Interim Award”) in its arbitration with Standard Refrigeration & Engineering Co Ltd (“Standard”). According to the directions agreed by the parties on 5 November 2013, I have to deal with the following outstanding issues:

(i) whether leave should be granted to Kim Hung to appeal against the Interim Award in respect of the liability of the CCMS Variation Claim[1], and if so, whether that part of the Interim Award should be set aside and dismissed; and

(ii) the issues of interest and costs in the Arbitration.

2.  The background of this case has been set out fully in my judgment handed down on 21 June 2013 (“the Judgment”), and I do not want to repeat the same here.

3.  For the purpose of this Decision, I would adopt the same abbreviations that I have used in the Judgment.

The CCMS Variation Claim

4.  The present dispute arose out of a programme implemented by HA to improve the ventilation systems in various public hospitals after the outbreak of SARS in Hong Kong in 2003.

5.  On or about 7 December 2005, Kim Hung (the Main Contractor) entered into a contract with HA (the Employer) to undertake construction works for the improvement of infection control provisions for autopsy facilities in 11 public hospitals.  One of the construction works was the upgrading of the Mechanical Ventilation Air-Conditioning System which was sub-contracted to Standard (the Sub-Contractor).

6.  Disputes subsequently arose between HA, Kim Hung and Standard.  Standard commenced the Arbitration proceedings against Kim Hung on 22 July 2010, and Kim Hung also commenced arbitration proceedings against HA on 9 September 2010.

7.  In the Arbitration, Standard claimed against Kim Hung for:

(i) additional expenditure in the sum of $1,067,824 incurred by Standard for Kim Hung’s delay in giving possession of the Sections 2 and 3 Hospitals as defined in the Schedule in SP 6.02 of the Main Contract and in the Schedule of Tentative Date for Possession and Handover annexed to the said letter of Kim Hung dated 3 April 2006 (“the Delay Claim”);

(ii) variation of CCMS Operation Modes in the sum of $604,190 (“the CCMS Variation Claim”); and

(iii) variation due to the omission of the MVAC Works at the Prince of Wales Hospital in the sum of $1,081,680 (“the Omission Claim”).

8.  On the other hand, Kim Hung counterclaimed Standard for loss and damage in the sum of $2,572,670 suffered as a result of the negligence on the part of Standard in failing to replace an old air duct at the North District Hospital, and as a result the contractually required fresh air intake and air pressure were not attained.

9.  After the arbitral hearing, the Arbitrator made and published the Interim Award in the following terms:

(i) Kim Hung is liable to Standard for the Delay Claim in the sum of $1,143,144.06 together with interest thereon;

(ii) Kim Hung is liable to Standard for the CCMS Variation Claim but the quantum assessed for this claim is nil;

(iii) Kim Hung is not liable to Standard for the Omission Claim; and

(iv) Standard is liable to Kim Hung for the Counterclaim in the sum of $428,301.95 together with interest thereon.

10.  In the first hearing before me on 5 March 2013 (“the Hearing”) and the subsequent written submissions, it is only fair to say that both parties just concentrated on the merits of the Delay Claim, with the dispute between the parties narrowed down to the following 2 issues:

(i) whether there had been contractual delay on the part of HA in giving possession of certain hospital sites resulting in corresponding contractual delay on the part of Kim Hung in giving possession of such hospital sites to Standard (“the Delay Issue”); and

(ii) whether the payment by Kim Hung to Standard was on a “pay-when-paid” basis, i.e. Kim Hung would only be contractually liable to pay Standard conditional upon receipt of the payment from HA (“the Payment Issue”).

11.  In the Judgment, I ruled in favour of Kim Hung on both issues, and I granted leave to Kim Hung to appeal against the Interim Award relating to the Delay Claim.  I also allowed the appeal and set aside the Interim Award on such claim.  After the handing down of the Judgment, both parties agree that I can just simply dismiss the Delay Claim without the need of remitting the case back for reconsideration by the Arbitrator.

12.  Standard is not satisfied with the Judgment and takes out an application for leave to appeal against the Judgment on the dismissal of the Delay Claim. I will have to deal with this application in due course.

13.  In the Judgment, I did not deal with the appeal relating to the CCMS Variation Claim.

14.  In the Hearing, my understanding was that “since the quantum assessed for the CCMS Variation Claim is nil, Kim Hung is not pressing for the appeal in respect of such claim”[2]. In fact, if one looks at the submissions of Mr Chong, counsel for Kim Hung, he had not made any specific submission relating to the CCMS Variation Claim.  According to Mr Chong, the claim for such variation works was subject to the same “pay-when-paid” arrangement.  Since I ruled in favour of Kim Hung on the Payment Issue and found that the agreed payment arrangement between the parties was one on a “pay-when-paid” basis, and that Kim Hung had not received any payment from the Employer in respect of the CCMS Variation Claim, Kim Hung is not liable to Standard for such claim.  Hence, Mr Chong submits that leave should also be granted to Kim Hung to appeal against the Interim Award relating to the CCMS Variation Claim.

15.  Despite that, Mr Chong’s stance on the appeal relating to the CCMS Variation Claim was far from clear.  In the Hearing, I had asked Mr Chong a number of times as to whether Kim Hung still wanted to maintain the appeal relating to the CCMS Variation Claim, and the last answer given to this question was somewhat unclear[3]. In any event, I agree that Kim Hung had not technically abandoned the appeal relating to the CCMS Variation Claim.  As I was not sure whether Kim Hung had formally abandoned such appeal, I said the following at §71 of the Judgment:

“Without the opportunity of hearing further submissions from the parties, I am not sure whether I should proceed to dismiss Standard’s Delay Claim right the way or to remit the case back for reconsideration by the Arbitrator together with the court’s opinion on the question of law. I am also not certain whether I would need to resolve other issues for the purpose of this appeal. I therefore direct the parties to fix another hearing before myself with an estimated time of 2 hours to deal with these matters. If the parties think that the time estimate is incorrect, they should write to the court to provide their time estimate for the hearing.”

16.  Since I have not indicated in the Judgment that Kim Hung had formally abandoned the appeal relating to the CCMS Variation Claim, and I have given parties liberty to argue on the remaining issues in the appeal (which should include the appeal relating to such claim), I am not functus officio on the matter and I can revisit Kim Hung’s application for leave to appeal against the Interim Award relating to the CCMS Variation Claim.  The question here is whether I should grant such leave.

17.  In my judgment, the answer must be no.   If one looks at the Reasons for the Interim Award (“the Reasons”), it is clear that the Arbitrator, in finding liability against Kim Hung on the CCMS Variation Claim, was not just relying on the dismissal of the “pay-when-paid” argument.  In fact, it was also part of Standard’s claim that Kim Hung had failed to secure the contractual benefits for Standard pursuant to SFDSC 10.3[4], and the Arbitrator found that Kim Hung was in breach of such duty.

18.  The CCMS Variation Claim relates to Standard’s claim for additional expenses incurred as a result of the CCMS system being changed from “2-mode” to “3-mode” and later reverting back from “3-mode” to “2-mode”. The Arbitrator found as a matter of fact that Standard had carried out the variation works pursuant to the instructions of the Architect and was therefore entitled to claim for the additional expenses.[5] The Arbitrator also accepted that Standard had properly pleaded the breach of SFDSC 10.3 in the pleading.[6]  Kim Hung argued that it was only liable to pay the CCMS Variation Claim to Standard when it received the related payment from the Employer, but the Arbitrator rejected such “pay-when-paid” argument.[7]  Further, the Arbitrator found that Kim Hung had failed to take reasonable steps to process the CCMS Variation Claim for Standard against the Employer, thereby in breach of SFDSC 10.3.[8]  Despite that Standard was entitled to claim for the additional expenses for the CCMS variation works, Standard had failed to discharge the burden of proving the losses under such claim, and so the Arbitrator assessed the quantum of such claim as nil.[9]

19.  I myself have some problem with the Arbitrator’s reasoning.  It seems that only when the parties were subject to a “pay-when-paid” arrangement that Kim Hung had a duty to secure the contractual benefits for Standard pursuant to SFDSC 10.3, otherwise Standard could just submit a claim for the variation works and it made no difference whether Kim Hung was to submit the corresponding claim to the Employer or not.  In my judgment, the contractual obligation under SFDSC 10.3 to secure the contractual benefits for Standard actually supports the existence of the “pay-when-paid” arrangement between the parties.

20.  However, the rejection of the “pay-when-paid” argument is not the only ground of establishing liability under the CCMS Variation Claim.  Rightly or wrongly, the Arbitrator found as a matter of fact that Kim Hung was in breach of SFDSC 10.3 in failing to secure the contractual benefits for Standard in respect of the CCMS Variation Claim.  Hence, what Mr Chong told me in the Hearing, that is the court can simply dismiss the CCMS Variation Claim if the court is to reject the “pay-when-paid” argument, is simply not true.  Obviously, though there was a “pay-when-paid” arrangement between the parties, such arrangement was subject to an obligation on the part of Kim Hung to take reasonable steps in securing the contractual benefits for Standard, otherwise Kim Hung could just sit there without doing anything even if Standard had a legitimate claim for the variation works.  This simply cannot be right.

21.  For the Delay Claim, there was also a complaint that Kim Hung was in breach of SFDSC 10.3 in failing to secure the contractual benefits for Standard.  However, the main issue in the Delay Claim was whether the Employer and Kim Hung, under the contractual provisions of the Main Contract and the Sub-Contract, were liable for the delay in giving possession of certain sites to Standard for the carrying out of the works.  As I found that, under SP 6.02 of the Main Contract, it was the duty on the part of Kim Hung (the Main Contractor) and indeed Standard (the Sub-Contractor) to make provision and to plan for the delay in obtaining possession of the sites, Kim Hung and Standard could not make a valid Delay Claim against the Employer.  In such circumstances, whether Kim Hung was in breach of SFDSC 10.3 is very much a non-issue.

22.  For the CCMS Variation Claim, the Arbitrator made a determination, which involved a mixed question of law and fact, that Kim Hung had failed to secure the contractual benefits for Standard in breach of SFDSC 10.3.  In the Hearing and the subsequent written submissions, Mr Chong had not addressed me specifically on the issue as to whether the Arbitrator was wrong in finding that Kim Hung was in breach of SFDSC 10.3.  Even in hearing on the outstanding issues, I am not sure that Mr Chong has addressed me specifically on such issue.  In such circumstances, I agree with Mr Clayton, SC, counsel for Standard, that since one of the aims of arbitration is to have a speedy and economical disposal of the dispute, the court should not allow Kim Hung to advance further arguments in the adjourned hearing as to whether the Arbitrator was right in holding that Kim Hung was in breach of SFDSC 10.3.

23.  Furthermore, s. 23(2) of the old Arbitration Ordinance (Cap 341) provides that an appeal shall lie to the court on any question of law arising out of an arbitral award, and s 23(4) further provides that leave to appeal shall not be granted unless the court considers that, having regard to all the circumstances, the determination of the question of law concerned can substantially affect the rights of one or more of the parties to the arbitration agreement.  Whether Kim Hung had failed to take all reasonable steps to secure the contractual benefits for Standard is a fact-sensitive issue.  In the absence of anything to show that the Arbitrator’s construction of Kim Hung’s obligation under SFDSC 10.3 is wrong, Kim Hung should not be allowed to appeal against the factual finding of the Arbitrator.  Even if the appeal relates to a point of law, it is certainly a “one-off” matter.  Hence, the court should not entertain Kim Hung’s appeal against the Interim Award relating to the CCMS Variation Claim.

24.  There is also an additional reason as to why leave to appeal should not be granted at this stage of the proceedings.  As conceded by Mr Chong, whether the CCMS Variation Claim should be dismissed would only be relevant on the question of costs in the Arbitration proceedings.  As the Arbitrator has reserved the issues of costs and interest for later determination, the outcome of the appeal relating to the CCMS Variation Claim may not have any practical significance.  The Arbitrator would have the benefit of reading the court’s decision on various points of law in determining the issue of costs.  In such circumstances, the granting of further leave to appeal at this stage may unnecessarily prolong and complicate the proceedings.   Further, with an impact on costs only, the appeal relating to the CCMS Variation Claim can hardly be said to be substantially affecting the rights of the parties, which is a pre-requisite for the granting of leave to appeal under s 23(4).

Interest and costs in the Arbitration

25.  The second outstanding issue relates to the questions of costs and interest in the Arbitration proceedings.

26.  The Arbitrator has reserved his decision in these matters.[10] However, since I allowed the appeal and dismissed Standard’s Delay Claim, Kim Hung asks me to deal with these matters in this appeal so that the case needs not go back to the Arbitrator and further delay and expenses can be avoided.

27.  This may be an attractive suggestion.  However, since the Arbitrator has reserved the decision on these matters, there is simply no decision on these matters against which Kim Hung can apply for leave to appeal.  Indeed, Kim Hung is not seeking to do so, but asking the court rather than the Arbitrator to decide these matters.  Yet there is no legal basis for the court to do so, as s 23(2) of the old Arbitration Ordinance clearly provides that the appeal has to be on a point of law arising from the award. The jurisdiction to deal with these matters therefore remains with the Arbitrator.

28.  For the above reasons, I dismiss Kim Hung’s application for leave to appeal against the Interim Award relating to the CCMS Variation Claim.  I also refuse Kim Hung’s application for the court to deal with the issues of costs and interest in the Arbitration proceedings.

29.  On the question of costs of the appeal proceedings, I make the following order nisi:

(i) the costs of the originating summons incurred up to 3 September 2013[11] be paid by Standard;

(ii) the costs of the originating summons incurred after 3 September 2013 and up to the date hereof be paid by Kim Hung.

30.  The order nisi shall be made absolute 21 days after the handing down of this Decision.