UDL ARGOS ENGINEERING & HEAVY INDUSTRIES CO LTD v. YAU LEE CONSTRUCTION CO LTD

HCCT 3/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 3 OF 2008

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J U D G M E N T

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I.   INTRODUCTION

1.  In June 1996 UDL entered into a Sub-Contract with Yau Lee for the installation of structural steelwork in the Air Mail Centre at Chek Lap Kok Airport.  Disputes arose between UDL and Yau Lee which were eventually referred to arbitration pursuant to the Sub-Contract.

2.  UDL now seeks leave to appeal against certain determinations of the Arbitrator (Mr. Charles Manzoni).  Those determinations were as follows:-

(1)   In relation to a “Partial Award Dealing with All Matters Save for Costs” (Award I) dated 20 December 2007:-

(a)    That the agreed lump sum contract price could be adjusted to reflect re-measurement of certain items in Bill 9.5.

(b)   That UDL unreasonably delayed in bringing its claim to arbitration and so should only be allowed 3 years’ interest on the principal sum awarded by the Arbitrator.

(2)   In relation to a “Partial Award on Liability for Costs” (Award II) dated 18 April 2008, that UDL had waived the application of Rule 18 of the Airport Core Programme Arbitration Rules (ACP Rules) governing the arbitration and could be deprived of its costs from 22 May 2007 as a result of a Calderbank letter sent by Yau Lee on 22 May 2007.

II.  DISCUSSION

A.  Provisional Quantities

3.  The Preamble to the Bills of Quantities stipulated that the Sub-Contract was to be a “Lump Sum fixed price tender”.  According to the Preamble, the Sub-Contract Sum could “only be adjusted in the case of adjustments to Provisional Sums or for variations in the Sub-Contract”.

4.  The Arbitrator held in light of this that the agreed lump for the Sub-Contract could only be revised in limited circumstances.  Two such situations were alterations in cost centre values and variations.  This much was clear (the Arbitrator thought) from cls.8 and 9 of the Sub-Contract Conditions.

5.  The Arbitrator rejected Yau Lee’s submission that the agreed lump sum could be revised to take account of mere errors in the Bills of Quantities. 

6.  Yau Lee had argued that Clause 68(3) of the Main Contract had been incorporated into the agreement with UDL by reason of cl.3 of the Sub-Contract. 

7.  Clause 68(3) of the Main Contract provided that:-

“The Quantities in the Bills of Quantities are firm except where described as provisional.  Only Provisional Quantities, variations ordered in accordance with Clause 65 ... and errors in firm quantities shall be measured.”

8.  Clause 3 of the Sub-Contract provided that:-

“The Sub-Contractor shall be deemed to have full knowledge of the provisions of the Contract (other than details of the Contractor’s prices and rates) ...

Save where the provisions of the Sub-Contract expressly require otherwise the Sub-Contractor shall ... execute complete and maintain the sub-contract work ... so that no act ... by the Sub-Contractor shall constitute ... any breach by the Contractor of any of its obligations under the Contract...; and [the Sub-Contractor shall] ... assume and perform all the obligations and observe ... all conditions of the Contract ... so far as they relate and apply to the Sub-Contract Works.”

9.  But the Arbitrator held that cl.68(3) had not been incorporated into the Sub-Contract.  He stated (at Award I, §34):-

“Clause 3 of the sub-contract has a particular purpose of ensuring that the sub-contractor carries out the work so that the work itself complies with the main contract, and such that the sub-contractor does not cause the main contractor to be in breach of the main contract. It does not have the effect of incorporating what are essentially the commercial terms of the main contract into the sub-contract in a way that would alter the basis on which the sub-contractor is entitled to be paid.  Therefore, unless there are direct provisions within the sub-contract that allow for re-measurement in the event of errors in the bills, I do not think that the sub-contract allows for it.”

10.  The question then was whether the re-measurement of certain quantities apparently described in Bill 9.5 as “Provisional” could lead to a revision of the lump sum contract price.

11.  The term “Provisional Quantities” was defined in the Main Contract, but not the Sub-Contract.  In the former, the definition given was:-

“a quantity of work defined as such in the bills of quantity, of which the extent is uncertain and for which quantities have been estimated.  Such work shall be remeasured as executed in accordance with the instructions of the architect and shall be valued in accordance with the provisions of clause 68(4).”

12.  For the same reason that he did not believe cl.68(3) to be part of the Sub-Contract, the Arbitrator rejected the suggestion that the definition of “Provisional Quantities” in the Main Contract had been incorporated into the Sub-Contract.  Nonetheless, having heard expert evidence, the Arbitrator thought (at Award I, §38) that in normal industry practice the designation “Provisional” in Bill 9.5 was:-

“an indication that the item in question was, at the time of tender, incapable of accurate estimation or measurement, and would be re-measured when completed, with the price adjusted to reflect the re-measurement.  This would be the case even in a contract which is otherwise a ‘Lump Sum’ contract.”

13.  The Arbitrator recognised that there was some ambiguity in Bill 9.5 as to what precisely the word “Provisional” was meant to qualify whenever it appeared.  The word could conceivably describe the stipulated price or even the relevant work itself.

14.  Nonetheless, on the basis that the word “Provisional” was intended to apply to quantities, the Arbitrator noted that on the strict wording of the Preamble to the Bills of Quantities, there could be no alteration of the agreed contract price even if the quantities designated “Provisional” were re-measured.  That is because, on a strict reading of the Preamble, there could only be an adjustment of the lump sum if there were an adjustment to a Provisional Sum (as opposed to a Provisional Quantity).

15.  But how could this be reconciled with what the Arbitrator found to be standard industry practice “to re-measure provisional quantities which have been included in a contract as provisional”?

16.  The Arbitrator resolved the dilemma as follows (at Award I, §45):-

“In my view there is a legitimate reconciliation.  I think the clear intent of the contract was to maintain a lump sum price for everything apart from the things which were said to be provisional.  I do not think that by the use of the words ‘Provisional Sums’ in the preambles the author of the bill was intending to exclude the remeasurement of a bill which everybody at the time must have recognised was provisional (either in its quantities, or in its price).  I do not think that the words were used in their strict sense to draw a distinction between Provisional Sums and Provisional Quantities, thereby allowing an alteration to the price for Provisional Sums, but not for Provisional Quantities.  Such a distinction would be odd in this contract, because apart from bill 9.5, there is nothing which is provisional.  There are no Provisional Sums unless the word ‘Provisional’ in bill 9.5 qualifies the sum of that last bill.  Thus, if it does not qualify the sum, but qualifies the quantities, there would be no sense in including the words in the preambles to allow an alteration to the contract price for Provisional Sums.  There would be no Provisional Sum in the contract to alter.  Thus the words must have been intended to cater for something else, and the only other thing which they would sensibly cater for would be an alteration in respect of provisional quantities.”

17.  This meant that the lump sum price in the Sub-Contract could be substantially revised downwards to take account of a re-measurement of the provisional quantities in Bill 9.5.

18.  Mr. Barrie Barlow SC (appearing for UDL) submits that the Arbitrator was obviously wrong.  Mr. Barlow suggests that, given the Sub-Contract was for a lump sum, the risk of changes in quantities was on Yau Lee.  The Bills of Quantities were simply (Mr. Barlow contends) a guide to assist UDL and other tenderers in arriving at their lump sum tenders. 

19.  Mr. Barlow further suggests that the Arbitrator confused the “different and distinct” concepts of Provisional Sums and Provisional Quantities.  The two concepts (which are defined in the Main Contract) cannot (Mr. Barlow says) be equated with each other in the way that the Arbitrator did.

20.  I am unable to agree with Mr. Barlow.

21.  The Arbitrator accepted that the Sub-Contract was for a lump sum.  But he inferred from the Preamble that the lump sum could be adjusted in certain circumstances, including the situation of Provisional Sums.  The Sub-Contract was not a pure lump sum agreement.  The Arbitrator therefore had to determine whether, as a matter of construction, the use of the word “Provisional” in bill 9.5 was an indication that the lump sum could be adjusted upon a re-measurement of the quantities apparently designated as “Provisional”.

22.  I do not think that it is fair to say that the Arbitrator confused “Provisional Quantities” with “Provisional Sums”.  He was plainly aware of the distinction, because (as we have seen) he drew attention to it in Award I.

23.  In my view, this is a one-off situation in which the Arbitrator was attempting to make sense of the Preamble to the Bills of Quantities and the apparent designation of certain quantities in Bill 9.5 as “Provisional”.  In light of industry practice as he found it to be, the Arbitrator decided upon a reconciliation which he thought would give some point (as opposed to no point) to the reference to “Provisional Sums” in the Preamble and to apparent “Provisional” quantities in Bill 9.5. 

24.  This is a standard method of construing a contract ut res magis valeat quam pereat.  I see no obvious (or even serious) error on the Arbitrator’s part.  On the contrary, it seems to me that the Arbitrator was probably right in his approach.

B.  Interest

25.  By Award I the Arbitrator ordered Yau Lee to pay UDL a principal sum of some $3.4 million.  On the question of interest, the Arbitrator then held as follows (at Award I, §102):-

“I turn therefore to an assessment of the rate and period of interest.  The starting date claimed is 1 March 1999, being one month after the final account was submitted.  Even allowing for a reasonable time for negotiation on the final account, proceedings probably could, and should, have been commenced by the time of the Scheme in April 2000.  An arbitration of this case would reasonably have been concluded within about 18 months of commencement (as indeed it has in fact taken, even some 6 years later).  Thus, if [UDL] had pursued its entitlement with reasonable diligence, an award, including interest, could reasonably have been expected within say 2½ years from the submission of the final account.  On this basis, this award has been delayed by some 6 years.  I am prepared to allow some leeway to the Claimant, on account of the disruption that may have occurred as a result of the Scheme, therefore, I will allow interest for a total of three years.”

26.  Mr. Barlow submits that the Arbitrator’s approach was obviously misconceived.  UDL (Mr. Barlow notes) had been kept out of a substantial net amount over the period disallowed by the Arbitrator.  It should (Mr. Barlow says) only be in exceptional circumstances that interest is refused to run from the notional date when (in the ordinary course of business) a principal sum ought to have been paid to the date of an award.

27.  It is implicit from the Arbitrator’s reasoning that on the facts he believed UDL to be guilty of unreasonable delay in the pursuit of its claim.  In those circumstances, I am unable to fault his discretion in rejecting UDL’s claim for interest over that period of time which the Arbitrator thought represented unreasonable or exceptional delay.

28.  This matter concerns a question of entitlement to interest given particular facts.  I doubt that it is a question of law justiciable by the Court on a review of an award.  In any event, it is a one-off situation and I see nothing in the Arbitrator’s exercise of his discretion on interest that is obviously (or even seriously) wrong.  I should add that I do not read the case of Komala Deccof v. Pertamina [1984] HKLR 219 (CA) cited by Mr. Barlow as saying that a judge (or arbitrator) can only deprive a party of interest for unreasonable delay in personal injury cases.

C.  Cost

29.  ACP Rule 18 provides that:-

“No account shall be taken by the Arbitrator of any written or oral offer of settlement where a payment into court could have been made.”

30.  Yau Lee argued that, by reason of a “without prejudice save as to costs” letter dated 22 May 2007 to UDL, Yau Lee should have costs from 22 May 2007.  By the letter Yau Lee offered to pay $4.15 million plus costs in settlement of UDL’s claim.  The $4.15 million was greater than the sum of $3.89 million (inclusive of principal and interest) which UDL eventually obtained under Award I.

31.  The question then was whether the Arbitrator could consider the Calderbank offer made by the letter dated 22 May 2007.  On the face of ACP Rule 18 he could not do so.

32.  But the Arbitrator noted that the parties had exchanged a series of “without prejudice save as to costs” letters between them.  In the course of such correspondence, Yau Lee had made settlement offers leading up to its final proposal of $4.15 million and UDL had put up alternative offers.

33.  From this, the Arbitrator concluded that the parties should be treated as having mutually waived the strict application of Rule 18 even if that provision formed part of the ACP Rules governing the arbitration.

34.  It was pointed out to the Arbitrator that the parties’ positions were not symmetrical.  Thus, while Yau Lee as debtor could make a payment into Court, UDL as creditor could not.  Any offer by UDL to accept a lesser sum could only be made by letter.

35.  The Arbitrator, however, was not persuaded by this argument.  He said (at Award II, §25):-

“That point [of a lack of symmetry] may have some validity in relation to the final offer made by [UDL] in its letter of 31 May 2007, but it is not relevant to the letter of 5 May 2007. In that letter [UDL] was not making an offer itself, but was expressly referring to an oral offer made by [Yau Lee][1], and indicating that it was insufficient and therefore had been rejected.  Therefore, it seems to me that as at 5 May 2007, [UDL] was operating on the basis that an oral offer by [Yau Lee] was something that could be brought to the attention of the Arbitrator when considering costs.”

36.  2.  The Arbitrator therefore took the 22 May 2007 offer into account.  Consequently, exercising his discretion on costs, he essentially ordered that UDL bear the costs of the reference to arbitration from 22 May 2007.

37.  Mr. Barlow suggests that the Arbitrator was plainly wrong in so doing.  Mr. Barlow contends that the Arbitrator exceeded his jurisdiction.

38.  I am unable to agree. 

39.  I believe this to be a one-off matter.  In my view, the Arbitrator was entitled to consider whether, despite Rule 18, on the facts the parties by their conduct waived that Rule’s strict application.  Having found waiver, he cannot be faulted for proceeding as he did.  I see neither obvious nor serious error.

III. CONCLUSION

40.  The result is that leave to appeal is refused on the 3 grounds raised by UDL. UDL’s Notices of Motion are dismissed.

[1] Wrongly referred to by the Arbitrator in the text of Award II, §25 as “the Claimant”.