ARNHOLD & COMPANY LIMITED v. THE ATTORNEY GENERAL

1988, No. MP 2438

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This originating summons raises a difficult and important point of construction of an engineering contract between the plaintiffs and the Government. The background facts are as follows:

2. In 1982, the Government invited tenders for the installation and construction of certain works at the Cheung Chau sewage works; printed tender forms and a specification were sent out to a number of contractors. Many of the items set out in that form had to be accepted by the contractor when tendering, and he knew if the tender was acceptable to the Government, then those terms would become part of the contract.

3. On September 10th 1982, the plaintiffs tendered for an amount of HK$6,931m. Subsequently a contract between the parties was signed on December 14th 1982. The works were due to be completed in 2 years, that is, December 13th 1984; this was later extended to May 3rd 1985. By that date they were not completed.

4. It was not until May 31st 1986 that the Government was satisfied that all the works the subject of the contract were now completed. The delay was 393 days and the defendants were alleging that they had suffered loss and damage because of that delay. The contract contains the usual arbitration clause and all points in issue would be decided by the arbitrator.

5. However, the Government says that it is entitled to deduct $374,529 from sums of money otherwise owing to the plaintiffs, because of its right to insist on liquidated damages which had been provided for in the contract.

6. This summons seeks basically a declaration that the Government is not so legally entitled, because the term containing the term containing the right for liquidated damages is either void for certainty, or is a penalty.

7. I now turn to the contract and documents. These are found conveniently set out in the affidavit of, Mr. Woo Lin Cheung, the plaintiff's project engineer. The tender, as I have said, was substantially completed by the defendants and the Appendix, which formed part of the contract, recites General Conditions of Contract:

Clause No.:

63 Amount of Liquidated Damages

..... $HK400.00 (min.) per day

$HK2,700.00 (max.)

Clause 63 of the contract provides.

(1) "If the Contractor shall fail to complete the works or any portion thereof within the time prescribed by clause 58 or extended time, then the contractor shall pay to Government the sum sated in the Appendix to the Form of Tender as liquidated damages for such default and not as a penalty for every day or part of a day which shall elapse between the time prescribed by Clause 58 or extended time, as the case may be, and the date of completion of the Works or the relevant portion thereof."

(4) "If before the completion the Works, any part of the Works is capable of occupation or used by Government and has been certified by the engineer as completed pursuant to clause 64, the liquidated damages (if any) prescribed for delay to the whole of the works shall for any period of delay after such certification be reduced in the proportion, which the value of the part so certified bears to the value of the whole of the Works. The provisions of this sub-clause shall apply, with the necessary changes as appropriate, to the liquidated damages for delay to portions of the Works."

8. There were special conditions of the contract; the important one Special Condition No. 2 says "Notwithstanding the provisions of clause 63(4) hereof, the resulting amount of liquidated damages after reduction in accordance with that clause shall not be less than the minimum amount of liquidated damages as stated in the Form of Tender." In other words, not less than $400. That is found also as Special Conditions Nos. 8 and 116.

9. The Government asserts that because of clause 63(d), the amount of liquidated damages has been reduced from a potential maximum of $2,700 to $953. What are the legal principles involved in the examination of this claim for liquidated damages? First, the wording of the clause was inserted by the defendants. It had to be accepted by the plaintiffs. Condition No.3 of the conditions of tender reads:

"No unauthorised alteration or erasure to the text of the tender documents will be permitted. Any tender containing such alteration or erasure will not be considered."

10. It is submitted by Mr. Scott and not really disputed by Mr. O'Sullivan that the 'contra proferentem' principle applies. This principle is succinctly put by Lord Justice Salmon, as he then was, in Peak Construction (Liverpool) Limited v. McKinney Foundations Limited (1969)1 BLR111, where he said "The liquidated damages and extension of time clauses in printed, forms of contract must be construed strictly 'contra proferentem'". That principle has been followed in other cases.

11. Might I say, at this stage, how impressed I have been by the quality of presentation of the argument by both counsel and also by them helpfully providing to me written skeleton arguments. I have said before that for commercial cases and, I think also in construction cases, this practice should be encouraged.

12. Secondly, the Court should construe commercial documents to try to give effect to the true intention of the parties.

13. Thirdly, an agreement containing a vague phrase may be binding because one party, is under duty, to resolve the uncertainty, see David Boyd & Co. v Louis Louca (1973) 1LLR 209.

14. Fourthly, the contract, tender and other documents should be construed together in a fair and broad manner.

15. I have read the provisions of clause 63. The first unusual phrase is "or any portion thereof". These words might appear to be tautologous, but as I pointed out in argument, these were probably shorthand for the words in clause 58 ".... and by portion thereof for which earlier completion is required in the contract.....".

16. Clause 63 says that the contractor shall pay to the Government they sum stated in the Appendix, for ever day or part of a day. What is the sum so stated? Normally singular means plural and vice versa, but it seems to me that these simple words mean that can be found stated in the Appendix a sum of money for each day where the contractor has delayed.

17. I find, however, an uncertain sum which can range from $400 minimum to $2,700 maximum. I must construe this contract as at the date it was entered into. I can find nothing within the contract or document which indicate (a) what principle governs the liquidated damages being fixed at a figure which is between $400 and $2,700,and (b) how such fixing is done. There is, however, no doubt that in the special conditions the contractor is told that the figure can never go below $400

18. Mr. O'Sullivan submits that clause 63(4) is the key to solving the problem. This permits a reduction in liquidated damages where the engineer has certified under clause 64 that some of the works have been completed. This, he says, protects the contractor because he only has to pay liquidated damages for the amount of work outstanding. It appears from an affidavit of Mr. John Collier, the contract engineer, that the two figures were inserted, having been ascertained from a formula set out in Technical Circular 9/80 and that by a series of mathematical calculations a figure of $953 a day can be found. These are set out in Mr. Collier's exhibits.

19. Mr. O'Sullivan submits that on a fair reading of clause 63, the liquidated damages, is $2,700 per day, but as clause 63(4) applies, then this figure can be reduced to something not less than $400. The technical memorandum, he says, is merely the machinery by which the calculation is made. It is important to note that this contract makes no provision for 'sectional completion' which often occurs in substantial development, carried out in phases where liquidated damages are applied to each phase of development.

20. Further, clause 63 (4) says "the liquidated damages prescribed for delay to the whole of the works" I can only find such prescription if I delete the words "$400 min." and the word "max.". In my judgment, I should construe this clause 'contra profereniem', even though I recognise that the parties contemplated liquidated damages would be given for delay.

21. In many years of experience, I have never come across a clause for liquidated damages expressed in the range of sums as this provides, nor apparently have Counsel.

22. I bear in mind that even if the liquidated damages clause is unenforceable, the defendants can still claim general damages for contractual delay. This matter, therefore does not fall within the general ambit of those authorities where the Court strives to preserve the contract, or retain terms which otherwise would fail, with no other remedy being available. The defendants may obtain general damages for what they are seeking as liquidated damages, but that is for the arbitrator to decide.

23. In my judgment, this clause is void for uncertainty. I am reinforced in my conclusion by a decision of Official Referee Hawser Q.C. given in the case of Bramall and Ogden Limited v. Sheffield City Council 29 BLR 73

24. I will only add this, as a matter of common sense, the object of a liquidated damages clause is to enable an easily ascertained figure to be know as the damages which the contractor pays if he does delay. The clause specifically envisages a sum payable for each day. This contract appears to me to defeats the object of such a liquidated damages clause and is in reality the antithesis of such a clause. That conclusion would permit me to give the relief sought, but as this matter may go further, it is right I give my reasons on the second point taken by Mr. Scott, that this clause is a penalty. The wording of the clause, says it is not a penalty and the law recognises liquidated damages as a method of genuinely pre-estimating damages.

25. The criteria for deciding whether a clause is a penalty or not are set out in the speech of Lord Dunedin in Dunlop Limited v. New Garage Co. Limited (1915) AC 79. At page 86 the learned Judge said

"...3. The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the making of the contract, not as at the time of the breach".

26. Mr. O'Sullivan cites various passages in Chitty on Contracts (25th Edn.) at paras. 1725, 1729 & 1731 - these ate well recognised principles in particular para. 1729 reads

"In building contracts and other similar contracts the courts have upheld as liquidated damages a system of graduated sums which increase in proportion to the seriousness of the, breach, e.q. so much per week for delay in performance, or so much according to the number of items in question. If in a building contract there is no such graduation the sum fixed is more likely to be held to be a penalty."

The figures in this contract are not set out as graduated sums, although they may have that effect. If $2,700 per day is the figure for liquidated damages, as is submitted, and this even though it could later be scaled down then, in my judgment, this was the figure which the Government could deduct under clause 63(l), whether there was a delay in the whole of the works, or any portion thereof. The figure therefore may exceed a pre-estimate of damages. If, as I have already set out, the seriousness of the breach would increase the amount of damages, I can find no graduated figures for delay to a portion of the works. Construing is provision, I am of the view that the claim for liquidated damages is a penalty.

27. Mr. Scott takes a further point that the operation of Special Condition of Contract - Clause 2 - is that of a penalty, in that it provides a minimum figure of $400 a day. In clause 63(4), a decreasing from $2,700 per day (assuming that is the figure so prescribed) is stipulated, dependant on the amount of work certified for occupation. This figure, therefore, should ultimately decrease to zero, but because of the operation of SCC-2 the minimum figure is $400. If, therefore, more than 85% of the work is capable of occupation or used by the Government, the Contractor is liable to pay a figure higher than what could possibly be a genuine pre-estimate of the anticipated loss.

28. I must examine the "terms & inherent circumstances of each particular contract" as at the making of the contract. Even were I doubtful that the sum specified in the Appendix was a penalty, the operation of SCC-2 convinces me that looking at all the terms, the sum stipulated is a penalty.

29. On this second ground therefore I would also have granted the relief sought.