CHINNEY CONSTRUCTION CO LTD v. PO KWONG MARBLE FACTORY LTD

HCCT 76/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 76 OF 2005

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J U D G M E N T

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I. INTRODUCTION

1.  On 16 February 2006 I granted Chinney leave to appeal against the “Final Award -- Save as to Settlement of Costs” of Mr. Leung Hing Fung as arbitrator.  This is the hearing of Chinney’s appeal.

2.  The essential facts have been summarised in the Introduction and Discussion sections of my 16 February 2006 Judgment (Judgment I).  I shall not repeat that material here.  In this decision, I shall use the abbreviations defined in Judgment I.

3.  As before Chinney says that the Arbitrator erred in law in the following respects:-

(1)	He failed to appreciate that by agreement, estoppel or waiver, Po Kwong had conceded that he had jurisdiction to review CF 31.
(2)	He misconstrued the 2nd proviso of Sub-Contract cl.22 as limiting his jurisdiction to review CF 31.
(3)	He treated CF 31 as a Final Certificate issued under Main Contract cl.30(6).

4.  As at the leave stage, Po Kwong maintains that whether the Arbitrator erred in his treatment of CF 31 or not, is an irrelevant question.  In his Award, the Arbitrator (Po Kwong says) dealt with the substance of Chinney’s case that CF 31 was wrong.  The Arbitrator (Po Kwong submits) concluded that the evidence did not support such case by Chinney.  Thus, there would be no point in remitting the matter back to the Arbitrator.  Even if Chinney were right on the law relating to CF 31, the Arbitrator (Po Kwong reasons) would still hold Chinney’s case to be unsustainable in fact.

II. DISCUSSION

A. Whether Arbitrator wrong that CF 31 could not be re-opened

5.  As stated in Judgment I §§50-55, it is clear from correspondence and statements passing between the parties that until 15 September 2005 everyone assumed that the Arbitrator had power to review CF 31.  The Arbitrator’s Interlocutory Order No.16 of 7 January 2005 was itself premised on an acknowledgment by Po Kwong that the Arbitrator had such power.

6.  It was only on 15 September 2005, after the evidence had been heard and submissions had closed, that the Arbitrator invited further submissions on whether CF 31 could be opened up, reviewed and revised.

7.  It therefore seems to me that, at least by 15 September 2005 if not earlier, Po Kwong was estopped from denying that CF 31 could be re-opened.  In those circumstances, it was unfair and wrong of the Arbitrator to allow Po Kwong to resile from its prior position.  The Arbitrator should instead have concluded that he could re-open, revise and review CF 31 (whether or not it was a Final Certificate) in light of Po Kwong’s earlier acceptance that he had such jurisdiction.

8.  Ms. Teresa Cheng SC (acting for Po Kwong) has submitted that I must remit this matter back to the Arbitrator to consider whether there has in fact been an estoppel in relation to CF 31. I do not think that is right.  The correspondence and statements said to give rise to the estoppel are undisputed.  The only issue is whether the Arbitrator was wrong to ignore the legal consequence of those undisputed matters.

9.  Given the estoppel, it is unnecessary to decide on the alternative bases on which Mr. Thomas contends the Arbitrator erred in holding that CF 31 was final.  Since those other bases involve construction of standard form contracts terms, I do not think that it would be desirable for me needlessly to indicate definitive views on those alternative grounds here.

B. Whether Arbitrator dealt with substance of Chinney’s case

10.  Given my conclusion above, then to the extent that the Arbitrator did not deal with Chinney’s substantive case because he thought such inquiry was precluded by a finality of CF 31, this matter should be remitted back to him.  The question is what that extent is.

11.  Chinney’s substantive case in the arbitration essentially comprised a claim of abatement and set-off. 

12.  Chinney contended that, although Po Kwong did not perform certain works, such works were valued in CF 31 as if they had been executed by Po Kwong.  Chinney argued that it was entitled to abatement in the amount of unexecuted works.

13.  The alleged unexecuted works pleaded by Chinney were:-

"	(a)	supply and installation of marble slab and feature at the following areas:-
		(i)	shopping arcades and staircase at G/F and UG/F;
		(ii)	shop front at G/F and UG/F;
		(iii)	entrance foyer;
	(b)	supply and installation of granolithic finishes between the sandstone crazy paving and at the pool deck;
	(c)	provision of adequate waterproofing materials for the supply and installation of waterproofing screed/ bedding to receive marble tiles at the toilets and the sandstone at pool deck;
	(d)	supply and application of sealant to bathroom counter tops, marble shelves to bathtub and showers and other areas;
	(e)	the effect of Employee Compensation Insurance;
	(f)	setting out works;
	(g)	final cleaning on completion; and
	(h)	design, supply and installation of metal frames for marble counters."

I shall refer to item (a) above as “the Marble Slab Work” and to item (d) as “the Bathroom Sealant Work”.  I shall refer to items (a) to (h) collectively as “the Unexecuted Works”.

14.  Chinney further maintained that it had to perform the Unexecuted Works itself.  Chinney therefore sought to set-off amounts alleged to have been expended in doing what Po Kwong ought to have done.

15.  Chinney additionally raised a claim in connection with the change of marble tile used in certain areas.  There was a switch from “Crema Classico Medium (Indonesia)” to “Switzer Beige (Turkey)” tiles.  This change (according to Chinney) resulted in a variation and a net omission of $1.9 million.  That omission (Chinney complained) was not reflected in CF 31.

16.  The Arbitrator considered all Chinney’s claims of set-off. He rejected those claims, largely on the basis that the evidence adduced by Chinney in support was not compelling.

17.  In respect of the changed tiles claim, the Arbitrator held that there was no evidence that the Architect considered that the tile change was a variation.  The Arbitrator therefore did not think that there was any question of net omission as a result of a variation.  In any event, he held that there was no evidence that the tile change gave Chinney a right of set-off.

18.  In its Re-Amended Reply and Defence to Counterclaim (Po Kwong’s Reply), Po Kwong admitted that it had not done the Marble Slab and Bathroom Sealant Works.  But Po Kwong maintained that it had performed all the other Unexecuted Works.

19.  Po Kwong’s Reply explains that part of the Marble Slab Work (involving the shopping arcades and staircase at G/F and UG/F) was excluded from the scope of the Sub-Contract Works.  This is said to have been done by item 9 of a Proposed Deviation to Original Scope of Works annexed to Appendix II of the Letter of Award.  The Arbitrator made no findings on this plea.

20.  Po Kwong’s Reply alleges that another part of the Marble Slab Work (involving the shop fronts at G/F and UG/F and the entrance foyer) was deleted from the scope of the Sub-Contract Works by a variation instructed by the Architect.  The variation (Po Kwong’s Reply pleads) was later valued by the QS at $414,841.70.  That amount is said to be reflected in IPC 29, IPC 30 and CF 31.  Again the Arbitrator made no findings on this plea.

21.  As for the Bathroom Sealant Work, Po Kwong’s Reply pleads that Chinney carried out such work on Po Kwong’s behalf.  The specific work was the subject of an arbitration between the parties before Mr. Peter Caldwell in September 2000.  The result (according to Po Kwong’s reply) was that Po Kwong admitted a liability of $126,500 to Chinney in respect of that work.  Mr. Caldwell duly awarded such sum to Chinney by his arbitration award.

22.  At the leave stage, Mr. Jason Pow SC (then appearing for Po Kwong) submitted that the abatement claim was merely the reciprocal of Chinney’s claim for set-off.   In Judgment I §72 I accepted Mr. Thomas’ submission that the abatement and set-off claims were not necessarily obverse sides of the same coin. 

23.  I commented that it was “particularly difficult to see the 2 claims as being the same in light of admissions by Po Kwong in its pleading that it did not do certain relevant work”.  I was concerned that the Arbitrator should “explain why there should not be abatement in respect of work which Po Kwong has admitted that it did not do”.

24.  In this appeal, I have had a closer look at Po Kwong’s admissions and the way in which the Arbitrator dealt with set-off in the Award.  I have also heard further submissions on the extent to which the set-off and abatement claims were expressly or impliedly dealt or not dealt with by the Arbitrator.

25.  Having had the benefit of counsel’s fuller argument, I am more firmly of the view that the abatement and set-off claims (though inter-linked) are not identical.

26.  By the set-off claim Chinney contended that the Unexecuted Works were performed by Chinney.  Chinney sought to set-off alleged expenditure for such remedial work.  The Arbitrator rejected the claim of set-off because he was not satisfied with Chinney’s evidence that it had done (and incurred expenditure on) the Unexecuted Works.

27.  But it does not follow from the rejection of Chinney’s set-off claim that Po Kwong executed all or part of the Unexecuted Works.  Nor does it follow from the rejection of Chinney’s case on set-off that any Unexecuted Works done by Po Kwong were correctly valued in CF 31.

28.  It cannot therefore be said that, by dismissing Chinney’s set-off claim, the Arbitrator in effect dealt with the substance of Chinney’s claim in abatement.  On the contrary, the Arbitrator failed to consider the abatement claim on the erroneous basis that he could not re-open CF 31.

29.  By way of example, let me examine more closely Chinney’s complaints in relation to the Marble Slab and Bathroom Sealant Works and the tile change.

30.  In respect of the Bathroom Sealant Work, Po Kwong accepted that the work was done by Chinney.  It gave Chinney credit for that work as a result of Mr. Caldwell’s arbitration award.

31.  This was recognised by the Arbitrator. He said:-

“	130.	I attempt to look at the bundles of the 1st Arbitration [before Mr. Caldwell].  I do not find any difference in terms of nature between the counterclaim raised this time [by Chinney] and the one raised in the 1st Arbitration in respect of the sealant as explained by Mr. Chan [Chinney’s witness].  In the 1st Arbitration [Chinney’s] claim was dismissed because of the uncertainty of the scope of actual work done save and except an amount of $126,500 admitted by [Po Kwong].  What I need to do is to look at the evidence in this Arbitration as to how much work done by the Respondent can be proved.
	131.	Miss Cruden [Chinney’s then counsel] maintains her view in her submission that as [Po Kwong] has admitted that it had not executed some work for which it was responsible for under the Sub-Contract, the amount as evaluated by Mr. Battersby should be taken away from the Final Certificate.
	132.	As I have already ruled that the Final Certificate is not to be opened up, reviewed or revised, the remaining question is whether an amount should be set-off from the payment due in any of the Interim Payment Certificates.
	133.	Upon considering all the evidence, I am not satisfied that [Chinney] has proved on a balance of probability that he sealant and associated works alleged by it has actually been performed by it.
	134.	I therefore hold that [Chinney] is not entitled to this part of alleged overpayment as counterclaimed.”

32.  It will be seen that the Arbitrator expressly did not assess the consequences (if any) of Po Kwong’s admission of non-execution of the Bathroom Sealant Works on the amount certified in CF 31.

33.  Po Kwong may have given credit for $126,500 in respect of work done by Chinney.  Chinney may have failed to prove before Mr. Caldwell that it did a more substantial part of the Bathroom Sealant Works.  However, neither fact implies that CF 31 has properly valued (if at all) the Bathroom Sealant Works to the extent done (or not done) by Po Kwong.

34.  In respect of the Marble Slab Work, the Arbitrator was “not satisfied that [Chinney] has performed at its own expense this part of the Alleged Unexecuted Works”.  It cannot follow from this finding that Po Kwong has done all the Marble Slab Work, since Po Kwong expressly admits that at least some of that work was excluded or deleted.

35.  The Arbitrator, however, refused to consider the extent to which the Marble Slab Work was done by Po Kwong and whether any partial work done by Po Kwong was rightly valued by CF 31.  Again this was because the Arbitrator erroneously believed that CF 31 was “final and binding” on him.

36.  Finally, consider the miscellaneous claim arising from the tile change.

37.  The Arbitrator said this:-

“	156.	Again Miss Cruden submits that the pleadings place the burden of proof in respect of the change of marble under this head of counterclaim upon [Po Kwong].  She submits that [Po Kwong] has not discharged this burden and therefore the above amount [resulting from the change of tile] should be deducted in the final account.
	157.	I find that upon a proper construction of the Sub-Contract, the one to order a variation is the Architect, meaning that he is the one to decide whether the Sub-Contract sum should be adjusted as a result of any variation as defined in the Sub-Contract.
	158.	I have to disagree with Miss Cruden’s submission as I have decided that the Final Certificate is not to be opened up, reviewed or revised in this Arbitration and therefore any deduction from the amount due to the Claimant must be based on set-off against the amount due.
	159.	I am no satisfied, from the evidence, that [Chinney] has discharged the burden of showing a right of set-off.  I therefore hold that [Chinney] is not entitled to the said deduction.”

38.  The Arbitrator rejected Chinney’s submission that the treatment of the tile change by CF 31 should be examined.  He did so because he believed CF 31 could not be revisited.  He restricted his inquiry to whether Chinney had a case of set-off, as opposed to whether the tile work carried out by Po Kwong was properly valued.

39.  In light of the foregoing, I do not think Ms. Cheng is right that there is no point in remitting the CF 31 valuation of the Unexecuted Works and tile change claim to the Arbitrator.  The Arbitrator cannot without making more findings say that Chinney’s case on abatement and the tile change claim is unsustainable.

III. CONCLUSION

40.  The appeal is allowed.

41.  Po Kwong is estopped from denying that CF 31 can be opened up, reviewed or revised.  The Arbitrator ought to have proceeded on the basis that he had power to review CF 31.

42.  This matter is to be remitted to the Arbitrator.  There will be an Order directing the Arbitrator to consider to what extent (if at all) he should open up, review or revise CF 31 in light of the case pleaded in Chinney’s Amended Defence and Counterclaim §§9, 10, 11, 12 and 12A.  Those paragraphs deal with the Unexecuted Works and tile change.

43.  There will be an Order Nisi that Po Kwong pay Chinney’s costs of the appeal, such costs to be taxed if not agreed.

44.  There will be liberty to apply in respect of further or consequential directions.