PILECON (HONG KONG) LTD. v. MIGHTYTON LTD.

1991, No A5119

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H E A D N O T E

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    Order 14 application - stay of proceedings pending arbitration - correct approach - Peter Leung Construction Co, Ltd v. Tai Poon Co Ltd, CA 45 of 1985 unreported, followed - common law right of set-off as a defence - challenge of architect's certificates - over-valuation & over-payment as a defence

1991, No.A5119

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an appeal against a Master's decision giving summary judgment for the plaintiff upon an Order 14 application and refusing the defendant's application for a stay of proceedings pending arbitration.

The plaintiff's claims

2. The plaintiff was the main contractor and the defendant the employer in a project for the construction of a residential development at Red Hill, Site D, R.B.L.1050, Tai Tam Road, Hong Kong. They entered into a written contract dated 18th August 1988 with conditions which were contained in the standard form of "Agreement and Schedule of Conditions of Building Contract for use in Hong Kong, Private Edition 1986" (P.21-58 of the Bundle). The project was for a contract sum of HK$219 million. The relevant provisions in this contract were as follows:

                General Condition 15(1):

When in the opinion of the Architect the Works are practically completed, he shall forthwith issue a certificate to that effect and.Practical Completion of the Works shall be deemed for all the purposes of this Contract to have taken place on the day named in such certificate.

                General Condition 30(1):

At the Period of Interim Certificates named in the appendix to these Conditions the Architect shall issue a certificate stating the amount due to the Main Contractor from the Employer, and the Main Contractor shall, on presenting any such certificate to the Employer, be entitled to payment therefor within the Period for Honouring Certificates named in the appendix to these Conditions. Interim valuations shall be made whenever the Architect considers them to be necessary for the purpose of ascertaining the amount to be stated as due in an Interim Certificate.

General Condition 30(2):

The amount stated as due in an Interim Certificate shall, subject to any agreement between the parties as to stage payments, be the estimated value of the work properly executed and of the materials and goods delivered to or adjacent to the Works for use thereon up to and including a date not more than seven days before the date of the said certificate less any amount which may be retained by the Employer (as provided in sub-clause (3) of this condition) and less any instalments previously paid under this Condition. Provided that such certificate shall only include the value of the said materials and goods as and from such time as they are reasonably, properly and not prematurely brought to or placed adjacent to the Works and then only if adequately protected against weather or other casualties.

                General Condition 30(3):

The Employer may retain the percentage of the total value of the work, materials and goods referred to in sub-clauses (2) and (2)(A) of this Condition which is named in the appendix to these Conditions as Percentage of Certified Value Retained. Provided ...

General Condition 35(1):

Provided always that in case any dispute or difference shall arise between the Employer or the Architect on his behalf and the Main Contractor, either during the progress or after the completion or abandonment of the Works, as to the construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (including any matter or thing left by this Contract to the discretion of the Architect or the withholding by the Architect of any certificate to. which the Main Contractor may claim to be entitled or the measurement and valuation mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), then such dispute or difference shall be and is hereby referred to the arbitration and final decision of a person to be agreed between the parties, or, failing agreement within fourteen days after either party has given to the other a written request to concur in the appointment of an Arbitrator, a person to be appointed on the request of either party by the President or Vice-President for the time being of The Hong Kong Institute of Architects co-jointly with the Chairman or Vice-Chairman for the time being of the Royal Institution of Chartered Surveyors (Hong Kong Branch).

3. According to the appendix to the conditions, the Period of Interim Certificates was one month and the Period for Honouring Certificates was 14 days.

4. It is not disputed that the project was carried out by the plaintiff. On 3rd December 1990, the architect issued Interim Certificate No.RH-Sup(d)-26 for the sum of HKS12,195,321 (P.60A of the Bundle). This certificate was presented by the plaintiff to the defendant on 5th December 1990. The defendant failed to pay the sum certified within 14 days. Such sum is still outstanding and is now the subject matter of the plaintiff's first claim. On 28th February 1991, the architect issued the Certificate of Practical Completion certifying that the works were practically completed on 31st August 1990. Pursuant to this, on 14th March 1991, the architect further issued Interim Certificate No.RH-Sup(d)-27 for a sum of HK$5,576,500 (P.63 of the Bundle). This Interim Certificate was presented by the plaintiff to the defendant on 18th March 1991. The defendant failed to pay the sum certified within 14 days. The said sum is still outstanding and is the subject matter of the plaintiff's second claim.

5. The writ was issued on 11th July 1991. After the defendant had filed a Notice of Intention to Defend, the plaintiff, on 1st August 1991, made an application for summary judgment or alternatively interim payment. Subsequent to the issue of this summons but before the return date on 12th September 1991, in a letter dated 12th August 1991, the defendant's solicitors wrote to the plaintiff's solicitors saying that there were disputes and differences between the parties and indicating that the defendant was prepared to do all things necessary to refer the matter to arbitration pursuant to an arbitration clause provided in the contract between the parties. On 28th August 1991, the defendant took out a summons applying for a stay of proceedings pending arbitration_. The plaintiff's and defendant's applications were heard together before the learned Master.

The defendant's case

6. In the affirmations filed by the defendant, it was alleged by the defendant (and it is apparently not disputed by the plaintiff) that at an early stage of the project there were disputes between the parties regarding the plaintiff's performance in the works and the delay in completion. Consequent upon such disputes, the parties entered into a Settlement Agreement on 23rd November 1989 (P.94-98 of the Bundle) whereby the parties agreed, inter alia, that the new date of completion of the works was to be 15th June 1990 and that if there was any delay, the plaintiff was to pay to the defendant liquidated and ascertained damages at the rate of $150,000 per day. The new date of completion was not met. It was admitted that on 28th February 1991, the architect had issued a Certificate of Practical Completion certifying that the works were practically completed on 31st August 1990. However, the defendant alleged that well after that date, a considerable amount of work had still to be carried out by the plaintiff and that there were defective as well as outstanding works. It was also pointed out that according to Clause 15 of the contract, the Certificate of Practical Completion was to be issued forthwith whereas in this case it was issued 6 months after the alleged date of practical completion. It was the defendant's case that it had valid reasons and did intend to challenge the Certificate of Practical Completion. If the Certificate could be successfully challenged, there would be no basis for Interim Certificate No.27. It was also alleged that the plaintiff had not made good the defects appearing in the houses constructed in this project resulting in various complaints from individual owners and their solicitors. These defects had to be remedied by other contractors engaged by the defendant and the plaintiff should be liable to pay for these remedial works. If there was a delay in completion by the plaintiff, the liquidated and ascertained damages payable by the plaintiff to the defendant for the period between 31st August 1990 and 28th February 1991 would amount to $22,950,000 under the terms of the Settlement Agreement. It was therefore alleged that the defendant had a claim which might exceed the plaintiff's present claims and the defendant was entitled to a set-off even if it were liable to the plaintiff.

7. The defendant further alleged that the works carried out by the plaintiff had been seriously overvalued. The original contract sum for the whole project was $219 million. Prior to the issue of Interim Certificate No. 26, the amount certified and paid to the plaintiff was $296,806,421.50. According to the defendant, a substantial portion of the works was not reasonably estimated and the plaintiff had already received more than it was entitled to receive and was not entitled to be paid any more under Interim Certificates No. 26 or 27. Because of this concern, the defendant had commissioned the services of D.G. Jones & Partners (H.K.) Ltd. to examine and remeasure all the Architect's Instructions totalling approximately 700 in number and to produce a Final Account based on the Architect's Instructions and Bills of Quantities. According to this firm of consultants, the task of remeasurments would be completed in less than 5 months. It was subsequently pointed out that in fact this firm was engaged not by the defendant but by another company which was apparently a joint-venture partner of the defendant in this project.

8. The defendant alleged that the plaintiff was also making other claims against the defendant in connection with the project apart from these two Certificates. These other claims were disputed by the defendant and it would be more appropriate to refer the plaintiff's present claims together with the other claims to arbitration.

9. All these allegations were denied by Mr YEONG Mun-kien of the plaintiff in his second affirmation. He pointed out that the defendant had accepted 31st August 1990 as the date of practical completion, that the houses had been handed over to the defendant and subsequently sold to individual owners and that the various defects mentioned by the defendant had all been rectified.

The further affirmations

10. In the present appeal, the defendant sought to rely on 2 further affirmations exhibiting an Interim Report and a draft final account on the remeasurements of the works made by D.G. Jones & Partners. The plaintiff objected to these affirmations and counsel referred me to the case of Core Resources (Far East) Ltd. v. Sky Finest Ltd., HCA No. 6920 of 1991, unreported, in which Kaplan, J. had, on good grounds, refused to accept further, affirmations at the hearing of an Order 14 appeal. With respect to counsel, I think the facts in that case were entirely different from those in the present one and I would exercise my discretion in allowing the defendant to rely on the fresh evidence.

11. In the Interim Report, D.G. Jones & Partners estimated that the final figure would be $288,354,000. If that figure was accepted, it would mean that the plaintiff had already been overpaid. Mr Yeong of the plaintiff filed a 3rd affirmation making various comments on the Interim Report and said that the consultant had based on insufficient information and given a wrong assessment of the works.

12. Extensive and further submissions on the facts and law involved were presented  to me by counsel for both parties in this appeal by way of re-hearing which lasted for 21/2 days. I am indebted to them for their assistance.

The approach to these applications

13. Order 14 applications and stay of proceedings applications are usually heard together. Many describe them as the 2 sides of the same coin. In a way, this is correct but not entirely. On the one hand, if the court thinks that there is a bona fide dispute and decides to stay the proceedings, judgment will not be entered against the defendant. On the other hand, if the court takes the view that there is no defence and is prepared to give summary judgment, it will refuse the stay application. However, in some cases, even if the court, for some reasons, refuses to stay the proceedings, it may not necessarily give summary judgment if the defendant can raise some triable issues. At the hearing of an Order 14 application and a stay of proceedings application, three questions usually arise for consideration. First, does the plaintiff's claim fall with the arbitration agreement? If it does not, the claim must be pursued by litigation. Second, if it does, should the court stay the proceedings pending arbitration? Or third, should the court give summary judgment against the defendant?

14. The first question involves a construction of the provisions of the arbitration agreement made between the parties and a determination of whether the case falls within its ambit. Since arbitration agreements very often require that there must be a dispute or a difference between the parties, the court is usually asked to decide whether there is in fact any dispute or difference and it does so by considering all the facts of the case

15. The second question involves not only a consideration of the existence and nature of the dispute or difference between the parties, but also an exercise of the discretion of the court.

16. The third question involves a determination by the court as to whether, to use the wordings of 0.14, r.3(1), there is an issue or question in dispute which ought to be tried. Again, this is a question which the court has to decide after considering all the facts of the case.

17. It is therefore clear that in dealing with these three questions, there is bound to be some overlapping in the issues or matters which fall to be considered and decided. These issues or matters may relate to a point of law or a dispute of facts. If "all that is involved is the determination of a point of law and there are no problems with the facts it is in order for a judge or master to resolve the question of law in 0.]4 proceedings", said Mayo, J. in Nin Hing Electronic Engineering Ltd. v. Aoki Corporation, [1988) 40 BLR 110, at 111 following the oft cited obiter of Kerr, L.J. in Sethia Ltd. v. State Trading Corporation, [1986] 1 Lloyd's LR 31 at 33 :-

"If a point of law is raised on behalf of the defendants, which the court feels able to consider without reference to contested facts simply on the submissions of the parties, then it is now settled that in applications for summary judgment under 0.14 the court will do so in order to see whether there is any substance in the proposed defence. If it concludes that, although arguable, the point is bad, then it will give judgment for the plaintiff. This course will also be adopted where there is a counter-application for a stay of the action. If the contract between the parties contains an arbitration clause to which s.1 of the 1975 Act applies, then the court is not thereby precluded from considering whether there is any arguable defence to the plaintiffs' claim. If the court concludes that the plaintiff is clearly right in law, then it will still give judgment for the plaintiff. In the same breath, as it were, it will then have decided that in reality there was not in fact any dispute between the parties. If the court is satisfied that the plaintiffs are clearly right in law, and that the defendants have no arguable defence, then it will not avail the defendants to have raised a point of law which the court can see is in fact bad. In those circumstances, the defendants cannot be heard to say that there was a dispute to be referred to arbitration. But if the court concludes that the plaintiffs are not clearly entitled to judgment because the case raises problems which should be argued and considered fully, then it will give leave to defend, and it is therefore then bound to refer the matter to arbitration under s.1 of the 1975 Act."

18. Very often, it is not merely a point of law which falls to be decided and the court will have to engage in a consideration of the facts. But be it a point of law or a dispute of facts, I think the same criterion would be adopted: whether there are any genuine disputes and arguable defence or triable issues?

19. The correct approach to be followed in these types of applications can be illustrated in the case of Peter Leung Construction Co. Ltd. v. Tai Poon Co. Ltd., CA 45 of 1985, unreported. There, the Court of Appeal had to deal with an arbitration clause which was in the same terms as the one relied on in the present case. That clause was in the following terms:-

"Provided always that in case any dispute or difference shall arise between the Employer or the Architect on his behalf and the Main Contractor . then such dispute or difference shall be and is hereby referred to the arbitration and final decision of a person to be agreed between the parties ..."

20. The Court of Appeal held that only if there was a dispute or difference in existence on the date of the issue of the writ, could a stay be granted under s.6 of the Arbitration Ordinance. Since there was no evidence in that case that the issues raised by the employer had been brought to the attention of the main contractor prior to the issue of the writ, the application for, a stay of proceedings pending arbitration was refused. The Court of Appeal in that case first dealt with the question of whether the case fell within the arbitration agreement and decided that it did not. That being the case, it was therefore not necessary to deal with the discretion of the court to grant a stay of proceedings. The Court of Appeal then continued to consider whether there were triable issues under the 0.14 application. I shall adopt the same approach in the present case.

21. Counsel for the defendant, in his very able submissions, cast doubts on the decision of the Court of Appeal in the Peter Leung case. He pointed out that the Court of Appeal cited and appeared to have relied on a passage in Mustill and Boyd, The Law and Practice of Commercial Arbitration in England, 1st edition, on P.91 which stated as follows:-

"Where the defendant has not actively admitted the claim, but has so far failed to deny it, it would seem that there is no 'dispute' then in existence, and the claimant not only can but must prosecute his claim by action, rather than by arbitration. Moreover, if he really believes that the defendant is saying nothing because he has nothing to say, he can apply for summary judgment."

22. Counsel said that in the 2nd edition, the learned authors seemed to express the opposite view at P.122 to 123:-

"Where the defendant has not actively admitted the claim, but has so far failed to deny it, this does not mean that there is no 'dispute' then in existence, and the claimant can prosecute his claim by arbitration, rather than by action. However, if he really believes that the defendant is saying nothing because he has nothing to say, he can bring an action and apply for summary judgment." (The difference is underlined.)

23. Counsel submitted that so long as there was an issue which could be disputable, it was not necessary that the dispute must have been in existence at the time of the issue of the writ before the action could be stayed and the matter referred to arbitration. He relied on the case of R.M. Douglas Construction y. Bass Leisure Ltd., [1991] Construction Law Journal 114. There His Honour Judge Bowsher, Q.C., acting as an Official Referee, said at P.115:-

"In Thyssen Engineering, I wrote the following:

`It is necessary to decide what is meant by the word 'dispute' in the 1975 Act. In some authorities, and certainly in everyday practice under the 1950 Act it has been assumed that the application for a stay and the application for summary judgment are opposite sides of the same coin. That is, if the plaintiff makes out a case for summary judgment there should not be a stay and if he does not make out a case for summary judgment there should be a stay. By a vigorous application of logic, Saville, J. in Hayter v. Nelson & Home Insurance 22nd March, 1990, has demonstrated that that assumption cannot be correct. By the application of the same. logic he demonstrated that one could only make sense of s.1 of the 1975 Act if one interprets the word 'dispute' in the 1975 Act as having a meaning different from its normal meaning in most Arbitration Agreements. He held that the words 'there is not in fact any dispute' mean 'there is not in fact anything disputable'.

Having now read a transcript of Saville, J.'s judgment, I can say that I agree with the whole of it and I shall not try to summarise the argument.

I ask myself, 'Is there in fact anything disputable?' It 'yet remains to consider the meaning in the present context of the word, 'disputable'. It is not easy, and not desirable to try to achieve dictionary definitions of words such as 'disputable' in this context. I take the view that what is 'disputable' means something different from the sort of material for which a court would look as the basis for granting leave to defend on an application for summary judgment. In the ordinary course of things, summary judgment or leave to defend is ordered byway of resolution of a dispute, and so the issue is disputable although at the end of a hearing which ought to be short, the court is left in no doubt that the matter should be resolved in one way or another. I agree with the statement of Saville, J. in Havter v. Nelson that, 'only in the simpliest and clearest cases, that is where it is readily and immediately demonstrable that the respondent has no good grounds at all for disputing the claim, should that party be deprived on his contractual right to arbitrate.'"

24. Counsel also relied on certain comments made by Balcombe, LJ in the case of Croudace v. London Borough of Lambeth, (1986) 33 BLR 20. The learned judge in that case dealt with s.4 of the Arbitration Act in 1950 (which is similar to s.6 of our Arbitration Ordinance) and made the following remarks:-

"Mr Thomas, for Croudace, submitted that as Lambeth never raised the bill 1/12A point until long after the proceedings had commenced, they could not then have been ready and willing to do all things necessary to the proper conduct of the arbitration, since there was at that time no dispute to go to arbitration. He submitted that it is implicit in s.4 that there must be a dispute in existence at the time when the proceedings were commenced. I do not accept those submissions. Not merely is there nothing to justify the implication for which Mr Thomas contends; to make such an implication would encourage every party to an agreement which contained an arbitration clause and who wanted to go to court rather than to arbitration to rush to court at an early stage before a dispute had fully developed and then maintained that s.4 had no application. That cannot be right. In any event in the present case there was a dispute in existence at the time when proceedings were commenced, viz, Lambeth's failure to take steps to instruct the ascertainment of Croudace's claim."

25. Counsel submitted that in the light of the change in attitude in Mustill and Boyd and the comments in these authorities, the Peter Leung case should not be followed.

26. With respect, I do not agree. The Court of Appeal in the Peter Leung case was only construing the arbitration clause in the light of s.6 of the Arbitration Ordinance. That section provides:-

"If any party to an arbitration agreement, or any person claiming through or under him, commences any legal proceedings in any court against any other party to the agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to those legal proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to that court to stay the proceedings, ..."

27. Before a party to the legal proceedings has the right to apply for (and the court the discretion to order) a stay of the proceedings, the subject matter of the proceedings must be in respect of any matter which the parties have agreed to be referred to arbitration. According to the arbitration clause in the Peter Leung case, in the event any dispute or difference shall arise between the parties, then such dispute or difference shall be and is (hereby) referred to arbitration. It follows that as soon as a dispute arises, it is a matter agreed to be referred to arbitration. If there is no dispute at the commencement of the proceedings, there is still nothing which has been agreed to be referred to arbitration and the subject matter of the proceedings is not yet a matter which the parties have agreed to be referred to arbitration. Hence, s.6 of the Arbitration Ordinance is not applicable and neither party is entitled to apply for a stay of the proceedings. If the subject matter of the litigation is an existing dispute, then it is a matter which, by virtue of the arbitration clause, the parties have already agreed to be referred to arbitration. It is only in such situation that a party can invoke s.6 of the Arbitration Ordinance and apply for a stay. This, in my humble opinion, is the point which was decided by the Court of Appeal in the Peter Leung case. And this, with respect, is the correct construction of the arbitration clause in the light of s.6 of the Ordinance.

28. The Court of Appeal did refer to the said passage in the 1st edition of Mustill and Boyd which was subsequently changed in its 2nd edition. However, that passage was cited when the Court of Appeal was making comments on the facts of that case, namely, that the Interim Certificates there were payable upon presentation, that the works had concluded long before the issue of the certificates and there was no reservation held by the employer in respect of the sum contained in the certificates. That passage was not cited in support of the construction of the relevant arbitration clause and s.6 of the Arbitration Ordinance. In my opinion, the change in that passage does not affect the construction of those provisions. Having read the passage in the 2nd edition, I do not think that the learned authors intend to take a view which is opposite to what they had expressed in the previous edition. They are now merely adopting a more flexible approach because the fact that a party does not admit or deny liability does not mean that there is no dispute between the parties. That passage must be read as a whole and considered in the light of the facts and relevant arbitration clause in each individual case.

29. It is not clear whether Judge Bowsher in the Douglas Construction case was dealing with a similar situation as that in the Peter Leung case and I am not sure that his remarks would be equally applicable in the present circumstances. The learned judge had attached a very wide meaning to "disputable" and used it to describe "something different from the sort of material for which a court would look as the basis for granting leave to defend." According to him, a point is "disputable" if it can be presented for argument although at the end of the hearing, the court may find it to be a totally bad point. With such view, I have some reservations. As to Balcombe L.J.'s comments in the Croudace case, they were clearly obiter and made only in connection with the equivalent of s.6 of our Arbitration Ordinance.

30. The arbitration clause in the present case is the same as that in the Peter Leung case. Not only do I agree with, I am indeed bound by, the decision of the Court of Appeal in that case. The parties here have agreed that if a dispute or difference arises between them, the same shall be referred to arbitration. Hence, it is only when a dispute or difference had arisen at the time of the issue of the writ that the defendant can invoke s.6 of the Arbitration Ordinance and apply for a stay of the proceedings pending the result of arbitration.

Whether there should be a stay

31. Prior to November 1986, it was true that the parties did have some disputes with regard to the plaintiff's performance in the works and the delay in completion. These disputes had been resolved by the parties entering into the Settlement Agreement signed on 23rd November 1989. In other words, instead of referring these disputes to arbitration, the parties had settled them. According to Clauses 5 and 6 of the Settlement Agreement, each party had unconditionally abandoned, withdrawn and/or waived all its claims, rights and remedies, if any, against the other. In these circumstances, I think that the parties can no longer refer whatever disputes they had prior to this Settlement Agreement to arbitration now. It remains to be considered whether any disputes other than those which had been settled had arisen at the time of the issue of the writ.

32. Interim Certificate No. 26, which is the subject matter of the plaintiff's first claim, was presented to the defendant on 5th December 1990 and Interim Certificate No. 27 on 18th March 1991. Three reminders were sent by the plaintiff to the defendant on 4th March 1991, 11th April 1991 and 10th May 1991 (P.74, 70 and 60 of the Bundle). There was no reply from the defendant to any of these certificates or letters. The Certificate of Practical Completion was issued on 28th February 1991. Again, no objection was raised or notified by the defendant to the plaintiff until the present applications. With regard to the alleged costs overrun, the defendant did raise the matter with the architect in a letter dated 19th March 1991. One of the defendant's partners in this project also raised this subject in another letter dated 8th April 1991. By a letter dated 10th July 1991, another partner of the defendant in this project instructed D.G. Jones & Partners to do a remeasurement of the works. I shall deal with these letters again at a latter stage. But it appears that all these letters were never sent or copied to the plaintiff. Nor is there any evidence before me that the plaintiff had ever been alerted to the question of costs overrun. The first letter from the defendant to the plaintiff regarding any possible disputes between the parties was a letter dated 12th August 1991 from the defendant's solicitors to the plaintiff's solicitors (P.76 of the Bundle). The second paragraph of that letter said:-

"As you are doubtless aware disputes and differences exist between our respective clients concerning, inter alia, the purported Certificates relied upon by your client in the above proceedings and the claim advanced in connection therewith, and in relation to your client's liability to our client in respect of Liquidated and Ascertained Damages and other items due under the Contract or at common law as a result of incomplete and/or defective work."

33. This letter which was sent about one month after the issue of the writ and 11 days after the plaintiff's application for summary judgment was the first notification by the defendant to the plaintiff of the "disputes" between the parties and the defendant's willingness "to do all things necessary to the proper conduct of the arbitration". From the evidence before me, I cannot help but conclude that there was no existing dispute at the time of the issue of the writ. In these circumstances, I take the view the case does not fall within the relevant arbitration clause and the defendant cannot invoke s.6 of the Arbitration Ordinance and apply for a stay of proceedings. The question of the Court's discretion does not arise. The learned Master was right in refusing a stay.

The Date of Practical Completion

34. The next question is : has the defendant raised any bona fide disputes or triable issues?

35. One of the two main issues raised by the defendant in resisting the 0.14 application relates to the date of practical completion of the project. According to the Main Contract as varied by the Settlement Agreement, the date of completion was to be 15th June 1990. If there was any delay in completion beyond that date, the plaintiff was to pay to the defendant liquidated and ascertained damages at a rate up to a maximum of HK$150,000 per day until the Certificate of Practical Completion for the whole of the works had been issued. It was the defendant's case that although the architect had issued a Certificate of Practical Completion on 28th February 1991 certifying that the works had been practically completed on 31st August 1990, there was as at that date still a substantial part of the works left to be done and there were various defects in the works to be rectified. It was pointed out that according to clause 15 of the Main Contract, the architect was to issue the Certificate of Practical Completion "forthwith". Yet the certificate in question was issued only 6 months after the alleged date of completion. Counsel for the defendant argued that the architect's certificate was not sacrosanct and could be reviewed. For this, he relied on the case of Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. [1984] QB 644. The defendant further contended that the actual date of practical completion should be 28th February 1991. If that was the case, then the plaintiff was liable to pay liquidated and ascertained damages for the delay from 1st September 1990 to 28th February 1991, which damages amounted to about $22 million. This, coupled with the defendant's claim for damages for defective work, would set off the plainiff's claims on the Interim Certificates. Counsel submitted that the right to set-off against certified sums was expressly upheld by the House of Lords in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] AC 689.

36. Counsel for the plaintiff submitted that this was not a bona fide defence. The architect was the defendant's own agent. The Interim certificates issued by the architect could not be challenged and must be honoured. I was referred to the case of Killby & Gavford Ltd. v. Selincourt Ltd. [1973] 3 BLR 104. Counsel said that the defendant as employer was obliged to pay the amount stated despite a possible error in the architect's Interim Certificates, and cited Lubenham Fidelities & Investment Co. Ltd. v. South Pembrokeshire District Council [1986) 33 BLR 39 in support. It was also pointed out that the defendant never raised any objection to these certificates prior to the commencement of these proceedings despite various reminders. On the contrary, counsel argued, the defendant had admitted its liability to pay. That was because in a letter dated lst May 1991 from the plaintiff to the defendant (P.66 of the Bundle), the plaintiff referred to the defendant's "verbal promises in several meetings (made by Mr Patrick Lee and Mr Kan Lee of (the defendant's) project management team) to resolve the overdue payments ...", but there was nothing in all the defendant's affirmations which denied these alleged verbal promises. My attention was also drawn to an insurance policy issued on 31st August 1990 to the defendant (P.252-3 of the Bundle) covering all risks on the buildings and substructure in the project for the period from 1st September 1990 to 1st December 1990. It was submitted that this was an indication that the defendant had considered that as from 1st September 1990, it had assumed the risks in the project.

37. I accept that the architect in a building project is usually the agent of the employer, and in this case the Interim Certificates were issued by the architect as agent for the defendant. However, this does not mean that the Interim Certificates can never be challenged. The architect is obviously acting in a dual capacity : an agent of the employer as well as a professional. As the learned authors of Keating on Building Contracts, 5th edition, say at P.114:-

"The employer and the contractor make their contract on the understanding that in all matters where the architect has to apply his professional skill he will act in a fair and unbiased manner in applying the terms of the contract. Such matters include not only certificates for payment and for satisfaction with the works but many instances where the architect has to form a professional opinion upon matters which would affect the amount paid to (or to be deducted from) the contractor."

38. Because the architect is under a duty to act fairly and in a professional manner, I should think that there must be cases in which the certificates issued by him can be challenged even by his own employer. Whether the architect's certificate can be challenged of course depends on the circumstances of each case including whether the challenge is indeed bona fide and whether having considered all the terms of the contract the parties can be taken to have agreed to the effect that the employer should pay first and arbitrate later. This is of course a matter of construction of the relevant terms in the contract. Hence, for example, in the Lubenham Fidelities case, supra, upon the true construction of the relevant terms of the contract, it was held that where in a building contract it was agreed that the employer's architect would issue Interim Certificates stating the amount due to the contractor from the employer and that the contractor would be entitled to a payment therefor within a specified period, the employer was bound to pay the amount stated in the certificate even though the amount was wrong and the certificate contained patent or latent errors. In the present case, on the one hand, there is nothing in the provisions of the Main Contract saying that the certificates issued by the architect cannot be challenged. On the other hand', Clause 30(1) and Clause 30(4)(b) do provide that the Main Contractor (the plaintiff) shall, on presenting any certificate to the employer (the defendant), be entitled to payment of the sum certified within the Period for Honouring Certificate which is 14 days. In my view, while the defendant has a right to challenge the architect's certificates, it does appear from those clauses that the plaintiff may well be entitled to payment first under Interim Certificates Nos. 26 and 27 before these certificates can be challenged. The right of set-off is, however, a separate matter. If it is evident that the plaintiff is also liable to the defendant, I should think that at least for the purpose of litigation, notwithstanding the plaintiff's entitlement, the defendant can invoke his common law right of set-off in resisting an 0.14 application (see the Gilbert-Ash case, supra). However, the defendant must make out a genuine case of set-off.

39. I accept that if the works were indeed not practically completed on 31st August 1990, then pursuant to the terms of the Settlement Agreement, the plaintiff is also liable to pay liquidated and ascertained damages to the defendant. I also accept that if there is clear evidence that the Certificate of Practical Completion had been wrongly issued and that the actual date of practical completion was much later than 31 August 1990, the defendant is entitled to a Gilbert-Ash set-off. The difficulty that faces the defendant is: what is the correct date of  practical completion and what is the amount of liquidated and ascertained damages which can be used as a set-off? The defendant alleged that the date of practical completion was not 31st August 1990 but 28th February 1991. There is no evidence before me as to how this latter date was arrived at Equally, there is no evidence before me as to why the architect did not issue the Certificate of Practical completion forthwith upon the works having been practically completed. However, what is clear to me is this. On 3rd December 1990, the architect purported to issue a draft Certificate of Practical Completion certifying the date of practical completion to be 27th July 1990 (P.212-3 of the Bundle). This proposed date of practical completion was not acceptable to the defendant (P.214 of the Bundle). Subsequently, the architect wrote to the defendant on 15th March 1991 saying:-

"After a careful study of their claim, justifications and the critical path of the construction programme, we have short-listed the following Architect's Instructions for which we consider necessary to grant appropriate extension of time to Pilecon (the plaintiff):-

... (then setting out four Architects Instructions giving details and the assessed extensions of time)

From our analysis of the critical path of the programme, and the time required for the above additional works, we conclude that it is fair to grant an extension of time to Pilecon (the plaintiff) until 31/8/90 for completion of the project since this is the time required for completion of the last critical event, i.e. the drainage alteration works under the above item 4. We wish to mention that other A.I.s were issued to Pilecon (the plaintiff) as late as Oct. 90 for additional improvement works to the houses. But since these works did not affect the handing over of the houses to individual house owners, and we have certifing (sic) practical completion on 31/8/90, we are therefore not granting any extension of time for additional works beyond the P.C. date.

We should be most grateful if you would kindly let us know as soon as possible if you do not agree with the above recommendation."

(P.263 - 265 of the Bundle).

40. In response to that letter, the defendant wrote to the architect on 20th March 1991 (at P.81 of the Bundle) as follows:-

"With reference to your letter dated 15th March, 1991 regarding the captioned subject, we would like to let you know that your recommendation for the extension of time for super structural works to 31st August, 1990 is acceptable to us."

41. By this letter, the defendant clearly indicated that it would accept the architect's suggestion that the date of practical completion should be 31st August, 1992. By that time, i.e. 20th March 1991, it seems that the defendant had already received the architect's Certificate of Practical Completion dated 28th February 1991 (at P.64 of the Bundle). Following the defendant's said letter of "acceptance", the architect on the same day issued a Notification of Extension of Time which said, among other things, that "the revised Date(s) for Completion are hereby confirmed as 31st August, 1990." (See P.80 of the Bundle).

42. In arguing that the date of practical completion was not 31st August 1990, the defendant purported to rely on a bundle of correspondence prior to, contemporaneous with and after that date. This was exhibited as "THT-2" in Mr TAM Hing-tat's 1st affirmation. These letters were mostly exchanges between the plaintiff and his sub-contractors regarding the conditions of and/or defects in the works. Having looked through the bundle of correspondence, I do not consider them to be of very much help in resolving this issue. However, there were some 6 letters which might be of interest. They were letters written by the plaintiff to its sub-contractors on various dates in September, October and November 1990, that is, after the certified date of practical completion (at P.109, 115, 118, 151, 159 and 160 of the Bundle). They were complaint letters to the sub-contractors urging them to rectify the works in order not to jeopardise or delay the "handing over" of the units to the employer or developer or purchaser. On the face of them, these letters might be interpreted to suggest that the construction works had not been fully completed on the dates on which these letters were written, i.e., between 8th September 1990 to 22nd November 1990. There however, might be other reasons for the plaintiff in writing the letters in this way. And I do not think they are unequivocal.

43. From the evidence adduced before me, it seems that. after an initial objection, the defendant had, in March 1991, agreed to grant extensions of time to the plaintiff up to 31st August 1990 and had agreed to the architect's letter that that date should be the date of practical completion. While there might be evidence suggesting that some works still remained to be carried out it was not clear whether they were merely rectification works or uncompleted works. What is clear however is firstly that after the defendant had agreed to the architect's proposed date of practical completion, the defendant had not raised any query relating to that until the present proceedings. I note that the defendant did not in any of its affirmations deal with the plaintiff's allegation (in the form of an exhibited letter) that the defendant's officers had made verbal promises to pay. However, I do not think that in the circumstances of this case, the absence of such a denial can be regarded as fatal. But the fact remains that the defendant had not since March, 1991, formally disputed the Certificate of Practical completion until these proceedings. Secondly, at a meeting of the plaintiff's representatives, the defendant's representatives and the architect held on 4th July 1990, the parties discussed the procedures to be followed for the handing over of the site by the plaintiff as contractor to the defendant as employer. If the project had not been near completion in July 1990, the parties would not have been contemplating a handing over. Thirdly, the insurance policy to which I have referred earlier was to commence with effect from 1st September 1990. This is a clear indication that the defendant had accepted the risks in respect of the works and the superstructures on the site. If the site had not been handed over, there was no reason why the defendant would see fit to cover those risks by taking up an insurance policy. It follows that it is likely that the works had been completed around that time. Finally, I note that some of the houses on the site were sold in September 1990. That is another indication that the project was likely to have been completed around August and September 1990. In these circumstances, I have some doubts whether the defendant's defence that the works had not been practically completed on 31st August 1990 but on 28th February 1991 was raised in good faith. As it now stands, I do not think the defendant has made out a claim for liquidated and ascertained damages for delay in completion as a set-off against the plaintiff's claims on the Interim Certificates.

The over-valuation and overpayment

44. The second defence raised by the defendant is that the project had been grossly over-valued. The defendant alleged that prior to the issue of Interim Certificate No. 26, the plaintiff had already received a total of over HK$296 million. There were reasons to believe that the whole project was worth considerably less than that. If the plaintiff had already been over-paid, then it should not be entitled to the sums claimed under Interim Certificates Nos. 26 and 27. That was the reason why the defendant or its associates had engaged the services of D.G. Jones & Partners (H.K.) Ltd. to remeasure the works and to examine the final account. At the hearing before the learned Master, a partner of that firm deposed in an affidavit to the effect that they were then conducting such remeasurements which would take several months. There was then little or nothing to show that there might have been an over-valuation. At the hearing before me, the defendant had filed further affirmations exhibiting an Interim Report prepared by D.G. Jones & Partners. The draft final account prepared by that firm showed a figure of about HK$288 million which was some HK$8.4 million less than that already received by the plaintiff. That being the case, the defendant submitted that the plaintiff should not be entitled to be paid anything more pending clarification and/or confirmation of the final accounts.

45. Mr Yeong of the plaintiff made an affirmation in reply attacking the defendant's Interim Report and draft final account as having been greatly understated and inaccurate. He pointed out that the estimates made by D.G. Jones & Partners were based on insufficient information and that some of the figures were merely based on previous assessments made by the parties' Quantity Surveyors, Davis, Langdon and Seah. Counsel for the plaintiff in a comprehensive analysis submitted that there was absolutely no basis for the allegation of over-payment and that the plaintiff had in fact been underpaid by over HK$46 million.

46. I have to decide on the evidence and in particular the fresh affirmations whether this defence has been raised in good faith and whether it has any substance. I notice that as early as 19th March 1991, the defendant had written to the architect about his suspicion of a costs overrun. (See P.218-219 of the Bundle.) On 8th April 1991, the defendant wrote again to the Surveyors, Langdon, Every & Seah Ltd. raising the same subject matter (at P.220-222 of the Bundle). It was not clear what happened after that but on 10th July 1991, the defendant's associates or partners in this joint venture wrote a letter to D.G. Jones & Partners instructing them to, inter alia, make remeasurements and to prepare a final account (P.224-225 of the Bundle). This letter of instruction was written before the issue of the present writ. Furthermore, the whole project was originally for a contract sum of HK$219 million. Up to but not including Interim Certificate No. 26, the plaintiff had already received the sum of over HK$296 million. I am quite aware that additional works were carried out a result of some 700 Architect's Instructions. There must therefore inevitably be an increase in the final contract sum. According to a Preliminary Statement of Final Account sent by the parties' Surveyors, Langdon, Every & Seah Ltd., to the defendant on or about 26th April 1991, the Surveyors were of the opinion that the anticipated final contract sum was to be over HK$342 million. Yet, in a Statement of Final Account Claim presented by the plaintiff to the defendant on 25th June 1991, the total sum claimed was over HK$386 million. If this figure was correct, there would have been a costs overrun of about 76% of the original contract sum. In these circumstances, it is not surprising and I do accept that the defendant was genuinely concerned about the question of over-valuation. I take the view that this defence is not taken without bona fide.

47. I have also considered carefully the draft Final Account and the Interim Report prepared by D.G. Jones & Partners in the light of the remarks made by Mr Yeong on behalf of the plaintiff. I do not think that it can be disputed that some of the estimates were based on insufficient information. In Item (1) of the Interim Report, about one quarter of the total value of bills 3 and 4 had not been remeasured at all due to a lack of information. However, for the unmeasured items, the original B.Q. figures had been adopted. In other words for these items, the plaintiff's figures were accepted for the time being. With regard to Items (2) and (3), it is also true that the figures were estimation only due to insufficient information available to D.G. Jones & Partners. Nevertheless, the original assessments made by Langdon, Every & Seah had been adopted. The same applies to Items (6) and (7) which were adopted from the original assessed figures given by the Surveyors. In other words, for those items for which the defendant had not obtained sufficient information, the defendant had accepted the figures given either by the plaintiff or the Surveyors. If the defendant's allegations were indeed correct and there was an over-valuation, I do not think that the acceptance of the plaintiff's or the original figures in the Interim Report would affect the defendant's case. This is because it can be argued that even accepting the plaintiff's or original figures (which the defendant alleged were grossly inflated), the final figure was still considerably less than the amount already received by the plaintiff. The only item in the defendant's Interim Report was Item (5). D.G. Jones & Partners described the item as "allowance for A.I.s of insufficient information and/or with possible double handling works". That was rounded off to HK$25 million. There is no evidence or explanation before me in support of this estimate. At the moment, this item remains rather dubious. It is not an insignificant sum. This and the other uncertainties may, in my view, render the defendant's final figure of HK$288 million rather unreliable. The defence that the plaintiff had already been overpaid must therefore be looked at with great caution.

Conclusion

48. At the end of the day, from all the evidence I have considered, I had come to the conclusion that I cannot say that this defence had not been raised without bona fide although I do not think it was particularly strong. My attention was drawn by counsel for the defendant to the case of C.M. Pillings & Co. Ltd. v. Kent Investments Ltd. [1985] 30 BLR 84 where there was a similarly huge costs overrun of over 100%. The Court of Appeal there held that there was a bona fide dispute that the certificate in question might have been over-valued. Each case must of course be decided on its own facts. From the evidence presented to me, I take the view that while there are genuine reasons to cause concern to the defendant that there was an over-valuation and some indications that the plaintiff might have been overpaid, the materials adduced by the defendant in the Interim Report although not without substance are not that satisfactory. While I am prepared very nearly to give judgment for the plaintiff, I do not think I should deprive the defendant of the opportunity to raise this defence.

49. In the circumstances, I would allow the appeal in part by setting aside the summary judgment and grant leave to the defendant to defend on condition that the defendant pays into court the full amount of the plaintiff's claims. I shall hear the parties on the further directions to be given and on the question of costs.