XCHRX CHUN WO BUILDING CONSTRUCTION LTD. v. TAI FONG ENGINEERING CO. LTD.

HCCT71/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 71 OF 1998

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J U D G M E N T

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1. By this summons the plaintiff seeks a determination of a question of law and consequent upon that determination, an order for summary judgment pursuant to O.14A, r.1 of the Rules of the High Court. The question of law is framed in the schedule to the summons as follows :

"1.	On its proper construction and as a matter of law, was the letter from the Plaintiff to the Defendant dated 2 February 1998 a 'decision' pursuant to clause 19 of the Sub-Contract between the Plaintiff and the Defendant?
2.	What was proper construction of the letter?
3.	Is the clause 19 decision legally and contractually binding upon the Defendant?"

2. The relevant part of clause 19 is sub-paragraph (a) :

"19. a)

If there is any dispute between the Contractor and the Subcontractor in relation to the Subcontract, the Contractor must make a decision in writing on the dispute in accordance with this clause. The decision shall be legally and contractually binding and must be observed by the Subcontractor unless the Subcontractor proposes to the Contractor, within 28 days of making the decision, that the dispute be referred to an arbitrator who shall conduct arbitration and make a final decision in accordance with the Arbitration Ordinance or any revised version of the rules currently in force. Any such referral shall be regarded as an acceptance of the arbitration stated in this clause."

3. It is necessary also to set out the terms of the letter of 2 February 1998, the material parts of which are :

"Since you fail to pay us the sum of HK$3,054,714.09 as demanded by our letter ref. CW/145/H1.1.21/12-472 dated 3rd January 1998, we regard your non-payment as a dispute under Clause 19 of general conditions of subcontract Pursuant to Clause 19(a) of the general conditions of subcontract, we give decision that you are liable to pay to us the following amount :-

A.		Total Subcontract Sum	$5,791,422.27
B.		Less Contract Charges
	(1)	Material purchased on behalf of Tai Fong (total $1,827,549.10 but calculated to be $1,600,000.00 at least)	($1,600,000.00)
	(2)	Contract Sum paid to Y&H Engineering Co., Ltd.	($4,520,000.00)
	(3)	Supervision Costs and Expenses incurred by Chun Wo (total $1,750,000.00 but calculated to be $875,000.00 at least)	($875,000.00)
C.		Less Previously paid	($748,587.26)
		Minimum amount due from Tai Fong to Chun Wo	($1,952,164.99)	"
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4. In outline the relevant correspondence which had preceded this was as follows :

(1)	12 December 1997 -
	Plaintiff served a notice of termination on the defendant, who then left the site.
(2)	3 January 1998 -
	Plaintiff issued its detailed final account to the defendant demanding payment of $3,053,714. The letter concluded that the plaintiff would treat non-payment "as a dispute under the sub-contract".
(3)	7 January 1998 -
	Defendant rejected the letter of 3 January "in its entirety" and set out its own detailed claim against the plaintiff in the sum of $3,644,638. The plaintiff is unlikely to have been taken by surprise by this letter because in this and in previous correspondence, the defendant made no secret of its attitude to the plaintiff's claim by use of expressions such as "ridiculous", "another attempt to project distorted history of the various events" "nothing but an attempt to get rid of your contractual liability", "the truth is ...." and "... a manipulated history. It has become necessary for us to set the record straight".
(4)	2 February 1998 -
	The plaintiff issued its letter set out above. Whether or not the comments in (3) above are justified is not the point at this stage in the proceedings. They merely serve to show that there was no real prospect of the defendant rolling over and paying the sum requested in the letter of 2 February and the plaintiff knew it. Particularly, because the letter, on the face of it, simply sought to reduce the plaintiff's claim by approximately one third without any specific references to the substance of the defendant's claim for $3.6 million (other than by stating in its letter "your letter of 7 January 1998 refers").
(5)	However, the 28 day period specified in clause 19(a) came and went without any proposal that the dispute be referred to arbitration. The plaintiff therefore submits that the defendant has lost its opportunity to resist the claim and is entitled to summary judgment.

5. Mr Kat, for the plaintiff, in an extensive and carefully prepared analysis of the facts and the law submits that the defendant's failure to respond to the clause 19 letter shuts them out from any form of resolution of the dispute between the parties. I confess I have found this to be a difficult issue to resolve. On the one hand, it is desirable that there is an element of certainty in contractual terms. The clause itself is intrinsically valid and is designed to bring the parties to the arbitral process speedily. It is fair to say that both parties agreed to the claim, were under no illusions as to its existence and should be strictly bound by it. In practice it normally acts as a short circuiting device to curtail lengthy and fruitless attempts to negotiate. It places an obligation on one of the contracting parties to state what it will accept. If it is not accepted, without further ado and without further offers and counter offers, the parties place themselves in the hands of the arbitrator. In other words, one party states its bottom line, take it or leave it. If the other party leaves it, an arbitration is automatically triggered. The rejection has to be notified to the other side.

6. Mr Graham, for the defendant, very properly concedes that such clauses are unobjectionable even though the initial "decision-maker" is one of the contracting parties. He submits, however, in a nutshell, that one party to what is an obvious and considerable dispute cannot be automatically shut out from its claim or counterclaim by the failure to notify the other side of its rejection of its opponent's "decision" on the matter. I put the word "decision" in quotation marks because it is fundamental to his submission that the mere statement of the minimum which the other party will accept should not be construed as a "decision" within the meaning of clause 19.

7. He submits that his lay client should only be shut out from pursuing its defence to the known and obvious dispute by a failure to respond within 28 days, if the letter purporting to be a "decision" under clause 19(a) is a decision as contemplated by the parties and not merely, as he describes it, part of a debt collecting mechanism.

8. At first blush there is a temptation to sympathise with the plaintiff's position. The terms of clause 19(a) are strict but both parties consented to them. What amounts to a "decision", the plaintiff would say, need not be a matter of legal niceties. It is not a difficult word to define and should not be given a restrictive and narrow meaning. It is simply a final resolution or conclusion. A statement to that effect is all that is required. Mr Kat submits that provided there is evidence that the decision-maker has considered the relevant material relating to the dispute between the parties, then a mere statement of his conclusion will suffice.

9. I have come to the conclusion, after careful consideration of the various authorities cited in support of the submissions advanced and not without some difficulty, that Mr Graham's argument on the defendant's behalf is correct.

10. I have concluded that the decision-maker's letter of 2 February 1998 does not qualify as a "decision" as envisaged by the contracting parties for two reasons. Firstly because the contents of the letter itself fall short of the requirements for such a letter to be construed as an adequate "decision". Secondly, because there is insufficient evidence to demonstrate that a proper decision making process preceded the writing of the letter.

1. The letter itself :

11. It is not sufficient to say "Your letter of 7 January refers ..." and then merely say "this is our decision - you pay us $x, $y and $z". The basic requirements of such a letter are firstly, a list of the various items in dispute on both sides and each party's most recent stated position, if any, in relation thereto. Secondly, a list (albeit in an abbreviated form) of the documents and correspondence which have in fact been read and considered by the decision-maker. The letter need not give reasons for the decision but must at least record the fact that the relevant material has been considered and that the decision-maker is correctly aware of all the heads of claim made by his side, together with the heads of counterclaim made by the other side. In other words, the full ambit of the dispute which the "decision" purports to resolve.

2. The decision making process :

12. It would be pointless simply to list the relevant documents and issues without some evidence that they had been examined and considered. Where a decision-maker, as here, is acting as a judge in his own cause, there is an implied requirement that, not only did he act reasonably and in good faith but it can be shown by evidence that he so acted. Either the letter itself or an affidavit or affirmation must reveal that it was a properly considered decision of all the matters actually in dispute between the parties. Mr Kat submits that the decision-maker is not required to give a decision on all the matters in dispute because clause 19(a) starts "if there is any dispute between ....". Therefore he can give a decision on anything not everything that is in dispute. In my opinion this is neither a helpful nor a correct interpretation. In this case the plaintiff is claiming $3.053 million, the defendant is counterclaiming $3.644 million. The written decision only makes specific reference to its claim of $3.053 million. It is of course true that the claim and counterclaim are inter-related but Mr Graham's complaint that there is a lack of evidence that issues which form part of his $3.644 million counterclaim have been properly addressed is well founded. I simply set out below, an extract from the defendant's affidavit which list those matters which they say were not dealt with by the decision-maker which renders his decision defective. It is firstly necessary to refer to certain brief passages in the affidavit evidence which illustrate the cause of the complaint.

13. In his first affirmation the decision-maker, Mr Ricky Law stated :

"In view of the dispute which then existed between the Plaintiff and Defendant, I was approached by John Yip who was our Senior Project Manager and Kevin Cheung our Assistant QS Manager to decide the dispute between parties. I then examined all the correspondence relevant to the dispute and on 2 February 1998, I made my written decision pursuant to clause 19(a) of the Conditions of Sub-Contract, and decided that the Plaintiff's claim should be reduced from HK$3,054,714.09 to HK$1,952,164.99."

14. It is to be noted that he did not say what correspondence he examined. He did not say what were the matters in dispute. He did not mention the fact of or the basis of the defendant's competing claim of $3.644 million.

15. The defendant's affirmation in reply was more specific, both as to the nature of the dispute and which correspondence was relevant. It contained the following statements :

"Now produced and shown to me marked 'YFP-1-A-Q' is a bundle of correspondence between the parties material to the court's determination. These letters span the period between 7th November 1997 and 10th March 1998 and encapsulate the numerous areas of dispute between the parties relevant to the sub-contract works at the MTRC Tsing Yi Station Development. ...

All the matters actually in dispute between the parties as at 12th December 1997 and 3rd January 1998 may be seen from the correspondence and documents exhibited at 'YFP-1-A-Q'. ..."

(here the deponent then lists those factual matters not dealt with which are set out below).

16. Mr Ricky Law's response was :

"I note that in paragraph 6 of Mr Ying's Affidavit, he encloses a bundle of correspondence marked YFP-1-A to YFP-1-Q.

For the avoidance of doubt, I confirm that I did in fact see and consider those documents prior to making my decision under Clause 19(a). However, I doubt the relevance of those documents for the purpose of this proceedings, and would question whether those documents are in fact necessary."

17. Of this, complaint is rightly made that, given that the expression "for the purpose of this proceedings" means for the purpose of the action generally (which I accept) and not for the purpose of the specific O.14A summons (as contended by Mr Kat), it is for the court to determine whether the correspondence is relevant. In fairness, Mr Law then continues to refer to other documents which fell for his consideration but this cannot convert the defective written decision into a proper one after the event.

18. As earlier indicated, I now recite those matters which the defendant contended, and reasonably so, were apparently not dealt with or may not have been dealt with in Mr Law's decision.

"Even without referring to all the earlier correspondence in 'YFP-1-A-Q', Mr. Ricky Law in his supposed 'decision' made no reference at all to the issues raised in Tai Fong's letter of 7th January 1998 in response to the letter of demand:

(a)	that Chun Wo's demand for a 'claw back' of an alleged overpayment of $3,054,714.09 could not be considered in isolation but only in the context of the alleged breaches of contract in failing to provide shop drawings and failure to respond to and properly assess Tai Fong's earlier 2 payment applications and the issues set out in Tai Fong's letters of 3rd December 1997 and 6th December 1997;
(b)	that there had been under payment of payment application No.1;
(c)	a disagreement over the assessment of Tai Fong's payment No.2 which Chun Wo had assessed at a negative amount (minus $828,234.41 i.e. an overpayment of that amount) and which Tai Fong claimed (Appendix 1 P3/5 of letter of 3rd December 1997) as opposed to Tai Fong's claim for $2,619,472.71 to which Chun Wo had not responded at all;
(d)	an additional claim by Tai Fong for $497,200.00 being 11% of a sum of $4,520,000.00 paid directly to Tai Fong's sub-contractor Y & H without authorisation;
(e)	a claim by Tai Fong for additional overheads in the sum of $86,208.19 being based upon prolongation of the works for 13 days caused by breaches of contract on the part of Chun Wo (e.g. failure to supply shop-drawings);
(f)	a contra-charge by Tai Fong for $312,000.00;
(g)	a claim by Tai Fong to be compensated in the sum of $129,757.34 that being a loss caused by Chun Wo's failure in respect of shop-drawings and to correctly and fairly assess payment applications according to the contract.

It may be seen that as quantified at 7th January 1998 Tai Fong was claiming a sum of $3,644,638.24 from Chun Wo."

19. To conclude, the role of the decision-maker is more than that of a mere asserter of what his party's bottom line is. He has obligations to both sides and a duty to perform. Of the numerous characters who feature in the hierarchy of construction and arbitration cases from filing clerks to arbitrators, their status falls just above a certifier but below an arbitrator. There is probably a higher duty on them than on a certifier. The role of a certifier is described in Hudson's Building and Engineering Contracts in this way :

" While a certifier is certainly not usually intended to be an arbitrator or settler of disputes, it is implicit in his r鬺e as a certifier in construction contracts, that he will often be required to decide what are strictly questions of law as well as of fact. For example ..." (many examples then follow)

and then :

"These are additional reasons why the courts should be slow to accord finality to his decisions."

20. This approach lends support to the view that a mere assertion of an acceptable figure should not be constructed as a "decision", as contemplated by the parties, under clause 19(a).

21. That his role is lower than the arbitrator is obvious and need not be elaborated on.

22. For the above reasons I refuse the plaintiff's application for summary judgment under O.14A Rules of High Court. The answers to the three questions posed in the schedule are :

1.	No
2. & 3.	require no answer in view of the answer to question 1 because it was not a "decision" as contemplated by the parties. However, the defence have correctly conceded that a "proper" decision would be legally and contractually binding.

23. I make an order nisi for costs of the application in the defendant's favour, to be taxed if not agreed.

24. I finally address the question of the way forward following this decision. Technically, as there was no clause 19 decision, then arbitration has not been triggered. However I invite the parties to consent to arbitration without the necessity of the plaintiff writing a supplementary "decision" letter. An arbitration would have flowed had either :

(a) The plaintiff written a proper decision which the defendant had rejected; or

(b) The defendant had in fact rejected the purported decision letter.

It seems to me that, failing summary judgment, arbitration is what both parties want. Further time should therefore not be wasted.