XCHRX PAUL Y.-ITC CONSTRUCTION LTD. v. SUNDART ENGINEERING LTD.

HCCT124/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.124 OF 1999

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J U D G M E N T

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1. By this notice of originating motion dated 16 December 1999, the applicant ("Paul Y.") appeals against a ruling made in an interim award made by the arbitrator, Michael Charlton, Esq. on 18 November 1999. His ruling relates to a preliminary point of jurisdiction unsuccessfully taken by the applicant.

2. Paul Y. was the main contractor for a development of which Agrila Ltd was the employer. The respondent ("Sundart") was the dry-wall nominated sub-contractor. As the nominated sub-contractor, they had been selected by the employer. The main contractor was bound to engage Sundart on terms negotiated by the employer. Nonetheless, the contract is between the main contractor and the sub-contractor.

3. By a letter dated 27 July 1999, Sundart issued a notice of arbitration against Paul Y. The sole issue to be determined is whether or not Sundart's contract permits a nominated sub-contractor an option to sue either the main contractor or the employer. The learned arbitrator ruled that it did have the option. Mr John Griffiths, S.C. for Paul Y., submits that that ruling was wrong. The proper construction of the contract, he submits, is that the nominated sub-contractor must use the "name borrowing" procedure as provided by the contract and, accordingly, can only sue the employer, having borrowed the main contractor's name. For Sundart, Mr Westbrook commends both the arbitrator's ruling and reasons.

4. For a proper understanding of the issue, it is necessary to set out the relevant clauses of the contract :-

(1) Clause 8(b) is the "extension of time" clause :-

"(b) Upon it becoming reasonably apparent that the progress of the Sub-Contract Works is delayed, the Sub-Contractor shall forthwith give written notice of the cause of the delay in the progress or completion of the Sub-Contract Works or any section thereof to the Main Contractor, who shall inform the Architect thereof and of any representations made to him by the Sub-Contractor as to such cause as aforesaid.

If on receipt of such information and representations as aforesaid the Architect is of the opinion that the completion of the Sub-Contract Works is likely to be or has been delayed beyond the period or periods stated in Part II of the Appendix hereto or beyond any extended periods previously fixed under this clause,

(i) By reason of any of the matters specified in clause 7(1) of this Sub-Contract or by any act or omission of the Main Contractor, his sub-contractors his or their respective servants or agents; or

(ii) For any reason (except delay on the part of the Sub-Contractor) for which the Main Contractor could obtain an extension of time for completion under the Main Contract

then the Main Contractor shall, but not without the written consent of the Architect, grant a fair and reasonable extension of the said period or periods for completion of the Sub-Contract Works or each section thereof (as the case may require) and such extended period or periods shall be the period or periods for completion of the same respectively and this clause shall be read and construed accordingly."

The "name borrowing" clause appears for the first time in the proviso to clause 8(b) :-

"PROVIDED always that if the Sub-Contractor shall feel aggrieved by a failure of the Architect to give his written consent to the Main Contractor granting an extension of the said period or periods for completion of the Sub-Contract Works, then, subject to the Sub-Contractor giving to the Main Contractor such indemnity and security as the Main Contract may reasonably require, the Main Contractor shall allow the Sub-Contractor to use the Main Contractor's name and if necessary will join with the Sub-Contractor as plaintiff in any arbitration proceedings by the Sub-Contractor in respect of the said complaint of the Sub-Contractor."

Thus the main contractor can only grant extension of time with the architect's permission.

(2) Clauses 8(c) together with 11(d) relate to the loss and/or expense resulting from delay :-

"8(c) If upon written application being made to the Main Contractor by the Sub-Contractor, both the Main Contractor and the Architect are of the opinion that the Sub-Contractor has been involved in direct loss and/or expense for which he would not have been reimbursed by a payment made under any other provision in this Sub-Contract by reason of the regular progress of the Sub-Contract Works or any part thereof having been materially affected by any of the circumstances in which the Main Contractor would under the Main Contract be entitled to recover such direct loss and/or expense as aforesaid, then the Main Contractor shall request the Architect to ascertain or cause to be ascertained the amount of such direct loss and/or expense. Any amount from time to time so ascertained shall be added to the Sub-Contract Sum and if an interim certificate is issued after the date of ascertainment, the Main Contractor shall request the Architect to add any such amount to the amount which would otherwise be stated as due in such certificate."

"11(d) If the Sub-Contractor shall feel aggrieved by the amount certified by the Architect or by his failure to certify, then, subject to the Sub-Contractor giving to the Main Contractor such indemnity and security as the Main Contractor shall reasonably require, the Main Contractor shall allow the Sub-Contractor to use the Main Contractor's name and if necessary will join with the Sub-Contractor as claimant in any arbitration proceedings by the Sub-Contractor in respect of the said matters complained of by the Sub-Contractor."

(3) The only other relevant clause for present purposes is clause 22, the "arbitration" clause :-

"In the event of any dispute or difference between the Main Contractor and the Sub-Contractor, whether arising during the execution or after the completion or abandonment of the Sub-Contract Works or after the determination of the employment of the Sub-Contractor under this Sub-Contract (whether by breach or in any other manner), in regard to any matter or thing of whatsoever nature arising out of this Sub-Contract or in connection therewith, then either party shall give to the other notice in writing of such dispute or difference and such dispute or difference shall be and is hereby referred to the arbitration of such person as the parties hereto may agree to appoint as Arbitrator. ..."

5. On 27 July 1999, Sundart issued an arbitration notice, following various exchanges of correspondence in the following (abbreviated) terms :-

"We, Sundart Engineering Ltd .... hereby give you Notice that a dispute or difference has arisen between us regarding the following matters;

1. Our entitlement to extensions of time under the Sun-Contract due to prolongation of our Sub-Contract Works by reason of the facts and matters described or contained in the documents forwarded to you under cover of our letters dated 10th December 1997, 27th December 1997, 21st December 1998 and 13th January 1999, including:-

(i) delays to fireproofing and curtain walling installation;

(ii) water damage, damage by other trades and additional work;

(iii) suspension of the low level fire barrier wall and typhoon storm damage;

(iv) compliance with your revised programming requirements;

and our entitlement to associated loss and/or expenses and/or additional costs under the terms of the Sub-Contract alternatively damages for breach thereof.

2. Our liability for contra-charges purportedly applied by you under the terms of the Sub-Contract and our entitlement to loss and/or damage and/or expense suffered and/or incurred by us due to damage caused by others.

3. ...

We hereby give you Notice that we require the above issues to be referred to arbitration in accordance with Clause 22 of the said Sub-Contract."

6. After hearing submissions on the preliminary issue of jurisdiction, the learned arbitrator determined that as, under clause 8(b), the main contractor can only grant extension of time with the permission of the architect, he did not have jurisdiction to hear an arbitration arising out of the nominated sub-contractor's complaint relating to extension of time. He put it as follows :-

"It is clear from Sub-Contract Clause 8b that the Main Contractor can only grant extension of time with permission of the Architect.

Under Sub-Contract Clause 22, I can only deal with matters in dispute between the Main Contractor and Sub-Contractor, and if the Main Contractor is prevented from granting an extension of time because he has not had permission, then I would have to conclude that this was not a matter (at this stage) representing a dispute with the Main Contractor until he has been given permission to grant an extension of time and has failed to do so."

7. Thus, he decided on the facts that the stage of a dispute between the main contractor and the nominated sub-contractor had not been reached. Sundart has not cross-appealed this ruling. The issue before me relates to his ruling in relation to clause 8(c). In short, he ruled that he did have jurisdiction to hear Sundart's claim against Paul Y., the main contractor for loss and/or expenses associated with the non-certification of extension of time by the architect.

8. On this issue, the arbitrator made the following (selected) observations :-

"The only other ground on which a name borrowing procedure need take place is in respect of any dissatisfaction with an Architect's certificate (Sub-Contract Clause 11d). This can only relate to disputes on entitlements to payment for measured work due under the Sub-Contract, or matters relating to loss and expense for which the Main Contractor has a similar right under the Main Contract (see Sub-Contract Clause 8c). It cannot relate to matters which lie only between the sub-contractor and Main Contractor, since such would never feature in an Architect's certificate.

Mr Nunn maintains that all matters referred to this arbitration fall into the name borrowing category, ie matters which can be passed on to the Employer. However, I am unable to accept this. It is apparent from the face of the correspondence from Sundart to Paul Y that much of their claim is for matters which cannot reasonably be passed on to the Employer.

Further, I do not believe it possible for Sundart to know, neither should they have to speculate upon whether a claim against Paul Y is one which can be passed on to the Employer. ...

I consider the procedure intended by the Sub-Contract to be such that the Sub-Contractor submits its claim to the Main Contractor. This will include those matters for which the Main Contractor is responsible, and those for which the Architect/Employer are responsible.

With regard to the latter the Main Contractor and Architect must deal with those claims under Sub-Contract Clause 8c. If the Main Contractor fails to do so however, I do not consider that the corresponding failure of the Architect to certify should become a matter for the Sub-Contractor under Sub-Contract Clause 11d, since he cannot reasonably know what if anything should have been certified. So far as the Sub-Contractor is concerned, his claim is against the Main Contractor, and only the Main Contractor and Architect can decide which part of it is recoverable under the Main Contract. Similarly, if the Architect fails to deal with the matter. Whilst the Sub-Contractor may choose to follow the name borrowing procedure under Sub-Contract Clause 11d, I see no obligation that he do so.

It follows from the above that I do not consider it any part of the Sub-Contractor's duty to pursue claims for loss and expense or damages under a name borrowing procedure under Sub-Contract Clause 11d.

The Main Contractor may elect to bring the Architect and Employer into the dispute, in which case he must serve an arbitration notice and presumably seek to consolidate the two arbitrations, or he may elect to deal with it without their involvement. In either event, it should not prejudice a Sub-Contractor's entitlement."

9. Thus, he found that the contract did not compel Sundart to use the name borrowing procedure, it merely gave them the option to use it when it was desirable and practical.

10. Mr Griffiths, in advancing his submission that "name borrowing" is mandatory makes the following points :-

(i) The respondent's notice of arbitration, namely, the letter of 27 July 1999 and the correspondence which preceded it frames the claim under clauses 8(b) and (c) of the nominated sub-contract. Therefore, it is bound to observe the name borrowing procedure contained in those clauses. In fact the references to clauses 8(b) and (c) are all contained in the earlier correspondence. I agree that this forms part of the notice, however, the letter of 27 July 1999 makes no reference to 8(b) and (c) and specifically states, "we give you notice ... in accordance with Clause 22 ...".

11. Both counsel referred to the wording of the pre-notice letters as to their meaning and effect. I do not propose to recite them all. It is plain to me that words cannot be construed to mean that the author was writing himself into a straightjacket which would preclude him from taking proceedings against the main contractor under clause 22. The references merely serve to identify the clauses under which the complaints arise. It does not follow that those complaints must always be made against the employer. The learned arbitrator stated as follows :-

"In my view, Sundart are not bound by the conditions referred to in their claim. Their notice of arbitration is sufficiently wide to allow them to plead their case other than in reliance on Clause 8c."

12. In my judgment the letter of 27 July 1999 has been carefully and correctly drafted. It starts in the following terms :-

"Our entitlement to extensions of time under the Sub-Contract due to prolongation of our Sub-Contract Works by reason of the facts and matters described or contained in the documents forwarded to you under cover of our letters ..."

and continues :-

"and our entitlement to associated loss and/or expense and/or additional costs under the terms of the Sub-Contract alternatively damages for breach thereof."

13. The words are wide but clear. The purpose of the notice is to identify the dispute. It should not be limited as a result of "pleading points". In any event, as Mr Westbrook points out, only two of the six letters referred to (some of which are lengthy) even mention clause 8(c).

(ii) Mr Griffiths' next submission is that to rule that there is no jurisdiction under clause 8(b), but that there is under clause 8(c) is inconsistent. The argument is simply that if the name borrowing procedure is to be used for clause 8(b), then the same procedure must be followed for claims for loss (8(c)) which flow from the 8(b) claim. Otherwise the issues, which he says are related, may ultimately be determined by different people leading to the risk of inconsistent findings.

14. I do not accept this argument for the same reasons given by the arbitrator. It does not follow that all the nominated sub-contractor's complaints will be against the employer. It may be difficult or even impossible to say with certainty who is liable. Sundart should not be compulsorily shut out from proceeding against the party who may be liable. If there are common issues, one party may join another and/or arbitrations may be considered or heard at the same time. In any event, the risk of inconsistency, which is a minor risk bearing in mind the procedural flexibility, is much the lesser of an evil than a party being compelled to sue someone who it does not want to sue and who may be entirely innocent of blame.

(iii) The next point made is that it is not right to allow the nominated sub-contractor to claim against the main contractor when in reality, the nominated sub-contractor has contracted to submit its work-payment applications and claims to the employer following the issue of the architect's certificate. I do not accept that simply because the nominated sub-contractor in the normal situation submits its work-payment applications to the employer, it should be prevented from making a claim against the main contractor. This pays scant regard to the contractual chain. The main contractor chose to enter into contractual relation with the employer on terms which clearly preserve the contractual chain. In particular, clauses 27(a) and (f) of the main contract stipulate :-

"(a) ... all specialists or others who are nominated by the Architect are hereby declared to be sub-contractors employed by the Main Contractor and are referred to in these conditions as 'Nominated Sub-Contractors'.

...

(f) Neither the existence nor the exercise of the foregoing powers nor anything else contained in these conditions shall render the Employer in any way liable to any Nominated Sub-Contractor."

By the same token, the contract which is being sued upon is between Paul Y. and Sundart. The sub-contract contains the following clause 3 :-

"Provided that nothing in this Sub-Contract contained shall ... create any privity of contract between the Sub-Contractor and the Employer ...".

15. The argument is further diluted by the words of the name borrowing provisions. Given that the sub-contract is a detailed document setting out the rights and liabilities between Paul Y. and Sundart, and given the parties' knowledge that Sundart has been nominated by the employer, it would have been open to the parties to state unequivocally that under 8(b), 8(c) and 11(d) Sundart had no option who to claim against. The only mandatory provision is that Paul Y. must allow its name to be borrowed. It would be dangerous and wrong to read into a contractual provision a mandatory duty which is plainly absent. It would have the effect of imposing restrictions on Sundart to which it had not contracted.

16. In order to succeed on this originating notice, the applicant, Paul Y. must satisfy the court that the contractual intention was that if the main contractor is not at fault, then the sub-contractor must borrow his name to claim against the employer. If the main contractor is at fault, then section 22 applies. In my judgment, for the reasons given and for the reasons given by the learned arbitrator, such an approach is over simplistic and not the correct interpretation. Such an interpretation could very easily result in the main contractor avoiding a liability which is truly his by forcing the nominated sub-contractor to omit him from its claim.

17. No such mischief would result from the interpretation given in this judgment and by the arbitrator because if the sub-contractor chose to claim initially against the main contractor whereas liability was ultimately determined to fall at the hands of the employer, the only mischief created would be that it had taken two steps to get to a just conclusion instead of one. Finally, the interpretation advanced by Mr Griffiths would place on the sub-contractor the often impossible task of splitting up its claim where liability may fall on both the main contractor and the employer, at an early stage, into a clause 22 arbitration where the main contractor was at fault and a name borrowing arbitration where the employer was at fault.

18. I am satisfied that the interim award of the preliminary point of jurisdiction was correctly decided. I therefore decline the motion to set it aside. I see no reason why costs should not follow the event. Accordingly, the costs of and arising from the applicant's Notice of Motion dated 16 December 1999 be the respondent's.