MC v. SC

HCCT 17/2020

[2020] HKCFI 2337

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 17 OF 2020

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D E C I S I O N

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Background

1.  This is an application by a main contractor (“MC”) for leave to appeal against an arbitral award (“Award”) under section 5 of Schedule 2 to the Arbitration Ordinance (“Ordinance”) in an arbitration in Hong Kong (“Arbitration”) between MC as the Claimant and its subcontractor (“SC”) as the Respondent.

2.  The Arbitration was brought pursuant to an arbitration agreement contained in a Subcontract dated 2 March 2018 (“Subcontract”) made between MC and SC for the supply and installation of the external façade renovation (“Subcontract Works”) of a complex in Hong Kong (“Project”). MC was the main contractor engaged by the employer of the Project (“Employer”) to carry out works under a contract dated 1 March 2017 (“Main Contract”). X Limited was the architect for the Project (“Architect”).  SC was the specialist subcontractor nominated by the Employer, and engaged by MC, to carry out the Subcontract Works which form part of the works under the Main Contract. In the course of the work, a particular payment arrangement was entered into between SC and the Employer directly, referred to as the Special Payment Arrangement (“SPA”).  There was dispute in the Arbitration as to whether MC became a party to the SPA.

3.  Disputes arose between MC and SC with regard to SC’s termination of the Subcontract by a letter dated 19 June 2018, on the alleged grounds of non-payment and the omission of works from the scope of the Subcontract Works to be given to others.  By letter dated 20 June 2018, MC accepted SC’s termination as a wrongful repudiation of the Subcontract.

4.  The disputes in the Arbitration focused on the Architect’s issue on 2 May 2018, on behalf of the Employer, of a variation instruction under the Main Contract (“AI”) to MC, whereby part of the Subcontract Works was omitted from the Subcontract, for such omitted works to be carried out by MC.  The instructions were then forwarded, by MC’s issue of the AI to SC under GS SC 7 (1) of the Subcontract on 4 May 2018.  MC claims that on 18 May 2018, it expressly invited SC to question or challenge the validity of the AI pursuant to GS SC 7 (2).  Instead of making any challenge, SC terminated the Subcontract instead, on the ground of MC’s breach. Such termination was accepted by MC as SC’s repudiation of the Subcontract.

5.  The arbitrator ordered 2 preliminary issues to be determined in the Arbitration:

(1)    On its true construction, would the omission of a significant part of SC’s scope of works under the Subcontract and the contemporaneous addition of the same scope of works to MC’s work be a breach of the Subcontract and/or the SPA?

(2)    Would any such breach as might be held to have occurred (under (1) above) be repudiatory in nature, giving rise to an entitlement on the part of SC to terminate the Subcontract, on the following alternate bases:

that SC had failed to comply with all of Clauses 2, 3 and 4 of the SPA (as pleaded by MC);

it is not established that SC had failed to comply with all of Clauses 2, 3 and 4 of the SPA.

6.  After receiving submissions from the parties, the arbitrator ruled on the 2 preliminary issues in favour of SC.  The arbitrator’s determination was that the omission of a significant part of SC’s works and the contemporaneous addition of such works to MC was a breach of the Subcontract, and that such breach was repudiatory in nature, giving rise to SC’s entitlement to terminate the Subcontract irrespective of its compliance with all of clauses 2, 3 and 4 of the SPA.

7.  In the Originating Summons (“OS”) issued by MC on 7 May 2020, MC claims that the arbitrator had erred in law, firstly, in finding the breach, and secondly, in determining that such breach was repudiatory in nature giving rise to SC’s right to terminate the Subcontract.  By the time of the submission of the skeleton arguments, MC only pursued the application on the second question of law (“Question”), claiming that the breach found was not repudiatory in nature as the arbitrator had found, and accordingly no entitlement to terminate arose.

8.  In opposing MC’s application for leave to appeal, no issue has been raised that the decision of the Question will substantially affect the rights of one or more of the parties (as required under section 6 (4) (1) of the Schedule), but SC claims that the Question to be decided is not one of general importance.  It is claimed by MC that the Question turns on the construction of the provisions of the standard form of Special Conditions of Subcontract, which are commonly used in the building industry, and that a decision on appeal on the Question will clarify the law to the benefit of the construction industry.  According to SC, significant amendments have since been made to the form of the conditions and contract adopted by MC and SC in this case, and the particular provisions in dispute in the Arbitration are no longer of general use.  SC claims in particular that the arbitrator’s determination of the Question and any appeal therefrom is on a one-off dispute between the parties, on the facts of the particular case and on the provisions of the Subcontract between MC and SC, which is supplemented by a separate SPA specifically agreed between the Employer and SC for the Project.  On SC’s case, therefore, the Question is of no general importance.

9.  Having considered the Award and the Question as framed in the OS, I agree that whether the breach as found by the arbitrator was repudiatory in nature depends on the facts and conduct of the parties in this case.  It is also pertinent that the parties’ relationship was supplemented by the SPA specifically agreed between the Employer and SC in relation to the Subcontract Works on the Project.  Whether there was breach and whether such breach can amount to repudiation in law is a one-off question between the parties to this case, and of no general importance.  Under section 6 (4) (c) of the Schedule, leave to appeal is to be granted only if the decision of the arbitrator on the Question is obviously wrong on the basis of the findings of fact in the Award.

10.  The legal principles can hardly be disputed.  Whether a breach entitles the innocent party to treat the contract as repudiated is “highly fact sensitive”, and is to be decided by looking at all the circumstances objectively from the perspective of a reasonable person in the position of the innocent party, to consider whether the contract breaker has “clearly shown an intention to abandon and altogether refuse to perform the contract” (paragraph 24-020, Chitty on Contracts 33^rd edition). The determination is accordingly a question of mixed law and fact, and the arbitrator’s decision has to be considered on the basis of his findings of fact made (section 6 (4) (c) of the Schedule).

11.  MC no longer disputes the arbitrator’s finding on SC’s breach of the Subcontract.  The arbitrator made such a determination on his construction of the relevant contract provisions, his rejection of the AI being “provisional”, and his conclusion that the relevant contract provisions did not entitle the Employer and MC to omit works from the scope of the Subcontract and to have such works carried out by MC.

12.  The arbitrator considered the Question of whether the issue of the AI to omit works constituted repudiation, from paragraph 80 of the Award.  It is pertinent that in deciding the Question, the arbitrator had considered the entirety of the evidence before him, including the existence and availability of the “challenge” mechanism under GC SC 7 (2) (“Challenge Provisions”), the fact that the AI was issued by MC pursuant to its obligations under GC SC 7 (1), and the contemporaneous correspondence exchanged between the parties.

13.  On behalf of MC, it was argued that it was the Employer which had instructed the omission of the relevant works from the scope of the Subcontract and for them to be carried out by MC, that MC was contractually required to comply with all instructions issued to it by the Architect, and that under GC SC 7 (1), SC was required to forthwith comply with the instructions.  It claims that in its letter of 18 May 2018, 14 days after its issue of the AI to SC confirming the omission of works, it had referred SC to the Challenge Provisions, under which SC may require MC to request the Architect to specify in writing the provision of the Main Contract which empowers the issue of instruction.  If this is contested by SC, SC may require MC to request the Employer to concur in the appointment of an arbitrator under the Main Contract, and SC was entitled to use the name of MC in the arbitration proceedings, for the arbitrator to decide whether the provisions specified by the Architect empowers the issue of the relevant instruction.

14.  According to MC, in the light of the availability of the challenge mechanism, and the fact that it had by its letter of 18 May 2017 invited SC to invoke the Challenge Provisions, MC’s issue of the AI on 4 May 2018 (following the Architect’s issue of the same to MC on 2 May 2018) could not have demonstrated an intention on its part to abandon the Subcontract and not to be bound thereby.  Any breach by the issue of the AI could have been corrected if SC had followed the agreed mechanism under the Challenge Provisions.  MC relies on the following passage in Keating on Construction Contracts:

“… it is not a repudiation merely to put forward in good faith an interpretation of the contract which is wrong, the more especially if it is put forward in such a way as to show that it is open to correction.”

15.  In finding repudiation, the arbitrator had considered the correspondence exchanged between MC and SC, particularly in the light of the submissions made by SC that in reality, MC had been involved in the decision making process, and that both the Employer and MC had made up their minds to remove the work from SC.  At paragraph 88 of the Award, the arbitrator referred to items of correspondence which evidence MC’s stance, as alleged by SC.

16.  The arbitrator had also referred to the correspondence from SC to MC, in which it had been highlighted that the works instructed for omission from the scope of the Subcontract constituted more than 60% of the Subcontract Works, located in areas where there was significant delay on the part of MC.  The arbitrator appeared to have accepted the submissions made on behalf of SC, that the actions of MC leading to the issue of the AI were deliberate, and that SC had already reminded MC prior to the issue of the AI that MC’s issue of such instructions would be a breach of contract and compound other breaches which had been alleged by SC against MC.  In the letter dated 12 May 2018 from SC to MC, the former had referred to MC’s “habitual and continual refusal to abide by the terms of the Subcontract”, including MC’s breach of its payment obligations, the issue of various purported notices of default which were disputed, and the instruction of the omission of works.

17.  At paragraph 80 of the Award, the arbitrator had set out the passage at paragraph 8-004 of Hudson cited by SC on repudiation:

“Where there is breach of a term which, while not by itself sufficiently serious, may be so protracted or repeated, despite protest or notice by the innocent party: that it either evinces an intention not to be bound by the contract as in the case of deliberate and continued breaches (however minor), or simply an objective inability to perform the contract properly.”

18.  It would appear from paragraphs 88 to 91 of the Award that the arbitrator accepted SC’s submissions, that a “formal protest” under GC SC 7 (2) would have been futile since SC had already challenged the omission instruction before its issue but to no effect, and with notice that SC challenged the validity of the AI in question, MC had proceeded nevertheless to issue the AI, without itself invoking the challenge mechanism which was open to MC as well.

19.  The arbitrator’s decision, that the breach amounted in law to repudiation, was obviously made in the light of his examination of the correspondence and the conduct of the parties as shown in and was evidenced by the correspondence placed before the arbitrator, and his conclusions made on what he regarded to be MC’s deliberate and continued breaches of the Subcontract, demonstrating an intention not to be bound by the Subcontract.  This, in my view, he was entitled to do.  The weight to be given to primary facts is a matter for the tribunal, and as Lord Hoffman stated in Bigogen Inc v Medeva Ltd [1997] 1 RPC 1, specific findings of fact are inherently an incomplete statement by the tribunal of fact of the impression which was made upon it by the primary evidence, and I cannot agree that the arbitrator’s decision on the Question was “obviously wrong”.

20.  Even if the test of “open to serious doubt” should apply, I do not consider that this threshold has been attained.

21.  For these reasons, I refuse leave to appeal on the Question.  The costs of the application are to be paid by MC to SC, on indemnity basis.