ON LEE GENERL CONTRACTORS v THE GARDEN CO. LTD

HEADNOTE

Construction Contract - Whether operation of defects liability period a bar to owner seeking to set off claims for defects against sums due under certificate. Order 14 - stay for arbitration.

A328 & 330 of 1992

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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J U D G M E N T

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1. In these two actions I have before me in each a summons for summary judgment which is met by an application for a stay in favour of arbitration. I heard both sets of applications together.

2. By a contract in writing made on 15th February 1990, the plaintiff agreed to construct a factory building for the defendant. The contract price was $98m and the contract was in the usual form of building contract used in Hong Kong. The plaintiff's claim in what I call the main Action (328) is for the sum of $3,388,350 under Certificate 20 issued by the architect on 29th October 1991.

3. In this certificate the architect certified that $79,828,502 represented the total work down. He then deducted the retention money of $4,250,000 and the previous payment of $74,355,152 and after adding back 1/2 of the retention fund, he certified that $3,388,350 was due.

4. On the 10th October 1991, the architect certified under Clause 15 of the Contract that (a) the Occupation Permit had been issued on 8th October 1991 and (b) the whole of the works had been completed to his satisfaction and he attached a list of outstanding works. He went on to state to the plaintiffs that they could now apply for the release of 1/2 of the retention fund.

5. The Certificate of Practical Completion was rendered by the architect under Clause 15 of the Contract. By this clause defects had to be scheduled by the architect and had to be made good by the contractor at his expense. The defects liability period was 12 months and this period started to run from 10th October 1991 and thus has another 7 months to run.

6. The plaintiffs contended that they have been attending to putting right these defects. The defendant contended that that the list issued by the architect is not complete, and the defendants have recently dismissed the architect. The defendants have got a report prepared by Chesterton Petty which deals with defects.

7. I do not propose to go into the whole contractual mechanism which is well known to the cognoscenti. Mr. Lewis who appears for the plaintiffs submits that the plaintiffs have a right, and an obligation, to complete the defects during the defects liability period and that they are not in breach of contract by doing this and thus the defendants have not suffered any damage yet, and have no grounds whatsoever to avoid paying under this certificate, and on this basis he submits that the plaintiffs should have summary judgment under O.14 and consequently there is no dispute or difference to go to arbitration. He points out that the contract provided no special rights of set off. He points out that the plaintiff has affirmed the contract and thus the contract remains in effect.

8. Mr. Kat who appeared for the defendants submitted that the defects identified by the architect amount to a breach of its contract which the defendants can rely upon to oppose the plaintiffs claim in this action. He says that there is clearly a dispute between the parties. Firstly, whether the defendants can set off the defects against sums otherwise due under the certificates, and secondly, whether the architect's list of defects is in fact accurate. All these matters including the construction of the contractual terms was agreed by the parties in Clause 35 of the contract to be referred to arbitration and that is what should now happen.

9. The very point relied upon by Mr. Lewis, namely whether the contractor's liability in damages is removed by a defects clause is a matter of construction of the contract. In the 5th edition of Keating on Building Contracts, one finds the following observations:

"(d) Alternative claim in damages

The contractor's liability in damages is not removed by the existence of a defects clause except by clear words, so that in the absence of such words the clause confers an additional right and does not operate to exclude the contractor's liability for breach of contract. Clear words in this context usually require the kind of architect's binding and conclusive certificate referred to under the next heading. It is a matter of construction in each case whether a term relating to defects and headed "Guarantee" is an exclusion clause to be construed against the contractor or confers an additional right and is therefore to be construed like any other' term. But is thought that most defects liability clauses will be construed to give the contractor the right, as well as to impose the obligation, to remedy defects which come within the clause. If the employer fails to give notice, or otherwise to avail himself of a defects clause and brings a claim for damages he may, on the principle of mitigation of loss, be liable to some reduction in the damages which would ordinarily be awarded. He may not be able to recover more than the amount that it would have cost the contractor to perform his obligation."

10. Similar observations can be found at p.394 of Hudson's Building & Engineering Contracts 10th edition.

11. One of the cases cited in Keating is H.W. Nevill (Sunblest) Ltd. v. William Press & Co. Ltd. 20 BLR 78, where Judge Newey Q.C. held that the plaintiff's remedies were not limited to the remedies specified in Clause 15 in that contract, since the defects in the works were breaches of contract. At p.88 Judge Newey expressed his view thus:

    " Clause 15(2) and (3) provided an efficient way of dealing with defects to the advantage of both parties. If Nevill had had to seek contractors new to the site to do the remedial work it might well have had difficulty in finding them. It would also almost certainly have had to pay them more and would then have sought to have recovered from William Press more than the cost to William Press of making good the defects.

    Whether a clause such as Clause 15 limits a party's remedies to that provided by the clause depends on the construction of the contract, see Lord Denning MR in Hancock v. Brazier [1966] 1 WLR at 1317.

    Clause 15 did not state in terms that it excluded claims for consequential loss, but if it had that. effect the result would plainly have been anomalous. If defects appeared before completion and delayed it, Nevill could have recovered liquidated damages under Clause 22 and the Appendix, which would obviously have been estimated by reference to Nevill's probable consequential loss, but if defects came to light after completion, Nevill would not have been able to recover anything, although at that stage its consequential loss would most likely have been greater.

    The absence of word such as "without prejudice to other rights" in Clause 15, whereas they appear in Clauses 25 and 26, does not impress me. In clauses dealing with determination of the whole contract, it was no doubt prudent to indicate that remedies such as claims for damages would survive. A clause such as Clause 15, merely created a simple way of dealing with part of a situation created by breaches of contract, is not to be read as depriving the injured party of his other rights.

    My conclusions with regard to the first issue are, therefore, that Nevill's remedies in respect of the defective work were not limited to the remedies specified in Clause 15 and that Nevill may claim damages for breach of contract to include consequential loss."

12. Now all this is very interesting but I have to remind myself that this is an application for summary judgment and that it is being met by an application for a stay in favour of arbitration.

13. In Icos Vibro Ltd. v. S.F.K. Construction Management Ltd. & Sung Foo Kee (Civil) Ltd. (Con. List 9 of 1991 - Judgment handed down 26th February 1992) I considered in some detail what an applicant for summary judgment had to establish before a stay would be refused. In particular, I considered the recent judgment of Saville J. in Hayter v. Nelson & Home Insurance (1990) 2 Lloyd's Rep. 265 which was cited with apparent approval by the English Court of Appeal in The Channel Tunnel Group v. Balfour Beattv (22nd June 1992). The test I apply is as stated by Saville J. namely:

"Only in the simplest and clearest cases i.e. where it is readily and immediately demonstrable that, the Respondent has no grounds at all for disputing the claim, should the party be deprived of his contractual right to arbitrate."

14. As Templeman L.J. (as he then was) said in Ellerine v. Klinger (1982) 1 WLR 1375:

"There is a dispute until the defendant admits that the sum is due and payable."

15. I reiterate the points that I made at p.17 in the Icos Vibro Case.

16. In my judgment it is not possible to say that there is no dispute here. The first dispute concerns the construction of Clause 15. Does it exclude the right to claim damages for these defects during the defects liability period? The parties have agreed that all disputes, and these include disputes relating to the construction of this contract, are to be referred to arbitration. What is more they have agreed that if they cannot agree on the identity of an arbitrator, he should be appointed co-jointly by the President or Vice President of the Hong Kong Institute of Architects and the Chairman or Vice Chairman of the Royal Institution of Chartered Surveyors (Hong Kong Branch). This is some indication, although not exclusively so, that the parties had in mind that any dispute ought to be arbitrated by a technical man.

17. Although Mr. Lewis' argument is attractive and neat, I do not find it to be such that I can conclude that it is "readily and immediately demonstrably that the (defendants) have no grounds at all for disputing the claim". I should add that Mr. Lewis was prepared to concede that an arbitration was likely to follow in any event, because the defendants were entitled to challenge the Architect's Certificate. He submitted that they should pay first and argue later.

18. In all the circumstances, therefore, I propose to dismiss the plaintiffs summons for summary judgment and in the exercise of my discretion under the Arbitration Ordinance, I grant a stay for arbitration there being no other grounds advanced as to why a stay should not follow. In this action I propose to make a costs order nisi in favour of the defendants on both summonses.

19. Action 330

20. It is common ground that the external works, subject matter of this action were originally part of the main contract. The plaintiff contends that it was subsequently agreed that these works would be treated as a separate contract. On this basis they contend there would be no arbitration clause.

21. The defendants contend that these works always remained part of the main contract and are thus subject to the same arbitration clause. They contend that the documents referred to by the plaintiffs as supporting the separate agreement come nowhere near to establishing a separation from the main contract.

22. Having considered these documents, I agree with the defendants' contention. These external works were part of the main contract and the material in support of a separate agreement is flimsy in the extreme.. I am satisfied that these works are covered by the main contract and are thus subject to the same arbitration clause.

23. The plaintiffs contention in this action, which is for $1,033,000 said to be due under a certificate, are identical to Action No. 328. For the same reasons, I consider that the plaintiffs have failed to establish a right to summary judgment and that it follows inexorably that this action too must be stayed in favour of arbitration as agreed. I therefore dismiss the O.14 summons with a costs order nisi in favour of the defendant. I grant the application for a stay and I make a costs order nisi in favour of the defendant.

24. Action 329 is still outstanding, as I adjourned it on the defendant's request. It may well be that the observations made in these two cases will make it unnecessary for the parties to bring on action 329. If they still wish to proceed I will hear the matter on a convenient date to be arranged.

25. I am grateful to Counsel for the high quality of their very helpful written submissions which made it possible to finish these two matters in the allotted time.