Relief from onerous terms may be available through the doctrines of waiver and estoppel, i.e. an unconscionable rescission from a previous position, promise or representation – but not through the court re-writing the clear language of the contract.
Construction contracts usually have notice of claim provisions. These provisions may require the legal basis of claim to be stated in the notice of claim and prescribe time limits for serving the notice. It is vitally important to strictly comply with these notice requirements. Construction contracts may require the legal basis of claim to be stated in the notice of claim. While for various reasons contractors may ultimately adopt a different basis of claim in the subsequent legal proceedings, that may risk non-compliance with the notice requirements in the contract and result in the claims being disallowed.
Contractors are often required under construction contracts to submit their notices of claim stating detailed particulars and the legal basis of their claims, all within a relatively short timeframe. As the project moves on, more information may come to light and with more time to review and formulate their claims, a different basis of claim may be adopted subsequently in the arbitration. However, this poses a risk in that the claims may be challenged on the grounds of failing to comply with the notice requirements in the contract. This is what happened in Maeda Kensetsu Kogyo Kabushiki Kaisha also known as Maeda Corporation and another v Bauer Hong Kong Limited  HKCFI 916.
The Maeda case concerns an appeal against an arbitral award on two questions of law. This case involves one of the MTR Express Rail Link projects. The plaintiffs, Maeda Corporation and China State Construction Engineering (Hong Kong) Limited are the main contractors. They subcontracted the diaphragm wall works to Bauer Hong Kong Limited, the defendant. Disputes arose and were referred to arbitration by Bauer.
First question of law – compliance of notice
The first question concerns whether Bauer had complied with the notice requirements in the contract in its ground conditions claim. Bauer’s primary case was that there were unforeseen ground conditions which gave rise to a variation of the scope of works under the sub-contract, so as to entitle it to claim additional payment. In the alternative, Bauer made other claims including additional rock excavation and excavation of hard transitional layer. These were brought as “like rights” claims under clause 21.1.1 of the sub-contract, i.e. a claim to recover from Maeda Corporation and China State any additional payment or loss and expense Bauer incurred as a result of any circumstances or occurrence as a consequence of which Maeda Corporation and China State are entitled to additional payment or loss and expense under the main contract. In the second interim award of the arbitration, the arbitrator dismissed Bauer’s primary case but allowed the alternative “like rights” claims.
THE NOTICES OF CLAIM SUBMITTED BY BAUER STATED THE CONTRACTUAL BASIS OF ITS CLAIMS TO BE VARIATIONS. HENCE, THERE IS NO BASIS TO FIND THAT BAUER HAD COMPLIED STRICTLY WITH THE NOTICE REQUIREMENTS IN RELATION TO ANY “LIKE RIGHTS” CLAIM UNDER CLAUSE 21.1.1 OF THE SUB-CONTRACT.
The arbitrator appears to have had sympathy with Bauer. The arbitrator considered that the contractual basis of the claim stated in the notice of claim did not have to be the same contractual basis on which the party ultimately succeeded in an arbitration. On this basis, the arbitrator’s finding was that appropriate notices had been given by Bauer, despite the fact that Bauer had made its claims in its notices of claim on the basis of a variation, and not on a “like rights” basis as pursued in the arbitration. The arbitrator made it clear in the second interim award that the claim allowed in the arbitration was a new legal basis, but that the Bauer was not precluded under the sub-contract to pursue a different contractual or legal basis.
The Court of First Instance (CFI) disagreed with the arbitrator’s finding. In CFI’s view:
- The sub-contract uses clear and mandatory language for the service and contents of notice. The sub-contract requires Bauer, as a condition precedent, to submit the contractual basis of the claim together with the detailed particulars.
- The notices of claim submitted by Bauer stated the contractual basis of the claims to be variations. Hence, there was no basis to find that Bauer had complied strictly with the notice requirements in relation to any “like rights” claim under clause 21.1.1 of the sub-contract.
- Bauer thus had failed to give proper notice in accordance with the sub-contract and the arbitrator was wrong in law to allow the Bauer’s “like rights” claims.
Contractors will think that this decision is harsh and that it has not taken into account the practicalities of life. The short time frame for submitting the notice of claim may mean that there will be limited analysis available and insufficient time to properly formulate claims including identifying the most suitable legal basis of claim.
There are a few takeaway points from the judgment:
(i) If the words in issue are clear, there is no justification to adopt a ‘purposive’ rather than a ‘literalist’ construction.
(ii) The judgment follows the trend of regarding provisions which affect the rights or obligations of the parties as being part of the ‘risk allocation’ scheme of the contract.
(iii) Relief from onerous terms may be available through the doctrines of waiver and estoppel, i.e. an unconscionable rescission from a previous position, promise or representation – but not through the court re-writing the clear language of the contract.
At the time of writing, Bauer has been granted leave to appeal against the CFI’s decision, but the appeal has not yet been heard by the Court of Appeal. The outcome of the appeal will be significant.
Second question of law – valuation of variation
The second question concerns the arbitrator’s valuation of a variation. Bauer claimed a variation for a deferment of diaphragm wall panels including the cost of the plant and equipment required for the diaphragm wall for the relevant period.
Under the contractual framework provided for in clause 19 of the sub-contract which is the valuation provision, since the variation is not work of a similar character or executed under similar conditions to work priced in the sub-contract, it should be ascertained at a rate or price based on the contract rates so far as may be reasonable, failing which at a rate or price agreed between the parties as being “a fair and reasonable rate or price”, and failing agreement to be determined under the dispute resolution procedures.
THE ARBITRATOR RECEIVED AND CONSIDERED ALL EVIDENCE AND REACHED A CONCLUSION AS TO WHAT IS A “FAIR AND REASONABLE” VALUATION. IT CANNOT BE SAID THAT THE ARBITRATOR HAD MISDIRECTED HIMSELF IN LAW, OR THAT HIS DECISION WAS OUTSIDE THE PERMISSIBLE RANGE OF SOLUTIONS WHICH WERE OPEN TO HIM.
Despite the fact that the plant and equipment in question was in storage during the relevant period and was not in use, the arbitrator valued the variation on the basis of “cost plus OH&P (overheads and profits)” and accepted the cost, OH&P figure of HK$3.99 million on Bauer’s expert evidence. Maeda Corporation and China State contended that the arbitrator was wrong to include such an amount not actually incurred by Bauer as cost. The equipment was in storage, was not operating at all, and would not cost anything to Bauer, for the purposes of valuation.
Bauer’s case was that valuation, as opposed to assessment of damages, is a contractual entitlement and does not require proof of loss. Bauer relied, among other things, on Sergeant and Wieliczko’s Construction Contract Variations, where the authors take the view that “In most cases a valuation will be undertaken using extrapolated rates and therefore the question of a contractor proving what costs it has incurred does not arise. Since proof of actual loss should not be required, it could be said that establishing “cost” should involve assessing what certain work would have cost it, rather than having to prove what the work did cost.”
The Judge concluded that the arbitrator’s decision on the valuation of variations was a mixed question of law and fact. The arbitrator received and considered all the evidence and reached a conclusion as to what is a “fair and reasonable” valuation. It cannot be said that the arbitrator had misdirected himself in law, or that his decision was outside the permissible range of solutions which were open to him. Thus the appeal on the variation valuation was dismissed.
In the Judgment, the Court did not decide on which method of valuation would produce a “fair and reasonable rate or price”. Both parties in this case referred to various legal authorities and text books supporting different methods of valuation. It would appear that so long as the arbitrator’s decision has taken into account the facts of the case and is not outside the range of valuation methodology approved by legal authorities and authoritative text books, the Court would be reluctant to interfere.
By Ian Cocking, Partner
and Simon Mok, Senior Associate