HCCT 3/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 3 OF 2008

----------------------

IN THE MATTER of an
ARBITRATION
and
IN THE MATTER of the
Arbitration Ordinance (Cap.
341)

----------------------

BETWEEN
UDL ARGOS
Applicant
ENGINEERING &
(Claimant in
HEAVY INDUSTRIES CO
Arbitration)
LTD
and
YAU LEE CONSTRUCTION
Respondent
CO LTD
(Respondent
in
Arbitration)
 ----------------------

AND

HCCT 25/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 25 OF 2008

----------------------

IN THE MATTER of an
ARBITRATION
and
IN THE MATTER of the
Arbitration Ordinance (Cap.
341)

----------------------

BETWEEN
UDL ARGOS
Applicant
ENGINEERING &
(Claimant in
HEAVY INDUSTRIES CO
Arbitration)
LTD
and
 YAU LEE CONSTRUCTION
Respondent
CO LTD
(Respondent
in
Arbitration)

----------------------

Before: Hon Reyes J in Court

Date of Hearing: 2 June 2008

Date of Judgment: 2 June 2008

----------------------

JUDGMENT

----------------------

I. INTRODUCTION

1. In June 1996 UDL entered into a Sub-Contract with Yau Lee for
the installation of structural steelwork in the Air Mail Centre at Chek
Lap Kok Airport. Disputes arose between UDL and Yau Lee which
were eventually referred to arbitration pursuant to the Sub-Contract.

2. UDL now seeks leave to appeal against certain determinations of

the Arbitrator (Mr. Charles Manzoni). Those determinations were as
follows:-

(1) In relation to a “Partial Award Dealing with All

Matters Save for Costs” (Award I) dated 20 December
2007:-
 (a) That the agreed lump sum contract price
could be adjusted to reflect re-measurement of
certain items in Bill 9.5.

(b) That UDL unreasonably delayed in bringing

its claim to arbitration and so should only be
allowed 3 years’ interest on the principal sum
awarded by the Arbitrator.

(2) In relation to a “Partial Award on Liability for Costs”

(Award II) dated 18 April 2008, that UDL had waived the
application of Rule 18 of the Airport Core Programme
Arbitration Rules (ACP Rules) governing the arbitration
and could be deprived of its costs from 22 May 2007 as a
result of a Calderbank letter sent by Yau Lee on 22 May
2007.

II. DISCUSSION

A. Provisional Quantities

3. The Preamble to the Bills of Quantities stipulated that the Sub-

Contract was to be a “Lump Sum fixed price tender”. According to
the Preamble, the Sub-Contract Sum could “only be adjusted in the
case of adjustments to Provisional Sums or for variations in the Sub-
Contract”.

4. The Arbitrator held in light of this that the agreed lump for the Sub-
Contract could only be revised in limited circumstances. Two such
situations were alterations in cost centre values and variations. This
much was clear (the Arbitrator thought) from cls.8 and 9 of the Sub-
Contract Conditions.

5. The Arbitrator rejected Yau Lee’s submission that the agreed lump
sum could be revised to take account of mere errors in the Bills of
Quantities .
6. Yau Lee had argued that Clause 68(3) of the Main Contract had
been incorporated into the agreement with UDL by reason of cl.3 of
the Sub-Contract.

7. Clause 68(3) of the Main Contract provided that:-

“The Quantities in the Bills of Quantities are firm except where
described as provisional. Only Provisional Quantities, variations
ordered in accordance with Clause 65 ... and errors in firm quantities
shall be measured.”

8. Clause 3 of the Sub-Contract provided that:-

“The Sub-Contractor shall be deemed to have full knowledge of the
provisions of the Contract (other than details of the Contractor’s
prices and rates) ...
Save where the provisions of the Sub-Contract expressly require
otherwise the Sub-Contractor shall ... execute complete and maintain
the sub-contract work ... so that no act ... by the Sub-Contractor shall
constitute ... any breach by the Contractor of any of its obligations
under the Contract...; and [the Sub-Contractor shall] ... assume and
perform all the obligations and observe ... all conditions of the
Contract ... so far as they relate and apply to the Sub-Contract
Works.”

9. But the Arbitrator held that cl.68(3) had not been incorporated into
the Sub-Contract. He stated (at Award I, §34):-
“Clause 3 of the sub-contract has a particular purpose of ensuring
that the sub-contractor carries out the work so that the work itself
complies with the main contract, and such that the sub-contractor
does not cause the main contractor to be in breach of the main
contract. It does not have the effect of incorporating what are
essentially the commercial terms of the main contract into the sub-
contract in a way that would alter the basis on which the sub-
contractor is entitled to be paid. Therefore, unless there are direct
provisions within the sub-contract that allow for re-measurement in
the event of errors in the bills, I do not think that the sub-contract
allows for it.”

10. The question then was whether the re-measurement of certain

quantities apparently described in Bill 9.5 as “Provisional” could lead
to a revision of the lump sum contract price.
11. The term “Provisional Quantities” was defined in the Main
Contract, but not the Sub-Contract. In the former, the definition given
was:-
“a quantity of work defined as such in the bills of quantity, of which
the extent is uncertain and for which quantities have been
estimated. Such work shall be remeasured as executed in accordance
with the instructions of the architect and shall be valued in
accordance with the provisions of clause 68(4).”

12. For the same reason that he did not believe cl.68(3) to be part of
the Sub-Contract, the Arbitrator rejected the suggestion that the
definition of “Provisional Quantities” in the Main Contract had been
incorporated into the Sub-Contract. Nonetheless, having heard expert
evidence, the Arbitrator thought (at Award I, §38) that in normal
industry practice the designation “Provisional” in Bill 9.5 was:-
“an indication that the item in question was, at the time of tender,
incapable of accurate estimation or measurement, and would be re-
measured when completed, with the price adjusted to reflect the re-
measurement. This would be the case even in a contract which is
otherwise a ‘Lump Sum’ contract.”

13. The Arbitrator recognised that there was some ambiguity in Bill
9.5 as to what precisely the word “Provisional” was meant to qualify
whenever it appeared. The word could conceivably describe the
stipulated price or even the relevant work itself.

14. Nonetheless, on the basis that the word “Provisional” was intended
to apply to quantities, the Arbitrator noted that on the strict wording of
the Preamble to the Bills of Quantities , there could be no alteration
of the agreed contract price even if the quantities designated
“Provisional” were re-measured. That is because, on a strict reading
of the Preamble, there could only be an adjustment of the lump sum if
there were an adjustment to a Provisional Sum (as opposed to a
Provisional Quantity).
15. But how could this be reconciled with what the Arbitrator found
to be standard industry practice “to re-measure provisional quantities
which have been included in a contract as provisional”?

16. The Arbitrator resolved the dilemma as follows (at Award I, §45):-
“In my view there is a legitimate reconciliation. I think the clear
intent of the contract was to maintain a lump sum price for
everything apart from the things which were said to be provisional. I
do not think that by the use of the words ‘Provisional Sums’ in the
preambles the author of the bill was intending to exclude the
remeasurement of a bill which everybody at the time must have
recognised was provisional (either in its quantities, or in its price). I
do not think that the words were used in their strict sense to draw a
distinction between Provisional Sums and Provisional Quantities,
thereby allowing an alteration to the price for Provisional Sums, but
not for Provisional Quantities. Such a distinction would be odd in
this contract, because apart from bill 9.5, there is nothing which is
provisional. There are no Provisional Sums unless the word
‘Provisional’ in bill 9.5 qualifies the sum of that last bill. Thus, if it
does not qualify the sum, but qualifies the quantities, there would be
no sense in including the words in the preambles to allow an
alteration to the contract price for Provisional Sums. There would be
no Provisional Sum in the contract to alter. Thus the words must
have been intended to cater for something else, and the only other
thing which they would sensibly cater for would be an alteration in
respect of provisional quantities.”

17. This meant that the lump sum price in the Sub-Contract could be
substantially revised downwards to take account of a re-measurement
of the provisional quantities in Bill 9.5.

18. Mr. Barrie Barlow SC (appearing for UDL) submits that the
Arbitrator was obviously wrong. Mr. Barlow suggests that, given the
Sub-Contract was for a lump sum, the risk of changes in quantities was
on Yau Lee. The Bills of Quantities were simply (Mr. Barlow
contends) a guide to assist UDL and other tenderers in arriving at their
lump sum tenders.

19. Mr. Barlow further suggests that the Arbitrator confused the
“different and distinct” concepts of Provisional Sums and Provisional
Quantities. The two concepts (which are defined in the Main Contract)
cannot (Mr. Barlow says) be equated with each other in the way that
the Arbitrator did.

20. I am unable to agree with Mr. Barlow.

21. The Arbitrator accepted that the Sub-Contract was for a lump
sum. But he inferred from the Preamble that the lump sum could be
adjusted in certain circumstances, including the situation of
Provisional Sums. The Sub-Contract was not a pure lump sum
agreement. The Arbitrator therefore had to determine whether, as a
matter of construction, the use of the word “Provisional” in bill 9.5
was an indication that the lump sum could be adjusted upon a re-
measurement of the quantities apparently designated as “Provisional”.

22. I do not think that it is fair to say that the Arbitrator confused
“Provisional Quantities” with “Provisional Sums”. He was plainly
aware of the distinction, because (as we have seen) he drew attention
to it in Award I.

23. In my view, this is a one-off situation in which the Arbitrator was

attempting to make sense of the Preamble to the Bills of
Quantities and the apparent designation of certain quantities in Bill
9.5 as “Provisional”. In light of industry practice as he found it to be,
the Arbitrator decided upon a reconciliation which he thought would
give some point (as opposed to no point) to the reference to
“Provisional Sums” in the Preamble and to apparent “Provisional”
quantities in Bill 9.5.

24. This is a standard method of construing a contract ut res magis

valeat quam pereat. I see no obvious (or even serious) error on the
Arbitrator’s part. On the contrary, it seems to me that the Arbitrator
was probably right in his approach.

B. Interest
25. By Award I the Arbitrator ordered Yau Lee to pay UDL a principal
sum of some $3.4 million. On the question of interest, the Arbitrator
then held as follows (at Award I, §102):-
“I turn therefore to an assessment of the rate and period of
interest. The starting date claimed is 1 March 1999, being one month
after the final account was submitted. Even allowing for a
reasonable time for negotiation on the final account, proceedings
probably could, and should, have been commenced by the time of the
Scheme in April 2000. An arbitration of this case would reasonably
have been concluded within about 18 months of commencement (as
indeed it has in fact taken, even some 6 years later). Thus, if [UDL]
had pursued its entitlement with reasonable diligence, an award,
including interest, could reasonably have been expected within say
2½ years from the submission of the final account. On this basis, this
award has been delayed by some 6 years. I am prepared to allow
some leeway to the Claimant, on account of the disruption that may
have occurred as a result of the Scheme, therefore, I will allow
interest for a total of three years.”

26. Mr. Barlow submits that the Arbitrator’s approach was obviously
misconceived. UDL (Mr. Barlow notes) had been kept out of a
substantial net amount over the period disallowed by the Arbitrator. It
should (Mr. Barlow says) only be in exceptional circumstances that
interest is refused to run from the notional date when (in the ordinary
course of business) a principal sum ought to have been paid to the date
of an award.

27. It is implicit from the Arbitrator’s reasoning that on the facts he

believed UDL to be guilty of unreasonable delay in the pursuit of its
claim. In those circumstances, I am unable to fault his discretion in
rejecting UDL’s claim for interest over that period of time which the
Arbitrator thought represented unreasonable or exceptional delay.

28. This matter concerns a question of entitlement to interest given

particular facts. I doubt that it is a question of law justiciable by the
Court on a review of an award. In any event, it is a one-off situation
and I see nothing in the Arbitrator’s exercise of his discretion on
interest that is obviously (or even seriously) wrong. I should add that
I do not read the case of Komala Deccof v. Pertamina[1984] HKLR
219 (CA) cited by Mr. Barlow as saying that a judge (or arbitrator) can
only deprive a party of interest for unreasonable delay in personal
injury cases.

C. Cost

29. ACP Rule 18 provides that:-

“No account shall be taken by the Arbitrator of any written or oral
offer of settlement where a payment into court could have been
made.”

30. Yau Lee argued that, by reason of a “without prejudice save as to

costs” letter dated 22 May 2007 to UDL, Yau Lee should have costs
from 22 May 2007. By the letter Yau Lee offered to pay $4.15 million
plus costs in settlement of UDL’s claim. The $4.15 million was
greater than the sum of $3.89 million (inclusive of principal and
interest) which UDL eventually obtained under Award I.

31. The question then was whether the Arbitrator could consider the
Calderbank offer made by the letter dated 22 May 2007. On the face
of ACP Rule 18 he could not do so.

32. But the Arbitrator noted that the parties had exchanged a series of
“without prejudice save as to costs” letters between them. In the
course of such correspondence, Yau Lee had made settlement offers
leading up to its final proposal of $4.15 million and UDL had put up
alternative offers.

33. From this, the Arbitrator concluded that the parties should be
treated as having mutually waived the strict application of Rule 18
even if that provision formed part of the ACP Rules governing the
arbitration.

34. It was pointed out to the Arbitrator that the parties’ positions were
not symmetrical. Thus, while Yau Lee as debtor could make a
payment into Court, UDL as creditor could not. Any offer by UDL to
accept a lesser sum could only be made by letter.

35. The Arbitrator, however, was not persuaded by this argument. He

said (at Award II, §25):-
“That point [of a lack of symmetry] may have some validity in
relation to the final offer made by [UDL] in its letter of 31 May
2007, but it is not relevant to the letter of 5 May 2007. In that letter
[UDL] was not making an offer itself, but was expressly referring to
an oral offer made by [Yau Lee][1], and indicating that it was
insufficient and therefore had been rejected. Therefore, it seems to
me that as at 5 May 2007, [UDL] was operating on the basis that an
oral offer by [Yau Lee] was something that could be brought to the
attention of the Arbitrator when considering costs.”

36. 2. The Arbitrator therefore took the 22 May 2007 offer into
account. Consequently, exercising his discretion on costs, he
essentially ordered that UDL bear the costs of the reference to
arbitration from 22 May 2007.

37. Mr. Barlow suggests that the Arbitrator was plainly wrong in so
doing. Mr. Barlow contends that the Arbitrator exceeded his
jurisdiction.

38. I am unable to agree.

39. I believe this to be a one-off matter. In my view, the Arbitrator

was entitled to consider whether, despite Rule 18, on the facts the
parties by their conduct waived that Rule’s strict application. Having
found waiver, he cannot be faulted for proceeding as he did. I see
neither obvious nor serious error.

III. CONCLUSION

40. The result is that leave to appeal is refused on the 3 grounds raised
by UDL. UDL’s Notices of Motion are dismissed.
 (A.T. Reyes)
Judge of the Court
of First Instance
High Court

Mr Barrie Barlow, SC instructed by Messrs Huen Wong & Co, for the
Applicant

Mr Adrian Bell instructed by Messrs Lovells, for the Respondent

[1] Wrongly referred to by the Arbitrator in the text of Award II, §25
as “the Claimant”.