Construction Law and Practice in HK

CHAPTER 1
THE HONG KONG CONSTRUCTION

INDUSTRY
PARA.
1. Law and Construction ............................................................................................................... 1.001
(a) Need for specialised knowledge ........................................................................................ 1.001
(b) Overview of text ................................................................................................................ 1.003
2. Nature of Industry ..................................................................................................................... 1.004

(a) Economic importance of construction industry ................................................................ 1.004
(b) Construction activities ...................................................................................................... 1.006
(c) Problems in the construction industry .............................................................................. 1.007
3. Nature of Construction Work .................................................................................................... 1.009

(a) Unique characteristics of construction projects ................................................................ 1.009
(b) Unique approach to problem solving ................................................................................ 1.011
4. Processes in Construction Projects ........................................................................................... 1.015

(a) Phases of construction ...................................................................................................... 1.015
(b) Determining value in construction projects ...................................................................... 1.019
5. Trend and Development ............................................................................................................. 1.020

(a) Global reforms .................................................................................................................. 1.020
(b) Developments in Hong Kong ............................................................................................ 1.022
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CHAPTER 2
PARTIES INVOLVED IN THE

CONSTRUCTION INDUSTRY
PARA.
1. Overview .................................................................................................................................. 2.001
(a) Scope of the construction industry..................................................................................... 2.001
(b) Range of human resources required ................................................................................... 2.003
2. Project Initiators ........................................................................................................................ 2.005

(a) Employer ............................................................................................................................ 2.005
(b) Project manager ................................................................................................................. 2.008
3. Consultants ............................................................................................................................... 2.014

(a) Project design professionals .............................................................................................. 2.014
(b) Licensing of authorised person ......................................................................................... 2.015
(c) Responsibilities of authorised person ............................................................................... 2.016
(d) Architect ............................................................................................................................ 2.017
(e) Structural engineer/building services engineer ................................................................. 2.019
(f) Quantity surveyor .............................................................................................................. 2.023
(g) Clerk of works ................................................................................................................... 2.026
(h) Other consultants .............................................................................................................. 2.028
4. Buildings Department .............................................................................................................. 2.029

(a) Statutory control of construction works ............................................................................ 2.029
(b) Administration of the Building Ordinance ....................................................................... 2.030
5. Contractors ............................................................................................................................... 2.032

(a) Choosing a contractor ....................................................................................................... 2.032
(b) Main contractor/domestic subcontractor/nominated subcontractor .................................. 2.035
(c) Management contractor .................................................................................................... 2.037
(d) Design-build contractor .................................................................................................... 2.038
6. Technically Competent Person ................................................................................................. 2.040

(a) Classes of supervision ....................................................................................................... 2.040
(b) Role of the technically competent person ......................................................................... 2.043

CHAPTER 3
PROCUREMENT METHODS
PARA.
1. Introduction ............................................................................................................................... 3.001

(a) Composition of project teams ........................................................................................... 3.001
(b) Overview of procurement ................................................................................................. 3.002
2. Methods of Procurement ........................................................................................................... 3.005

(a) Factors affecting choice of arrangement ........................................................................... 3.005
(b) Traditional general contracting ......................................................................................... 3.006
(c) Design and build ............................................................................................................... 3.010
(d) Management contracting ................................................................................................... 3.013
(e) Construction management ................................................................................................ 3.017
3. Types of Contracts ..................................................................................................................... 3.019

(a) Based on payment method ................................................................................................ 3.019
(b) Lump sum fixed-price contract ......................................................................................... 3.020
(c) Measurement contract ....................................................................................................... 3.022
(d) Cost-reimbursement contract ............................................................................................ 3.023
4. Tendering Procedures ................................................................................................................ 3.025

(a) Tender documents ............................................................................................................. 3.025
(i) Types of documents ................................................................................................. 3.025
(ii) Bills of quantities .................................................................................................... 3.027
(iii) Drawings ................................................................................................................. 3.028
(iv) Specifications .......................................................................................................... 3.029
(b) Tendering methods ............................................................................................................ 3.030
(i) Selection of main contractor ................................................................................... 3.030
(ii) Open tendering ........................................................................................................ 3.031
(iii) Selective tendering .................................................................................................. 3.033
(iv) Negotiated tendering ............................................................................................... 3.037
(c) Submission of tender ......................................................................................................... 3.038
(i) Responsibilities of tenderers ................................................................................... 3.038
(ii) Review of submitted tenders ................................................................................... 3.041
(d) Assessment of tender in public works contracts ............................................................... 3.042
(i) Approved lists ......................................................................................................... 3.042
(ii) Central Tender Board .............................................................................................. 3.045
(iii) Public Works Tender Board ..................................................................................... 3.046
(iv) World Trade Organisation ....................................................................................... 3.049

CHAPTER 4
PRINCIPLES OF CONTRACT
PARA.
1. Formation of Contract ............................................................................................................... 4.001

(a) General principles ............................................................................................................. 4.001
2. Essential Features ...................................................................................................................... 4.004

(a) Key requirements .............................................................................................................. 4.004
(i) Agreement .............................................................................................................. 4.005
(ii) Contractual intention .............................................................................................. 4.007
(iii) Consideration .......................................................................................................... 4.008
(b) Freedom to enter into contract .......................................................................................... 4.009
(c) Objective test ..................................................................................................................... 4.011
(d) Standard forms .................................................................................................................. 4.013
3. Offers and Acceptance .............................................................................................................. 4.014

(a) Importance of offer and acceptance .................................................................................. 4.014
(b) Invitation to treat ............................................................................................................... 4.015
(c) Invitation to tender ............................................................................................................ 4.020
(d) Offer .................................................................................................................................. 4.022
(e) Tender ................................................................................................................................ 4.027
(f) Cost of tendering ............................................................................................................... 4.035
(g) Acceptance ........................................................................................................................ 4.037
(h) Letters of intent ................................................................................................................. 4.041
(i) Battle of forms .................................................................................................................. 4.046
(j) Standing offers .................................................................................................................. 4.049
(k) Incomplete agreements ..................................................................................................... 4.051
4. Certainty of Terms ..................................................................................................................... 4.055

(a) Determination of binding force ......................................................................................... 4.055
(b) Custom and trade usage .................................................................................................... 4.060
(c) Reasonableness ................................................................................................................. 4.061
(d) Meaningless and self-contradictory terms ........................................................................ 4.062
(e) Subject to details ............................................................................................................... 4.063
(f) Subject to contract ............................................................................................................. 4.064
(g) Back-to-back ..................................................................................................................... 4.068
(h) Incorporation of terms by reference .................................................................................. 4.074
(i) Contract price .................................................................................................................... 4.075
5. Capacity of Parties .................................................................................................................... 4.078

(a) Contract invalid without necessary capacity ..................................................................... 4.078
(b) Corporation ....................................................................................................................... 4.080
(c) Partnerships ....................................................................................................................... 4.082
(d) Unincorporated association ............................................................................................... 4.084
(e) Hong Kong construction entities ....................................................................................... 4.086

42 PRINCIPLES OF CONTRACT
(f) Joint ventures .................................................................................................................... 4.088
6. Consideration ............................................................................................................................ 4.089

(a) Definition .......................................................................................................................... 4.089
(b) Rules regarding consideration ........................................................................................... 4.092
(i) Flow from promise ................................................................................................. 4.092
(ii) Invalid if past .......................................................................................................... 4.093
(iii) Not necessary to be adequate ................................................................................. 4.095
(iv) Required to be sufficient ......................................................................................... 4.096
(v) Must be definite in nature ....................................................................................... 4.100
7. Contractual Intention ................................................................................................................ 4.103

(a) Objective test ..................................................................................................................... 4.103
(b) Situations where a contractual intention is presumed ....................................................... 4.106
(c) Situations where the absence of a contractual
intention is presumed ........................................................................................................ 4.109
8. Doctrine of Privity .................................................................................................................... 4.112

(a) Rights of third parties ....................................................................................................... 4.112
(b) Hong Kong position .......................................................................................................... 4.115
9. Breach of Contract .................................................................................................................... 4.117

(a) Forms of breach ................................................................................................................ 4.117
(b) Effect of breach ................................................................................................................. 4.119
(i) Cause for action but not necessarily discharge ....................................................... 4.119
(ii) Condition versus warranty ...................................................................................... 4.121
(c) Breach of conditions of contract and non-payment .......................................................... 4.124
(i) Relief from future performance .............................................................................. 4.124
(ii) Repudiation for non-payment ................................................................................. 4.128
(iii) Creatiles Building Materials Co Ltd v To’s
Universe Construction Company Ltd ..................................................................... 4.131
(iv) Reasonable cause to suspend work ......................................................................... 4.135
(v) Pointless to proceed ................................................................................................ 4.145
(d) Remedies for breach ......................................................................................................... 4.146
(i) Purpose of damages ................................................................................................ 4.146
(ii) Cost of repair .......................................................................................................... 4.148
(iii) Losses consequential to breach .............................................................................. 4.149
(iv) Foreseeability of damage ........................................................................................ 4.150
(v) Repudiation or recovery of damages ...................................................................... 4.153
(vi) Principle of election ................................................................................................ 4.157
(vii) Duty to mitigate own loss ....................................................................................... 4.159
(viii) Court order for performance ................................................................................... 4.162
(ix) Injunction ................................................................................................................ 4.164
(x) Quantum meruit ...................................................................................................... 4.168
(xi) Extinction of remedies ............................................................................................ 4.170
10. Misrepresentation .................................................................................................................... 4.174

(a) General .............................................................................................................................. 4.174
(i) Types of pre-contract statements ............................................................................ 4.174
(ii) Mere puff ................................................................................................................ 4.175
(iii) Term of contract ...................................................................................................... 4.176

PRINCIPLES OF CONTRACT 43
(iv) Representation ........................................................................................................ 4.177

(v) Misrepresentation of opinion .................................................................................. 4.178
(vi) Misrepresentation of intention ................................................................................ 4.180
(vii) Misrepresentation of law ........................................................................................ 4.181
(viii) Effect of misrepresentation ..................................................................................... 4.182
(b) Types of misrepresentation ............................................................................................... 4.185
(i) Remedies based on type ......................................................................................... 4.185
(ii) Fraudulent misrepresentation ................................................................................. 4.186
(iii) Negligent misrepresentation .................................................................................... 4.187
(iv) Innocent misrepresentation ..................................................................................... 4.189
(v) Principal remedies .................................................................................................. 4.190
(c) Remedies for misrepresentation ........................................................................................ 4.191
(i) Fraudulent misrepresentation ................................................................................. 4.191
(ii) Negligent misrepresentation ................................................................................... 4.192
(iii) Innocent misrepresentation ..................................................................................... 4.193
(iv) Loss of remedy of rescission .................................................................................. 4.195
11. Mistake and Rectification ....................................................................................................... 4.196

(a) General .............................................................................................................................. 4.196
(i) Effect of mistake ..................................................................................................... 4.196
(ii) Types of mistake ..................................................................................................... 4.197
(iii) Mutual mistake ....................................................................................................... 4.200
(iv) Unilateral mistake ................................................................................................... 4.205
(v) Non est factum ........................................................................................................ 4.208
(vi) Rectification ............................................................................................................ 4.212
12. Duress and Undue Influence ................................................................................................... 4.221

(a) Undue influence ................................................................................................................ 4.221
(b) Economic duress ............................................................................................................... 4.224
13. Illegality .................................................................................................................................. 4.229

(a) General .............................................................................................................................. 4.229
(b) Court’s position ................................................................................................................. 4.231
(c) Effect based on weight of illegality ................................................................................... 4.232
(d) Quantum meruit claim ...................................................................................................... 4.233
(e) Enforceability of illegal contract ....................................................................................... 4.234

CHAPTER 5
CONTENTS OF CONTRACT
Para.
1. Extent of Obligations ............................................................................................................... 5.001
2. Express Terms .......................................................................................................................... 5.004

(a) General principles ............................................................................................................. 5.004
(b) Exemption clauses ............................................................................................................. 5.020
(c) Liquidated damages clauses .............................................................................................. 5.029
(d) Time bar clauses ................................................................................................................ 5.048
(e) Forfeiture clauses .............................................................................................................. 5.055
(f ) Set-off clauses ................................................................................................................... 5.070
3. Implied Terms .......................................................................................................................... 5.078

(a) Statutory implication ......................................................................................................... 5.080
(b) Necessary implication and obvious inference ................................................................... 5.094
(c) Duty to cooperate .............................................................................................................. 5.107
(d) Duty not to prevent completion ........................................................................................ 5.124
(e) Other implied terms .......................................................................................................... 5.134

CHAPTER 6
CONSTRUCTION OF CONTRACT
Para.
1. Goal of Interpretation ............................................................................................................... 6.001
(a) Objective intention of parties ............................................................................................ 6.001
(b) Determination of correct meaning .................................................................................... 6.006
2. Principles of Interpretation ...................................................................................................... 6.008

(a) General .............................................................................................................................. 6.008
(b) Examination of express terms ........................................................................................... 6.010
(c) Court preference for non-voidable meaning ..................................................................... 6.013
(d) Non-standard or technical meanings ................................................................................. 6.014
(e) Contract presumed a consistent document ........................................................................ 6.019
(f ) Interpretation of ambiguous term ..................................................................................... 6.020
(g) Unreasonable terms not voidable, if unambiguous ........................................................... 6.022
3. Parol Evidence Rule ................................................................................................................. 6.025

(a) Operation of parol evidence rule ....................................................................................... 6.025
(b) Summary of principles ...................................................................................................... 6.028
4. Factual Matrix and Business Sense .......................................................................................... 6.030

(a) Scope of factual matrix ..................................................................................................... 6.030
(b) Common sense approach .................................................................................................. 6.034
(c) Technical versus commercial meanings ............................................................................ 6.036
5. Contra Proferentem Rule ......................................................................................................... 6.039

(a) Application of contra proferentem rule ............................................................................ 6.039
(b) Rationale of contra preferentum rule ................................................................................ 6.041
(c) Rule not applicable to standard form contract terms ........................................................ 6.043
6. Ejusdem Generis Rule .............................................................................................................. 6.044

(a) Application of ejusdem generis rule ................................................................................. 6.044
7. Particular Principles ................................................................................................................. 6.049

(a) Priority of words written, typed and deleted ..................................................................... 6.049
(b) Incorporation of documents .............................................................................................. 6.058
(c) Impossibility ..................................................................................................................... 6.062

CHAPTER 7
COLLATERAL AGREEMENTS
PARA.
1. Overview ................................................................................................................................... 7.001

(a) Types of collateral agreements .......................................................................................... 7.001
2. Agreement Between Same Parties ............................................................................................ 7.005

(a) Application of parol evidence rule .................................................................................... 7.005
(b) Exceptions to parol evidence rule ..................................................................................... 7.009
(c) Determining whether a collateral agreement exists .......................................................... 7.016
3. Agreement With Third Party ..................................................................................................... 7.021

(a) Collateral warranty ............................................................................................................ 7.021
(b) Use of collateral warranty in Hong Kong ...........................................................................7.024
4. Collateral Warranty Regarding the Designer ............................................................................ 7.026

(a) Responsibility of the designer ........................................................................................... 7.026
(b) Usual level of competence ................................................................................................ 7.028
(c) Designer’s liability for fitness of purpose ......................................................................... 7.029

CHAPTER 8
ESTOPPEL AND WAIVER
PARA.
1. Estoppel and Waiver .................................................................................................................. 8.001

(a) Definition .......................................................................................................................... 8.001
(b) Distinction between estoppel and a waiver ....................................................................... 8.006
2. Estoppel by Conduct ................................................................................................................. 8.008

(a) Forms of estoppel by conduct ........................................................................................... 8.008
(b) Estoppel by convention or agreement ............................................................................... 8.009
(c) Estoppel by representation ................................................................................................ 8.014
3. Promissory Estoppel ................................................................................................................. 8.018

(a) The purpose of promissory estoppel ................................................................................. 8.018
(b) Operation of promissory estoppel ..................................................................................... 8.019
(c) Defensive in nature ........................................................................................................... 8.020
(d) Development of estoppel in Australia ............................................................................... 8.024
4. Waiver ....................................................................................................................................... 8.025

(a) Distinction between waiver and election ........................................................................... 8.025
(b) Changes to performance of contract ................................................................................. 8.027
(c) Insistence on strict compliance ......................................................................................... 8.029

CHAPTER 9
TORT
Para.
1. Law of Torts ............................................................................................................................. 9.001
(a) Definition of tort ............................................................................................................... 9.001
(b) Function of the law of torts ............................................................................................... 9.004
(c) Tort versus contract ........................................................................................................... 9.005
(d) Interaction of tort and contract .......................................................................................... 9.006
(e) Remedy in tort .................................................................................................................. 9.012
2. Negligence ............................................................................................................................... 9.013

(a) Definition of negligence .................................................................................................... 9.013
(b) Duty of care ....................................................................................................................... 9.016
(i) Donoghue v Stevenson principle ............................................................................ 9.016
(ii) Damage foreseeable by a reasonable man ............................................................... 9.019
(iii) Physical damage to property ................................................................................... 9.020
(iv) Foreseeability, proximity and fairness .................................................................... 9.022
(v) No duty of care ........................................................................................................ 9.026
(c) Breach of duty ................................................................................................................... 9.031
(i) ‘Reasonable man’ test ............................................................................................. 9.031
(ii) Special skill may be considered .............................................................................. 9.034
(iii) Bolam test ............................................................................................................... 9.035
(iv) Res ipsa loquitur rule .............................................................................................. 9.037
(d) Damage .............................................................................................................................. 9.040
(i) Determination of damage ........................................................................................ 9.040
(ii) Causation ................................................................................................................. 9.041
(iii) ‘But for’ test ............................................................................................................ 9.042
(iv) More than one cause ............................................................................................... 9.043
(v) Quantification of damage ........................................................................................ 9.044
(e) Economic loss .................................................................................................................... 9.048
(i) Liability for economic loss ..................................................................................... 9.048
(ii) Recovery of economic loss is restrained ................................................................. 9.050
(iii) Hedley Byrne principle ........................................................................................... 9.052
(iv) Economic loss arising from defective buildings ..................................................... 9.055
(v) Hong Kong law in relation to defective buildings .................................................. 9.060
(vi) Reworking of Hedley Byrne principle .................................................................... 9.061
(f) Contributory negligence .................................................................................................... 9.063
(i) Court determines the just and equitable amount ..................................................... 9.063
(ii) Defendant’s liability under contract ........................................................................ 9.068
(iii) Concurrent delay ..................................................................................................... 9.069
3. Occupiers’ Liability .................................................................................................................. 9.070

(a) Governing legislation ........................................................................................................ 9.070
(b) Statutory duty of care ........................................................................................................ 9.071

202 TORT
(c) Occupier ............................................................................................................................ 9.077

(d) Independent contractors .................................................................................................... 9.081
(e) Warning ............................................................................................................................. 9.085
(f ) Trespassers ........................................................................................................................ 9.089
4. Nuisance and Ryland v Fletcher .............................................................................................. 9.093

(a) Types of nuisance .............................................................................................................. 9.093
(b) Interference with enjoyment of land ................................................................................. 9.094
(c) Competing rights of neighbours ........................................................................................ 9.097
(d) Right to support of land .................................................................................................... 9.098
(e) Duty to reduce nuisance .................................................................................................... 9.099
(f) Rylands v Fletcher ............................................................................................................ 9.100
(g) Non-natural use of premises ............................................................................................. 9.102
(h) Liability cannot be delegated ............................................................................................ 9.104
5. Trespass to Land ....................................................................................................................... 9.105

(a) Definition of trespass ........................................................................................................ 9.105
(b) Termination of contract leading to trespass ...................................................................... 9.106

CHAPTER 10
STATUTORY DUTIES
PARA.
1. Breach of Statutory Duties ...................................................................................................... 10.001

(a) Civil and criminal liability .............................................................................................. 10.001
(b) Intention of legislation to create duty under tort ............................................................. 10.003
(c) Contractor liability in relation to subcontractor breach .................................................. 10.005
(d) Strict liability offences .................................................................................................... 10.006
(e) Offences requiring mens rea ........................................................................................... 10.008
(f) Liability in joint ventures ................................................................................................ 10.010
2. Building Control ..................................................................................................................... 10.011

(a) Buildings Ordinance and Building Authority ................................................................. 10.011
(i) Buildings Ordinance (Cap 123) ............................................................................ 10.011
(ii) Scope of the Building Authority ........................................................................... 10.012
(iii) Growing complexity of building regulation ......................................................... 10.014
(b) Building works control .................................................................................................... 10.017
(i) Definition of building works ................................................................................. 10.017
(ii) Process of approval for building works ................................................................ 10.019
(iii) Unauthorised building works ................................................................................ 10.022
(iv) Power to order cessation of works ........................................................................ 10.024
(v) Occupation permits ............................................................................................... 10.025
(vi) Wilful concealment of substandard works ............................................................ 10.026
(c) Building maintenance ..................................................................................................... 10.027
(i) Normal duties of owners ....................................................................................... 10.028
(ii) Orders to rectify unsafe situations ........................................................................ 10.030
(iii) Compliance with orders ........................................................................................ 10.032
3. Environmental Protection ....................................................................................................... 10.035

(a) Governing legislation ...................................................................................................... 10.035
(b) Air pollution .................................................................................................................... 10.036
(i) Scope of Air Pollution Control Ordinance (Cap 311) .......................................... 10.036
(ii) Application of section 9 ........................................................................................ 10.038
(iii) Pollutants controlled by statute ............................................................................. 10.042
(c) Noise control ................................................................................................................... 10.043
(i) Scope of the Noise Control Ordinance (Cap 400) ................................................ 10.043
(ii) Noise abatement notices ....................................................................................... 10.045
(iii) Other controls on noise pollution ......................................................................... 10.048
(d) Water pollution ................................................................................................................ 10.050
(i) Applicable legislation ........................................................................................... 10.050
(ii) Obligations of licensee ......................................................................................... 10.051
(e) Solid waste control .......................................................................................................... 10.054
(i) Applicable legislation ........................................................................................... 10.054

242 STATUTORY DUTIES
(f) Environmental Impact Assessment ................................................................................. 10.058

(i) Purpose of legislation ........................................................................................... 10.058
(ii) Procedure for obtaining environmental permit ..................................................... 10.059
(iii) Addressing public interest .................................................................................... 10.062
(iv) The granting or refusal of permit ......................................................................... 10.064
4. Site Safety ............................................................................................................................... 10.068

(a) Relevant legislation ......................................................................................................... 10.068
(b) Duty to reasonably ensure health and safety ................................................................... 10.070
(c) Legislation in operation: examples ................................................................................. 10.072
(d) Other safety legislation ................................................................................................... 10.075
5. Immigration Offences ............................................................................................................. 10.076

(a) Responsibility of employer to check employees’
legal status ....................................................................................................................... 10.076

CHAPTER 11
PROCUREMENT, TENDER AND PRICE
Para.
1. The Procurement Process ........................................................................................................ 11.001
(a) Avoidance of dispute ....................................................................................................... 11.001
(b) Tender or negotiation approach ....................................................................................... 11.002
(c) Open versus limited tender system ................................................................................. 11.004
(d) Rationale for the tendering process ................................................................................. 11.005
(e) Pre-qualification .............................................................................................................. 11.006
(f) Stages in the tendering .................................................................................................... 11.008
(g) Evaluation of the tenders ................................................................................................. 11.009
(h) Combining tendering and negotiation ............................................................................. 11.010
(i) Acceptance of a tender .................................................................................................... 11.011
2. Legal Aspects of Public Procurement ..................................................................................... 11.012

(a) Principles of government procurement ........................................................................... 11.012
(b) Judicial review ................................................................................................................ 11.016
(c) WTO Agreement on Government Procurement .............................................................. 11.018
(d) Doctrine of legitimate expectation .................................................................................. 11.026
(e) Public versus private decision ......................................................................................... 11.028
(f) Review Body on Bid Challenges .................................................................................... 11.030
(g) Restricted tender arrangements ....................................................................................... 11.032
3. Invitation to Tender and Tendering .......................................................................................... 11.036

(a) Invitation to treat ............................................................................................................. 11.036
(b) No set formalities in construction contracts ................................................................... 11.037
(c) Acceptance must be pertinent and unambiguous ............................................................ 11.040
(d) Employer not obligated to accept any tender .................................................................. 11.041
(e) Invitation to tender may be an ‘if ’ contract ..................................................................... 11.046
(f) Distinct from request to develop design ......................................................................... 11.048
(g) Tender for works as employer may order ........................................................................ 11.049
(h) Documentation involved in an invitation to tender ......................................................... 11.051
(i) Costs of tendering ........................................................................................................... 11.053
4. Acceptance of Tender .............................................................................................................. 11.056

(a) Unconditional acceptance ............................................................................................... 11.056
(b) Counter-offers ................................................................................................................. 11.057
(c) Acceptance by conduct ................................................................................................... 11.058
(d) Subject to contract ........................................................................................................... 11.059
(e) Agreement on essential terms ......................................................................................... 11.063
(f) Quantum meruit .............................................................................................................. 11.065
(g) Qualified tenders ............................................................................................................. 11.067
5. Withdrawal of Tender .............................................................................................................. 11.070

(a) Designated period of validity .......................................................................................... 11.070
(b) Termination of offer ........................................................................................................ 11.073

272 PROCUREMENT, TENDER AND PRICE
(c) Mistake in tender ............................................................................................................. 11.074
6. Letter of Intent ........................................................................................................................ 11.075

(a) Effect of letter of intent ................................................................................................... 11.075
(b) Interpretation of obligations ............................................................................................ 11.080
(c) Condition precedent ........................................................................................................ 11.083
7. Price ........................................................................................................................................ 11.084

(a) Fixing the price ............................................................................................................... 11.084
(b) Implied term of reasonable rates ..................................................................................... 11.085
(c) Pricing schemes .............................................................................................................. 11.086
(d) Lump sum/fixed price contracts ...................................................................................... 11.088
(e) ‘Without quantities’ ......................................................................................................... 11.091
(f) ‘With quantities’ .............................................................................................................. 11.093
(g) Remeasurement contracts ............................................................................................... 11.096
(h) Non-traditional contract forms ........................................................................................ 11.100
(i) ‘Turnkey’ or ‘design-build’ contracts ..................................................................... 11.101
(ii) ‘Management’ contracts ......................................................................................... 11.104
(i) Adjustments to price ....................................................................................................... 11.105
(j) Index-based price adjustment .......................................................................................... 11.107
(k) Adjusting price by provisional sum of prime cost .......................................................... 11.111

CHAPTER 12
PERFORMANCE BOND, GUARANTEES AND

COLLATERAL WARRANTIES
PARA.
1. Insurance and surety bonds ..................................................................................................... 12.001
2. Bid bonds ................................................................................................................................ 12.007
3. Payment bonds ........................................................................................................................ 12.009
4. Demand or conditional bonds ................................................................................................. 12.020
5. Summary ................................................................................................................................. 12.021

CHAPTER 13
INSURANCE AND INDEMNITY
Para.
1. Types of Liability .................................................................................................................... 13.001
2. Clause 18 – Employer’s Indemnity Clause Regarding

Injury to Persons and Property ................................................................................................ 13.002
(a) Clause 18(1) .................................................................................................................... 13.002
(b) Clause 18(2) .................................................................................................................... 13.005
3. Negligence .............................................................................................................................. 13.007
4. Clause 19 – Insurance Against Injury to Persons and Property .............................................. 13.013

(a) Clause 19(2) .................................................................................................................... 13.019
5. Clause 20 – Insurance of Works Against Accidents of Fire,

Lightning, Explosion, etc ........................................................................................................ 13.020
6. Summary of Clauses 18 to 20 ................................................................................................. 13.023

CHAPTER 14
CERTIFICATES
Para.
1. Overview ................................................................................................................................. 14.001
(a) Types of certificates ......................................................................................................... 14.001
(b) Function of a certificate .................................................................................................. 14.003
(c) Definition of certificate ................................................................................................... 14.004
2. Approval and Certificates ........................................................................................................ 14.005

(a) Legal effect ...................................................................................................................... 14.005
(b) Interim payment certificate ............................................................................................. 14.007
(i) Principle of interim payment .................................................................................. 14.007
(ii) Clause 30 of the HKIA form .................................................................................. 14.009
(iii) Effect of an interim certificate in law ..................................................................... 14.013
(iv) Error in certificate .................................................................................................. 14.014
(v) Conclusiveness of a certificate ............................................................................... 14.016
(c) Non-completion certificate ............................................................................................. 14.018
(i) Late completion by contractor ............................................................................... 14.018
(ii) Deduction of liquidated damages ........................................................................... 14.020
(d) Practical completion certificate ....................................................................................... 14.023
(i) Practical completion determined by the architect .................................................. 14.023
(ii) Events following issue of a certificate ................................................................... 14.025
(iii) Working definition of practical completion ........................................................... 14.027
(iv) Employer possession prior to practical completion ............................................... 14.031
(e) Final certificate ................................................................................................................ 14.032
(i) Function of the final certificate .............................................................................. 14.032
(ii) Time limits for issue .............................................................................................. 14.033
(iii) Legal effect of the final certificate ......................................................................... 14.034
(iv) Contractor’s obligation to supply documents ......................................................... 14.035
(v) Conclusiveness of the final certificate .................................................................... 14.037
(vi) Employer not entitled to dispute quality: relevant case law ................................... 14.041
(vii) Maintenance certificate .......................................................................................... 14.050
(f) Certificate of making good defects ................................................................................. 14.053
(i) Defects liability period ........................................................................................... 14.053
(ii) Schedule of defects ................................................................................................ 14.057
(iii) Effect of the issue of the certificate ........................................................................ 14.058
(g) The granting of an extension of time .............................................................................. 14.060
(i) Reasons for delay ................................................................................................... 14.060
(ii) Time limitations for granting an extension of time ................................................ 14.062
3. Form and Sufficiency of Certificate ........................................................................................ 14.067

(a) Duties of the certifier ...................................................................................................... 14.067
(i) Obligations of the certifier ..................................................................................... 14.067
(ii) Interim certificates ................................................................................................. 14.070

322 CERTIFICATES
(iii) Need for impartiality .............................................................................................. 14.072

(iv) Reasonable satisfaction .......................................................................................... 14.074
(b) Attacking the certifier ..................................................................................................... 14.076
(i) Issues relating to conclusiveness ............................................................................ 14.076
(ii) Challenge in arbitration .......................................................................................... 14.077
(iii) Court’s power to open up and review certificates ................................................... 14.079
(iv) Not within jurisdiction ........................................................................................... 14.083
(v) Not properly made ................................................................................................. 14.085
(vi) Disqualification of a certifier ................................................................................. 14.091
(vii) Impartiality ............................................................................................................. 14.092
(viii) Immunity from liability .......................................................................................... 14.094

CHAPTER 15
MONEY
Para.
1. Introduction ............................................................................................................................. 15.001

(a) Payment overview ........................................................................................................... 15.001
2. Types of contract ..................................................................................................................... 15.004

(b) Lump sum contract ......................................................................................................... 15.005
(c) Measurement contract ..................................................................................................... 15.007
(d) Cost reimbursement contract .......................................................................................... 15.010
3. Interim Payments .................................................................................................................... 15.011

(a) Interim payment procedure ............................................................................................. 15.011
(b) Period for honouring certificates ..................................................................................... 15.015
(c) Materials and goods ........................................................................................................ 15.017
(d) The entire contract .......................................................................................................... 15.020
(e) Consideration .................................................................................................................. 15.022
(f ) Substantial completion .................................................................................................... 15.026
(g) Non-completion .............................................................................................................. 15.030
(h) Role of certifier ............................................................................................................... 15.035
(i) Effecting a certificate ...................................................................................................... 15.038
4. Variation and Valuation ........................................................................................................... 15.042

(a) Overview ......................................................................................................................... 15.042
(b) Extra works ..................................................................................................................... 15.045
(c) Express or implied promise ............................................................................................ 15.049
(d) Authority ......................................................................................................................... 15.053
(e) Condition precedent ........................................................................................................ 15.055
(f) Agreeing on the rates ...................................................................................................... 15.057
(g) Possibilities for negotiation ............................................................................................. 15.060
(h) Consideration .................................................................................................................. 15.063
5. Right to Withhold Payment ..................................................................................................... 15.064

(a) ‘Reasonable’ approval of employer ................................................................................. 15.064
(b) Damages as remedy for breach ....................................................................................... 15.067
(c) Relationship between contractor and subcontractor ....................................................... 15.069
6. Pay when Paid ......................................................................................................................... 15.070

(a) Payment by employer a condition precedent ................................................................... 15.070
(b) Dispute whether a contractor paid or not ........................................................................ 15.073
(c) Ambiguity of term ‘payment’ ......................................................................................... 15.079
7. Nominated Subcontractor’s Payment ...................................................................................... 15.083

(a) Bound to both main and subcontract .............................................................................. 15.083
(b) Employer responsible for payment .................................................................................. 15.085
(c) Insolvency ....................................................................................................................... 15.087

352 MONEY
(d) Termination by the employer .......................................................................................... 15.098

(e) Termination by the main contractor ................................................................................ 15.101
8. Retention Money ................................................................................................................... 15.106

(a) Entitlement to retention money ....................................................................................... 15.106
(b) Deductions from retention money ................................................................................... 15.110
(c) Whether proportion is due to subcontractor ................................................................... 15.112
(d) Whether retention money is kept separate ...................................................................... 15.116
9. Non-payment and Remedies ................................................................................................. 15.117

(a) Non-payment and repudiation ......................................................................................... 15.117
(b) Contractor’s right to determine employment ................................................................... 15.119
(c) Lien ................................................................................................................................. 15.120
(d) Trust ................................................................................................................................ 15.122
10. Quantum Meruit .................................................................................................................... 15.124

(a) Payment not determined by contract ............................................................................... 15.124
(b) Implied contract .............................................................................................................. 15.125
(c) Assessment of reasonable sum ........................................................................................ 15.126
(d) Situations attracting quantum meruit .............................................................................. 15.128
11. Set-off and Abatement .......................................................................................................... 15.131

(a) Dissatisfaction of the employer ....................................................................................... 15.131
(b) Set-off and counter-claim ................................................................................................ 15.133
(c) Set-off when valid certificates are issued ........................................................................ 15.134

CHAPTER 16
TIME
Para.
1. Overview ................................................................................................................................. 16.001
(a) Importance of timely completion .................................................................................... 16.001
(b) Anticipation of delay ....................................................................................................... 16.005
2. Construction Delays ................................................................................................................ 16.007

(a) Delay claims .................................................................................................................... 16.007
(b) Types and remedies of delays .......................................................................................... 16.009
(c) Excusable delays/compensable delays ............................................................................ 16.011
(d) Excusable/non-compensable delays ................................................................................ 16.012
(e) Non-excusable delays ...................................................................................................... 16.013
(f ) Concurrent delays ........................................................................................................... 16.016
3. Critical Path Method Analysis ................................................................................................ 16.018

(a) Determining effect of delay ............................................................................................ 16.018
4. Extension of Time .................................................................................................................. 16.022

(a) Effect of extension of time .............................................................................................. 16.022
(b) Obligation of contractor in claiming for an extension of time ........................................ 16.023
(c) Importance of giving prompt notice ............................................................................... 16.025
(d) Timing of granting an extension of time ......................................................................... 16.029
(e) Grounds for extension of time ........................................................................................ 16.031
(f ) Fault of neither of the parties .......................................................................................... 16.034
(i) Subclause 23(a) – force majeure ............................................................................ 16.035
(ii) Subclause 23(b) – inclement weather .................................................................... 16.036
(iii) Subclause 23(c) – loss or damage occasioned by any one or
more of the contingencies referred to in subclauses 20(A) or (B) ......................... 16.039
(iv) Subclause 23(d) – strikes, etc ................................................................................. 16.040
(v) Subclause 23(g) – delay of nominated subcontractors or
nominated suppliers ............................................................................................... 16.041
(vi) Subclause 23(j) – contractor’s inability to secure labour,
goods or materials .................................................................................................. 16.044
(vii) Subclause 23(k) – antiquities ................................................................................. 16.045
(g) Fault of the employer or the architect .............................................................................. 16.046
(i) Subclause 23(e) – the architect’s instructions ........................................................ 16.046
(ii) Subclause 23 (f) – lateness of drawings ................................................................. 16.047
(iii) Subclause 23(h) – Delay of artists or tradesmen .................................................... 16.052
(iv) Clause 23(i) – inspection and testing of work ........................................................ 16.054
(h) Interference with contractor’s progress ........................................................................... 16.055
(i) Deferment of date of possession ..................................................................................... 16.056
(j) Degree of access that the employer is obliged to grant ................................................... 16.057
(k) Obligation to appoint certifiers, nominated subcontractors, etc ..................................... 16.059
(l) Remedy for delay ............................................................................................................ 16.061

396 TIME
5. Liquidated Damages / Penalty .............................................................................................. 16.063

(a) Meaning of liquidated damages ...................................................................................... 16.063
(b) Purpose of liquidated damages ....................................................................................... 16.065
(c) Differentiation between liquidated damages and penalty ............................................... 16.066
(d) Mechanism of liquidated damages .................................................................................. 16.071
(e) Failure to insert the amount of liquidated damages ........................................................ 16.074
(f ) Without liquidated damages provision ............................................................................ 16.077
(g) Ambiguity in contract completion date ........................................................................... 16.078
(h) Liquidated damages as the maximum claimable remedy ............................................... 16.080
(i) Time at large ................................................................................................................... 16.084
6. Contractor’s Progress ............................................................................................................ 16.088

(a) ‘Regularly and diligently’ ................................................................................................ 16.088
7. Loss and Expense .................................................................................................................. 16.094

(a) Contractor’s ability to claim ............................................................................................ 16.094
(b) Disruption claims ............................................................................................................ 16.097
(c) Prolongation claims ........................................................................................................ 16.100
(d) Submission of direct loss and/or expense claims ............................................................ 16.101
(e) Subclause 24(1) ............................................................................................................... 16.106
(f ) Mitigation ........................................................................................................................ 16.107
(g) Distinction between direct and indirect loss ................................................................... 16.108
(h) The remoteness test ......................................................................................................... 16.118
8. Practical Completion ............................................................................................................. 16.122

(a) Fit for employer to occupy and use ................................................................................. 16.122
(b) Effect of issuing the certificate ....................................................................................... 16.127
9. Sectional Completion ............................................................................................................ 16.128

(a) Provisions for phased completion ................................................................................... 16.128
(b) Court will not alter clear agreement ............................................................................... 16.131
10. Defects Liability Period ........................................................................................................ 16.137

(a) Defects clauses ................................................................................................................ 16.137
(b) Schedule of defects ......................................................................................................... 16.139
(c) Exclusion clause .............................................................................................................. 16.142

CHAPTER 17
QUALITY
PARA.
1. Quality in Construction Contracts .......................................................................................... 17.001
(a) Growing importance of quality standards ....................................................................... 17.001
(b) Principles of quality management systems ..................................................................... 17.003
(c) Common law approach to quality ................................................................................... 17.005
(d) Engineer’s and architect’s duties in quality control ......................................................... 17.007
(e) Contractor’s obligation to fix defects .............................................................................. 17.009
(f) Contractor’s obligation to use materials and carry out work as specified ....................... 17.011
(i) Contractor’s obligation for care and protection of work ....................................... 17.012
2. Defects in Design, Materials and Workmanship ..................................................................... 17.013

(a) Design ............................................................................................................................. 17.014
(i) Definition .............................................................................................................. 17.014
(ii) Standard of reasonable care and skill ................................................................... 17.015
(iii) Standard of fitness for purpose ............................................................................. 17.019
(iv) Design-build and turnkey contracts ...................................................................... 17.021
(v) Fit for purpose when the work is designed by a contractor .................................. 17.026
(vi) Employer’s reliance on contractor’s skill .............................................................. 17.028
(vii) Contractor’s duty to warn ...................................................................................... 17.030
(viii) Analysis of implied terms dependent on express terms ....................................... 17.034
(b) Materials ......................................................................................................................... 17.036
(i) Specification of materials ..................................................................................... 17.036
(ii) Quality control measures ...................................................................................... 17.037
(iii) Application of implied warranty as to quality of materials .................................. 17.039
(iv) Circumstances where warranty of fitness may not apply ..................................... 17.041
(v) Consideration of parties’ intentions ...................................................................... 17.043
(c) Workmanship .................................................................................................................. 17.046
(i) Obligation to exercise proper skill and care ......................................................... 17.046
(ii) Distinction from warranty of materials ................................................................ 17.047
(iii) Determination of degree of skill required ............................................................ 17.049
(iv) Duty to warn of design defects ............................................................................. 17.051
(v) Production of final result ...................................................................................... 17.053
3. Defects and Acceptance .......................................................................................................... 17.054

(a) Defects ............................................................................................................................ 17.054
(i) Generally .............................................................................................................. 17.054
(ii) Principle of complete performance ...................................................................... 17.055
(iii) Defects detected at substantial completion ........................................................... 17.056
(iv) Defects detected prior to substantial completion .................................................. 17.057
(b) Acceptance ...................................................................................................................... 17.059
(i) Periodic checks and approval of work .................................................................. 17.059
(ii) Liability for defects extends past receipt of full payment .................................... 17.061
(iii) Defective materials approved by the employer ..................................................... 17.064

432 QUALITY
4. Maintenance and Certificate ................................................................................................... 17.067

(a) Scope of maintenance period .......................................................................................... 17.067
(b) Whether the certificate is considered conclusive as to acceptance ................................. 17.068
5. Temporary Work and Permanent Work ................................................................................... 17.072

(a) Definition of temporary works ........................................................................................ 17.072
(b) Contractor responsible for the design of temporary works ............................................. 17.074
(c) Impossibility ................................................................................................................... 17.076
(d) Doctrine of frustration .................................................................................................... 17.080
(e) Unexpected difficulty no excuse for non-performance ................................................... 17.082
6. Damages for Defective Works and Outstanding Works .......................................................... 17.084

(a) Cost of repair ................................................................................................................... 17.084
(b) The employer has a duty to mitigate loss ........................................................................ 17.086
(c) The employer is entitled to recoup additional costs ........................................................ 17.087

CHAPTER 18
TERMINATION
Para.
1. Termination of Construction Contracts ................................................................................... 18.001
(a) Termination and determination ....................................................................................... 18.001
(b) Interaction between express provisions and common law rights .................................... 18.003
(c) No reliance on the termination clause of own default .................................................... 18.006
(d) Differing consequences of termination under common law versus contract terms ........ 18.009
2. Contractor Remaining On Site ................................................................................................ 18.011

(a) Right of the contractor to remain .................................................................................... 18.011
(b) Employer’s right to evict upon termination ..................................................................... 18.013
(c) Injunction preventing termination ................................................................................... 18.016
(d) Remedy in damages for contractor ................................................................................. 18.017
(e) Illustration of issues: Hong Kong Housing Society v
Hing Lee Construction Co Ltd ........................................................................................ 18.019
3. Repudiation at Common Law ................................................................................................. 18.020

(a) Non-payment ................................................................................................................... 18.020
(b) Consequences based on the importance of broken terms ............................................... 18.021
(c) Categories of repudiatory breach .................................................................................... 18.026
(d) Significance of cumulative breaches ............................................................................... 18.027
(e) Monies owed at time of termination may be recoverable ............................................... 18.031
(f ) Notice to perform ............................................................................................................ 18.035
4. Contractual Termination .......................................................................................................... 18.036

(a) The purpose of termination clauses ................................................................................ 18.036
(b) The difference of termination under common law .......................................................... 18.037
(c) Formalities must be fully complied with ........................................................................ 18.038
(d) Overlapping of contractual and common law termination .............................................. 18.039
(e) Termination by the employer .......................................................................................... 18.041
(f ) Termination by the contractor ......................................................................................... 18.044
(g) Reasonable exercise of the power to terminate ............................................................... 18.046
(h) Failure to proceed regularly and diligently ..................................................................... 18.051
(i) When payment is unreasonably withheld by the employer ............................................. 18.055
(j) Knock-on termination ..................................................................................................... 18.056
(k) Contractual notice requirement ....................................................................................... 18.057
(l) Risk of an invalid notice ................................................................................................. 18.059
(m) Termination based on erroneously held beliefs ............................................................... 18.062
(n) Set-off and cross-claim issues ......................................................................................... 18.064
5. Rights upon Termination ......................................................................................................... 18.065

(a) Kinds of remedies ........................................................................................................... 18.065
(b) Rights of employer .......................................................................................................... 18.067
(c) Interim rights ................................................................................................................... 18.069

466 TERMINATION
6. Construction Insolvency ......................................................................................................... 18.070

(a) Overview of the insolvency procedure ........................................................................... 18.070
(b) Impact of the main contractor’s insolvency .................................................................... 18.072
(c) Standard provisions addressing insolvency ..................................................................... 18.074
(d) Proprietary safeguard ...................................................................................................... 18.075
(i) Direct payment clauses ......................................................................................... 18.075
(ii) Direct payment and insolvency laws .................................................................... 18.077
(iii) Abuse of insolvency regime to collect payment ................................................... 18.080
(e) Contractual safeguard ..................................................................................................... 18.082
(i) Plant and material ownership ................................................................................ 18.082
(ii) Plant and material vesting clauses ........................................................................ 18.084
(iii) Vesting clauses under Hong Kong standard forms ............................................... 18.088
(iv) Effectiveness of property-vesting clauses ............................................................. 18.090
(v) Dispute over ownership ........................................................................................ 18.094

CHAPTER 19
STANDARD FORM OF CONTRACT
Para.
1. Standard Form Contracts in Hong Kong ................................................................................. 19.001
(a) Introduction ..................................................................................................................... 19.001
(b) Use of standard contract documents ............................................................................... 19.002
(c) Benefits of standard forms .............................................................................................. 19.003
(d) Problems with standard forms ........................................................................................ 19.004
(e) Main contracts ................................................................................................................. 19.008
(i) Public works ........................................................................................................... 19.009
(ii) Private sector .......................................................................................................... 19.011
(f ) Subcontracts .................................................................................................................... 19.013
(i) Public works ........................................................................................................... 19.015
(ii) Private sector .......................................................................................................... 19.016
2. The New Contract for Hong Kong .......................................................................................... 19.017

(a) Rationale for revision ...................................................................................................... 19.017
(b) The 2005 standard form of building contract ................................................................. 19.019
(c) Contractor’s obligations .................................................................................................. 19.023
(d) Power of an architect ....................................................................................................... 19.025
(e) Variation .......................................................................................................................... 19.026
(f ) Completion issues ........................................................................................................... 19.028
(g) Nominated subcontractors and suppliers ........................................................................ 19.031
(h) Final certificate ................................................................................................................ 19.032
(i) Determination and dispute resolution ............................................................................. 19.033
3. Certain Features of Standard Form Contracts ......................................................................... 19.035

(a) Summary and review ...................................................................................................... 19.035
(b) Acceleration and recovery of delay ................................................................................. 19.036
(c) Risk of unforeseen conditions ......................................................................................... 19.037
(d) Impossibility ................................................................................................................... 19.038
(e) Care of works .................................................................................................................. 19.039
(f ) Third-party interference .................................................................................................. 19.040
(g) Risk of legislative changes .............................................................................................. 19.041
(h) Payment issues ................................................................................................................ 19.042
(i) Claims ............................................................................................................................. 19.044
4. The FIDIC Forms .................................................................................................................... 19.045

(a) Background ..................................................................................................................... 19.045
(b) New underlying principles .............................................................................................. 19.048
(c) Certain features found in the FIDIC new standard forms ............................................... 19.049
5. The Nec Forms ........................................................................................................................ 19.056

(a) Background ..................................................................................................................... 19.056
(b) Rationale and structure ................................................................................................... 19.059

CHAPTER 20
CONSTRUCTION LITIGATION
Para.
1. Features of Construction Litigation ........................................................................................ 20.001
(a) Operation of construction industry ................................................................................. 20.001
(b) Common causes of disputes ............................................................................................ 20.004
(c) Characteristics of construction contracts ........................................................................ 20.007
(d) Drawbacks of construction litigation .............................................................................. 20.008
(i) Documents involved ............................................................................................... 20.009
(ii) Parties involved ...................................................................................................... 20.010
Discovery and standard of proof ............................................................................ 20.011
Time to trial ............................................................................................................ 20.012
(iii) Expert evidence ...................................................................................................... 20.013
(e) Civil justice reform ......................................................................................................... 20.014
2. Courts and Process of Laws .................................................................................................... 20.016

(a) Adversary system ............................................................................................................ 20.016
(b) Initial proceedings ........................................................................................................... 20.017
(c) Appeal proceedings ......................................................................................................... 20.020
(d) General process of litigation ........................................................................................... 20.024
3. Pleadings ................................................................................................................................. 20.025

(a) In general ........................................................................................................................ 20.025
(b) Global or composite claim .............................................................................................. 20.029
(i) Need for detail ........................................................................................................ 20.029
(ii) Contribution of separate causes ............................................................................. 20.031
(iii) Failure to establish a causal link ............................................................................ 20.034
(iv) Forms of global claim ............................................................................................ 20.038
(c) Scott Schedule ................................................................................................................. 20.039
(i) Useful procedural device ....................................................................................... 20.039
(ii) Tailored to dispute requirements ............................................................................ 20.042
(d) Set-off and counter-claim ................................................................................................ 20.046
(i) Counter-claim or defence ....................................................................................... 20.046
(ii) Common law and equitable set-off ........................................................................ 20.047
(iii) Set-off under contract ............................................................................................. 20.050
(iv) Contractual limitation on right to set-off ............................................................... 20.051
(v) Abatement .............................................................................................................. 20.053
4. Discovery ................................................................................................................................ 20.054

(a) Production of documents ................................................................................................ 20.054
(b) Determination of document relevance ............................................................................ 20.056
5. Interlocutory Applications ...................................................................................................... 20.064

(a) Definition ........................................................................................................................ 20.064
(b) Summary judgement ....................................................................................................... 20.066

530 CONSTRUCTION LITIGATION
(i) Appropriate only when no defence to claim .......................................................... 20.066

(ii) Importance of set-off or counter-claim .................................................................. 20.069
(iii) Stay of proceedings to arbitration .......................................................................... 20.074
(iv) Summary of court’s approach ................................................................................ 20.078
(c) Interim payment ............................................................................................................... 20.079
(i) Application for interim payment ............................................................................ 20.079
(ii) Conditional leave to defend ................................................................................... 20.083
(d) Security for costs ............................................................................................................. 20.085
(i) Award of security for costs .................................................................................... 20.085
(ii) Balancing exercise for courts ................................................................................. 20.090
6. Expert Evidence ...................................................................................................................... 20.095

(a) Role of expert evidence ................................................................................................... 20.095
(b) Admissibility of expert evidence .................................................................................... 20.099
(c) Duties and responsibilities of experts ............................................................................. 20.102
(d) Use of experts in stages of dispute .................................................................................. 20.106
7. Trial and Preparation ............................................................................................................... 20.112

(a) General ............................................................................................................................ 20.112
(b) Trial process .................................................................................................................... 20.114
(c) Witness statements .......................................................................................................... 20.116
8. Costs and Interest .................................................................................................................... 20.117

(a) Court discretion to award costs ....................................................................................... 20.117
(b) Party and party basis ....................................................................................................... 20.120
(c) Common fund basis ........................................................................................................ 20.121
(d) Indemnity basis ............................................................................................................... 20.122
(e) Interest ............................................................................................................................. 20.123
9. Settlement and Compromise ................................................................................................... 20.128

(a) Benefits of early settlement ............................................................................................. 20.128
(b) Settlement by voluntary payment of sum into court ....................................................... 20.129
(c) Settlement by Calderbank letter ...................................................................................... 20.130
(d) Open offer to settle .......................................................................................................... 20.133
(e) Mediation ........................................................................................................................ 20.134

CHAPTER 21
CONSTRUCTION ARBITRATION
AND ADR
PARA.
1. Trend Toward Alternative Dispute Resolution ........................................................................ 21.001

(a) Reasons for trend ............................................................................................................ 21.001
(b) Features of alternative dispute resolution (ADR)
in the construction industry ............................................................................................. 21.002
(c) Advantages of ADR ........................................................................................................ 21.003
(i) Control .................................................................................................................. 21.004
(ii) Speed ..................................................................................................................... 21.005
(iii) Lower costs ........................................................................................................... 21.006
(iv) Flexibility .............................................................................................................. 21.007
(v) Confidentiality ....................................................................................................... 21.008
(vi) Lower hostility ...................................................................................................... 21.009
(vii) Finality .................................................................................................................. 21.010
(d) Goal of ADR ................................................................................................................... 21.011
(e) Evolution of ADR ........................................................................................................... 21.012
(f) Scope of ADR ................................................................................................................. 21.014
(g) Facilitative processes ....................................................................................................... 21.016
(h) Advisory processes ......................................................................................................... 21.017
(i) Determinative processes ................................................................................................. 21.018
2. Dispute Resolution Adviser/Dispute Review Board ............................................................... 21.022

(a) Real-time dispute resolution ........................................................................................... 21.022
(b) Growth of dispute review boards .................................................................................... 21.023
(c) Dispute review board process ......................................................................................... 21.024
(d) Elements essential for success ........................................................................................ 21.029
(e) Advantages of dispute review board system ................................................................... 21.030
(f) Drawbacks of the dispute review board system .............................................................. 21.031
(g) Development of the dispute resolution adviser system ................................................... 21.032
(h) Objectives of the dispute resolution adviser system ....................................................... 21.033
(i) Dispute resolution adviser process .................................................................................. 21.034
(j) Implementing real-time dispute resolution ..................................................................... 21.037
(k) If the dispute is unable to be resolved ............................................................................. 21.038
(l) Advantages of the dispute resolution adviser system ..................................................... 21.040
(m) Elements essential to success .......................................................................................... 21.041
(n) Conclusion ...................................................................................................................... 21.043
3. Construction Adjudication ...................................................................................................... 21.044

(a) Definition and development ............................................................................................ 21.044
(b) Statutory adjudication scheme ........................................................................................ 21.046
(c) Operation of adjudication in practice .............................................................................. 21.048

566 CONSTRUCTION ARBITRATION AND ADR
(d) International growth of adjudication ............................................................................... 21.050

(e) The Hong Kong position ................................................................................................. 21.055
(f) Evaluation of the adjudication process ........................................................................... 21.057
4. Construction Mediation .......................................................................................................... 21.060

(a) Objective of mediation .................................................................................................... 21.060
(b) Distinction between mediation and conciliation ............................................................. 21.061
(c) Types of mediation .......................................................................................................... 21.062
(d) Features particular to construction mediation ................................................................. 21.064
(e) Mediation in Hong Kong ................................................................................................ 21.065
(f) What is mediation ........................................................................................................... 21.069
(g) How mediation operates .................................................................................................. 21.073
(h) Role of the mediator ........................................................................................................ 21.076
(i) Why mediation works ..................................................................................................... 21.079
(j) Why mediation fails ........................................................................................................ 21.085
(k) Achieving outcome in mediation .................................................................................... 21.089
(l) Preparing for effective mediation .................................................................................... 21.094
5. Construction Arbitration ......................................................................................................... 21.100

(a) Features of arbitration ..................................................................................................... 21.100
(b) Arbitration and ADR ....................................................................................................... 21.102
(i) Main difference to other forms of ADR ................................................................ 21.102
(ii) Advantages of arbitration ...................................................................................... 21.103
(iii) Final, binding decisions ........................................................................................ 21.104
(iv) International recognition of arbitral awards .......................................................... 21.105
(v) Neutrality .............................................................................................................. 21.106
(vi) Legal representation .............................................................................................. 21.107
(vii) Specialised competence of arbitrators .................................................................. 21.108
(viii) Speed and economy .............................................................................................. 21.109
(ix) Confidentiality ....................................................................................................... 21.110
(c) Arbitration Framework in Hong Kong ............................................................................ 21.113
(i) International and domestic arbitration agreements ............................................... 21.113
(ii) Objective of Arbitration Ordinance (Cap 609) ...................................................... 21.120
(iii) Application of legislation ...................................................................................... 21.121
(iv) Role of arbitral tribunal ......................................................................................... 21.124
(v) Role of the court ................................................................................................... 21.125
(d) Stay of proceedings ......................................................................................................... 21.126
(i) Commencement of litigation where an arbitration agreement exists .................... 21.126
(ii) Arbitration agreement declared null and void ...................................................... 21.127
(iii) Allegations of fraud .............................................................................................. 21.130
(iv) Non-occurrence of condition precedent ................................................................ 21.133
(e) Agreement to arbitrate .................................................................................................... 21.136
(i) Definition of agreement ........................................................................................ 21.136
(ii) Whether the agreement is in writing ..................................................................... 21.138
(iii) Back-to-back agreements ...................................................................................... 21.143
(iv) Dispute over existence of an arbitration agreement .............................................. 21.144
(f) Appointment of arbitrators .............................................................................................. 21.146
(i) Methods of appointment ....................................................................................... 21.146
(ii) Challenge to arbitral appointment ......................................................................... 21.148

CHAPTER 21
CONSTRUCTION ARBITRATION
AND ADR
PARA.
1. Trend Toward Alternative Dispute Resolution ........................................................................ 21.001

(a) Reasons for trend ............................................................................................................ 21.001
in the construction industry ............................................................................................. 21.002
(c) Advantages of ADR ........................................................................................................ 21.003
(i) Control .................................................................................................................. 21.004
(ii) Speed ..................................................................................................................... 21.005
(iii) Lower costs ........................................................................................................... 21.006
(iv) Flexibility .............................................................................................................. 21.007
(v) Confidentiality ....................................................................................................... 21.008
(vi) Lower hostility ...................................................................................................... 21.009
(vii) Finality .................................................................................................................. 21.010
(d) Goal of ADR ................................................................................................................... 21.011
(e) Evolution of ADR ........................................................................................................... 21.012
(f) Scope of ADR ................................................................................................................. 21.014
(g) Facilitative processes ....................................................................................................... 21.016
(h) Advisory processes ......................................................................................................... 21.017
(i) Determinative processes ................................................................................................. 21.018
2. Dispute Resolution Adviser/Dispute Review Board ............................................................... 21.022

(a) Real-time dispute resolution ........................................................................................... 21.022
(b) Growth of dispute review boards .................................................................................... 21.023
(c) Dispute review board process ......................................................................................... 21.024
(d) Elements essential for success ........................................................................................ 21.029
(e) Advantages of dispute review board system ................................................................... 21.030
(f) Drawbacks of the dispute review board system .............................................................. 21.031
(g) Development of the dispute resolution adviser system ................................................... 21.032
(h) Objectives of the dispute resolution adviser system ....................................................... 21.033
(i) Dispute resolution adviser process .................................................................................. 21.034
(j) Implementing real-time dispute resolution ..................................................................... 21.037
(k) If the dispute is unable to be resolved ............................................................................. 21.038
(l) Advantages of the dispute resolution adviser system ..................................................... 21.040
(m) Elements essential to success .......................................................................................... 21.041
(n) Conclusion ...................................................................................................................... 21.043
3. Construction Adjudication ...................................................................................................... 21.044

(a) Definition and development ............................................................................................ 21.044
(b) Statutory adjudication scheme ........................................................................................ 21.046
(c) Operation of adjudication in practice .............................................................................. 21.048

(d) International growth of adjudication ............................................................................... 21.050

(e) The Hong Kong position ................................................................................................. 21.055
(f) Evaluation of the adjudication process ........................................................................... 21.057
4. Construction Mediation .......................................................................................................... 21.060

(a) Objective of mediation .................................................................................................... 21.060
(b) Distinction between mediation and conciliation ............................................................. 21.061
(c) Types of mediation .......................................................................................................... 21.062
(d) Features particular to construction mediation ................................................................. 21.064
(e) Mediation in Hong Kong ................................................................................................ 21.065
(f) What is mediation ........................................................................................................... 21.069
(g) How mediation operates .................................................................................................. 21.073
(h) Role of the mediator ........................................................................................................ 21.076
(i) Why mediation works ..................................................................................................... 21.079
(j) Why mediation fails ........................................................................................................ 21.085
(k) Achieving outcome in mediation .................................................................................... 21.089
(l) Preparing for effective mediation .................................................................................... 21.094
5. Construction Arbitration ......................................................................................................... 21.100

(a) Features of arbitration ..................................................................................................... 21.100
(b) Arbitration and ADR ....................................................................................................... 21.102
(i) Main difference to other forms of ADR ................................................................ 21.102
(ii) Advantages of arbitration ...................................................................................... 21.103
(iii) Final, binding decisions ........................................................................................ 21.104
(iv) International recognition of arbitral awards .......................................................... 21.105
(v) Neutrality .............................................................................................................. 21.106
(vi) Legal representation .............................................................................................. 21.107
(vii) Specialised competence of arbitrators .................................................................. 21.108
(viii) Speed and economy .............................................................................................. 21.109
(ix) Confidentiality ....................................................................................................... 21.110
(c) Arbitration Framework in Hong Kong ............................................................................ 21.113
(i) International and domestic arbitration agreements ............................................... 21.113
(ii) Objective of Arbitration Ordinance (Cap 609) ...................................................... 21.120
(iii) Application of legislation ...................................................................................... 21.121
(iv) Role of arbitral tribunal ......................................................................................... 21.124
(v) Role of the court ................................................................................................... 21.125
(d) Stay of proceedings ......................................................................................................... 21.126
(i) Commencement of litigation where an arbitration agreement exists .................... 21.126
(ii) Arbitration agreement declared null and void ...................................................... 21.127
(iii) Allegations of fraud .............................................................................................. 21.130
(iv) Non-occurrence of condition precedent ................................................................ 21.133
(e) Agreement to arbitrate .................................................................................................... 21.136
(i) Definition of agreement ........................................................................................ 21.136
(ii) Whether the agreement is in writing ..................................................................... 21.138
(iii) Back-to-back agreements ...................................................................................... 21.143
(iv) Dispute over existence of an arbitration agreement .............................................. 21.144
(f) Appointment of arbitrators .............................................................................................. 21.146
(i) Methods of appointment ....................................................................................... 21.146
(ii) Challenge to arbitral appointment ......................................................................... 21.148

CONSTRUCTION ARBITRATION AND ADR 567
(g) Consolidation of arbitration ............................................................................................ 21.151

(i) Circumstances where consolidation is appropriate ............................................... 21.151
(h) Court decision-making process ....................................................................................... 21.154
(i) Arbitration process .......................................................................................................... 21.156
(i) Special features in construction arbitration processes .......................................... 21.156
(ii) Commencement of arbitration .............................................................................. 21.157
(iii) Appointing body ................................................................................................... 21.164
(iv) Name-borrowing procedure .................................................................................. 21.166
(v) Hearing procedures ............................................................................................... 21.170
(vi) Special hearing procedures ................................................................................... 21.175
(j) Challenging against arbitration awards ........................................................................... 21.177
(i) Passive or active remedies ..................................................................................... 21.177
(ii) Court policy of minimal interference .................................................................... 21.180
(iii) Example of the court’s approach ........................................................................... 21.182
(iv) Appeal under s 5 of Sch 2 of the Arbitration Ordinance (Cap 609) ..................... 21.188
(v) Nema guidelines .................................................................................................... 21.192
(vi) Challenge under s 4 of Sch 2 of the Arbitration Ordinance (Cap 609) ................. 21.193
(vii) Carl International (HK) Ltd v Ernst Komrowski & Co ........................................ 21.195
(viii) Attorney-General v Shimizu Corp ........................................................................ 21.200
(ix) Misconduct or misunderstanding .......................................................................... 21.206
(x) Setting aside awards under s 81 of the Arbitration Ordinance (Cap 609) ............. 21.212

CONSTRUCTION ARBITRATION AND ADR 567
(g) Consolidation of arbitration ............................................................................................ 21.151

(i) Circumstances where consolidation is appropriate ............................................... 21.151
(h) Court decision-making process ....................................................................................... 21.154
(i) Arbitration process .......................................................................................................... 21.156
(i) Special features in construction arbitration processes .......................................... 21.156
(ii) Commencement of arbitration .............................................................................. 21.157
(iii) Appointing body ................................................................................................... 21.164
(iv) Name-borrowing procedure .................................................................................. 21.166
(v) Hearing procedures ............................................................................................... 21.170
(vi) Special hearing procedures ................................................................................... 21.175
(j) Challenging against arbitration awards ........................................................................... 21.177
(i) Passive or active remedies ..................................................................................... 21.177
(ii) Court policy of minimal interference .................................................................... 21.180
(iii) Example of the court’s approach ........................................................................... 21.182
(iv) Appeal under s 5 of Sch 2 of the Arbitration Ordinance (Cap 609) ..................... 21.188
(v) Nema guidelines .................................................................................................... 21.192
(vi) Challenge under s 4 of Sch 2 of the Arbitration Ordinance (Cap 609) ................. 21.193
(vii) Carl International (HK) Ltd v Ernst Komrowski & Co ........................................ 21.195
(viii) Attorney-General v Shimizu Corp ........................................................................ 21.200
(ix) Misconduct or misunderstanding .......................................................................... 21.206
(x) Setting aside awards under s 81 of the Arbitration Ordinance (Cap 609) ............. 21.212

PART I
CONSTRUCTION PROCESS
AND THE LAW

CHAPTER 1
THE HONG KONG CONSTRUCTION

INDUSTRY
PARA.
1. Law and Construction ............................................................................................................... 1.001
(a) Need for specialised knowledge ........................................................................................ 1.001
(b) Overview of text ................................................................................................................ 1.003
2. Nature of Industry ..................................................................................................................... 1.004

(a) Economic importance of construction industry ................................................................ 1.004
(b) Construction activities ...................................................................................................... 1.006
(c) Problems in the construction industry .............................................................................. 1.007
3. Nature of Construction Work .................................................................................................... 1.009

(a) Unique characteristics of construction projects ................................................................ 1.009
(b) Unique approach to problem solving ................................................................................ 1.011
4. Processes in Construction Projects ........................................................................................... 1.015

(a) Phases of construction ...................................................................................................... 1.015
(b) Determining value in construction projects ...................................................................... 1.019
5. Trend and Development ............................................................................................................. 1.020

(a) Global reforms .................................................................................................................. 1.020
(b) Developments in Hong Kong ............................................................................................ 1.022

1. LAW AND CONSTRUCTION
(a) Need for specialised knowledge
The body of knowledge required by those in the construction industry in Hong 1.001
Kong is evolving faster and getting more diversified than ever before. Knowledge of
construction law is no exception. In the past, many of those involved in construction
gained their requisite legal knowledge while working on the job; today, many
undergraduate and postgraduate law or mixed programmes are specially designed
and offered to enable people in the construction field to obtain well-rounded and
systematic knowledge of and training in the laws relevant to the construction industry.
Many individuals in the construction industry also, at some stage, get professionally
involved in the dispute resolution process, whether at the site level or during arbitration
or litigation. Consequently, focus has shifted and there is now a greater drive for
people in the construction industry to pursue knowledge of the law as part of the body
of knowledge in the construction field.
For other professionals, such as lawyers, arbitrators, mediators, adjudicators and 1.002
experts, who are commonly involved in the resolution of construction disputes, they
have to learn the essential features of the construction process on the job. In this
regard, a roadmap drawn from the perspectives of those who are not closely involved
in the construction industry can be useful in filling in gaps in knowledge and provide
a reference for further research.
(b) Overview of text
This book covers both the various substantive areas of construction law and construction 1.003
practices. It also extends to a discussion of construction dispute resolution processes,
featuring an account of practical matters to which those involved in construction
should be alerted.
2. NATURE OF INDUSTRY
(a) Economic importance of construction industry
The construction industry is a major pillar of the overall economy of Hong Kong. 1.004
The modern and efficient infrastructure of Hong Kong has supported the evolving
role of Hong Kong as a trade port and regional financial and services centre. The
level of construction output closely correlates with overall GDP performance and, in
percentage terms, the share of contribution made by the construction industry to the
overall GDP has been in the stable range of 5 to 6 per cent. Notwithstanding the local
economic downturn in late 1997, the gross value of construction work performed by
main contractors at construction sites still showed an increase from HK$44.7 billion
to HK$82.3 billion between 1990 and 2000, and there are now signs since 2004 that
construction activity is picking up again, with the gradual economic recovery and the
implementation of some infrastructure projects.

6 THE HONG KONG CONSTRUCTION INDUSTRY
1.005 The construction industry is also a major employer in Hong Kong, and possesses a
vast diversity of personnel, ranging from managers and professionals to technical and
administrative staff and site labour. At its peak in 1998, the number of persons in the
construction industry was 309,500. In recent years, some 6 to 9 per cent of the local
workforce is engaged in the construction industry.1
(b) Construction activities
1.006 Local construction activities can be broadly divided into three areas. One is
represented by the public housing projects undertaken by the Housing Authority. These
were a major backbone to the whole construction industry during the boom years
in the 1990s. However, with the Hong Kong Government’s recent change in public
housing policy, the scale of construction activities in this area is expected to fall, at
least while the policy remains. The second area is represented by the public sector
work commissioned by the Hong Kong Government itself, by authorities such as the
Hong Kong Airport Authority and other entities like the Kowloon-Canton Railway
Corporation and the Mass Transit Railway Corporation. Construction activities in this
area have been and remain the key columns of support in the industry. Last are the
private sector construction projects that are undertaken by property developers. These
activities have consistently accounted for about half the gross value of construction
work in recent years.
(c) Problems in the construction industry
1.007 Obviously, as with its counterparts elsewhere, the Hong Kong construction industry
is not without its inherent problems. The Report of the Construction Industry Review
Committee of 2001, titled “Construct for Excellence”, provided a concise summary of
the problems facing the Hong Kong construction industry, as follows:
“There are, however, a number of shortcomings in the industry’s operations and

in the quality of its products. Local construction activities are labour-intensive,
dangerous and polluting. Built products are seldom defect-free. Construction
costs are comparatively high. The industry is very fragmented and is beset
with an adversarial culture. Many industry participants adopt a short-term
view on business development, with little interest in enhancing their long-term
competitiveness. There is a tendency to award contracts to the lowest bidders
and delivery programmes are often unrealistically compressed. Accountability is
undermined by the prevalence of non-value adding multi-layered subcontracting
and lax supervision. An inadequately trained workforce also impairs the industry’s
ability to adopt new technologies and to cope with new challenges.” 2
1
See statistics from Hong Kong Census and Statistics Department, http://www.censtatd.gov.hk viewed 12 Feb
2011 for details.
2
The Provisional Construction Industry Co-ordination Board (PCICB) was formed in September 2001 to
spearhead industry reform and to pave way for the early formation of the statutory coordinating body, ie the
Hong Kong Construction Industry Council established on 1 Feb 2007 to take over the work of PCICB.

NATURE OF CONSTRUCTION WORK 7
To the general public, construction activities come with both poor safety and pollution 1.008
to the environment. From time to time, serious site accidents are in the headlines or
frustrating images of the damage that construction work has caused to a neighbouring
landscape or stream hit the television screens. Highly labour-intensive construction
methods that have been employed for decades are still being widely used without much
updating. A majority of the structural elements are still designed using traditional
reinforced concrete, requiring labour to fix steel bars on site prior to pouring concrete.
The input and investment for research and development in the construction industry
is generally low among the local entities. The crossover between the academic and the
industrial sectors has been very limited. Construction costs fluctuate substantially with
the supply of skilled labour or plants and are comparatively high in the regional area.
The wages of skilled labour can be a determining factor to the overall construction
costs in peak times. Considerations for buildability and life cycle cost are normally
not the focus in the design phase of projects. The use of design-and-build contracts
is still a new thing to many local practitioners and entities. Under the existing
practice, direct communication between the design team and the frontline contractor
is rare when the project is under design. A not uncommonly shared perception is
that construction projects frequently result in poor quality, delayed completion and
overrun budgets. The industry is also highly fragmented with an ingrained adversarial
culture. There may be several levels of subcontracting but there is seemingly no actual
value and benefit brought to the project by such multi-layer subcontracting. Plenty of
these subcontractors are small and medium in size, and it may come as no surprise
that some of them are even, in effect, a company run by a single individual. Cash
flow is obviously the lifeblood of the construction industry and non-payments and
claims become an experience of daily life for all involved in construction projects.
The traditional contractual arrangements in a construction project have been said to
normally come with the habitual disputes bred of strained relationships and mutual
suspicion.
3. NATURE OF CONSTRUCTION WORK

(a) Unique characteristics of construction projects
The laws governing construction projects are the same laws that apply in other spectrums 1.009
of substantive matters. Yet, construction work has certain unique characteristics of its own.
To start with, construction work is highly technical in its nature. Even for those in the 1.010
industry, every trade in the team has varying levels of understanding and individual areas
of focus for the same item of work and, as such, everyone’s experience and point of view
may be unique. Furthermore, construction projects often last longer than other one-off
commercial transactions. Indeed, a construction project usually lasts for years, and
uncertainty and changes obviously arise during its lifespan. This results in a continuing
relationship among those involved, which is subject to external influence, and can, in
itself, be a crucial influence on the behaviour and culture of the personnel in handling
matters arising from the construction work. More importantly, the respective rights and
obligations of those involved in a construction project are governed by a contractual web

formed by a series of separate and, often, independent, contracts, each involving different
parties and having dissimilar content. The relative risks of those involved rely heavily
on a balanced allocation via this contractual web. Within this web, many management
systems, each with competing interests and priority, are also in operation. Moreover,
construction work is executed by humans and machines in a complex system of activities
and resources. Since these humans and machines may be involved with other construction
projects at the same time, the system of activities in different projects may overlap.
(b) Unique approach to problem solving
1.011 As construction is a field requiring the practical application of technology, there are
certain features of construction work that call for a different mindset from that which
outsiders might consider common.
1.012 Firstly, in many instances, there is no one right solution to an engineering problem. The
choice among different options is affected by both tangible factors, such as costs and time,
and intangible factors, such as aesthetical matters and environmental concerns. From time
to time, it is necessary to resort to professional judgment in the decision-making process.
Secondly, those involved in the construction industry are satisfied with simplification or
approximation in applying theories to practice. For example, the concept of ‘factor of
safety’ is widely adopted in various aspects of engineering design, and empirical formulae
derived from experiments and physical or computer modelling is also commonly used
in the design process for large-scale construction. Thirdly, as said by Lord Wright in
Liesbosch, Dredger v SS Edison3and referred to with approval by Lord Denning in SCM
(United Kingdom) Ltd v WJ Whittall & Son Ltd4:
“[I]n the varied web of human affairs the law must abstract some consequences
as relevant not perhaps on the grounds of pure logic, but simply for practical
reasons”.
1.013 Likewise, in approaching problems, construction people are all too familiar with
practical reasons, and the use of pure logical induction and deduction in the analysis
of a state of affairs in the construction setting may not be sufficient or meaningful.
1.014 Also, it should be always remembered that construction work is a unique production
and no two projects are truly the same.
4. PROCESSES IN CONSTRUCTION PROJECTS

(a) Phases of construction
1.015 A typical construction project goes through several phases in a linear manner. The
construction processes are very complex and stretch from the concept of development
3
[1933] AC 449.
4
[1971] 1 QB 337.

PROCESSES IN CONSTRUCTION PROJECTS 9
to the operation and disposal of the completed work. In gist, these include the
formulation phase, the planning phase, the design phase, the construction phase, the
use management phase and the disposal phase.
At the formulation phase, the owner requirements are examined. These cover three 1.016
key elements: scope, budget and schedule, and also the crucial matter of whether the
project is in need at all. The planning phase of the project follows, where preliminary
design is based on the project definition as formulated by the owner. Up to this stage,
various studies may be needed to assist the decision on what the nature and scope of
the project is, and whether, and/or how, the project should go ahead. These studies may
include a cost-benefit analysis, a preliminary feasibility study, a feasibility study and
another detailed study.
The next phase is the design phase where detailed design is carried out. Plans and 1.017
specifications of the project are developed and worked out in detail. The complete
set of contract documents is usually produced during this phase, although concurrent
amendments and redefinition of the project may still be going on, and even extend into
the construction phase. Estimates obtained earlier are refined based on the detailed
design and, once approved, the finalised design is put to the intended bidders for tender
or quotation. The bid package commonly includes a number of documents apart from
the design drawings and specifications. The construction phase starts after the tender
is accepted and the contractor is requested to commence the work. When the project
is completed, the work is handed over to the owner or the relevant entities and the
use management phase or maintenance phase starts. From then on, the construction
project is put to full use, till it is subsequently replaced or otherwise disposed of years,
if not decades, later.
Thus, the overall construction process is broken into discrete steps, each of which 1.018
is normally understood to independently add value to the final product, ie the
completed work as a whole. This visualises the construction process as a series of
steps of transformation, as in the production industry, and the focus of management
is on the optimisation of each and every discrete operation, with a view to achieving
an optimised condition as a whole. The lowest price for each operation, order,
contract or purchase is expected to inevitably lead to the lowest overall project costs.
This is the common management mindset among many entities in the construction
industry.
(b) Determining value in construction projects
However, this approach to the construction process may risk losing sight of the 1.019
non-value-adding activities in the construction processes. These may appear in the
form of sums spent on non-value-generating activities such as inspection, testing,
disputes, transport and movement. A lot of such non-value-generating activities
are found in construction projects. In recent years, taking the benchmark from
the production industry, a theory of lean construction has emerged: changing the
perspective and focus in the management of construction projects. This calls for
a perception of the construction industry as a service provider. Production in the
construction industry is performed by a combination of trades that need to be

oriented towards generating value to the overall project. This asks for a new view as
to what the true value of the output is, and an ongoing attempt to maximise value and
minimise waste at the same time.
5. TREND AND DEVELOPMENT

(a) Global reforms
1.020 At the moment, there is enthusiastic interest around the world in looking for ways to
reform the construction industry. In the United Kingdom, following the 1998 report of
Sir John Egan, entitled “Rethinking Construction”, various movements are underway
to change the culture and establish best practices in the construction industry. Likewise,
drive for change can also be seen in South Africa. Following the publication of a
white paper in 1999, entitled “Creating an Enabling Environment for Reconstruction
Growth and Development in the Construction Industry”, the Construction Industry
Development Board was set up in 2001 by legislation to provide strategic leadership
in the growth, development, and transformation of the South Africa construction
industry. In Australia, the Royal Commission into the Building and Construction
Industry published a 23-volume report in 2003 for the overhaul of the Australian
construction industry.
1.021 On the legislative side, there are also worldwide movements to address one of the
key causes of problems in the construction industry – non-payment. In the United
Kingdom, there is the Housing Grants, Construction and Regeneration Act 1996,
making adjudication mandatory in many construction contracts and dealing with the
problem of non-payment to contractors. Likewise, legislation addressing construction
issues can be found in Australia (New South Wales Building and Construction
Industry Security of Payment Act 1999) and in New Zealand (Construction Contracts
Act 2002).
(b) Developments in Hong Kong
1.022 Hong Kong cannot and has not been an exception in the call for reform to the
construction industry.
1.023 Back in the 1990s, the Hong Kong Government commissioned a consultant study to look
at issues arising from its form of the standard conditions of contract. In the private sectors,
discussion for the renewal of the now popular version of the standard form of contract
for use in building works had also been ongoing. In 2000, a government committee, the
Construction Industry Review Committee (CIRC), was also set up to look for ways to
modernise the Hong Kong construction industry and improve on procurement, quality
and safety. The 2001 report of the committee, entitled “Construct for Excellence”, has
now become a roadmap for the reform of the construction industry in Hong Kong.
1.024 The CIRC has submitted 109 recommendations that are, apart from raising the level
of quality and cost-effectiveness, designed to inculcate a new culture of excellence
and to inject impetus for change. These recommendations are intended to foster a
culture of quality among all participants in the industry. In the context of procurement,

TREND AND DEVELOPMENT 11
it is observed that best value for the overall project does not necessarily equate to
the lowest initial tender price, and the focus should be shifted to achieving value in
construction procurement. To accomplish this, it is naturally necessary for efforts to
be put into the nurturing of a professional workforce at all levels. To address the issues
of relatively high construction costs, measures are recommended to build an efficient,
innovative and productive industry. Obviously, there are also further drivers toward
safer workplaces and an environmentally responsible industry.
The CIRC also recommended the setting up of a statutory industry body, the Construction 1.025
Industry Council, to forge consensus on strategic issues and to sustain the momentum
for continual improvement, by taking firm ownership of the reform programme. It
was intended that the primary tasks for the Construction Industry Council would be
to generate consensus on long-term strategic matters affecting the industry as a
whole; to communicate the needs and aspirations of the industry to the Hong Kong
Government; and to serve as the main channel for the Hong Kong Government to seek
industry feedback on construction-related issues.
Based on these recommendations, the Provisional Construction Industry Coordination 1.026
Board (PCICB) was established on 28 September 2001 to spearhead industry reforms
and to propagate a new culture of change. The Hong Kong Construction Industry
Council was established on 1 February 2007 to take over the work of PCICB.
Committees on construction site safety, procurement, environment and technology,
subcontracting and manpower training and development have been set up to implement
improvement measures. The progress on the implementation of the recommendations
is subject to periodic review and is published on the internet.5
Among these changes, there are two areas in particular that should be highlighted. 1.027
First, the call for good contracting practices in construction contracts is on the rise.
The use of partnering in Hong Kong projects has been growing, and guidelines for
good practice in contracting are being promoted. An example of this is the Guidelines
of Subcontracting Practice of the then Provisional Construction Industry Coordination
Board6. Second, the approach to dispute resolution nowadays is to have the disputes
dealt with as they arise, during the execution of the construction work, rather than
leaving them to be resolved after the completion of the work. Dispute resolution
mechanisms, such as mediation, adjudication and dispute resolution advisers,
are being promoted. Indeed, similar promotion of alternative dispute resolution
mechanisms, particularly mediation, is also supported in the Civil Justice Reform.
There are identified important principles in relation to the resolution of construction
disputes. The principles set out by the Hong Kong Construction Industry Council in
the Guidelines on Dispute Resolution (2010) include, first, it is important to manage a
dispute actively and positively to encourage early and effective settlement. Secondly,
justice delayed is justice denied; and thirdly cash flow is the lifeblood of a contractor.
5
For details, see http://www.hkcic.org viewed 12 Feb 2011.
6
There were also the Guidelines on Standard Form of Domestic Subcontracts for Basic Trades published in
May 2005. The Construction Industry Council also published the Guidelines on Partnering in Aug 2010 and the
Guidelines on Dispute Resolution in Sep 2010.

1.028 With these developing trends in the construction industry, practitioners in the industry
need to be more alert to the growing role that they play and the contribution that they
may bring to the success of construction projects by preparing themselves to utilise
the right approach at the right time in the discharge of their daily work. To achieve
this, skills enhancement in the overlapping areas of contract administration and
construction law have now become much more crucial.

1. OVERVIEW
(a) Scope of the construction industry
The construction industry is a complex organisation centred on building contractors 2.001

who are responsible for carrying out the building work. It is notable for its mix of
large and small firms involved in several different market areas: new construction
work, alterations, repair and demolition of buildings and civil engineering works.
The industry also encompasses the on-site assembly and installation of prefabricated
integral parts of buildings or works, as well as the installation of fixtures and fittings.
In Hong Kong, the construction industry is one of the major pillars of the economy. 2.002
It embraces all the construction activities undertaken within the realm of the main
infrastructures and real estate, including new construction, repairing and alterations
of any existing structures. It also involves different stakeholders such as real estate
developers, professionals, academics, contractors, workers and government officials.
Generally speaking, in Hong Kong, construction activities can be broadly divided
into three main areas, that is, public housing projects, other public sector works
commissioned by the HKSAR government and quasi-government bodies such as
the Mass Transit Railway Corporation and private sector development projects. In
the private sector, these may be subdivided into separate market segments such that
building is composed of housing, industrial and commercial markets. These works
are undertaken by a large number of small firms with a small number of large firms
competing for the largest projects. This suggests that the construction industry
comprises firms who differ in terms of size and scope. Even within firms there is
often a great diversity of activity, with different parts of the firms tackling specific
sub-markets. This produces the opportunity for constructors to focus their activities or
to remain flexible, enabling them to compete in all sectors.
(b) Range of human resources required
Given that projects comprise a complex sequence of a large number of inter-dependent 2.003
tasks it is clear that there is strong demand for a range of human resources. Parties
involved in a given project include clients, design consultants (architects, engineers,
surveyors, etc) and main contractor and subcontractors, in a wide variety of possible
combinations. The industry comprises the contractors’ office and supervisory staff and
workmen, the architect or the engineer who designs the project work and supervises
the erection, the quantity surveyor who is the specialist on measurement and cost,
suppliers who supply the building materials, subcontractors who do specialised
work and sometimes consultant structural or mechanical engineers who relieve the
architect of certain specialised areas of the design. Thus, the construction industry in
Hong Kong employs a whole spectrum of professionals, which commonly includes
architects, landscape architects, engineers, surveyors, project managers, safety officers,
construction managers, site agents, builders, planners, mediators, arbitrators, etc.1
1
For more details on the construction professionals in Hong Kong, please refer to Chapter 29 of MA J, Professional
Conduct and Risk Management in Hong Kong (Hong Kong, 2007).

16 PARTIES INVOLVED IN THE CONSTRUCTION INDUSTRY
2.004 As is frequently the case on a modern complex project, numerous special types
of construction are involved. The contractor who enters into agreement with the
employer to construct a project may find that the work can better be accomplished by
subcontracting with domestic contractors and specialist contractors to do a portion of
the work. Craft skills still play an important part in the overall construction process.
Although their significance may have diminished in the face of initiatives to standardise
work tasks, their importance has not been removed. Technological innovation has
traditionally proved less readily applicable to the construction process than to other
industries, and craft-based occupations are still widespread. The importance of the
construction workforce is highlighted by the fact that the industry relies on skills, and
on the capacity to bring different skills together effectively. Each construction project
relies on teamwork and cooperation.
2. PROJECT INITIATORS
(a) Employer
2.005 The level of new orders for construction work is dependent on the state of the economy
and on the choices available to the clients both in the public and private sectors. The
employer is the organisation or person who commissions the construction project and
who pays the cost of the work.
2.006 The construction process is always initiated by the employer’s recognition of a
need or an opportunity for construction. The employer then contracts with design
professionals to transform the general concept ultimately into a complete set of plans
and specifications for the entire project. It sometimes happens that the employer is
uncertain of his requirements and the architect or engineer helps in formulating them.
2.007 In building contracts, the employer usually enters into a contract with an architect to
plan and design a project to satisfy the employer’s particular needs, in coordination
with other professionals like engineers and surveyors. The employer participates
during the design period to set criteria for design, cost and time limits for completion
and to provide decision-making inputs to the architect.
(b) Project manager
2.008 Project management can be a separate professional role dedicated to achieving time,
cost and quality performance. Every organisation participating in a project may have
its own project manager. Whether in the direct employ of the employer, the design
firm or the contractor, project managers are usually the people responsible for the
management of all phases of the project for the organisations they represent.
2.009 Typical activities of the project manager include initiation of the project, project
scheduling, project start-up, project control, contractual strategies and financial
planning. From the initiation of the project, the project manager acts as the key catalyst
to simulate effective communication and coordination between design, procurement
and construction activities to ensure that the project is completed within budget, on
schedule and meets the technical and construction quality objectives.

CONSULTANTS 17
For a design firm, the project manager controls the scheduling, budgeting, cost control, 2.010
coordination of design and construction and the letting of consultant contracts for the
employer and is normally the sole contact with the client as a representative of the
design firm.
For the employer, a project manager is similarly responsible for all phases of a project, 2.011
but may participate in the selection of a consultant team and is the representative
of the employer in connection with any business concerning the project. Where an
architectural firm has been engaged for design services only, the employer’s project
manager will provide construction contract administration and may employ a resident
project representative to work under her or his supervision.
In a contractor’s organisation, “project manager” is also a frequently used title. 2.012
As the title implies, the main contractor’s or subcontractor’s project manager is in
complete charge of the project. The particular responsibilities include coordination of
subcontractors, scheduling, cost control, labour relations, purchasing and numerous
other functions related to the project.
Many project managers will be familiar with the wish that clients express to have the 2.013
highest possible quality of work carried out as soon as possible and at the minimum cost.
In reality, they know that these three objectives may not necessarily be simultaneously
compatible, and that coming to a compromise trade-offs must be made. It is fairly simple
to encapsulate the main responsibilities of a project manager – to complete the project
within time, at or under budget cost, in accordance with the required performance
and quality levels and also to ensure that none of the major project goals are placed in
jeopardy during the execution of the field work. In addition to the functionality of the
facilities, a project manager may also consider the aesthetics and safety of the project
and its effect on the environment and public welfare.
3. CONSULTANTS
(a) Project design professionals
The project design team often also plays a pivotal role in the administration of a 2.014
construction project, with responsibility for contract interpretation, certifications of the
contractor’s applications for payment, inspection, contract compliance and acceptance
of the work. For these reasons, proper recognition and allocation of the relative rights
and responsibilities of the design professionals are essential to an understanding of the
legal relationships that govern a project.
(b) Licensing of authorised person
In relation to construction works, the HKSAR Government delegates part of the 2.015
government’s building control functions to statutorily recognised persons, where
a professional licensing system involving registration of an experienced building
professional called the “Authorised Person”2 (AP) is implemented. The AP can be an
2
Section 3(1) and (2) of the Buildings Ordinance (Cap 123).

architect, a structural engineer or a building surveyor.3 These building professionals

have to pass a professional interview before they can practice as APs.4
(c) Responsibilities of authorised person
2.016 Under the Building Ordinance (Cap 123), property developers who want to carry out
property development have to appoint an AP to submit their building proposals to
the Building Authority for approval. The appointed AP shall supervise the carrying
out of the building works, notify the Building Authority of any contravention of the
regulations that would result from the carrying out of any work shown in any approved
plan and comply with the provisions of the Ordinance. Upon completion of the
building works, the AP has to endorse compliance with the Ordinance on a certificate
prepared by the registered contractor to apply for an occupation permit. To assist the
AP in exercising the above functions, the Building Authority issues practice guidelines
called Practice Notes for Authorised Person (PNAP) with the up-to-date technical and
administrative information.5
(d) Architect
2.017 The architect is often regarded as the leader and coordinator of the building project6 and
is concerned with a diversity of matters for which support from the other members of
the design team is needed. The architect receives the commission to design, supervises
the erection of the building and is empowered by the employer to issue additional
work and variations to work. It is the architect’s responsibility to ensure that all the
design decisions fit together to describe a building that is visually satisfying and works
properly.7 The task is made particularly onerous by the close interaction of the work of
architects, structural engineers, building services engineers and other team members.
2.018 The typical architectural organisation that would be involved in a major project is
likely to be run by a top-level team comprised of the conceptual designer who creates
the overall image of the building, a senior designer who deals with the design issues
which arise in the day-to-day running of the project and a technical coordinator who
keeps track of the status of all the drawings to ensure that changes are communicated
to everyone involved. The technical coordinator also deals with the local authorities,
such as the Buildings Department and Water Supplies Department whose approval
is needed before certain work can be carried out, as well as handles any statutory
undertakings. Finally, the technical coordinator ensures that the design architect’s
3
The register of “authorised persons” is actually separated into three lists. Disciplinary proceedings are provided
for in s 7 of the Buildings Ordinance (Cap 123). The Buildings Ordinance also provides, for example, for a
“registered structural engineer”, with likewise disciplinary procedures.
4
Registration is regulated by s 3(5) to (13) of the Buildings Ordinance (Cap 123).
5
For details, please refer to the website of the Hong Kong Buildings Department at http://www.bd.gov.hk/english/
documents/index_pnap.html viewed 12 Feb 2011.
6
See R v Architects’ Registration Tribunal, Ex parte Jaggar [1945] 2 All ER 131. In engineering projects, this
function may instead be discharged by a civil engineer.
7
Section 4 of the Buildings Ordinance (Cap 123).

CONSULTANTS 19
concepts are translated into practical details for the specialist contractors who will
actually build each detail of the building.
(e) Structural engineer/building services engineer
Usually, there will be several consultant engineers employed on the same building 2.019
project, each specialising in their own particular fields, who are coordinated by
the architect. Although the architect is responsible for the overall performance and
appearance of the building, it is the structural engineer who ensures that it forms a
safe and efficient structure. The structural stability of buildings is essential for them
to function properly.
The structural engineer receives the proposed design drawings of the building project 2.020
from the architect. He must then work with the architect’s conceptual designs and
ensure that the overall size and shape of the building and the choice of materials and
the way these materials are joined together can withstand the expected forces. These
forces include wind pressure, movements due to changes in temperature, the weight of
the building itself and, most unpredictable of all, the loads imposed by the users and
all the furniture, equipment and other effects they may bring with them. The structural
engineer must design a structure that accommodates all these forces and fits in with
the architect’s overall concept. Structural engineers may also be asked to prepare a
preliminary programme, method statements, temporary work designs and site-layout
drawings.
Likewise, building services engineers are brought in to handle the electrical and 2.021
mechanical works, such as lift systems, fire services installations, water pumps, etc.
Frequently, in building projects, the architectural firm is primarily responsible for 2.022
the design and the contract documents. It, in turn, subcontracts responsibility to
independent mechanical, electrical, structural and plumbing engineers or other
consultants. On the other hand, many design firms in Hong Kong provide both
architectural and engineering services.
(f) Quantity surveyor
In Taylor v Hall,8 Morris J described, a surveyor9 as a person 2.023
“…whose business consists in taking out in detail the measurements and

quantities from plans prepared by an architect for the purpose of enabling builders
to calculate the amounts for which they would execute the plans.”
Once the scheme design is recommended to the client, the quantity surveyor produces
a cost plan, which describes how the client’s construction budget will be spent. The
8
(1870) IR 4 CL 467.
9
In construction projects in Hong Kong, quantity surveyors are commonly engaged to discharge some of the
functions, traditionally carried out by engineers and architects, such as the preparation of estimates and bills of
quantities and the valuation of work done for interim and final payments, etc.

cost plan is arranged into design elements. Thus it provides a cost target for each
member of the design team.
2.024 The next stage is for the quantity surveyor to produce bills of quantities. This is a
very detailed measurement of all the items of work needed to produce the building
as designed by the architect and engineers. The result is essentially a quantified
specification, which together with the working drawings, defines exactly what is to
be built.
2.025 The contract is essentially an agreement to build all the work described in the bills of
quantities for the contract fee, under the supervision of the architect. When the work
is complete, the architect issues a certificate and the quantity surveyor values the work
each month. Upon completion of the project, the quantity surveyor prepares the final
account, which takes into consideration the cost of work carried out by nominated
subcontractors and uses the individual rates in the bills of quantities to value variations
ordered by the architect.
(g) Clerk of works
2.026 The clerk of works10 is appointed by and acts as inspector on behalf of the employer
to provide constant supervision in order to ensure that the quality of materials and
workmanship complies with the contract requirements, but the duties associated with
this position – detailed day-to-day inspection and issuing verbal instructions – are
carried out only under the directions of the architect, who consequently confirms them
in writing in the form of the architect’s instructions.
2.027 The clerk of works is also responsible for reporting any variations from the plans and
specifications or other contract documents.
(h) Other consultants
2.028 Depending on the nature of the project, other consultants such as landscape architects,
environmental consultant interior designers and acoustic consultants may also be
engaged in a project.
4. BUILDINGS DEPARTMENT
(a) Statutory control of construction works
2.029 The statutory obligations of construction organisations engaged in construction works

are mainly stated in the laws of Hong Kong in the form of various ordinances.11 The
10
The equivalent for this is the Inspector of Works in engineering projects.
11
These, for example, include the APs and registered structural engineers under the Buildings Ordinance
(Cap 123) or the technically competent person under the Technical Memorandum for Supervision Plans issued
under s 39A of the Buildings Ordinance; the registered architects under the Architects Registration Ordinance
(Cap 408); the registered professional engineers under the Engineers Registration Ordinance (Cap 409); the
registered professional surveyors under the Surveyors Registration Ordinance (Cap 417); or the registered
landscape architect under the Landscape Architects Registration Ordinance (Cap 516).

CONTRACTORS 21
process of a property development project is subject to the control of many government

departments. Some are vested with statutory authority for approval, sanction and
enforcement under a specific ordinance, such as the Building Ordinance (Cap 123)
administered by the Buildings Department. In Hong Kong, statutory control of building
developments can largely be divided into four categories, including planning of land
use, administration of land lease, building control and other controls under a collection
of relevant ordinances. Although these are administered by different government
authorities, it is the Building Department that plays the central coordinating role and
provides the essential framework to support development control in Hong Kong.
(b) Administration of the Building Ordinance
The Hong Kong Buildings Department was established on 1 August 1993. Before 2.030
then, it was part of the Buildings and Lands Department known as the Buildings
Ordinance Office. The Director of Buildings is the Building Authority, charged with
responsibility for administering and enforcing the Building Ordinance to ensure
compliance with statutory standards of safety, health and environment in private
buildings and building works.
For property development in Hong Kong, building plans submitted to the Buildings 2.031
Department will be forwarded to all relevant government departments for comment.
Under the centralised plans processing system, the Building Department will only
approve the plans when all the requirements with respect to town planning, major lease
matters, drainage, structural design, etc, as specified by the relevant departments, are
complied with by the developer.12
5. CONTRACTORS
(a) Choosing a contractor
Under a traditional contractual arrangement, after selection of a qualified construction 2.032

contractor, the employer enters into a contract directly with the main contractor,
who will then be responsible directly to the employer’s designated representative for
building the project in accordance with the plans, specifications and the local laws.
In Hong Kong, developers are free to choose any contractor to carry out construction 2.033
works for their projects. The primary statutory requirement for the contractors in the
private sector is that they must have been registered in the appropriate categories of
registered contractors under the Building Ordinance.13 For the contractors working on
public works, such as public housing, government buildings and infrastructure works,
etc, they are controlled through administrative rules promulgated by the relevant
government departments. For examples, the Development Bureau maintains an
12
For details, refer to the practice notes by the Hong Kong Buildings Department at http://www.bd.gov.hk/english/
documents/index_pnotes.html viewed 12 February 2011.
13
See ss 8A to 8F of the Building Ordinance (Cap 123).

approved list of contractors as suitable candidates for tendering public sectors works.
They are classified as Group A, B or C contractors according to their capacity to take
on certain sizes of projects.
2.034 Contractors seldom employ a large standing workforce. To a very large extent, main
contractors subcontract the direct execution of the construction work to their own
choice of domestic contractors for the portion of the work it will not perform with its
own forces, the second-tier subcontractor may then subcontract to a third-tier and so on.
On the other hand, the architect can nominate the subcontractor he wishes to undertake
the work, which usually will be of a specialist nature. Obviously, the architect may
nominate the specialist contractor who has proved to be most appropriate during the
project’s design stages. The main contractor is obliged to enter into contracts with such
specialist contractors as nominated by the architect in accordance with the stipulated
provisions in the contract document.
(b) Main contractor/domestic subcontractor/nominated subcontractor
2.035 The main contractor is responsible for all operations on the site and coordinating other
contractors involved in the construction for the satisfactory and timely completion
of the work, whether or not subcontractors have been engaged to accomplish any
portion of it. Such subcontracts are agreements between the main contractor and the
subcontractors only, and involve no contractual relationship between any subcontractor
and the employer. For this reason, it is imperative that a subcontract is entered into
between the main contractor and the subcontractor to safeguard the interests of the
main contractor. Successful project performance depends on the legal and business
relationship between the main contractor, the subcontractors and the suppliers.
As noted above, there are several circumstances under which an employer would wish
to nominate a subcontractor (nominated subcontractor) with whom the main contractor
must enter into a contract, typically in relation to building services work.
2.036 With the growing variety of contractual arrangements now in use in the construction
industry in Hong Kong, other types of contractors are also seen in operation.
(c) Management contractor
2.037 The management contractor is appointed to work with the professional team, to
contribute his construction expertise to the design and later to manage the specialist
package or work contractors. A management contractor is responsible for the smooth
running of the work on site so that the construction can be finished within time and
cost allowances.
(d) Design-build contractor
2.038 The design-build concept is can be used when a single firm has the in-house staff and
expertise to perform all planning, design and construction tasks. This concept has the
advantage that differences or disputes between the design team and the construction
force are matters internal to a single company. This eliminates disputes between design
and contractor.

TECHNICALLY COMPETENT PERSON 23
Employing a design-build contractor also has the advantage that design and construction 2.039
can be done concurrently. That means that work can be started in the field before a
complete design is available. This allows for phased construction and a compression
of the schedule since design must not be totally complete prior to commencement of
construction. Another advantage is the availability of construction technology input
through constructability reviews early in the design phase. These can substantially
reduce project construction cost by incorporating suggested construction improvements
as the design phase develops.
6. TECHNICALLY COMPETENT PERSON

(a) Classes of supervision
The Technical Memorandum for Supervision Plans (currently the 2005 edition)14 2.040
issued by the Secretary for Planning, Environment and Lands under s 39A(3) of the
Building Ordinance (Cap 123), first came into operation in 1997. It supplements the
provisions of the Buildings Ordinance governing the supervision of building works
and street works. Quality supervision15 and site safety supervision16 fall under this.
The classes of supervision by which the Building Authority identifies various types 2.041
of building works and street works having regard to their complexity, the manpower
required and level of supervision, shall be determined by the criteria set out in the Code
14
As per s 39A(1) of the Buildings Ordinance (Cap 123), the technical memorandum deals with:
“(a) the circumstances in which a supervision plan is not required for building works or street works; (b) the
classes of supervision that the Building Authority identifies as appropriate to various types of building works
and street works having regard to the complexity of the building works or street works, the manpower required
and level of supervision required for each of the classes of supervision; (c) detailed supervision requirements
for various types of building works and street works including the management structure required to ensure site
safety, the manpower required for each element of the management structure, the qualifications and experience
of the personnel involved and the specific tasks to be associated in each element of the management structure;
(d) the method statement of various types of building works and street works, the types of precautionary and
protective measures required to be undertaken for the safety of the site, the workers and the public, and such
other details relating to site safety as the Building Authority may consider necessary; (e) the qualifications
and experience required for technically competent persons to be appointed for supervisory work under
supervision plans; (f) the circumstances in which an authorized person, registered structural engineer,
registered geotechnical engineer, registered general building contractor or registered specialist contractor is
permitted to notify in retrospect for minor deviations from a supervision plan; (g) the method and timing of
notification of, and the amendment procedures for, a proposed or actual deviation from a supervision plan,
including deviations caused by an emergency; (h) the form and content of a supervision plan; (i) the general
responsibilities of the site supervision personnel for the various types of building works and street works;
( j) the procedure, timing ad sequence for the submission of supervision plans.”
15
This means the necessary site supervision required to ensure that the building works or street works are carried
out in general accordance with the provisions of the Buildings Ordinance (Cap 123) and regulations, the plans
approved in respect of such building works or street works by the Building Authority and any order made or
condition imposed, pursuant to any provision of the Ordinance or regulations on that behalf, by the Building
Authority.
16
This means the necessary site supervision required to check that the carrying out of building works or street works,
including the sequence of construction, temporary works pertinent to all stages of building works or street
works and the working environment are safe, such that the hazards from these works are controlled and risks to
workers on site, all persons around the site and adjoining properties and land are mitigated.

of Practice.17 The AP shall seek advice from the Registered Structural Engineer (RSE),
the Registered Geotechnical Engineer (RGE) and other professionals, and shall use
a standard scoring calculation form to assess the degree of complexity of the works.
2.042 Under the Technical Memorandum, with reference to different types of the works,
there are minimum supervision requirements on the grades of TCP responsible and the
corresponding minimum frequency of inspection. These will need to be increased for
complex works. The method of assessing complexity is set out in the Code of Practice
for Site Supervision 2005 and complexity is assessed on the basis of certain criteria,
including the type of building works or street works, the construction and scale of
structure, the locality and the effect of the works to adjacent buildings, structures,
lands, streets and utilities.
(b) Role of the technically competent person
2.043 The AP, RSE, RGE, authorised signatory (AS)18 of the registered contractors and
the TCP they appoint shall each have a role to play in safety management. TCPs are
organized in four streams led respectively by the AS, RSE, RGE and AP and shall
carry out the duties assigned to them. All TCPs shall have common responsibilities
which are to keep records and to report on their own work; and to co-operate with
and communicate with the TCPs in other streams.19 Within the work streams of the
registered contractor, the RSE, the RGE and the AP, TCPs of the appropriate grades
shall be appointed, either full time or part time depending on the type of building
works or street works involved. The TCP’s tasks shall be grouped into two types
of supervision – engineering safety supervision and routine safety supervision.
Engineering safety supervision is carried out by TCPs of grades T4 and/or T5. Routine
safety supervision is carried out by TCPs of grades T1 to T3. The grade of TCPs to be
deployed depends on the degree of complexity of the works.20
17
This means the code of practice for site supervision of building works and street works issued by the Building
Authority, currently being the Code of Practice for Site Supervision 2005.
18
This means the person appointed by the registered contractor to act for it for the purposes of the Buildings
Ordinance (Cap 123), and authorised by the registered contractor to act on his behalf to exercise overall control
of the registered contractor’s safety management structure for the project.
19
For illustration, see Code of Practice for Site Supervision 2005, para 5.
20
For details of the minimum supervision requirements for different types of building works or street works, see
Table 1 of the Technical Memorandum for Site Supervision 2005, http://www.bd.gov.hk/english/documents/
code/sup_plan2005_e.pdf visited 16 February 2011.

1. INTRODUCTION
(a) Composition of project teams
Most building construction projects are set up with two distinct teams: the design 3.001
team and the construction team. The design team is usually headed by the architect as
prime consultant and includes various other consultants such as the quantity surveyor,
who maintains financial management during construction and a structural engineer,
who designs a structure that can accommodate all forces imposed on the building.
The construction team is often headed by a main contractor, who in turn subcontracts
much of the work to directly employed domestic subcontractors and also nominated
subcontractors as directed by the employer. In fact, the current trend is to tailor
arrangements to fit each project. The organisation of the team can take different forms,
and each of them may have a significant effect on the liabilities and responsibilities
of the parties.
(b) Overview of procurement
There are three main procurement paths, namely traditional general contracting, 3.002
design and build and management contracting. In fact, most building work is currently
carried out under the system of traditional general contracting. Construction industry
professionals are familiar with this structure and the roles of the parties under it.
Under the traditional structure, design and construction proceed sequentially, with
construction commencing only after the design is complete. However, waiting for a
complete design before starting any construction may expose the employer to inflation
and delayed occupancy. Waiting that length of time also denies the employer the ability
to react quickly to changing market conditions and immediate needs.
Since the last few decades, the construction industry has experienced significant changes 3.003
in the way in which contracts are managed. Certainly new procurement methods, such
as design and build and management contracting have imposed changes on the way
professionals organise their practices. Each procurement option will have a different
time, cost and quality implication. Altering any one element will have an effect on the
others. The particular circumstances of each project may result in different procurement
routes to best satisfy the priorities of time, cost and quality.
The criteria for selecting a procurement method for a project will be drawn from the 3.004
client’s brief.
2. METHODS OF PROCUREMENT
(a) Factors affecting choice of arrangement
The selection of an appropriate procurement system depends largely on the accurate 3.005
identification of client requirements. Any emphasis placed on quality, time, cost
and other objectives must be clearly sought from clients at the outset for a project
to be fully successful. For instance, the procurement selection chart devised by the

28 PROCUREMENT METHODS
National Economic Development Office (NEDO)1 sets out eight assessment criteria
namely timing, controllable variation, complexity, level of quality, price certainty,
competition, division of responsibility, professional responsibility and risk avoidance.
Dispute resolution is also listed as criteria to consider. It is a central responsibility
of the project managers to ensure that the system chosen provides the best fit to the
brief and the circumstances of the project. Depending on the situation, the factors that
influence the choice of appropriate contractual arrangement include:
1. size, nature and complexity of development;

2. dates for commencement and completion;
3. degree of quality and performance required;
4. aesthetics requirements;
5. ability to define the client’s requirements clearly before contract;
6. adequacy of construction information on which to establish client’s cost limit;
7. availability of valid and adequate construction information on which to obtain
tenders;
8. the scale of changes the client is likely to effect during the construction phase.
(b) Traditional general contracting
3.006 This tends to be the default procurement method where design is a separate function
from construction. Under this structure, the party that carries out the work is the main
contractor. The employer and the main contractor are the two parties to the main
contract. Professional services, including design, cost advice, etc, are provided by
other persons. They are not parties to the main contract and their relationship is by
separate contract with the employer.
3.007 The consultant’s role is viewed as an independent one. The consultant converts the
employer’s requirements first into a brief and subsequently into a workable design.
The task of supervising the construction is usually carried out by the architect.
A main contractor is employed to undertake the details of the project as specified by
the designers. This means that the contractor is not liable for the design, but only for
workmanship. The contractor is responsible for the performance of every party on
site, whether subcontractors are directly employed by the contractor or are nominated
subcontractors selected by the employer.
3.008 The traditional structure for project procurement is considered a sequential method
because the employer takes the scheme to an advanced stage with his professional
team, before appointing a contractor. Because of this, critics of the traditional method
argue that with the ‘end on’ design-build arrangement the overall project period is long
and consequently the cost is greater, eg due to the need to finance the purchase of the
1
NEDO, Thinking About Building (HMSO, 1985).

METHODS OF PROCUREMENT 29
land. There is also the time lost to the client in occupying or letting the premises, and
the income that would be generated. Under the traditional method an ‘us and them’
attitude tends to develop between designers and contractors, which is not conducive to
the smooth running of a contract.
All drawings have to be fully prepared before tendering, which puts less pressure on 3.009
the designers. The result is normally a more aesthetically pleasing design with most of
the technical complexities resolved. Also under this method, building cost is usually
quite accurate and variations can be easily calculated. Separating responsibilities for
design and construction is seen as the main reason to switch to alternative contractual
arrangements.
(c) Design and build
These contracts work on the principle that the contractor offers a package-deal 3.010
service,2 which simplifies the contractual links between the parties to the main contract
because the contractor is responsible for undertaking the design work outlined in the
contractor’s proposal, constructing the building and coordinating and integrating the
entire process. Contractors may commission design and cost services from outside
consultants, or they can employ the design team from within their own organisation. It
is believed that this allows contractors to offer a better deal, as they are in control of all
aspects of the project. It also reduces conflict between the parties by having the ‘single
point of responsibility’ to the employer. All the risk is therefore transferred to the
design and build contractor and thus it is not necessary to distinguish the difference
between a design fault and a workmanship fault.
In tender stage, the employer obtains competition in price as well as design. It is 3.011
very important that the brief is concise and unambiguous from an early stage. Since
the contractor is undertaking the design work, there are opportunities to overlap the
design and construction processes and thus to make an early start on site. Since the
contractor retains full control of design, features that are impractical or awkward to
carry out on site can be rejected. Inherently more buildable designs, familiarity with
his system and an overlap of design and construction phases lead to early completion.
Implementation of changes is simplified throughout the construction programme.
As contractors must design to a budget, a client is certain of the necessary financial
commitment from the start. However, contractors may offer a functional design that
is not aesthetically appealing. They are inclined to develop a low-cost design with
opportunities to increase their margins. Contractors might make a client’s brief fit their
own preferred solution and thus the long-term life of a building might be overlooked,
and if the brief is vague, the client could pay an inflated price or take possession of an
inferior building. In fact, clients always find that it is necessary to employ consultants
to monitor the various aspects of the work and to ensure that the work of the contractor
is of an acceptable standard. In addition, tender comparison becomes complex as
it involves evaluation of design, quality and construction cost. The cost of abortive
2
There are a number of variants of design and build contracting, including just design and build (D&B); design,
build and operate (DBO); and design, build, operate and maintain (DBOM).

designs and tendering is a heavy burden on contractors’ overheads and eventually the
costs will be passed on to clients.
3.012 One variation of the concept is the ‘develop and construct’ method, where the builder
bids on the basis of outline drawings and the performance specification provided by
the client. The successful builder is then responsible for developing the initial design
and the subsequent building work. Another variation is the turnkey method, where the
builder provides the client with a fully designed building, including all the necessary
plant and equipment for immediate use.
(d) Management contracting
3.013 This is the separation of management from construction in the form of management
contracting for a fee, but the fee can often be varied if the time or cost performance
of the project differs significantly from the initial plan and budget. In management
contracting, the employer has a direct contract with the management contractor.
The contractor is solely providing management services and is normally excluded
from undertaking construction work. The contractor is responsible for the smooth
running of the work on site so that the contract can be finished within time and cost
expectations. The combination of size and complexity of a project will result in the
need for a management contract.
3.014 Under this system, the project team is provided with access to an experienced
contractor at an early stage. The consultants prepare the drawings, specifications
and bills of quantities for the various works contracts. From the project’s outset, the
management contractor becomes part of the project team, working together to achieve
a client’s project objectives of time, cost and quality. It also enables the contractor to
advise on quality, buildability, suitability, availability of labour, plant and materials
and construction methods during the design phase.
3.015 During construction the management contractor’s duties include placing and letting
contracts with specialists, setting out, providing shared facilities, planning and
monitoring the work and coordinating all the activities on site, but not carrying
out the permanent works. Early appointments of management contractors enable
them to give information on the organisation of construction works, the site
layout, possible works contractors and tendering arrangements. Such projects are
progressed by the letting out of the project to works contractors on a number of
separately tendered work packages. This system allows the design of each package
to be completed whilst building work continues on site for the earlier designed
packages. Due to this parallel working, the project completion period is reduced.
Each package of work is undertaken by a specialist, who will be competitive for that
part of the works, resulting in a lower price. The integration of the contractor into
the design/construction team helps to remove the ‘us and them’ friction. All works
are competitively tendered for the work packages, but the client will not know the
final project cost until the last package is ordered, unless a guaranteed maximum
price is given.
3.016 One development under this system has been to combine the design and build and
management contracting, namely ‘design and manage’ whereby the contractor

TYPES OF CONTRACTS 31
produces a design and guaranteed maximum price and the work is later assigned to a
number of major package contractors.
(e) Construction management
There are many similarities between management contracting and construction 3.017
management. The feature that distinguishes construction management most clearly
from management contracting is that the employer contracts directly with each of
the specialist and work contractors, and the coordinator of the construction work
has no contractual responsibility for their performance. The specialist construction
manager has emerged as the manager of a large number of technical people in the
design, programme and construction of a building became less of an architectural
issue, and more of a management issue. The most suitable situation in which to
adopt construction management is when all design activities have been delegated
to consultants, then the problem of coordination ceases to be a design problem and
becomes a pure management problem.
This requires the responsibility of design and management to be separated. A 3.018
construction manager performs the role of construction consultant while the architect
is the design consultant. The construction manager manages and supervises the
overall process in terms of information flow and coordination, providing advice on
fabrication and assembly, while design coordination remains the responsibility of the
architect. The obligations as to time are entirely related to the construction manager’s
programme. This means that an employer who wants speedy progress should appoint
a construction manager who has proven experience of being able to complete projects
quickly. However, in the absence of a main contractor, the employer must take on some
of the risks.
3. TYPES OF CONTRACTS
(a) Based on payment method
The basis of the tender will dictate the way in which the contractor will be paid and the 3.019
relative risk of the project. There are three fundamentally different types of contract in
normal use. In practice, the contractor’s bid will be one of the following.
(b) Lump sum fixed-price contract
Under this type of contract, a defined work is carried out for a price that has been 3.020
agreed, or where the basis on which the agreed price will be subject to possible
increases or decreases according to strict conditions in the contract, such as variations
ordered by the architect and fluctuations in accordance with the contract. In general,
civil and building contracts adopt this type of contract.
Contracts could be based on the plans and specifications where the contractor 3.021
undertakes to carry out the work to completion for a lump sum as described by working
drawings together with specifications. In this way, there are substantial risks imposed

on the tenderers as they are responsible for any errors they make in implementing
the drawings but this will save the employer a lot of time working out the quantities.
Whereas in lump sum contracts based on bills of quantities, the work is carried out
in accordance with the completed working drawings and bills of quantities where
the specification may or may not be included as one of the contract documents. It
reduces the contractor’s estimating time and provides a fair basis for competition. However,
the process of preparing the bills of quantities imposes a restraint on the employer and
the design team to finalise the requirements as much as practicable before tendering.
(c) Measurement contract
3.022 This type of contract allows the contract sum to be calculated later and will be used
whenever there is a high percentage of uncertainties as to the quantities of works in
the contract. The final contract sum is to be ascertained by measurement and valuation
according to bills of approximate quantities or a schedule of rates adhered to the
contract. Hence, the amount of interim payments and the final account are subject to
the measurement of completed work during progress and at the end of the contract
on site. The bills of approximate quantities are normally used where an employer
cannot finalise her or his requirements in advance, or the project is so urgent that
it does not allow adequate time for the design team to produce the firm quantities
prior to tendering. In measurement contracts based on a schedule of rates, the work is
measured and valued at a rate in a schedule of rates. The schedule consists of a list of
measured items with units of measurement stated against each, but with no quantities
given. This leads to difficulty in quoting realistic prices, resulting in greater risk to
both the employer and the contractor.
(d) Cost-reimbursement contract
3.023 This is an arrangement by which the cost will be paid by the client on the basis of
actual cost incurred by the contractor including labour, plant and materials plus an
agreed amount, such as a percentage of the total price or a fixed amount to cover
overheads and profit. This type of contract is suitable for repair works or urgent works
with a very tight programme. Once the contract has been agreed, the work can be
commenced immediately but it is difficult to predict accurately the final cost until a
later stage of the project.
3.024 There are many factors that can affect the choice of a type of contract. For instance,
employers may be unable or unwilling to accept the risk of over-expenditure on the
project and will therefore insist on a lump sum contract. However, setting up a lump
sum contract requires time and effort and the resulting delay in getting started may
not be worthwhile. In addition, pressure is put on employers to control their input to
the design process carefully to avoid excessive variation costs. With a reimbursable
contract, bills of approximate quantities or a schedule of rates permit the overlapping
of design and construction. However, the employer will need to supervise the contract
more closely and will incur greater cost in doing so as the contractor has no particular
incentive to manage his operations efficiently. In practice, various hybrid types of
contract have been used from time to time to try to achieve a more acceptable form.

TENDERING PROCEDURES 33
4. TENDERING PROCEDURES
(a) Tender documents
(i) Types of documents

It is of vital importance that all tenderers receive identical sets of bidding documents. 3.025
Whenever there are changes in the drawings, which are issued as addenda to the
bidding documents, a copy of the addenda should be mailed to each tenderer. The time
allowed for the preparation of tenders will be influenced by the size and complexity
of the project.
Under normal tender submission based on bills of quantities, selected tenderers will 3.026
usually receive the following items:
1. general and special conditions of tender;

2. general conditions of contract;
3. special conditions of contract;
4. form of tender;
5. general and particular specification;
6. bills of quantities;
7. drawings; and
8. suitably addressed and labelled envelopes for the return of the tender.
The information used to produce tender prices is examined below.
(ii) Bills of quantities

Bills of quantities are used to obtain competitive bids from tenderers on an absolutely 3.027
consistent basis. However, it is usually impracticable to prepare a complete design
because of the time needed and the fact that sometimes choices can only be finalised
at a later stage of the project. So in reality, the bill of quantities only itemises and
quantifies every aspect of the work as far as possible; provisional sums may be
provided for costs that cannot be detailed at the time of tendering. In essence, the
tenderers simply state their unit price for each item of work, multiply it by the quantity
of that item, and add the totals in the tendered summary form which must be enclosed
for submission. It therefore provides a detailed breakdown of the tendered sum and
a basis on which variations will be valued in the construction stage. Variations are
changes in the contract work and/or conditions under which work is executed. To be
valid, those changes must be authorised by the architect, in writing, and preferably
before execution of the work.
(iii) Drawings
Those drawings used in preparing the bills of quantities will be listed in the bills of 3.028
quantities for the tenderers’ reference.

(iv) Specifications
3.029 Specifications are usually prepared by architects to provide written technical
information mainly on the type and quality of materials and workmanship, using their
own procedures. These often vary widely in coverage and technical content.
The bills of quantities together with working drawings and specifications enable the
nature of the required work to be envisaged by the tenderers.
(b) Tendering methods
(i) Selection of main contractor

3.030 Upon deciding on a contractual arrangement for the project, attention should be
on selecting the main contractor. In Hong Kong, a large proportion of work in the
construction industry is obtained by way of tendering, either on a competitive or
negotiated basis, or sometimes a combination of both. The tendering procedures
vary widely depending on whether the employer is public or private. The methods
of tendering commonly used are open competitive tendering, selective competitive
tendering, and negotiated tendering.3
(ii) Open tendering

3.031 The procedure for inviting tenders is simply to advertise the requirement for tenders
and permit any applicant to submit a tender. All interested suppliers/contractors are free
to submit tenders. For instance, the HKSAR government publishes tender invitations
in the Gazette and on the Internet, as well as local press and selected overseas journals,
if necessary.
3.032 It enables new but ambitious contractors to compete with well established companies
on an equal basis. Because of the fierce competition, it is possible that the contract
price may be so low that the contractor may not consider the rewards sufficient to
warrant quality workmanship. If the employer does not know very much about the
tenderers, the contract may be awarded to a firm that is not technically competent and
financially sound.
(iii) Selective tendering

4
3.033 Selective tendering is often carried out in two stages. The first stage limits the number
of competing contractors to a reasonable number. It may be carried out either by
advertising or selection.
3.034 If tenderers are selected by way of advertising, the employer must be certain that the
selected contractor is capable of performing the work described. Therefore, the employer
must pre-qualify all tenderers before considering a tender. Contractors interested in
3
There is also the method of single or restricted tendering where tenders are invited from only one or a limited
number of contractors/suppliers in special circumstances when open competitive tendering would not be an
effective means of obtaining the requisite supplies or services.
4
Under the other method of pre-qualified tendering, tender invitations are sent by letter to those pre-qualified
contractors and invitations to apply for pre-qualification may take the form of open tendering and selective
tendering.

preparing and submitting a tender are asked to submit documents that establish their firm’s
expertise and capability in accomplishing similar types of construction. In effect, the
client asks the firm to submit its reference for consideration. If the employer has doubts
regarding the contractor’s ability to successfully complete the work, the employer can
simply withhold qualification. By the other method, the employer can select tenderers
from a list of firms who have been investigated, whose capabilities are known and who
possess the established skill, integrity, responsibility and proven track record for work of
the character and size contemplated. For the fear of being blacklisted, some contractors
feel obliged to tender if they are chosen even if they do not really want to tender. For public
works, tender invitations are published in the HKSAR Government Gazette, or letters are
sent to all contractors on the established list of relevant approved qualified contractors.
A short list for the second stage is then compiled from applicants. This process aims 3.035
at a compromise between the need for rigorous competition and the avoidance of
excessive, abortive estimating work by the unsuccessful tenderers. As a rough guide,
the number of contractors invited to tender would be between five and eight. The
greater the value of the project, the greater is the number.
In the second stage, the final selection of one contractor will mainly be based on the 3.036
criteria of price. Other criteria may also be considered at this stage, the most common
being time and any qualification within the tenders. Because of less competition,
prices tend to be higher when compared with open tendering but the standard of work
should be high, as the firms chosen will be competent contractors.
(iv) Negotiated tendering

Negotiations are conducted with a pre-selected contractor to reach a compromise on the 3.037
terms of agreement.5 Negotiations between the employer and a contractor interested in
obtaining the contract may be carried out with or without competition beforehand. The
employer may wish to place his business with a particular firm capable of handling the
project. The employer may reach her or his decision on which contractor to use based
on submitted tenders or schedules of rates for past projects of a similar nature. If there
is no competition beforehand, the tenderers may be aware of the lack of competition
and of the improbability of the employer selecting another firm without loss of time,
and so will invariably offer an expensive tender and terms that are more beneficial to
him. Negotiation may occur following the selection of a contractor concerning the
correction of mistakes in tendering, the agreement of an addendum or the reduction
bill. Some employers choose this tendering procedure because of the desire to involve
the contractor’s expertise at the design stage or where the contract is of a specialist
nature. Negotiation on price proceeds until the design is complete and an acceptable
total price is agreed.
5
For public works contracts, in general, it is the HKSAR Government’s policy to procure goods or services
on the basis of competitive tendering, with the contract being awarded to the tenderer that conforms with the
tender specifications and offers the most advantageous terms to the HKSAR Government. Where it would be
in the HKSAR Government’s best interest to negotiate with a tenderer or tenderers, such negotiations shall
be conducted in a non-discriminatory manner between different tenderers. For details, see Tender Procedures for
Government Procurement (Chapter III of the Stores and Procurement Regulations) para 385.

(c) Submission of tender
(i) Responsibilities of tenderers

3.038 In formal competitive bid situations, the issuance of the notice to tender opens the
tendering period. To ensure fair competitive tendering, it is essential that the tenders
submitted by each contractor be based on the identical tender documentation and
that tenderers should not vary the common basis by qualifying their tenders. Where
a tenderer considers that any of the tender documents are deficient in any way and
requires clarification, he or she should notify the issuing architect as soon as possible,
copying in the quantity surveyor, in practice. If it is decided to amend the documents,
all tenderers should be informed and the tendering period extended if necessary.
3.039 Tenderers price the bills of quantities item by item to arrive at their total tendered price.
They usually seek competitive tenders from the trade contractors they expect to employ
as subcontractors, if they are successful in being awarded the contract. Although an
estimator or quantity surveyor will have a feel for the prices in the marketplace, it is
the responsibility of management to add an amount for general overheads, assess the
risk and turn the estimate into a tender.
3.040 Tenderers must submit their tenders and deposit them into the prescribed tender box
before the tender closing date and time stipulated in the tender notices. Where tenders
are received after the stipulated date and time, it is generally advisable to reject it since
there is a possibility that the tenderers involved may have been aware of the amounts
of some of the other tenders before submitting their own.
(ii) Review of submitted tenders
3.041 Once tenders have been opened, comparatively lower tenders are noted. The employer
can immediately review the qualifications of the tenderers in ascending order from
lowest to highest price. If the lowest priced tenderer can be considered responsible
based on his or her capability for carrying out the work, then further review is deemed
unnecessary. The award of contract is not necessarily made to the lowest priced,
responsible bidder. The word responsible is very important since the contractor
submitting the lowest bid may not, in fact, be competent to carry out the work. It
focuses on whether the contractor has the necessary technical, managerial and
financial capability and integrity to perform the work. In practice, when tenders are
invited, an explicit statement is made that the employer does not guarantee to accept
the lowest tender. A responsible bidder is a contractor who is capable of undertaking
and completing the work in a satisfactory manner.
(d) Assessment of tender in public works contracts
(i) Approved lists

3.042 Inviting tenders from all contractors on the approved list is the most common method of
tendering for public works. The Works Bureau currently manages two lists of approved
contractors; namely the List of Approved Contractors for Public Works and the List

of Approved Suppliers of Materials and Specialist Contractors. It makes additions,

deletions, alterations or amendments as appropriate to the lists from time to time. The
lists are normally updated monthly. However, there may be circumstances in which it
is necessary to pre-qualify the list of tenderers to identify those that are financially and
technically capable of undertaking public works contracts that are extremely complex
in nature, high value, subject to very rigid completion programmes, requiring a high
level of coordination and technically demanding.
Selection of suitable contractors for public works actually starts when considering the 3.043
application of contractors for admission onto the approved lists. Before a contractor
can be admitted to the relevant list of approved contractors, they must submit an
application to the Works Bureau. The suitability of a contractor for inclusion in
one or more of the works categories and in a particular group is assessed on the
basis of both the contractor’s global business activity and his activity in Hong Kong.
Upon receipt of an application by a contractor, the Works Bureau will assess whether
the applicant meets the financial criteria, and whether the applicant has appropriate
technical and management capability in respect of each category in relation to the
group for which he has applied. In addition, it is a precondition that the contractor
possess the ISO9000 certification for admission onto the list. Admission will be
subject to an applicant that meets the financial criteria, has the appropriate technical
and management capabilities and fulfils any other items that are considered necessary
for inclusion on the list.
While the works departments of the HKSAR are responsible for the tendering of the 3.044
works contracts, the authority to accept tenders rests with the following two tender
boards: the Central Tender Board and the Public Works Tender Board. The boards
shall consider the tender recommendations submitted by the Works department and
shall decide whether or not to accept the tenders as recommended. In considering
a department’s tender report, the tender boards take into account the department’s
recommendation and justifications. The boards may seek clarifications from the
department before accepting the department’s recommendation. The decision not
to accept any tender in a tender exercise must be made by the relevant tender board.
Upon notification of the tender board’s approval, the procuring department will
inform the successful tenderer in writing of the acceptance of her or his tender
and invite the supplier/contractor to execute a contract with the department. The
procuring department will also inform unsuccessful tenderers of the outcome of
their bids, and upon request from the tenderers, the reasons why their tenders were
unsuccessful.
(ii) Central Tender Board

The Board is responsible for dealing with tenders for construction and engineering 3.045
services exceeding HK$30 million. The use of pre-qualified tendering and the
evaluation criteria for pre-qualifying applications require the prior approval of the
Central Tender Board. The Board is chaired by the Permanent Secretary for Financial
Services and the Treasury (Treasury) to deal with high value tenders, which exceed
those values specified for the subsidiary tender boards.

(iii) Public Works Tender Board

3.046 The Board is responsible for dealing with tenders for construction and engineering
services not exceeding HK$30 million. The Board is chaired by the Deputy Director
of Architectural Services.
3.047 The Works department is guided by a number of principles in assessing tenders for
public works contracts. It must ensure that the recommended tenderer is both technically
and financially capable of satisfactorily undertaking the contract concerned, as well as
all other contracts already in hand. Before recommending a tender for acceptance, the
department would take the following factors6 into account, where appropriate:
1. tender prices;
2. technical and financial capability of the tenderers and their past performance
records;
3. timely delivery or completion;
4. compatibility with existing or planned purchases;
5. after sale support and service including maintenance and spare parts provision;
and
6. running and maintenance costs.
3.048 The Works Bureau has always emphasised that the best value does not necessarily
equate with the lowest tender price, but also encompasses various quality
considerations, as well as longer-tem benefits such as lower life cycle costs. Where
approval has been given for the use of a marking scheme in the evaluation of tenders,
the tenders would be assessed according to the criteria previously endorsed by the
relevant tender boards. Normally, the tender that attains the highest overall technical
and price score is recommended.
(iv) World Trade Organisation

3.049 Hong Kong has been a signatory to the World Trade Organisation Agreement on
Government Procurement (WTO GPA) since 20 May 1997. The object of the WTO
GPA is, by means of prescribed procedures, to ensure that all procurement entities
under the WTO GPA provide for open and fair competition amongst domestic and
foreign suppliers and service providers. Pursuant to the WTO GPA, for all public work
contracts above the value of XDR 5,000,000 (ie about HK$ 55,109,000), the tendering
has to be conducted in accordance with the agreement.
3.050 Although the tendering policies and procedures are in general consistent with the
spirit and objectives of the WTO GPA, the HKSAR Government still needs to align
some procedures for full compliance with the provisions of the Agreement. One of
the major changes is to extend the shortest tendering period of public works contracts
6
For details, see Guide to Procurement at http://www.fstb.gov.hk/tb/eng/procurement/tender04.html#02 visited
February 19, 2011.

from 21 to 40 days. For those contracts covered by WTO GPA, the Works department
will also notify consultants and overseas trade commissions, where appropriate. The
tendering system must therefore comply with the rules in WTO GPA. According to
WTO GPA, the works contract must be awarded to a tenderer:
1. who has been determined to be fully capable of undertaking the contract, and
2. whose tender is either
a. the lowest; or
b. the tender which in terms of the specific evaluation criteria set forth in the
notices or tender document is determined to be the most advantageous.
As a party to the WTO GPA, the HKSAR Government is required to provide a 3.051
mechanism to deal with complaints from suppliers/contractors on alleged breaches of
the Agreement. The independent Review Body on Bid Challenges was hence set up
on 30 December 1998 to handle bid challenges. It is to ensure the provision of open
and non-discriminatory treatment of all goods and services suppliers irrespective of
their country of origin, and to provide for open and fair competition amongst domestic
and foreign suppliers. The Review Body on Bid Challenges has its own set of rules of
operation and may conduct hearings when complaints are received.
Challenges to the awards of tenders may also be brought by litigation, as illustrated in 3.052
China Harbour Engineering Co Ltd v Secretary for Justice.7
7
[2007] HKEC 124. Application for leave to appeal to the Court of Final Appeal was refused. See China Harbour
Engineering Co Ltd v Secretary for Justice [2007] HKEC 2232.

1. FORMATION OF CONTRACT
(a) General principles
The formation of a contract is the start of the parties’ contractual relationship, which 4.001
will affect their rights and obligations during the execution of the contract. A contract
is a legal document and governs the rights of the parties.
Contracts can be made orally or in writing. It does not turn upon whether both parties 4.002
sign the same document but more importantly whether an offer and an acceptance
have been made. Commercial negotiations between the parties often precede the
agreement. These commercial negotiations cannot normally be taken into account
when ascertaining the rights and obligations of the parties arising from the contract.
See Prenn v Simmonds1 and Reardon Smith Line Ltd v Australia Wheat Board.2 It is
important therefore to understand the essential requirements in the formation of a
contract, as once such a contract is formed, obligations arise.
Most contracts tend to stipulate the governing law. In construction contracts, the governing 4.003
law tends to be the law at the place where the project is to be constructed. Where it
is a consultancy agreement, different issues may arise and it is therefore important to
stipulate the law governing the contract so that the rights of the parties can be properly
ascertained. For example, a French consultant may enter into a contract with a Japanese
developer building an oil refinery in China. Issues, such as what is the proper test to
ascertain whether there has been any negligent design, may arise unless the details as to
the requirements of the design, meaning which standard it is to meet, are clearly set out.
2. ESSENTIAL FEATURES
(a) Key requirements
It is frequently said that there are three essential elements to the creation of a contract: 4.004
agreement, contractual intention and consideration. For details, see Chitty on Contracts
(Sweet & Maxwell, Vol.1, 30th edn), Chapter 2.
1
[1971] 1 WLR 1381. As applied in Bouygues SA v Shanghai Links Executive Community Ltd [1998] 2 HKLRD
479, where it turned on the proper construction of a solicitors’ letter, it was not appropriate to make any findings
about what the parties had said was actually agreed upon in the course of the negotiations and given that evidence
of negotiations. In that case, the contract price for the construction of a number of housing units was paid to
the plaintiff contractor from a segregated account of the defendant, a parent company of the employer. It was
held that the sums in the account were not held on trust for the plaintiff. See China Complant Development
(HK) Ltd v Ng Shing Fat [2007] HKEC 770; Oriental Sharp Ltd v Hong Kong Housing Authority [2006] HKEC
2020; and Lam Geotechnics Ltd v Milichich [2005] HKEC 1040. See Gold Shine Investment Ltd v Secretary for
Justice [2009] HKEC 2098 and Urban Renewal Authority v Agrila Ltd [2009] HKEC 516. See also Yoshimoto v
Canterbury Golf International Ltd [2001] NZLR 523; Rugby Group Ltd v ProForce Recruit Ltd [2005] EWHC
70 (QB); Stroude v Beazer Homes Ltd [2005] NPC 45; and Berkeley Community Villages Ltd v Pullen [2007]
3 EGLR 101.
2
[1956] AC 266. See also AIC Ltd v Marine Pilot Ltd (The Archimidis) [2007] 2 All ER (Comm) 189 and St
Vincent Shipping Co v Bock, Godefroy & Co (The Helen Miller) [1980] 2 Lloyd’s Rep 95.

(i) Agreement
4.005 When one talks about agreements, it is not just an agreement on part of the terms
of the contract, but rather an agreement on all terms. The normal test is to ascertain
whether an offer and an acceptance have been made. Offer and acceptance in
building contracts frequently, if not always, take the form of an invitation to tender,
letter of intent and execution of formal contract. One therefore starts by asking
whether an offer has been made by one party to the other, and an acceptance of
that offer has been made by the other party. Furthermore, in order to establish an
agreement, the parties must have reached agreement on all the terms that form the
contract.
4.006 Even if there is an agreement as a result of the offer and acceptance, and it is supported
by consideration, a contract is still not valid. In order for a contract to be valid, it must
be made with an intention to create legal relations between the parties.
(ii) Contractual intention

4.007 The contractual intention is the intention to create a contractual relationship between
the parties to the contract. A unilateral intention to contract is insufficient to establish
a legally binding agreement. That is why it is frequently said that there needs to be a
‘meeting of minds’ before a contract can be said to have been formed.
(iii) Consideration
4.008 There must be sufficient consideration exchanged between the parties. The law then
requires the parties to give sufficient consideration to the promise made to it. In
building contracts, the consideration given by the employer is the price paid or the
promise to pay for the works to be executed by the other party. The consideration
by the contractor or consultant is the carrying out of the works or the promise to
carry them out. Consideration is not always in monetary terms and can take other
forms, eg forbearance to sue. Consideration is an important concept, but can also be
a complex one. A promise without consideration would not be enforceable in law.
The only exception is where a promise is made in the form of a deed. The doctrine of
consideration is dealt with in more detail below.
(b) Freedom to enter into contract
4.009 It is frequently said that parties are free to enter into whatever forms of contract
they wish. This is not always the case, however, as there is legislation that regulates
commercial transactions and instances where absolute freedom of contract is seen as
undesirable. For instance, a party who is mentally incapable of entering into a contract
will not have the freedom to enter into a valid contract.
4.010 Another element that should also be looked at is the capacity of the parties to enter
into a contract. For instance, a minor cannot enter into a valid and binding contract.
There are also other formalities required by law with which compliance may be
necessary.

OFFERS AND ACCEPTANCE 47
(c) Objective test
The court adopts the objective test in determining whether parties have reached 4.011
agreement and also to ascertain the intention of the parties. In other words, the subjective
intention of the parties is irrelevant for the purpose of ascertaining whether a legally
binding agreement has been reached and indeed for the construction of the contract.
In Hong Kong Housing Authority v Rotegear Corp Ltd,3 the court found an actionable 4.012
contract to exist between the authority and a nominated subcontractor for the electrical
works in a building project derived from the standard form of tender and the exchange
of the correspondence, and the subcontractor was liable for breach of the contract.
(d) Standard forms
Standard form contracts are frequently used in the construction industry. These standard 4.013
forms comprise the general conditions of the contract, which are frequently, if not
inevitably, supplemented by special conditions. As a general rule, special conditions
take precedence over general conditions. Construction contracts also comprise other
documents, such as specifications and bills of quantities.
3. OFFERS AND ACCEPTANCE

(a) Importance of offer and acceptance
The formation of a contract is frequently preceded by negotiations between parties 4.014

on the terms to be set out in the contract itself. It is important to understand what
constitutes an offer and an acceptance as the law provides that the test to be applied
in deciding whether the parties have reached agreement is to be applied objectively.
(b) Invitation to treat
Invitation to treat usually arises when the parties negotiate during certain preliminary 4.015
communications, before any definite offer is made. For instance, a party may merely
ask about the price of particular goods that it wishes to purchase or alternatively may
invite the other to make an offer for its goods.
In Harvey v Facey,4 the following telegrams were exchanged between the parties: 4.016
Plaintiff: Will you sell us Bumper Hall pen? Telegraph lowest cash price.
Defendant: Lowest cash price for Bumper Hall Pen £900.
Plaintiff: We agree to buy Bumper Hall pen for the £900 asked by you.
The Judicial Committee of the Privy Council held that the defendant’s telegram did 4.017
not amount to an offer but merely a statement as to price. The offer was made by the
3
[2009] HKEC 1224.
4
[1983] AC 552. See also Dencora v Norfolk CC [1995] EG 173 and Bigg v Boyd Gibbins [1971] 1 WLR 913.

plaintiff in the second telegram and no acceptance had been made. There was therefore
no contract between parties.5
4.018 Most advertisements ‘for sale’ are invitations to treat. The logic is simple. If the
advertisement amounted to an offer, then any response to it could amount to an
acceptance, giving rise to a contract. As there may be more than one acceptance, the
offeror would only be able to honour one contract and would be in breach of all the
others. However, where special arrangement is set out in the advertisement, it may
amount to an offer to sell. In Harvela Investment Limited v Royal Trust of Canada,6 a lot
of shares were offered to the highest bidder in the advertisement. The House of Lords
held that such an advertisement amounted to an offer to sell. The other issue in that case
relates to the two responses that were received, both claiming to be the highest bidder.
One offers a fixed price of HK$2,175,000 whereas the other offered HK$2,100,000 or
HK$101,000 in excess of any other offer to be received. The House of Lords decided
that the referential bid made with reference to other offers received was not valid.
4.019 An offer is frequently preceded by what is sometimes described as invitation to treat.
The distinction between an invitation to treat and an offer is not easy to discern. It
primarily turns on whether the statement bears an expression of willingness to be
bound. The wordings of the statement are not conclusive.
(c) Invitation to tender
4.020 In construction contracts, the employer or its agent sends out an invitation to tender for
the proposed work.7 An invitation to tender frequently contains statements of fact such
as the quantities or the site condition. This statement, depending on the circumstances,
may have no legal effect at all; amount to representation; form collateral warranties;
or may give rise to a claim for negligent misstatement. Sometimes these statements
become incorporated into the contract. This document normally includes proposed
general and special conditions of contract, specifications, bills of quantities, etc.
An invitation to tender is not normally an offer binding the employer to accept the
5
In other words, there is no consensus ad idem as between the parties. In Shanghai Tongji Science & Technology
Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, the Hong Kong Court of Final Appeal remarked:
“… And the court will not imply such a contract lightly. The conduct relied on must be unequivocally referable
to the contract sought to be inferred … it is not enough to show that the parties have done something more
than, or something different from, what they were already bound to do under obligations owed to others. What
they do must be consistent only with there being a new contract implied, and inconsistent with there being no
such contract … A contract will not be concluded unless the parties are agreed as to its material terms. There
must be ‘consensus ad idem’. Whether the parties have reached agreement on the terms is not determined by
evidence of the subjective intention of each party.”
See Tang Wai Kuen Raymond v Asia Landscaping Ltd [2010] HKEC 1437; Yew Sang Hong Ltd v Hong Kong
Housing Authority [2007] HKEC 1699; and Berlin Building Products Ltd v Prosperity Lamps & Components
Ltd & Rotegear Corp Ltd (Third Party) [2001] HKEC 475. See also Macdonald Estates Plc v Regenesis (2005)
Dunfermline Ltd 2007 SLT 791 and Denfleet International Ltd v NHS Purchasing and Supply Agency [2005]
EWHC 55 (Admin).
6
[1985] 3 WLR 276. See also Office of Fair Trading v Abbey National Plc [2010] 1 AC 696 and Harmon CFEM
Facades (UK) Ltd v Corporate Officer of the House of Commons (2000) 67 ConLR 1.
7
In these circumstances, the submitted tender or quotation is normally the offer; the invitation to tender or request
for quotation is normally a mere invitation to treat. See, for example, Spencer v Harding (1870) LR 5 CP 561.

lowest or indeed any other tender. Most invitations to tender would expressly make a
statement to that effect.
If an express offer to accept the lowest tender is made, it can be binding. It has the effect 4.021
of turning the invitation to tender into an offer, the acceptance of which would lead
to a legally enforceable contract. To achieve that, the invitation to tender would have
to be construed as a contractual offer capable of being converted by acceptance into
a legally enforceable contract. In Gibson v Manchester City Council,8 the statement
made by the local authority was that “the corporation may be prepared to sell the house
to you at the purchase price of £2,725…”; the court held that this phrase “may be
prepared to sell” did not amount to an offer to sell the house as its purpose was simply
to invite the making of a ‘formal application’ which would then amount to an offer.
(d) Offer
The widely accepted definition of offer is an expression of willingness to contract 4.022

made with the intention (actual or apparent) that it is to become binding on the person
making it as soon as it is accepted by the person to whom it is addressed.9 See Storer v
Manchester City Council10 and First Energy (UK) Limited v Hungarian International
Bank Limited.11 Under the objective test of agreement, an apparent intention to be
bound may suffice, that is, the alleged offeror may be bound if his words or conduct
are such as to induce a reasonable person to believe that he intends to be bound, even
though in fact he has no such intention.12
The offer can be made orally or in writing but it must be definite and unambiguous. The 4.023
words in the statement prevail over the subjective intention of the person making the
statement when deciding whether that statement is an offer or not. In other words, the test
as to whether a statement amounts to an offer is an objective test. An offer can also be made
by conduct. The offer must therefore be precise and contain an expression of willingness
to be bound. This offer must be directed to a recipient (offeree). The offer should also set
out the terms that would be the terms of the contract if the offer were accepted.
Sometimes, contract negotiations may result in a series of counter-offers being 4.024
made before there is acceptance resulting in a contract. In these circumstances, the
position of the offeror and offeree may change every time a counter-offer is made. The
counter-offer has to satisfy the same requirements as that of an offer in order for an
acceptance of it to result in a contract.
8
[1979] 1 WLR 294. See also Happy Dynasty Ltd v Wai Kee (Zens) Construction & Transportation Co Ltd &
Dyno Wesfarmers (HK) Ltd (Third Party) [1998] 1 HKLRD 309 and Shun Fung Ironworks Limited v Director
Of Buildings And Lands [1995] 2 HKLR 311. See also AE Yates Trenchless Solutions Ltd v Black & Veatch Ltd
(2008) 124 ConLR 188; Gurney Consulting Engineers (A Firm) v Pearson Pension Property Fund Ltd [2004]
EWHC 1916 (TCC); and Galliford Try Construction Ltd v Michael Heal Associates Ltd (2003) 99 ConLR 19.
9
See Etacol (Hong Kong) Ltd v Sinomast Ltd [20074] HKEC 113.
10
[1974] 1 WLR 1403. See Birse Construction Ltd v St David Ltd (No.2) (2000) 78 ConLR 121 and Zakhem
International Construction Ltd v Nippon Kokkan KK (No.1) [1987] 2 Lloyd’s Rep 596.
11
[1993] 2 Lloyd’s Rep 195. See Composers and Authors Society of Hong Kong Ltd v Sun Satellite Television Co
Ltd [2007] HKEC 612. See also Vodafone Ltd v GNT Holdings (UK) Ltd [2004] EWHC 1526 (QB).
12
See Brown v Rice [2008] FSR 3. In Birse Construction Ltd v St David Ltd (No.2) (2000) 78 ConLR 121, it was
stressed that the court could only find a contract by reference to the objective intentions of the parties at the
relevant time.

4.025 The ascertainment of whether the intention to be contractually bound is established is

based on the objective test. See Ignazio Messina & Co v Polskie Linie Oceaniczne.13
Hence, an apparent intention to be bound may suffice so far as the intention of the
offeror is concerned.
4.026 The intention or state of mind of the offeree is equally important. In this respect, the
test may be said to be not purely objective. See Paal Wilson and Co a/s v Partenreederei
(the Hannah Blumenthal).14
(e) Tender
4.027 The offer to carry out the works usually comes in the form of a tender from the
contractor. This is normally a response to the invitation to tender. It is the tender that
may amount to an offer. This offer must be definite and unambiguous. See Falck v
Williams15 and Harvey v Facey.16 The contractor (the offeror) directs the offer to the
employer (the offeree). The tender normally stipulates a time within which the tender
is to remain valid. This is the period in which the offer can be accepted or rejected.
4.028 Where the person who invites the tenders states in the invitation that he binds himself
to accept; the highest offer to buy or the lowest offer to sell or to provide the specified
services, the invitation to tender may amount to an offer and the highest or lowest bid
would then amount to acceptance. See Spencer v Harding;17 William Lacey (Hounslow)
Limited v Davis.18
4.029 An offer stipulating a time for acceptance cannot be accepted after that time. If time to
accept is not stipulated, the law will imply a reasonable time for the offer to be accepted
under that circumstance, the offer comes to an end at the expiration of the reasonable
time. See Ramsgate Victoria Hotel Company v Montefiore19 and Article 21(1) of
the Vienna Convention on contracts for the international sales of goods. As to what
amounts to a reasonable time will depend on the circumstances.
13
[1995] 2 Lloyd’s Rep 566. In the judgment, Clarke J said:
“There are now a number of cases which support the conclusion that, subject of course to the circumstances
of the particular case, where there are negotiations for a charterparty or the sale of a ship and terms are agreed
which are expressed to be subject to details there is no binding agreement until the details have been agreed.”
See also Thoresen & Co (Bangkok) Ltd v Fathom Marine Co Ltd [2004] 1 All ER (Comm) 935.
14
[1983] 1 AC 854 at 924. See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd
(2004) 7 HKCFAR 79. See also Fiona Trust & Holding Corp v Privalov [2007] 1 All ER (Comm) 891 and McKie
v MacRae 2006 SLT 43.
15
[1900] AC 176. In this case, the parties corresponded by means of a telegraphic code and it was held that the
burden was on the plaintiff to prove that the proposal made by it and accepted by the defendant was so clear and
unambiguous that the defendant could be heard to say that he misunderstood it. See also J Jackson & Sons v Ben
Silver (1922) 10 LlL Rep 34 and Eastes v Russ [1914] 1 Ch 468.
16
[1893] AC 552. In this case, it was held that the last telegram was an offer to buy and not an acceptance of an
offer to sell as none had been made. See also Dencora v Norfolk County Court [1995] NPC 173.
17
[1870] LR 5CP 561. In this case, it was held that a circular sent out in the following wordings, namely: “We are
instructed to offer to the wholesale trade for sale by tender the stock in trade …”, did not amount to a contract
or promise to sell to the person who made the highest tender. See also Blackpool and Fylde Aero Club Ltd v
Blackpool Borough Council [1990] 1 WLR 1195.
18
[1957] 1 WLR 932 at 939. See Profit Boat Development Ltd v Craft Projects (HK) Co Ltd [2007] HKEC 1615 and
Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. See also MSM
Consulting Ltd v Tanzania (2009) 123 ConLR 154 and Eugena Ltd v Gelande Corp Ltd [2004] EWHC 3273 (QB).
19
[1866] LR Ex 109. See also Manchester Diocesan Council of Education v Commercial & General Investments,
Ltd [1970] 1 WLR 241.

An offer may also be terminated by withdrawal, rejection, lapse of time, occurrence of 4.030
a condition, death and supervening incapacity.
An offer may be withdrawn at any time before it is accepted. This general rule applies 4.031
even if a time for acceptance has been stipulated because such a promise to keep the
offer open is unsupported by consideration and cannot therefore be binding.20 The
withdrawal must be communicated. It must also be withdrawn before an acceptance
is made. Hence if the offeree accepts the offer before the notice of the withdrawal
reaches the offeree, he or she may sue for damages. Whilst the notice of withdrawal
must reach the offeree, it need not emanate from the offeror. It is sufficient if the
offeree knows from a reliable source that the offeror no longer intends to be bound by
the offer it has made. This is not entirely satisfactory in that whether the source is a
reliable one cannot be free from doubt.
An offer is terminated if it is rejected. Once a rejection is made, the offer can no longer 4.032
be accepted. In the commercial sector, a rejection is frequently accompanied by a
counter-offer. Hence where parties are trying to bargain on the price to be paid for a
house, once a counter-offer of a lower price is made, the original offer can no longer
be accepted. If however the statement amounts to an enquiry as to whether the original
offeror is prepared to reduce the price, it may not amount to a rejection of the offer
and the original offer would still be capable of being accepted.21 Like a withdrawal, a
rejection must also be communicated. The rejection takes effect from the time when
the offeror receives the rejection or when it is actually communicated to him. Hence
if an offeree changes his mind after posting the rejection, he should ensure that the
offeror has notice of the acceptance before receiving the rejection.
The offer may also be terminated as a result of certain changed circumstances such as 4.033
the supervening incapacity of the offeror or offeree. In the case of a company, it may
lose its capacity to tender for the specific works if it has altered its memorandum of
association, so that the transaction can be described as ultra vires and void.
Qualified tenders are sometimes submitted. It is up to the party making the invitation 4.034
to tender and the terms of the invitation to tender to decide whether a qualified tender
is to be considered or not. In some contracts, the invitation to tender will stipulate that
qualified tenders will not be considered. It is important therefore to look at the tender
documents to ascertain to what extent a qualified tender can be made.
(f ) Cost of tendering
Costs are inevitably incurred in preparing tenders, especially tenders involving a 4.035
significant element of design. Such work is generally treated as part of the ordinary
20
See Routledge v Grant [1828] 4 Bing 653. See also Bristol Cardiff & Swansea Aerated Bread Co v Maggs (1890)
LR 44 Ch D 616 and Reichel v Mackarness (1887) LR 35 Ch D 48.
21
Gibson v Manchester County Council [1979] 1 WLR 294 at 302. See Happy Dynasty Ltd v Wai Kee (Zens)
Construction & Transportation Co Ltd & Dyno Wesfarmers (HK) Ltd (Third Party) [1998] 1 HKLRD 309
and Shun Fung Ironworks Limited v Director Of Buildings And Lands [1995] 2 HKLR 311. See also AE Yates
Trenchless Solutions Ltd v Black & Veatch Ltd (2008) 124 ConLR 188; Gurney Consulting Engineers (A Firm) v
Pearson Pension Property Fund Ltd [2004] EWHC 1916 (TCC); and Galliford Try Construction Ltd v Michael
Heal Associates Ltd (2003) 99 ConLR 19.

course of business for a contractor, and it may be said that the contractor does it
gratuitously for the purpose of securing business. Sometimes a contractor may be
able to recover a reasonable sum for work done at the employer’s request that falls
outside the normal work that a contractor performs gratuitously for the purpose of
preparing a tender.22 This may be based on the obligation to pay under a quasi-contract
or restitution.23 Similarly, if the employer invites a tender without any intention of
entering into a contract, and the contractor incurs expenses in preparing the tender,
the contractor may have a claim for damages in full against the employer. The law
generally imposes an obligation to pay a reasonable sum.
4.036 Similarly, if a contractor prepares a tender involving certain designs, and the tender is
not awarded to the contractor but the designs provided are later used by the employer,
the contractor may claim for reasonable costs so incurred (following the principle in
William Lacey (Hounslow) Limited v Davis).24
(g) Acceptance
4.037 An acceptance can be defined as a final and unqualified expression of assent to the
terms of an offer. Like the offer, it must be definite and unambiguous as well. Therefore
a statement that the offer is accepted subject to certain conditions would amount to a
rejection of the offer, accompanied by a counter-offer.
4.038 An offer may be accepted by conduct if it is clear that the offeree acted in such a way
as to evince an intention of accepting the offer. However, silence does not constitute
acceptance. This principle of law is not overcome by the offeror stating that the offer
is treated as accepted by silence.
4.039 The acceptance must also be communicated to the offeror. The logic is simply that
it would cause severe hardship to the offeror if he does not know that his offer has
been accepted. The communication must be such that it is brought to the notice of
the offeror. Where the offeree left the written notice of acceptance at the offeror’s
address, and this written notice of acceptance has not actually come to the notice of the
offeror, the requirement of communication may still have been satisfied.
4.040 Acceptance must be unconditional. If new terms were attached, it would normally
constitute a counter-offer or a fresh offer.
22
William Lacey (Hounslow) Limited v Davis [1957] 1 WLR 932. See Profit Boat Development Ltd v Craft Projects
(HK) Co Ltd [2007] HKEC 1615 and Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing
Ltd (2004) 7 HKCFAR 79. See also MSM Consulting Ltd v Tanzania (2009) 123 ConLR 154 and Eugena Ltd v
Gelande Corp Ltd [2004] EWHC 3273 (QB).
23
If the nature of the matters on which the agreement had not been reached precluded there being a binding
contract, the performance of services by one party at the request of the other might give rise to a non-contractual
restitutionary claim for recompense. See Benourad v Compass Group Plc [2010] EWHC 1882 (QB). See
British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 at 511. See Ming Kee Asphalt
Engineering Ltd v China Road and Bridge Corp [2004] HKEC 1184 and Shanghai Tongji Science & Technology
Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. See also RTS Flexible Systems Ltd v Molkerei Alois
Muller GmbH & Co KG [2010] BLR 337 and Whittle Movers Ltd v Hollywood Express Ltd [2009] 2 CLC 771.
24
[1957] 1 WLR 932.

(h) Letters of intent
Letters of intent or letters of award are a common phenomenon in the offer and 4.041
acceptance process in the construction industry. Whether or not such letters of intent
amount to an acceptance is a question of fact. Sometimes even if it does not constitute
acceptance, it may amount to a quasi-contract from which liability may still arise.
Normally a letter of intent expresses an intention to enter into a contract in the future 4.042
but creates no liability in respect of that future contract. It may however give rise to
liability depending on the factual context upon which the letters of intent were issued.
A letter of intent may be treated as an acceptance of offer that is binding on both 4.043
parties: see Wilson Smithett & Cape (Sugar) v Bangladesh Sugar and Food Industries
Corp.25 It may give rise to liability in that a party would have to pay a reasonable
sum in quasi-contract or restitution: see British Steel v Cleveland Bridge.26 It has
also been held to give rise to the agreement of an indemnity in respect of reasonable
expenditure incurred.27 There was an offer to the employer to carry out certain urgent
design works for the purposes of obtaining estimates and planning permission with
the statement that receipt of a letter of intent would amount to an acceptance of the
offer. The employer was held to have to pay for the work carried out after the letter of
intent was sent.28
25
[1986] 1 Lloyd’s Rep 378. In this case, a letter of intent was intended to have contractual effect, but it was a
somewhat unusual case. See also Hussey v Horne Payne (1879) 4 App Cas 311; Tariff Construction v Regalia
Knitting Mills (1971) 9 BLR 20; British Steel v Cleveland Bridge and Engineering [1984] 1 All ER 504; Pagnan
SPA v Feed Products Limited [1987] 2 Lloyd’s LR 601; Kleinwort Benson v Malaysia Mining [1989] 1 All ER
785; Trentham v Arcitol Lukesfer [1993] 1 Lloyd’s LR 25; Monk Construction v Norwich Union (1992) 62 BLR
107; and Jarvis Interiors v Galliard Homes (2000) BLR 33.
26
[1984] 1 All ER 504.
27
See Drake and Scull v Higgs and Hill (1995) 11 Con LJ 214. As to the principles to follow in considering whether
a contract has resulted from a course of conduct or correspondence, see Pagnan SPA v Feed Products Limited
[1987] 2 Lloyd’s LR 601, where Lloyd LJ said:
“1. In order to determine whether a contract has been concluded in the course of correspondence, one must
first look to the correspondence as a whole … 2. Even if the parties have reached agreement on all the terms
of the proposed contract, nevertheless they may intend that the contract shall not become binding until some
further condition has been fulfilled. That is the ordinary subject to contract case … 3. Alternatively, they
may intend that the contract shall not become binding until some further term or terms have been agreed …
4. Conversely, the parties may intend to be bound forthwith, even though there are further terms still to be
agreed, or some further formality to be fulfilled … 5. If the parties fail to reach agreement on such further
terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms
renders the contract as a whole unworkable or void for uncertainty … 6. It is sometimes said that the parties
must agree on the essential terms, and that it is only matters of detail which can be left over. This may be
misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means a term without
which the contract cannot be enforced, then the statement is true. The law cannot enforce an incomplete
contract. If by ‘essential’ one means a term which the parties have agreed to be essential for the formation
of a binding contract, then the statement is tautologous. If by ‘essential’ one means only a term which the
Court regards as important as opposed to a term which the Court regards as less important or a matter of
detail, then that statement is untrue. It is for the parties to decide whether they wish to be bound, and, if so,
by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined
by the Judge, ‘the masters of their contractual fate.’ Of course the more important the term is, the less likely
it is that the parties will have left it for future decision, but there is no legal obstacle that stands in the way of
the parties agreeing to be bound now, while deferring important matters to be agreed later. It happens every
day when the parties enter into so-called ‘heads of agreement’…”
28
See Turriff Construction v Regalia (1971) 9 BLR 20. See AC Controls Ltd v BBC (2002) 89 ConLR 52 and
Project Consultancy Group v Trustees of the Gray Trust [1999] BLR 377.

4.044 The choice of words in a letter of intent is important. This is particularly so when
dealing with letters of intent issued to potential nominated subcontractors as
employers may incur liability vis-à-vis the potential nominated subcontractor if the
main contractor does not in the end enter into any nominated subcontract with the
subcontractor.
4.045 The provision of an estimate for works to be carried out may also give rise to liability.
Hence a statement that “an estimate … {amounting} to the sum of £1,230”, gave rise
to liability on the part of the offeree who made the estimate. The offeree was held to
have to pay for the additional cost incurred in having the work carried out by another
contractor. The additional cost was the balance between the estimated price and the
actual cost incurred.29
(i) Battle of forms
4.046 The construction industry uses many standard printed forms. Whilst the main
construction contract would not normally give rise to issues regarding competing
forms, other contracts such as the supply of construction materials may be affected
by such difficulties. This arises when an offer is made based on certain printed terms
and subsequent counter-offers are made based on other standard terms. Normally the
last standard terms that were ultimately accepted would be the governing terms for the
contract. This is the ‘last shot’ approach.
4.047 Generally, the court would look at who ‘fired the last shot’ in deciding the issue
regarding competing forms.30 Where both parties insist on the adoption of their own
standard terms, the party who gives up on this insistence and starts to perform would
probably not be treated as the party ‘who fired the last shot’. There are, of course,
exceptions to this general principle. In Butler Machine Tool Company v Ex-cell-o
Corporation,31 the seller included a price for the machine in its offer as well as a price
escalation clause. The buyer placed the order but stated that the order was based on the
buyer’s terms not including any provisions for price escalation. The order also attached
a page for the seller to sign and return to the buyer. The attachment provided for the
seller to accept the terms of the buyer in the order form. The buyer signed on the
attached form but attached a letter stating that the acceptance of the order was based
on the quotation of the seller. The court did not accept that the seller’s term formed
the basis of the contract because its letter was only referring to the quotation, ie price
for the machine, as opposed to the inclusion of the standard terms, which included the
price escalation clause.
29
See Croshaw v Pritchard (1899) 16 TLR 45. In this case, it was held that the use of the word ‘estimate’ did not
preclude the conclusion that that estimates became a binding lump sum price.
30
See BRS v Crutchley [1967] 2 All ER 785. See also Brogden v Metropolitan Railway (1877) 2 AC 666.
31
[1979] 1 WLR 401. See Headwin Engineering Ltd v United Soundfair Engineering Co Ltd [2008] HKEC 591
and Oka Electronics Ltd v Manohar Chugh (T/A Electric & Electronics Industries) [1991] HKLY 154. See also
Tekdata Interconnections Ltd v Amphenol Ltd [2010] 2 All ER (Comm) 302 and AE Yates Trenchless Solutions
Ltd v Black & Veatch Ltd (2008) 124 ConLR 188.

In a lot of sale of goods contracts, the parties have started to perform their obligations 4.048
before clarifying which standard terms they have agreed to adopt. When disputes
arise, the first issue the court or arbitral tribunal will have to decide is which standard
terms became the final terms of the contract. The problems that relate to competing
forms include issues such as which jurisdiction has the right to handle the dispute;
whether it should go to the court or to an arbitral tribunal; what is the governing law of
the contract; and depending on the governing law, what is the limitation period within
which a party can raise a claim.
( j) Standing offers
Standing offers are similar to what are sometimes called term contracts in Hong Kong. 4.049
A contractor is engaged for a term in respect of works of a particular nature to be
carried out in a specific area within a specified period of time.
Generally, standing offers may arise in three scenarios. First, the contract is to carry out 4.050
a fixed amount of work during a specified period. Secondly, the contract may require
the employer to order the work as needed during that period with that contractor. In
such a case, where the employer engages another party to carry out the work specified
in that contract, he would be in breach and liable for damages. Thirdly, the amount
of work is not fixed and the employer may order as and when he chooses. To make
this standing offer binding in the form of a contract such that the contractor cannot
revoke this offer at its wish, there must be consideration for the contractor to keep this
standing offer open or alternatively, as it is normally done in the construction industry,
to execute the contract under seal.
(k) Incomplete agreements
In the process of finalising a contract, it is not unusual that only the main terms are 4.051
agreed rather than every single detailed term. The court will still probably treat the
contract as having been made if the main terms giving rise to the parties’ rights and
obligations have been set out so that the purpose of the contract is clear, and the three
basic essential requirements are found – the agreement having been reached on the
basis of offer and acceptance, contractual intention is established and consideration
has been given. Then as a matter of reality, parties tend to continue to negotiate,
especially if by conduct they have started to perform the main terms of the contract. In
that case, further negotiations by the parties would amount to variations to the contract
that has been reached.
In Perry v Suffields,32 the court said: 4.052
“When once it is shown that there is a completed contract, further negotiations

between the parties cannot, without the consent of both, get rid of the contract
already arrived at.”
32
[1916] 2 Ch 187. Contrast Ch’ng Poh v China Everbright Ltd (No 2) [2002] HKLRD (Yrbk) 234 and Kwan Siu
Man Joshua v Yaacov Ozer [1999] 1 HKC 150.

4.053 Sometimes, whilst the contract is still being negotiated, a party may require the other
party to start to perform before the terms are finalised. The contract may not have been
concluded as yet. However, in the example of a sale of goods contract, the seller may
already have shipped the goods at the request of the buyer. If the strict principles are to
be applied and the correct legal analysis is that no contract is formed, the seller would
have acted to its detriment with no remedy albeit by request to the buyer. The court of
equity intervened and introduced the concept of restitution, which means that even if
no legally binding contract has been concluded, but the seller has already delivered or
taken steps to comply with the request of the buyer, then the buyer will have to pay the
reasonable costs so incurred or the price for the goods, if already delivered. This would
then constitute what is commonly called a quantum meruit claim.33
4.054 Depending on the type of contract that is being negotiated, the main terms that need to
be concluded in order to form a legally binding contract would differ. For instance, in
the case G Scammell & Nephew Ltd v HC & JG Ouston,34 a hire purchase agreement
between the parties was negotiated. As there were many different forms of hire purchase
arrangements that could be adopted, the fact that the parties had expressly in writing
referred to a hire purchase being arranged for the sale of particular goods, the court
held that the contract was still not yet concluded as the main terms were still unclear.
4. CERTAINTY OF TERMS
(a) Determination of binding force
4.055 One of the requirements for a valid contract is that there must be certainty of terms.
In the case of G Scammell & Nephew Ltd v HC & JG Ouston,35 Lord Maugham said:
“In order to constitute a valid contract, the parties must so express themselves
that their meaning can be determined with a reasonable degree of certainty.”
4.056 Where terms are too vague and imprecise, this certainty of terms requirement will not
be satisfied.
4.057 Hence even though there may be a written agreement, the terms may be so vague or
uncertain that no binding contract has been formed. The court however approaches
these questions sensibly and recognises that in the commercial world, businessmen
may not be drafting contracts with strict legal precision. The requirement of
certainty in a strict sense may result in contracts, which were intended to have
33
See British Steel Corporation v Cleveland Bridge [1984] 1 All ER 504. See Ming Kee Asphalt Engineering Ltd v
China Road and Bridge Corp [2004] HKEC 1184 and Shanghai Tongji Science & Technology Industrial Co Ltd v
Casil Clearing Ltd (2004) 7 HKCFAR 79. See also RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH &
Co KG [2010] BLR 337 and Whittle Movers Ltd v Hollywood Express Ltd [2009] 2 CLC 771.
34
[1941] AC 251. See New World Development Co Ltd & Others v Sun Hung Kai Securities Ltd (2006) 9 HKCFAR
403.
35
[1941] AC 251.

CERTAINTY OF TERMS 57
binding force by businessmen, to be struck down by the courts. This would be

highly undesirable.
“Businessmen often record the most important agreements in crude and summary
fashion; modes of expression sufficient and clear to them in the course of their
business may appear to those unfamiliar with the business far from complete or
precise. It is accordingly the duty of the court to construe such documents fairly
and broadly, without being too astute or subtle in finding defects; but, on the
contrary, the court should seek to apply the old maxim of English Law, verba ita
sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not
mean that the court is to make a contract for the parties, or to go outside the words
they have used, except in so far as they are appropriate implications of law.” 36
This approach has been applied in HTA Architects Ltd v Countryside Properties Plc,37
Organic Group Ltd v Charterhouse MacMillan Group,38 and Durham Tees Valley
Airport Ltd v Bmibaby Ltd.39
In Star Shipping AS v China National Foreign Trade Transportation Corporation (The 4.058
Star Texas),40 it was held an arbitration clause providing for “arbitration in Beijing
or London in defendant’s option” was not invalid for uncertainty as it gave an option
to the defendant. This also explains why parties to commercial transactions prefer
arbitrations using an arbitrator who is familiar with the particular type of business with
which the contract deals.
The court has accepted some qualifications to the requirement of certainty of terms. 4.059
(b) Custom and trade usage
Where there are certain usual terms that the particular trade adopts, the court will not 4.060
hold that a reference “on the terms of the usual collier guarantee” as too vague.41
(c) Reasonableness
In an agreement for sale of timber “of fair specification”, the court held that such a 4.061
term is not too vague as the court can always decide what is reasonable.42 In Sweet &
36
See WN Hillas & Co Ltd v Arcos Ltd (1932) 43 Lloyd’s LR 359. See Hyundai Engineering & Construction Co Ltd
v Vigour Ltd [2005] 3 HKLRD 723. See also Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd 1996
SLT 604 and Technocrats International Inc v Fredic Ltd (No 1) [2004] EWHC 692 (QB). Contrast Courtney &
Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd (1974) 2 BLR 97.
37
[2002] EWHC 482 (TCC).
38
[2007] EWHC 1275 (QB).
39
(2010) 154(18) SJLB 28. See also Hillas & Co Limited v Arcos Limited (1932) 147 LT 503.
40
[1993] 2 Lloyd’s Rep 445 at 455. See Felton Construction Limited v Liverpool City Council [2007] EWHC 3049
(TCC).
41
See Shamrock SS Co v Storey & Co [1899] 81 LT 413. See also Bishop & Baxter v Anglo Eastern Trading &
Industrial Co Ltd [1944] KB 12 and British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings
Ltd [1953] 1 WLR 280.
42
See Hillas & Co Limited v Arcos Limited (1932) 147 LT 503.

Maxwell Limited v Universal Meals Services Limited,43 it was held that an agreement
for a lease providing that it was to “… contain such other covenants and conditions as
shall be reasonably required by …” the lessor, was sufficiently certain to be enforced
by specific performance. In David T Boyd & Co v Louis Louca,44 the court did not
find that the agreement was too vague where the buyer was bound to select the port
of shipment, using a reference to a “good Danish port” without specifying the details.
(d) Meaningless and self-contradictory terms
4.062 The court or arbitral tribunal always strives to give an apparently meaningless term a
meaning. However these meaningless words may be ignored, struck out or may vitiate the
agreement. The effect of the meaningless terms will depend on the importance
the parties are considered to have attached to the meaningless terms. For instance,
where the specifications and terms of sale for steel bars are perfectly clear except for the
proviso that the sale was subject to “the usual conditions of acceptance”, the court held
that such a phrase was severable and could be ignored without vitiating the contract.45
(e) Subject to details
4.063 The words “subject to” tend to connote a lack of intention to contract. However,
where the main terms have been agreed then even though there are details still to be
finalised, the courts are more likely than not to find the contract as being validly made.
This approach is in line with the sentiment expressed by Lord Wright in Hillas & Co
Limited v Arcos Limited.46
(f ) Subject to contract
4.064 Where an agreement is expressed to be ‘subject to contract’, it generally shows that

further negotiations are still contemplated and therefore the contract has not yet been
concluded. This may mean that the contract is still conditional and its coming into effect
depends on the occurrence of an event. There are many cases that deal with agreements
marked ‘subject to contract’. In most circumstances, this means that the agreement is
still not yet binding. In some circumstances, the agreement that is subject to contract is
43
[1964] 2 QB 699.
44
[1973] 1 Lloyd’s Rep 209. See also Bulk Trading Corp Ltd v Zenziper Grains and Feed Stuffs [2001] 1 All ER
(Comm) 385.
45
See Nicolene Limited v Simmonds [1953] 1 QB 543. See also Gola Sports v General Sportcraft Co [1982] Com
LR 51 and Scottish Wholefoods Collective Warehouse Ltd v Raye Investments Ltd [1994] SCLR 60. Contrast with
Hobbs Padgett & Co (Reinsurance) Ltd v JC Kirkland Ltd [1969] 2 Lloyd’s Rep 547.
46
[1932] 147 LT 503. In the judgment, Lord Wright explained in the following terms:
“[The court will hold that there is no contract where] … the language used was so obscure and so incapable
of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual
intention. The object of the court is to do justice between the parties, and the court will do its best, if satisfied
that there was an ascertainable and determinate intention to contract, to give effect to that intention, looking
at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not
synonymous with ambiguity so long as any definite meaning can be extracted. But the test of intention is to be
found in the words used. If these words, considered however broadly and untechnically and with due regard to
all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no
choice but to say that there is no contract. Such a position is not often found.”

nevertheless binding.47 It is therefore important to ascertain the circumstances giving

rise to such agreement and how it came to be ‘subject to contract’.
In construction contracts, frequently the parties have agreed upon all the terms and 4.065
they mark the agreement as ‘subject to contract’ because they intend that all these
terms shall be embodied in a formal document to be executed by the parties in
due course. While it is not best practice, it is frequently the case that the execution of
the formal contract takes place after execution of the works has commenced. This can
be illustrated in Rossiter v Miller 48 and Lewis v Brass.49
The words ‘subject to contract’ are sometimes treated as surplus and rejected or 4.066
ignored by the court50.
On the other hand, in World Food Fair Ltd v Hong Kong Island Development Ltd,51 in 4.067
deciding that there was no concluded agreement of a tenancy, the Hong Kong Court of
Final Appeal observed that it is not uncommon for parties in the course of negotiations
which are still incomplete or subject to contract to pay deposits or to allow builders
access to the premises.
(g) Back-to-back
In a lot of domestic subcontracts in Hong Kong, the phrase ‘back-to-back’ is frequently 4.068
used. While the meaning of this phrase is not entirely free from doubt, it seems that no
challenge has been made in the use of this phrase in contracts; certainly contracts have
not been voided for this reason.
In practice, such a phrase is frequently coined into the subcontract with the primary 4.069
intention of incorporating therein the main contract provisions as to the performance
and quality of the work. The common problem associated with subcontracts made
back-to-back is the uncertainty as to its scope and meaning. In this sense, disputes
arising from such back-to-back subcontracts often go beyond issues on the performance
and quality of the work.
For example, in Astel-Peiniger Joint Venture (A Joint Venture Partnership) v Argos 4.070
Engineering & Heavy Industries Co Ltd,52 the sub-subcontract contained a clause
that:
47
See Alpenstow Ltd v Regalian Plc [1985] 1 WLR 721. In the judgment, Nourse J observed that:
“But there might be a very strong and exceptional context which would induce the court not to give them
that particular meaning in a particular case ... Speaking generally you would expect to find the words ‘subject
to contract’ at the preliminary stage of a negotiation, not, as here, some four or five months on. You would
not expect to find them, as you do here, in a detailed and conscientiously drawn document which admittedly
cancelled and replaced a previous binding agreement.”
See also Pang Nap Puiv Secretary of Justice [2006] HKEC 1454. See further Sainsbury’s Supermarkets Ltd v
Oliveview Ltd [2004] EWHC 1090 (Ch).
48
[1878] 3 AC 1124.
49
(1877) 3 QBD 667.
50
Richard’s (Michael) Properties Limited v St Saviours Parrish Southwark [1975] 3 All ER 416.
51
(2006) 9 HKCFAR 735.
52
[1995] 1 HKLR 300.

“All terms and conditions of the assembly subcontract shall, subject to the
following clauses hereof, be directly applicable on a back-to-back basis but
proportionally to scope of works as described in Clause 1 hereof and to the
proportion and value of this sub-subcontract.”
4.071 This sub-subcontract concerned the painting work under the assembly subcontract
for the building of the Tsing Ma bridge. A dispute arose between the subcontractor
and sub-subcontractor as to which of them was responsible under the sub-subcontract
for the supply and construction of mobile paint sheds. Relying on the presence of
an arbitration clause in the assembly subcontract, the subcontractor contended that
the parties had agreed to arbitrate any disputes and accordingly sought a stay of the
court proceedings pending arbitration. The court held that there was incorporated
into the sub-subcontract an arbitration clause. In the judgment of Kaplan J, it was
held that, by the actual words used by the parties in their agreement, they did intend
to incorporate the arbitration clause of the assembly subcontract and that, in using
the word “proportional”, the parties had recognised that some modifications would
have to be made. It was also remarked by the court that, in construction cases, the
question of incorporation by reference had to be approached from the standpoint of
the intention of the parties with no preconceived notions and, for this purpose, one
would be entitled to take into account all the surrounding facts, but, at the end of the
day, one would end up trying to give contractual and commercial effect to the actual
words used by the parties.
4.072 The phrase back-to-back may be used in a different context of subcontracts in relation
to the entitlement of payment of the subcontractor. In Wo Hing Engineering Ltd v Pekko
Engineers Ltd,53 the defendant subcontractor engaged the plaintiff to carry out works
under its subcontracts with the main contractor, under purchase orders containing a
clause that provided that the subcontract was based on a “back-to-back basis including
payment terms”. When the plaintiff claimed for monies due and owing for work done
there was not the slightest complaint of unfinished or defective work. The defendant
did pay over these monies but only after the writ was issued. An issue that affected
the costs of the litigation then arose in relation to whether the monies claimed were
due for payment when the writ was issued. The defendant contended that, at the time
of the writ, it had not been paid in turn by the main contractor. Hence, the liability to
pay the plaintiff had not arisen yet. In approach to this, the court asked the question
whether, on a proper construction of these terms in the contract, payment of the final
balance was only due to the plaintiff from the defendant after the defendant received
payment from the main contractor, or whether the plaintiff was entitled to be paid after
a reasonable time had elapsed from completion of the works. The court held that in the
absence of any clear express words to the contrary, those clauses merely provided for
the time of payment and that the plaintiff’s right to be paid was not dependent upon the
defendant getting paid first. In reaching this conclusion, the court relied on the New
Zealand case of Smith & Smith v Winstone54 where it was said:
53
(1998) (unrep, HCA No 5561 of 1996), Suffiad J.
54
[1992] 2 NZLR 473.

“While I accept that in certain cases it may be possible for persons contracting with
each other in relation to a major building contract to include in their agreement
clear and unambiguous conditions which have to be fulfilled before a subcontractor
has the right to be paid, any such agreement would have to make it clear beyond
doubt that the arrangement was to be conditional and not to be merely governing
the time for payment. I believe that the contra proferentem principle would apply
to such clauses and that he who seeks to rely upon such a clause to show that there
was a condition precedent before liability to pay arose at all should show that the
clauses relied upon contain no ambiguity … For myself I believe that unless the
condition precedent is spelled out in clear and precise terms and accepted by both
parties, then clauses such as the two particular ones identified in this proceeding do
no more than identify the time at which certain things are required to be done, and
should not be extended into the ‘if’ category to prevent a subcontractor who has
done the work from being paid merely because the party with whom he contracts
has not been paid by someone higher up the chain.”
The meaning and effect of such a term depends on the construction of the contract.55 4.073
However, the proper construction of the contract may imply a term in a subcontract to
carry out the work ‘back-to-back’ with the main contract.56 The situation can indeed be
different in different circumstances. In Takahashi v Cheng Zhen Shu,57 which involved
a series of transfers of the rights to build and manage a highway project in Mainland
China, it was highlighted that where parties had expressly or impliedly allocated risks
among themselves through a network of back-to-back or interlinking agreements, the
law of restitution might not without compelling reason interfere with that allocation.58
(h) Incorporation of terms by reference
Also, in relation to the use of words for incorporating terms into contracts by reference, 4.074
as remarked by Donaldson MR in Skips Nordheim v Syrian Petroleum,59
“Operative words of incorporation may be precise or general, narrow or wide.

Where they are general, and in particular where they are general and wide, they
may have the effect of incorporating more than can make any sense in the context
of an agreement governing the right and liabilities of the shipowner and of the
bill of lading holder. In such circumstances, what one might describe as ‘surplus’,
55
See, for illustration, Au Yeung Lun Kan v Cho & Partners Engineering Ltd [2009] HKEC 364; Ho Fat Sing v
Hop Tai Construction Co Ltd [2008] HKEC 2201; Yip Kwai Chor v King Fung Construction Work Co Ltd [2008]
HKEC 1971; and Chow Kee James v Transway Construction & Engineering Ltd [2008] HKEC 852.
56
See, for example, Sincere Air-Conditioning Co Ltd v AS Watson Group (HK) Ltd [2008] HKEC 2017.
57
[2010] 1 HKLRD 603. See also Crowning Success Ltd v Brightland Corp Ltd [2009] HKEC 531.
58
See also Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR 635; Pan Ocean Shipping Ltd v Creditcorp Ltd
[1994] 1 WLR 161; and Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKLRD 307.
59
[1984] 1 QB 599. See Astel-Peiniger Joint Venture (A Joint Venture Partnership) v Argos Engineering & Heavy
Industries Co Ltd [1995] 1 HKLR 300, where the court held that an arbitration clause could be incorporated by
reference in a contract providing:
“All terms and conditions of the assembly sub-contract shall, subject to the following clauses hereof, be
directly applicable on a back to back basis but proportionally to scope of works as described in Clause 1 hereof
and to the proportion and value of this sub-sub-contract.”

‘insensible’ or ‘inconsistent’ provisions fall to be ‘disincorporated’, ‘rejected’ or

ignored as ‘surplusage’. But the starting point must always be the provisions of
the bill of lading contract producing the initial incorporation And what must be
sought is incorporation, not notice of the existence or terms of another which is
not incorporated.”
(i) Contract price
4.075 Most major transactions would have the contract price for the goods to be supplied agreed
and set out in the contract. In construction contracts, there is also an original contract
price set out. But such contract price is invariably changed at the final account stage. This
is so because the construction contract provides for a mechanism by which the contract
price can be varied as a result of variations or other matters set out in the contract.
4.076 If the price for a specific piece of work is not agreed in the contract, the law will
imply a promise on the part of the employer to pay for such works or services, which
is rendered on the basis of reasonable charges. This is one aspect of a quantum meruit
claim. Other aspects of a quantum meruit claim can be applied where there is: an
express agreement to pay a reasonable sum; a quasi-contract; work carried out that was
outside the contract; or work was done under a void or unenforceable contract but the
works and services rendered were provided at the request of the other party.
4.077 It is also important to bear in mind that the absence of a price does not necessarily
render the contract invalid. All that needs to be provided in the contract is a mechanism
by which the price for the particular works or services to be rendered can be
determined. Indeed, the law of equity will not allow an employer to benefit from such
works and services rendered, without implying a promise that the contractor would
be paid reasonable charges. See Foley v Classique Coaches;60 National Coal Board v
Galley;61 and Hillas v Arcos.62 The parties can also agree that the price to be paid shall
be agreed and if in default of agreement, will be determined by the arbitrator. See May
and Butcher Limited v The King63 and Hillas v Arcos.64 This arrangement is of course
not satisfactory as it may delay the receipt of the price for the work done. It would
especially be inappropriate in Hong Kong because the Hong Kong standard terms
only permit arbitration to be commenced after completion of the works or alleged
60
[1934] 2 KB 1. In the judgment of Greer LJ, it was remarked:
“In order to give effect to what both Parties intended the Court is justified in implying that, in the absence
of agreement as to price, a reasonable price must be paid, and, if the Parties cannot agree as to what is a
reasonable price then arbitration must take place.”
See also Ming Kee Asphalt Engineering Ltd v China Road And Bridge Corp [2004] HKEC 1184 and New World
Development Co Ltd v Sun Hung Kai Securities [2006] 3 HKLRD 345.
61
[1958] 1 WLR 16. See Cathay Pacific Airways Ltd v Wong Sau Lai (2006) 9 HKCFAR 371. See also Giedo van
der Garde BV v Force India Formula One Team Ltd (formerly Spyker F1 Team Ltd (England)) [2010] EWHC
2373 (QB) and Tullett Prebon Group Ltd v El-Hajjali [2008] EWHC 1924 (QB).
62
[1932] 147 LT 503. See New World Development Co Ltd v Sun Hung Kai Securities [2006] 3 HKLRD 345 and
Hyundai Engineering & Construction Co Ltd v Vigour Ltd [2005] 3 HKLRD 723.
63
[1934] 2 KB 17. See Keen Lloyd Energy Ltd v Secretary for Justice [2009] HKEC 682 and A-Target Inc v Kalon
Limited, t/a Cititime Corp [1990] 1 HKLR 611.
64
[1932] 147 LT 503.

CAPACITY OF PARTIES 63
completion of the works. The typical Hong Kong arbitration clause has much to be
desired and should be changed to allow parties to commence arbitration as and when
appropriate depending on the dispute.
5. CAPACITY OF PARTIES
(a) Contract invalid without necessary capacity
A contract will not be valid if the parties to the contract do not have the necessary 4.078
capacity to execute such contract. The issue of capacity of parties is particularly
important when dealing with companies from the Mainland as there is specific
legislation governing the capacity of the parties in regard to registration, license and
areas of business.
Minors, persons of unsound mind and citizens of hostile nations or powers in time 4.079
of war do not have the capacity to enter into a contract generally. For the purposes
of construction contacts, parties are usually corporations, government departments,
unincorporated associations or partnerships.
(b) Corporation
Each corporation is a legal entity and the shareholders or directors are separate legal 4.080
entities to the corporation. However the acts of a corporation are governed by its
memorandum of association and articles. Whether an act done by a company is valid
would depend on whether or not it had acted within its powers. Any purported contract
for purposes beyond the object set out in the companies’ memorandum would be ultra
vires, that is, beyond its powers. Such contract would be void.
A corporation frequently acts through its agents who would have obtained express 4.081
or ostensible authority from the principal, the corporation. Directors of a company
would have the authority to buy the company. When a party enters into a contract with
another party, which represents itself as having authority that it does not possess, the
contract is void for want of authority. In such a case, the first party can sue the party
that misrepresented itself for breach of warranty of authority.
(c) Partnerships
Partnership is a relationship between persons carrying on business in common with 4.082

a view to profit. A partner can enter into a contract on behalf of the other partners, so
making the whole partnership liable.
Partnerships are governed by the Partnership Ordinance (Cap 38) and Limited 4.083
Partnerships Ordinance (Cap 37). A partnership is an unincorporated body of persons
combined for a common object and is not a separate legal entity. It is owned by the
partners in common, and the partners are liable for the firm’s debts. There are no rigid
formalities for the creation of a partnership. The partnership firm is managed by a
majority decision of the partners.

(d) Unincorporated association
4.084 This is a group of persons who act together for certain purposes. Apart from partnership,
common forms of this include clubs or societies. In Hong Kong, societies are governed
by the Societies Ordinance (Cap 151). Like partnerships, unincorporated associations
do not have legal personality separate from the individuals concerned. Thus, unlike
corporations or companies, there is no separation of ownership and liabilities.
4.085 A club is an example of an unincorporated association. Members of the committee
who enter into the contract would be liable and in general, a person dealing with the
club is normally entitled to look to the members of the committee of management.65
(e) Hong Kong construction entities
4.086 In the Hong Kong construction industry, most employers in the public sectors are
incorporated by legislation. An example is the Kowloon-Canton Railway Corporation
Ordinance (Cap 372). Others are departments or associated authorities of the Hong
Kong SAR Government. In earlier days, the consultant engineers traded in the capacity
of a partnership, but gradually they have changed and now mostly operate using a
limited company as a vehicle.
4.087 As to contractors, many of the main contractors operate in the form of local or overseas
companies; some subcontractors or sub-subcontractors are either trading as a firm or
a sole proprietor. For the purpose of sharing the risks or getting mutual gains, some
contractors do sometimes tender for contracts in the capacity of joint ventures.
(f ) Joint ventures
4.088 Joint ventures of contractors are perhaps a result of the new form of procurement and
the ever-increasing size of construction projects. It is becoming common for two or
more parties to combine as a joint venture to fulfil the role of one of the parties in a
project. The simplest form of joint venture involves two companies who contract on
the basis that each of them takes on full responsibility (joint and several liability)
so that one could drop out and the other could complete the project. The two joint
venturers themselves may enter into a contract regulating their internal rights and
liabilities. They may also form a separate body specially to effect this aim.
6. CONSIDERATION
(a) Definition
4.089 Under the law of contract, unless the contract is under seal, there is no contract if there
is no consideration. A contract under seal becomes a deed. In the past centuries, people
contracting would drip a drop of hot wax on the bottom of the contract and press a family
65
See Steele v Gourley [1887] 3 TLR 118 at 119. See JH Rayner (Mincing Lane) Ltd v Department of Trade and
Industry [1989] Ch 72.

CONSIDERATION 65
ring into the wax, thereby signifying consent to the terms of the document. Nowadays,
deeds are used mostly in contracts that involve real estate. Many contracts do have red
seals, dots or ‘made under seal’ text boxes next to the signature block to show that the
contract is under seal. If a contract is a deed, then no consideration is required.
The definition of consideration to support a contract has all along been a vague 4.090
concept. In gist, consideration represents the value exchanged between the parties. It
refers to the price paid for the promise of the ‘promisor’, ie the one who makes the
promise. In exchange for that promise, every simple contract requires the promisor to
ask the ‘promisee’, ie the one to whom the promise is made, to ‘pay’ a price in that
it needs to suffer a detriment or loss. In effect, there must be something given for
something received.
If an employer, for no reason, agrees to pay HK$1 million to a contractor and the 4.091
contractor accepts, the contractor cannot sue the employer for breach of contract if
the employer does not pay. This is because no contract exists between them. To create
a binding contract, the contractor has to promise in return to give or do something in
exchange for the HK$1 million. In this way, the contractor has given consideration to
support the employer’s promise. Thus, the law will not generally enforce gratuitous
promises. The supply of consideration can take many forms, ie as an act for an act, an
act for a promise, a promise for an act or a promise for a promise.
(b) Rules regarding consideration
(i) Flow from promise

Consideration must move from the promise. It need not flow to the promisor. The rule 4.092
ensures that a person who wants to enforce a promise must have paid for it. It also
allows the promisor to direct the consideration to some third party. Thus, if a person
is promised by another to be paid a sum of money if a third person does a certain act,
that person cannot enforce the promise and insist on the payment to her or him of the
money. This is because, unless, say, he or she agrees in return to procure the third
person to do the act, he or she has not paid anything for the promise.66
(ii) Invalid if past

Consideration may be executory or executed but it cannot be past. Consideration is 4.093
executory when the promise is made in return for a counter-promise; it is executed
when it is made in return for the performance of an act. An example of executory
consideration is to sell goods to be delivered on credit in the future; one for executed
consideration is to pay a reward for the return of a dog. In both of these circumstances,
the promise is made before the act in exchange is returned. Where a promise is made
after the performance of an act, the consideration is said to be past, and is invalid under
the law of contract. The rationale is that there is an absence of an exchange of promises,
ie consideration, at the time of the contract. An illustration for past consideration
66
See Poolway v Abdullah [1974] 1 WLR 493. See Yu Tai Hing Land Agency Limited v Leung Wing Yin [1986]
HKEC 409.

can be seen in Re McArdle,67 where work done to the family house by a child before
a document was signed by all other children stating that “in consideration of your
carrying out certain alterations and improvements to the property, we hereby agree
that the executors shall repay to you from the estate, when distributed, the sum of £488
in settlement of the amount spent on such improvements” and the court held that, as
all the work on the house had in fact been completed before the document was signed,
the consideration in support of document as a binding contract was past consideration.
4.094 However, there are circumstances where a contract supported by an act already carried
out is still validly enforceable. The Privy Council case of Pao On v Lau Yiu-Long68
concerns the sale of the shares of a company holding a 21-storey building then
under construction. A guarantee of the price of shares on a particular date made in
consideration of the agreement to sell the shares that had already been in place was
valid. It was held that an act done before the giving of a promise to make a payment or
to confer some other benefit can sometimes be consideration if the act had been done
at the promisor’s request; the parties had understood that the act was to be remunerated
either by money or some other benefit; and the money or other benefit, would be
legally enforceable had it been promised in advance.
(iii) Not necessary to be adequate

4.095 Consideration need not be adequate. The courts are not concerned whether the quality of
bargain reached by the parties was good or poor, so long as there is some consideration
in the agreement. Hence, consideration that is nominal or trivial is still valid in law. The
consideration provided by the promisee does not have to be equal in value to the promisor’s
promise. The law, based on the principle of freedom of contract, is that it is for the parties,
rather than the court, to determine the adequacy of the consideration. For example, in
Ho Yuk Chu v Shun Hing Refrigerator Air-Conditioning Engineering Ltd,69 it was held
that the procurement of an award of air-conditioning contract by way of introduction,
recommendation and assistance in preparation of tender was found to be valid consideration
to support an agreement to pay 7 per cent of the contract sums to be received.
(iv) Required to be sufficient

4.096 Consideration must however be sufficient. Although consideration need not be
adequate, it must be sufficient. Adequacy and sufficiency of consideration have
different meanings. Sufficiency means that the consideration must have some legal
value, in the eyes of the law, to support the bargain, rather than factual value, which is
a matter of adequacy. On public policy grounds, the courts will not enforce a contract
where, in return for payment, the promisee is neither conferring a benefit nor incurring
additional detriment. General examples of such insufficient consideration include
performance of a public duty owed by law and performance of an existing duty owed
67
[1951] 1 Ch 669. See Latimer Management Consultants v Ellingham Investments Ltd [2005] EWHC 1732 (Ch)
and Pennington v Waine (No.1) [2002] 1 WLR 2075.
68
[1979] HKLR 225. See Prosperous Nursing Centre Ltd v Cheung Yuk Ying [2008] 2 HKLRD 360.
69
[2001] HKEC 1476.

CONSIDERATION 67
under a contract between the same parties. In Collins v Godefroy,70 the promise of
payment to someone who had received a subpoena to attend a court case as a witness
did not amount to sufficient consideration in law. The principle of Stilk v Myrick71
illustrates that the performance or promise to perform a pre-existing obligation means
that there is no consideration for a purported subsequent agreement, for example, one
to pay higher prices. The law will not enforce gratuitous promises. Foakes v Beer,72
which decided that there is no consideration for a promise to accept less than the full
amount of a debt, is another example of this principle at work.
Yet, in more recent cases, the application of such a principle as a rigid rule has been 4.097
distinguished in the circumstances of the cases, shifting the focus to the finding of the
intention of the parties to the contract where the bargaining powers are not unequal
and where the finding of consideration reflects the true intention of the parties. In
D&C Builders Ltd v Rees,73 the builder, when it was in desperate financial straits,
was threatened that it would get nothing otherwise and did agree to accept a sum
less in settlement, then claimed for the balance of work and labour done and goods
and materials supplied for the repair of a shop. It was held that there was no true
accord between the parties, and no equity in the shop owner to prevent the builder
from recovering the full amount of the debt.
In Williams v Roffey Bros & Nicholls (Contractors) Ltd,74 while upholding that a 4.098
gratuitous promise, pure and simple, remained unenforceable unless given under
seal, it was held that, where a party undertook to make a payment because by so
doing it would gain an advantage arising out of the continuing relationship with the
promisee, the new bargain would not fail for want of consideration. That case concerns
a subcontract for carpentry work in a block of 27 flats for an agreed price of £20,000.
The subcontractor got into financial difficulty because the agreed price was too low for
it to operate satisfactorily and at a profit. The main contract contained a time penalty
clause and the main contractor worried that the subcontractor would not complete
the carpentry work on time. They made an oral agreement to pay the subcontractor
an additional sum of £10,300 at the rate of £575 for each flat on which the carpentry
work had been completed. When the subcontractor had substantially completed more
flats some weeks later, the defendants had made only one further payment of £1,500
whereupon the plaintiff ceased work on the flats.
The impact of added advantage or element in the new bargain is well illustrated in 4.099
Pinnel’s Case,75 where it was held that a debt could be discharged by a partial payment
with an introduction of some elements such as an earlier repayment or other extra
services. Furthermore, if a new party is involved in the existing obligations under
70
(1831) 1 B & Ad 950. See Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270.
71
(1809) 2 Camp 317. See BSC Interior Contract and Engineering Co Ltd v Shinta Ltd [2008] HKEC 1601.
72
(1884) LR 4 CP 324. See Kwong Ka Wai v Fortis Insurance Co (Asia) Ltd [2010] HKEC 507.
73
[1966] 2 QB 617. See Kwong Ka Wai v Fortis Insurance Co (Asia) Ltd [2010] HKEC 507; Bank of China (Hong
Kong) Ltd v Cosan Ltd [2006] HKEC 856; and Dixie Engineering Co Ltd v Vernaltex Co Ltd [2003] HKEC 980.
See also Collier v P & MJ Wright (Holdings) Ltd [2008] 1 WLR 643 and Floods of Queensferry Ltd v Shand
Construction Ltd (No 2) [1999] BLR 319.
74
[1991] 1 QB 1. See SKK (Hong Kong) Co Ltd v Hon Fung Engineering Ltd [2005] HKEC 114 and Yeung Kin Ha
v El Grande Holdings Ltd [2004] 2 HKLRD G4.
75
(1602) 5 Coke’s Rep 117a. See Collier v P & MJ Wright (Holdings) Ltd 2008] 1 WLR 643.

contract, there can readily be sufficient consideration in law. In Welby v Drake,76 where
the father of a debtor made an agreement with the creditor, offering an amount less
than that of the debt in full settlement of the debt, the debt became extinct. Also, as
illustrated in Scotson v Pegg,77 an agreement to do an act that the promisor is under an
existing obligation to a third party to do, may quite well amount to valid consideration
in that the promisee obtains the benefit of a direct obligation which he can enforce.
(v) Must be definite in nature

4.100 The nature of consideration must be definite in order to have value. Consideration that
is vague, for example a promise by a son not to bore his father, is regarded by the law as
illusory as in White v Bluett,78 where a father promised his son that he would forgo all legal
rights with regard to a debt owed to him by the son if, in return, the son promised not to
bore him with the complaint that that son had been treated more harshly than his brothers.
4.101 In the context of the construction industry, an agreement to pay an additional sum
for no extra work may not always fail for consideration. For example, as illustrated in
Williams v Roffey Brothers,79 when a subcontract carpenter was in financial difficulties
and the agreed price for his work was too low, it was held that there was consideration
for the main contractor’s promise to pay an additional amount for the same work in
that the main contractor thereby secured benefits or obviated disbenefits from the
continuing relationship with the subcontractor. The benefits were ensuring that the
subcontractor did not stop work in breach of contract; avoiding the penalty for delay;
and avoiding the trouble and expense of engaging others to complete the work. In that
case, Glidewell, LJ summarised the law as follows:
“(i) if A has entered into a contract with B to do work for, or to supply goods
or services to, B in return for payment by B; and
(ii) at some stage before A has completely performed his obligations under the
contract B has reason to doubt whether A will, or will be able to, complete
his side of the bargain; and
(iii) B thereupon promises A an additional payment in return for A’s promise to
perform his contractual obligations on time; and
(iv) as a result of giving his promise, B obtains in practice a benefit, or obviates

a disbenefit; and
(v) B’s promise is not given as a result of economic duress or fraud on the part
of A; then
76
(1825) 1 C&P 557.
77
(1861) 6 H & N 295. See also Dawson v Kearton (1856) 3 Sm & G 186.
78
(1853) 23 LJ Ex 36.
79
[1990] 2 WLR 1153. In this case, where a contractor found it had underquoted and asked for and was granted
a higher contract price, it was held that there was sufficient consideration upon which to find a new contract
between the parties. Contrast with Re Selectmove Ltd [1995] 2 All ER 531, where it was remarked that a promise
to pay a sum which a debtor was already bound by law to pay was not good consideration, noting that the
principle that a promise to perform an existing obligation could amount to good consideration provided there
were practical benefits to the promisee was confined to cases where the obligation involved was a supply of goods
or services and, hence, that principle could not be extended to an obligation to make a payment.

CONTRACTUAL INTENTION 69
(vi) the benefit to B is capable of being consideration for B’s promise so that
the promise will be legally binding.”
Likewise, in UBC (Construction) Limited v Sung Foo Kee Ltd,80 it was recognised in 4.102
such circumstances that there were clearly incentives to both the main contractor and
subcontractor to make a further arrangement in order to relieve the subcontractor of
its financial difficulties and also to ensure that the subcontractor was in a position, or
alternatively was willing, to continue with the subcontract works to a reasonable and
timely completion.
7. CONTRACTUAL INTENTION
(a) Objective test
Agreements are made every day in domestic or social context but not all of them will 4.103
automatically become a contract in the eyes of law. To invite a friend to dinner is not to
invite litigation. Thus, in addition to the fact of an agreement, it is necessary also that
there should be an intention in the parties to create legal relations between themselves.
The test of contractual intention is objective, not subjective. Thus, what matters is 4.104
how reasonable persons would perceive the words, conduct and circumstances, rather
than what is actually on the mind. If reasonable persons would assume that there was
no intention of contractual obligations, there is no contract. If the parties expressly
declare or clearly indicate the rejection of contractual obligations, the court will
normally accept and implement such an intention.
In deciding issues of contractual intention, the courts normally apply an objective 4.105
test and the objective test prevents a party from relying on a party’s uncommunicated
belief as to the binding force of the agreement, as in Investors Compensation Scheme
Ltd v West Bromwich Building Society (No 1).81
(b) Situations where a contractual intention is presumed
In the commercial context, there is a presumption that an intention to create legal 4.106
relationships applies. In Edwards v Skyways Ltd,82 it was held that where an agreement
80
[1993] 2 HKLR 207. See Tri-Union (International) Development Ltd v Shum Lee Man [2008] HKEC 820; Vinson
Engineering Ltd v Kin Shing Engineering (HK) Co Ltd [2008] HKEC 279; and Wong Chuk Kin v Millennium
Engineering Ltd [2007] HKEC 1521.
81
[1998] 1 WLR 896. See, for illustration, Lam Po Chiu Mark v Ion Global (BVI) Ltd [2010] HKEC 1428; Japsignal
Property Management Co Ltd v Incorporated Owners of Prat Mansion [2010] HKEC 496; Goldlion Properties
Ltd v Kimberley Hotel Ltd [2009] HKEC 1019; Headwin Engineering Ltd v United Soundfair Engineering Co
Ltd [2008] HKEC 591; Falcon Building Materials Co Ltd v Fine View Engineering Ltd [2008] HKEC 9; Wong
Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521; and Wealthy Gate Architects & Associates Ltd v
Syw Trustee Holdings Corp [2006] HKEC 627.
82
[1964] 1 WLR 349. In other words, where the subject of agreement relates to business affairs, the onus of
establishing that the agreement was not intended to create legal relations is a heavy onus. See Bishara v Asiamedia
Company Limited [1988] HKEC 3 and New World Development Co Ltd v Sun Hung Kai Securities (2006) 9
HKCFAR 403. See also O’Kelly v Trusthouse Forte Plc [1984] QB 90 and Sydenhams (Timber Engineering) Ltd
v CHG Holdings Ltd (2007) 112 ConLR 49. Contrast with Kleinwort Benson Ltd v Malaysia Mining Corp Bhd
[1989] 1 WLR 379, in relation to a letter of comfort.

was reached in the course of business relations and there was an intention to agree,
there was a heavy onus on the party alleging that it had not intended to give rise
to legal obligations. Yet, an intention that an agreement is not to give rise to legal
relations may be implied from the subject matter of the agreement. In the leading case
of Rose and Frank Co v JR Crompton and Bros Ltd,83 it was said:
“Now it is quite possible for parties to come to an agreement by accepting a

proposal with the result that the agreement concluded does not give rise to legal
relations. The reason of this is that the parties do not intend that their agreement
shall give rise to legal relations. This intention may be implied from the subject
matter of the agreement, but it may also be expressed by the parties. In social and
family relations such an intention is readily implied, while in business matters the
opposite result would ordinarily follow.”
4.107 Thus, to create a contract there must be a common intention of the parties to enter
into legal obligations, mutually communicated expressly or impliedly. That intention
ordinarily will be inferred when parties enter into an agreement that in other respects
conforms to the rules of law as to the formation of contracts. It may however be
negatived impliedly by the nature of the agreed promise or promises, such as in the
case of offer and acceptance of hospitality or of some agreements made in the course
of family life between members of a family.
4.108 In Cable & Wireless (Hong Kong) Ltd Staff Association v Hong Kong Telecom
International Ltd,84 the issue was whether there was intention to contract in an
agreement reached between a registered trade union representing a telecom company’s
employees, whereby the company agreed not to dismiss any of the union’s members
or change the general conditions of employment without prior consultation with
the union. Thus, what the court needed to decide was whether the agreement was
a binding contract enforceable in law or merely a ‘gentlemen’s agreement’, binding
in honour only. The court held that, in determining whether the parties intended to
create legal relations, one of the matters that needed to be looked at was the terms of
the agreement itself. If the terms clearly showed the intention of the parties to make a
contract enforceable in law, then that would be the end of the matter; if the terms of the
agreement did not provide a clear answer, the court could look at all the surrounding
circumstances to ascertain objectively what the intention of the parties was. Such
circumstances would include the background in which the agreement was made and
the climate of opinion among persons concerned with industrial relations then. The
court also remarked that it would be necessary to consider the nature of the agreement
83
[1923] 2 KB 261. This is to rend with the presumption that parties reaching an express agreement of a commercial
character are presumed to intend it to have legal effect unless the contrary is shown. In deciding whether the onus
has been discharged, the courts will be influenced by the importance of the agreement to the parties, and by the
fact that one of them acted in reliance on it. See New World Development Co Ltd v Sun Hung Kai Securities
Ltd (2006) 9 HKCFAR 403 and Cable & Wireless (Hong Kong) Ltd Staff Association v Hong Kong Telecom
International Ltd [2001] 2 HKLRD 809. See also Moir v JP Porter Co (1979) 103 DLR (3d) 22.
84
[2001] 2 HKLRD 809.

DOCTRINE OF PRIVITY 71
and, as in the case of collective bargaining agreements, the general common law view
was that they were not legally binding.
(c) Situations where the absence of a contractual

intention is presumed
Families, relatives and friends do make agreements from time to time. Yet, in such 4.109
social or domestic agreements, the general presumption is that they are not intended to
be legally binding unless there is evidence suggesting otherwise.
In Balfour v Balfour,85 a civil servant in Ceylon was alleged to have promised his 4.110
wife a sum of £30 a month as maintenance during the time that they were forced
to live apart, while in England on leave and when it became clear that she could
not again accompany him abroad because of her health. The court held that there
was no contract and remarked that the husband was only bound in honour to make
such payment.
In the construction industry, there has been a growing use of partnering as a 4.111
technique to resolve disputes and, for this purpose, the parties involved will enter
into partnering charters. The partnering charter comprises a mission statement by
senior management along with the shared objectives for the project. The mission
statement declares the overall goals in a single statement and the objectives
transform the goals into the specific aims of the project. General qualitative
project objectives based on shared partnering goals may include equitable sharing
of contract risks, meeting the intent of the contract and solution of problems at
the lowest possible management level. Not uncommonly in Hong Kong, it is also
expressly provided that the partnering charter is not to be legally binding in nature
and dos not have contractual force.
8. DOCTRINE OF PRIVITY
(a) Rights of third parties
A contract or its performance can affect a third party. In the usual contractual setting 4.112
of the construction industry, the engineer or the architect is usually conferred with
various powers but neither of them is a party to the contract. However, the doctrine
of privity means that, as a general rule, a contract cannot confer rights or impose
obligations arising under it on any person except the parties to it.
85
[1919] 2 KB 571, thus, a family arrangement to look after aged parents may never be intended as a legal contract.
The parties may never intend to enter into a legal relationship. Very often that is what happens. Where that
happens, the courts will not enforce the agreement. There is no presumption that this must be so, simply because
the agreement is within the family. The intention of the parties is a question of fact and to be inferred from the
terms of the agreement and the surrounding facts and circumstances. See Ma Chi Wing v Personal Representative
of Estate of Ma Vincent [2005] HKEC 759. See also Parker v Clark [1960] 1 WLR 286; Tanner v Tanner [1975]
1 WLR 1346; and MacLeod v MacLeod [2010] 1 AC 298.

4.113 It is generally agreed that the modern third party rule was conclusively established in
Tweddle v Atkinson.86 The facts involved an agreement between the fathers of a bride
and groom to pay the groom a sum of money. When the bride’s father failed to pay,
the groom sued unsuccessfully. In the judgment, Wightman J said that no stranger to
the consideration could take advantage of a contract though made for his benefit and
Crompton J said that consideration must move from the promise, ie the one to whom
a promise is made.
4.114 In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd,87 the House of Lords accepted
that it was a fundamental principle of English law that only a party to a contract
who had provided consideration could sue on it. Thus, a subcontract, domestic or
nominated, cannot sue the employer on the main contract obligations in relation to
payment for the works, as remarked in Morison, Son & Jones (Hong Kong) Ltd v Yiu
Wing Construction Co Ltd88 and Shui On Construction Co Ltd v Moon Yik Co.89 In
Otis Elevator Company (HK) Limited v Wide Project Engineering & Construction
Company Limited,90 a subcontractor agreed with the main contractor to supply and
install 18 lifts in an industrial building to be erected. The subcontractor had taken out
an insurance policy regarding the work. A fire broke out. The main contractor, as a
stranger to the insurance policy taken out by the subcontractor, did not enjoy privity
of contract with the subcontractor’s insurers and could not claim under that insurance
policy.
(b) Hong Kong position
4.115 It should be noted that, in Hong Kong, though legislative review is underway, there
is still no counterpart legislation like the Contracts (Rights of Third Parties) Act
1999 in the United Kingdom, which creates exception to the doctrine of privity with
potentially wide-ranging effects. One of the underlying principles of the Contracts
(Rights of Third Parties) Act 1999 is that the third party is entitled to receive benefits
but cannot be subjected to burdens under the terms of a contract to which he is not a
party. It modifies the doctrine of privity of contract by providing that a third party may
enforce a contract where that party is given the right to do so in the contract, or where
86
(1861) 1 B & S 393. See City Polytechnic Of Hong Kong v Blue Cross (Asia-Pacific) Insurance Ltd [1995]
2 HKLR 103, where Rhind J said:
“My understanding of the meaning of the requirement that ‘consideration must move from the promisee’ is
that such consideration must be provided by the promisee, or arise out of his contractual relationship with the
promisor. It is consideration provided by somebody else, not a party to the contract, which does not ‘move
from the promisee.’ This was the situation in Tweddle v. Atkinson …”
See also Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 and Williams v Roffey Bros & Nicholls
(Contractors) Ltd [1990] 1 QB 1.
87
[1915] AC 847. A contract between two parties for the benefit of a third party is not enforceable by the third party,
who is a stranger to the consideration. See B + B Construction Ltd v Sun Alliance and London Insurance Plc
[2000] 2 HKC 295 and Kenworth Engineering Ltd v Airport Authority [2002] 1 HKLRD 796. See also Marquest
Industries v Willows Poultry Farms (1967) 63 DLR (2d) 753 and Scruttons Ltd v Midland Silicones Ltd [1959]
2 QB 171. Contrast Town of Truro v McCulloch (1971) 22 DLR (3d) 293 and Tanenbaum v Sears (1969) 9 DLR
(3d) 425.
88
[1989] 1 HKLR 432. See Yuenfield Ltd v Cuming Development Co Ltd [1998] HKLRD (Yrbk) 588.
89
[1987] HKLR 1224.
90
[1985] HKEC 23.

BREACH OF CONTRACT 73
the contract purports to confer a benefit on that party and the contract manifests no
intention that the third party may not enforce it. Therefore, the position in Hong Kong
is still governed by the common law.91
In Law Ming Chiu v Maeda Corp,92 the sub-subcontractor claimed against the principal 4.116
contractor for the value of goods delivered to the construction site. The principal
contractor relied on the contract clause in the contract vesting the property of materials
on site with the employer. This argument was rejected by the court in view of privity
of contract.
9. BREACH OF CONTRACT
(a) Forms of breach
A breach of contract occurs where a party to a contract repudiates or fails to perform 4.117
one or more of the obligations imposed on it by the contract. The forms of breach arise
differently from the manner in which the obligations under the contract are promised.
It may occur where a party fails to perform its obligation by the time fixed for 4.118
performance by the contract. For example, the employer may fail to allow the
contractor to take possession of a portion of the site by the agreed date. A breach may
occur when one party indicates that it will not perform its promise. This gives rise to
the repudiation of the contract. For example, a subcontractor that stops working on site
and removes all plant and materials from the site, demanding immediate payment for
all works completed may be taken as having repudiated the contract. Also, there may
be a breach if a party does some act which disables it from performing its obligations.
An example is when an employer, during the period when it should give notice to the
contractor, to whom the work has been awarded, directing the commencement of the
work, allowed another contractor to take possession of the site and start carrying out
the same work. This may sometimes be referred to as anticipatory breach where a
party is rendered liable for a breach of a promise binding at present.
(b) Effect of breach
(i) Cause for action but not necessarily discharge

Whichever form it takes, a breach entitles the innocent party to claim for damages. 4.119
Yet, it does not always discharge the innocent party from further performance of
the contract.93 This affects the contracting parties in that it relates directly to the
entitlement of the innocent party to refuse to perform the obligation that it has
91
For details, see the Report on Privity of Contract (2005) by the Hong Kong Law Reform Commission available
at http://www.hkreform.ogv.hk/ visited on 21 February 2011.
92
[2010] HKEC 431. See also Viatech Engineering Ltd v Ming An Insurance Co (HK) Ltd [2008] HKEC 1706 and
BSC Interior Contract and Engineering Co Ltd v Shinta Ltd [2008] HKEC 1601.
93
Not every breach of a contract will entitle the innocent party to treat the contract as at an end. See Afovos
Shipping Co SA v Pagna [1983] 1 All ER 449.

otherwise undertaken. Any breach of contract gives rise to a cause of action; not every
breach gives a discharge from liability.
4.120 In Mersey Steel & Iron Co v Naylor Benzon & Co,94 it was remarked that a clear
indication of refusal or inability to pay future instalments would be a repudiation and
it would also be a repudiation if there was a repeated failure to pay on time in response
to warnings thereby raising an inference of an intention to pay late habitually, so as to
derive financial advantage. Thus, delay in making payments, if sufficiently serious and
persisted in after warnings, may, after suitable notice, justify repudiation, particularly
if there are no provisions for interest for late payment in the contract. In that case,
there was a contract to sell 5,000 tons of steel to be delivered at the rate of 1,000
tons per month and with payment to be made within three days of receipt of shipping
documents. After some of the steel was delivered, the buyer, acting upon erroneous
legal advice, refused to make any payment unless permission to do so was obtained
from the court by the seller, who was then facing winding-up proceedings. The seller
then declared that the refusal to pay would discharge them from further performance.
It was held that the conduct of the buyer did not amount to repudiation on these facts.
In Maple Flock v Universal Furniture Products, Ltd,95 it was suggested that factors to
be taken into account included the effect of the breach to the contract as a whole and
the likelihood of such breach being repeated.
(ii) Condition versus warranty
4.121 Where a term of the contract, essential to the continued existence of the contractual
ties, is broken, this breach destroys the foundation of the contract. In earlier cases,
there was a tendency to classify terms in a contract as either conditions, the breach of
which would entitle the innocent party to refuse further performance, or warranties,
the breach of which merely gave it a right to damages. A term may be held to be a
condition if there are precedent decisions or legislation so categorising it, or when the
parties have so agreed in their contract. In L Schuler AG v Wickman Machine Tool Sales
94
(1884) 9 App Cas 434. In the judgment of Lord Selbourne, it was said:
“... actual circumstances of the case in order to see whether one party to the contract is relieved from its future
performance by the conduct of the other; you must examine what that conduct is, so as to see whether it amounts
to renunciation, to an absolute refusal to perform the contract, such as would amount to a rescission if he had
the power to rescind, and whether the other party may accept it as a reason for not performing his part ...”
See Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309 and
Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd [2005] HKEC 1264. See also Ross
T Symth & Co, Ltd v TD Bailey, Son & Co [1940] 3 All ER 60. Contrast with Woodar Investment Development
Ltd v Wimpey Construction U K Ltd [1980] 1 WLR 277 where the House of Lords held that a party who took
action relying simply on the terms of the contract in question and not manifesting by his conduct an ulterior
intention to abandon it, was not to be treated as repudiating it. Hence, the whole of the circumstances must be
considered.
95
[1934] 1 KB 148. In that case, the UK Court of Appeal indicated that the chief considerations are first, the
ratio quantitatively which the breach bears to the contract as a whole, and secondly, the degree of probability
or improbability that such a breach will be repeated. See Chinluck Properties Ltd v Casil Clearing Ltd [2004]
HKEC 2328. See also Seadrill Management Services Ltd v Oao Gazprom (2009) 126 ConLR 130 and CDV
Software Entertainment AG v Gamecock Media Europe Ltd [2009] EWHC 2965.

Ltd,96 it was held that the mere fact that a commercial contract described one of its
terms as a condition did not compel the court to hold that that term was a condition in
the strict sense and that the question would be decided by construing the contract as a
whole. In doing so, the court would take into account whether a particular construction
of the term will lead to a very unreasonable result. Hence, the more unreasonable the
result, the more unlikely it is that the parties can have intended it, and if they do intend
it the more necessary it is that they shall make their intention abundantly clear. In City
Famous Ltd v Profile Property Ltd,97 in relation to a subsale contract for 21 shops with
a clause that the plaintiff should not agree, without consent of the defendant, to change
or modify the agreement concerning the sale of the shops that had been entered into
between the plaintiff and the head vendor, it was held that such a term, which could
be breached in a trivial way or a fundamental way was an intermediate term as defined
in the leading case on this subject – Hongkong Fir Shipping Co Ltd v Kawasaki Kisen
Kaisha Ltd.98 The case of Hongkong Fir Shipping shows that the proper approach to
the question of whether a term should be a condition or a mere warranty relates to the
construction of that term. As Upjohn LJ remarked:
“Where, however, upon the true construction of the contract, the parties have not
made a particular stipulation a condition, it would in my judgment be unsound
and misleading to conclude that, being a warranty, damages is necessarily a
sufficient remedy.”
In Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd,99 a case which concerned 4.122
an agreement for sale of the Hong Kong Futures Exchange shares, there were clauses
requiring the purchaser to make timely applications with best endeavours to the authorities
for dealership and membership. The court looked at the relevant clauses in the context
of the entire agreement and in turn construed the clauses against the surrounding factual
matrix at the time of its making. In finding that the defendant had acted in repudiatory
breach of the agreement, the court held that, although no precise time limit had been
fixed, given the importance of the application and the timing when they were to be made,
strict compliance of those provisions was of the essence of the agreement.
Particular regard should be given to the parties’ underlying commercial aims and 4.123
objectives in entering into the agreement, the commercial importance of these terms
in relation to the agreement and the importance of commercial certainty.
96
[1974] AC 235. See Incorporated Owners of Ning Fung Court v Ho Mei Tak [2010] HKEC 1149; Japsignal
Property Management Co Ltd v Incorporated Owners of Prat Mansion [2010] HKEC 496; and Marble Holdings
Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222. See also Oliver v RSN Ltd [2007] 10 EG 182 (CS) and
Australia & New Zealand Banking Group v Beneficial Finance Corp (1982) 44 ALR 241.
97
[1999] 3 HKLRD I5. In this case, Cheung J regarded the clause in issue could be breached in a trivial way or in
a fundamental manner and held that the breach in that case did not constitute a repudiation. See also Au Yeung
Ming Him v Ng Yuk Keung [2003] HKEC 731.
98
[1962] 2 QB 26. See Decro-Wall International SA v Practitioners in Marketing [1971] 1 WLR 361.
99
[2005] 4 HKLRD 447. See BS & N Ltd (BVI) v Micado Shipping Ltd (Malta) [2001] 1 Lloyd’s Rep 341; Bunge
Corp v Tradax SA [1981] 1 WLR 711; and Societe Italo-Belge Pour le Commerce et L’Industrie SA (Antwerp)
v Palm & Vegetable Oils (Malaysia) Sdn Bhd [1981] 2 Lloyd’s Rep 695. Contrast Bremer Handelsgesellschaft
Schaft mbH v Vanden Avenne Izegem PVBA [1978] 2 Lloyds’ Rep 109 and Homyip Investment Ltd v Chu Kang
Ming Trade Development Co Ltd [1995] 2 HKC 458 distinguished.

(c) Breach of conditions of contract and non-payment
(i) Relief from future performance

4.124 It is usual to label the key terms of a contract as conditions of contract in the
construction industry. These however cover a wide range of terms, some of which
cannot normally be regarded as conditions in the strict sense. Examples may include
those terms concerning the issue of passes for site entrance.
4.125 As held in Hongkong Fir Shipping, the test whether an event discharges one of the
parties from further performance of his undertakings is this: does the occurrence of the
event deprive the party who has further undertakings still to perform, of substantially
the whole benefit, which it was the intention of the parties as expressed in the contract
that he or she should obtain as the consideration for performing those undertakings.
4.126 Thus, one must look at the actual circumstances of the case in order to see whether the
one party to the contract is relieved from its future performance by the conduct of the
other. What must be examined is whether that conduct amounts to an absolute refusal
to perform the contract, such as would amount to repudiation.
4.127 In Decro-Wall International SA v Practitioners in Marketing,100 there was an instalment
contract of sale which called for cash on delivery for each instalment, but the buyer
insisted on paying the instalment by credit instead of cash. It was held that the primary
way to approach this was from the terms of the contract itself. Hence, the contract may
state expressly or by necessary implication that the breach of one of its terms will go
to the root of the contract and accordingly amount to repudiation. Where it does not do
so, the courts must look at the practical results of the breach in order to decide whether
or not it does go to the root of the contract. In that case, the court took into account that,
in the past the plaintiffs had never regarded late payment as being of vital importance
to them, and stated that the case would have been quite different if the breaches in
late payment had been such as reasonably to shatter the plaintiff’s confidence in the
defendant’s ability to pay for the goods with which the plaintiff supplied them. In such
a situation, the consequences of the breach could properly have been regarded as most
serious, indeed fundamental, and going to the root of the contract so that the plaintiffs
would have been entitled to refuse to continue doing business with the defendants.
(ii) Repudiation for non-payment
4.128 It has always been said that a breach of contract must go to the root of that contract for
there to be a repudiation. This, however, has to be reviewed in light of the history of the
whole matter. At the same time, it is clearly recognised that a deliberate refusal to make
an interim payment is capable of amounting to a repudiation of the contract. Also, it
100
[1971] 1 WLR 361. See Distribution Ltd v Amann & Sohne Gmbh & Co KG [2009] 4 HKLRD 633; Good
Earth Agricultural Co Ltd v Novus International Pte Ltd [2007] 1 HKLRD 685; and Hongkong Underground
Engineering Ltd v Welcome Construction Co Ltd [2005] HKEC 1264. See also Alan Auld Associates Ltd v Rick
Pollard Associates [2008] BLR 419; Engineered Medical Systems v Bregas AB [2003] EWHC 3287; Shaw
(Inspector of Taxes) v Vicky Construction Ltd [2002] EWHC 2659 (Ch); and Shyam Jewellers Ltd v Cheeseman
[2001] EWCA Civ 1818.

may be noted that, even in an ordinary commercial contract, the non-payment of an

instalment of the price may normally be treated as a repudiatory act, as in Dymocks
Franchise Systems (NSW) Pty Ltd v Todd.101
On the other hand, a party is not entitled to insist that it is not repudiating because it 4.129
proposes to perform part of the contract in a manner not permitted by the contract. In
gist, ultimately one has to examine the facts of the case to see whether the non-payment
amounted to repudiation. The principle is to consider whether the circumstances of the
non-payment show an intention not to be bound.
Also, in the context of the construction projects, a distinction between a breach that 4.130
discharges the innocent party from performance and one that merely entitles it to claim
damages is of crucial impact. There is no general right in common law to suspend work
if payment is wrongly withheld. The common law position has been reviewed in the
New Zealand case of Canterbury Pipelines v Christchurch Drainage.102 This involved
road reinstatement works at the end of a drainage project where the engineer reduced
the valuation of such reinstatement works in the interim payments since he was of
the view that the contractor had seriously underestimated such cost and acted under
a mistaken view of a contractual provision. The contractor responded by reducing
the labour on site and suspending the work until full payment. The employer then
terminated the contract upon notice given regarding the inadequate supply of labour.
The New Zealand Court of Appeal acknowledged that the contractor had been in the
wrong but held that there was no power to suspend work for non-payment at common
law or in the contract provisions.
(iii) Creatiles Building Materials Co Ltd v

To’s Universe Construction Company Ltd
A similar situation arises before the Court of Appeal in Hong Kong in the case of 4.131
Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd.103 That case
concerned a subcontractor who agreed to apply five coats of spray coating to the four
elevations of a building. The payment terms under the contract were that the contractor
was to pay the subcontractor a 10 per cent deposit upon signing; 30 per cent upon
materials being delivered on site; and the “balance by each 14 days interim payment
during work-in-progress”. The deposit and the 30 per cent payments were duly made.
When the subcontractor commenced work and issued a debit note to the contractor for
20 per cent of the balance of the contract price due, despite two promised dates for
payment, the amount was not paid. Through its solicitors, the subcontractor wrote to
the contractor stating that if payment was not made by a certain time, the subcontractor
would treat the contract as having been repudiated by the contractor. No payment was
forthcoming but the defendant wrote that the reason for non-payment was that all five
coatings to one elevation had to be completed before the subcontractor could claim for
payment. The subcontractor then left the site and claimed that there was a repudiation
of the contract by the contractor.
101
[2002] 2 All ER 849.
102
(1979) 16 BLR 76.
103
[2003] 2 HKLRD 309.

4.132 The court at first instance found in favour of the subcontractor. On appeal by the
contractor, the Hong Kong Court of Appeal confirmed that there was no general right
in common law to suspend work if payment was wrongly withheld and observed
that a deliberate refusal to make an interim payment was capable of amounting to
a repudiation of the contract. Taking into account the facts that the contract clearly
required an interim payment every 14 days during the progress of the work and that
two promises were breached in this regard, it was held that the contractor’s response
to the subcontractor solicitors evinced an unequivocal intention to no longer be bound
by the contract. As such, there was repudiation by the contractor. It was also remarked
that, by not paying and further expecting the subcontractor to continue working, the
contractor was attempting to change the payment method under the contract from cash
to credit. Thus, ultimately, one has to examine the facts of the case to see whether the
non-payment does amount to repudiation. The principle to consider is whether the
circumstances of the non-payment show an intention not to be bound by the contract.
4.133 The approach of Creatiles Building Materials has been considered in a subsequent case
of Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd,104 which
concerns a specialist subcontractor in underground tunnelling work. The facts of the case
are not uncommon. Under the subcontract, the interim payment arrangement was to be
effected via invoice submitted before the end of each calendar month with payment to be
paid within 30 days of receiving the invoice. The subcontractor applied in its first invoice
for HK$324,400 and the contractor, via its own assessment, calculated an amount of
HK$169,800, but paid only HK$100,000 eventually. In likewise manner, the contractor
paid over HK$150,000 for the second invoice, which claimed for HK$338,000 and
was assessed by the contractor to be HK$288,000. For the third invoice, the contractor
paid in full its assessed amount but with a delay of more than 2 months. No further
payments were made on the fourth and fifth invoices. The subcontractor wrote to the
contractor stating that its non-payment evinced an intention to no longer be bound by
the contract. To this, the contractor indicated that reasonable sums were withheld for
liquidated damages that might be imposed. In his judgement, Sakhrani J was of the view
that the figures of HK$100,000 and HK$150,000 were without contractual basis and,
using his words, “… simply a figure plucked out of the air without any calculation …”.
Applying Shyam Jewellers Ltd v Cheeseman,105 it was held that the ‘potency’ and legal
effect of the concerned breach was to be judged in the light of the seriousness of the
breach and its effect upon the continuing performance of the contract and this involved
an examination of the circumstances of the breach itself as well as its implications for
the future of the contract and any likelihood of repetition. In finding that the contractor
did evince an intention not to be bound by the contract, it was also stressed, in doing
so objectively, the court could only concern itself with the reasonable perceptions and
reactions of the party asserting a repudiatory breach and it would not take into account
concerns or fears, which, however naturally entertained, were not justifiably grounded
in the actions and intentions manifested by the party alleged to be in repudiatory breach.
104
[2005] HKEC 1264. See also the case of Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive Technology Ltd
(Third Party) [2005] HKEC 2152, where it was held that the persistent failure of the defendant to pay, or even to
respond at all to demands for payment did evince an intention not to be bound by the contract.
105
[2001] EWCA Civ 1818.

From the above, there appears to be certain indicators or factors for considering the 4.134
consequences as a result of not getting paid in respect of interim or progress payments.
While these are neither meant to be nor are capable of being exhaustive, examples of
the above factors are:
• whether time of payment is of essence in the contract, via express or implied

terms;
• whether there are provisions for interest for late payments in the contract;
• whether there is clear indication of refusal or inability to effect future

payments;
• whether there is available a termination clause covering default of payment

and, if so, whether it has become applicable;
• whether there is a repeated pattern to pay the correct amount despite warnings;
• whether there is a repeated failure to pay on time despite warnings;
• whether the default in payments is a serious breach of the contract;
• whether the default in payments affects the continuing performance of the

contract;
• whether payments already effected is of amounts with certain contractual

basis;
• whether there is response or reasonable response to support the refusal or

default in payment;
• what the reasonable perceptions and reactions of the party asserting the
repudiatory breach are;
• whether there is prior or subsequent inconsistent knowledge or conduct

regarding the alleged bona fide reliance upon the payment term to refuse
timely or correct payment, based on mistaken understanding of the concerned
term;
• whether the reliance upon the understanding of payment term to refuse timely
or correct payment is or otherwise can be bona fide; and
• whether there are other consequences evincing an intention not to be bound

by the contract.
(iv) Reasonable cause to suspend work

In the earlier case of Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd,106 a 4.135
contract for construction of the superstructure of a building was entered into between
the owner and the contractor. The contract was in the standard form of building
contracts for use in Hong Kong and clause 25 thereof provided that, if the contractor,
106
[1999] HKEC 675.

without reasonable cause, wholly suspended the carrying out of works or failed to
proceed with them regularly and diligently, and the architect gave notice specifying
such default, the owner was entitled to terminate the employment of the contractor if
such default continued after notice. That clause also said that the employer’s notice
should not be given unreasonably or vexatiously.
4.136 During the progress of the works, the architect gave notice under clause 25 stating that
the contractor was in default in respect of its failure to proceed regularly and diligently.
This was followed by a notice from the owner’s solicitors to terminate the contract.
The owner then issued proceedings in court seeking, among other relief, damages for
breach of contract. In its defence, the contractor pleaded that under the contract an
architect was required to be willing to discharge the functions of an architect, but that
the architect had failed to do so. As a result of this, the contractor suffered damages
in respect of the work done, described in its application for interim payments. The
contractor denied suspending the works or failing to proceed regularly and diligently,
and said that it was unable to maintain normal progress of the works because the owner
did not make the payments of the sums alleged. In approaching the issue on whether or
not the owner lawfully had terminated the contract, the court referred to the case of JM
Hill & Sons v London Borough of Camden107 and was of the view that the withholding
of a substantial sum legitimately due to a contractor would be unreasonable and that
an architect exercising his balancing function when considering whether or not to
issue a notice under clause 25 had to consider whether or not a suspension was with
reasonable cause when the employer was deliberately, without any reasonable cause,
withholding a substantial amount of money rightly due to the contractor. In such case,
Findlay J noted that:
“I think that, if an architect had done this, it would have been inevitable that
he would have concluded that the suspension was not without reasonable cause
because it would be totally unreasonable to expect a contractor not being paid a
large sum undeniably due to him to continue with the works and, in effect, finance
the employer’s building operations to an extent beyond that contemplated by the
contract.”
4.137 Thus, the starting point for this is that there is no general right in common law to
suspend work if payment is wrongly withheld. This is illustrated in the classic case of
Lubenham Fidelities & Investment Co Ltd v South Pembrokeshire District Council.108
The employer in this case withheld interim payments by deducting liquidated damages
on wrongful advice by the architect. The contract was in the JCT 63 form. The
contractor wrote to terminate the contract for such a breach and ceasing work on site.
This led to the employer sending out determination notices for the contractor’s ceased
works without reasonable cause and the contractor also served notices to terminate the
107
(1980) 18 BLR 31. See Muir Construction Ltd v Hambly Ltd 1990 SLT 830; Southwark LBC v Mills [2001]
Ch 1; and Balfour Beatty Construction Northern Ltd v Modus Corovest (Blackpool) Ltd [2009] CILL 2660.
108
(1986) 33 BLR 39. See Cleveland Bridge UK Ltd v Multiplex Constructions (UK) Ltd [2010] EWCA Civ 139
and Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd [2006] BLR 113.

contract for the employer’s failure to effect interim payments as certified, also issuing
a writ. The UK Court of Appeal held that the contractor109 had repudiated the contract
by ceasing works without reasonable cause notwithstanding that the employer was
wrong in deducting liquidated damages at that stage. Thus, by serving the notices of
termination for non-payment and issuing a writ thereafter, the contractor was held to
have indicated an intention not to be bound by the contract, leaving the employer with
no alternative but to accept the repudiation.110
Also, in Mersey Steel and Iron Co v Naylor, Benzon & Co,111 it was held that on the facts 4.138
of the case the party that had postponed an instalment payment under erroneous advice
had not shown an intention to repudiate the contract so as to release the other party
from further performance. How the legal consequence of a breach is to be ascertained
is regarded as a matter to be determined primarily from the terms of the contract itself,
and the facts and practical results of the breach have to be examined to see whether it
will go to the root of the contract and accordingly amount to repudiation.112
This approach also has support from the New Zealand case of Canterbury Pipe Lines 4.139
Ltd v The Christchurch Drainage Board113 where McMullin J held that:
“It is true that where a stoppage in payments is temporary only, in the sense of
being no more than delayed rather than withheld, the contractor’s rights may not
extend beyond a right to sue the employer. There may be some cases in which the
contractor can treat the stoppage as repudiation. Much will depend on the facts.”
However, the difficulties for an innocent contractor associated with this approach is 4.140
that non-payment, in itself, does not normally amount to a repudiation that can be
relied on to discharge the innocent party from further performance of the contract. All
the circumstances have to be assessed to search for an intention not to be bound by
the contract on the part of the defaulting party. Indeed, a contractor in such situations
is further faced with the risks and consequences of a wrongfully terminated contract
109
The plaintiff was indeed the bondsman who choose to take over the contract to perform it rather than paying on
the performance bond.
110
In giving the judgment of the court, May LJ said:
“Whatever be the cause of the under-valuation, the proper remedy available to the contractor is, in our opinion,
to request the architect to make the appropriate adjustment in another certificate, or if he declines to do so, to
take the dispute to arbitration under clause 35 …”
111
[1884] 9 AC 434. In the judgement of Earl of Selborne LC, it was stated that:
“You must look at the actual circumstances of the case in order to see whether the one party to the contract is
relieved from its future performance by the conduct of the other; you must examine what that conduct is, so
as to see whether it amounts to a renunciation, to an absolute refusal to perform the contract, such as would
amount to a rescission if he had the power to rescind, and whether the other party may accept it as a reason for
not performing his part.”
112
See Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, per Salmon LJ, where it
was stated that:
“The contract may state expressly or by necessary implication that the breach of one of its terms will go to the
root of the contract and accordingly amount to repudiation. Where it does not do so, the courts must look at the
practical results of the breach in order to decide whether or not it does go to the root of the contract.”
113
(1979) 16 BLR 76.

or stopped work, when the non-payment is merely a breach114 and not sufficient to
become a repudiation. In that case, the ‘innocent’ contractor can be liable for wrongful
repudiation of the contract by its act.
4.141 Uncertainty and complications in this regard are further highlighted by the cases like
James Shaffer Ltd v Findlay Durham & Brodie,115 Sweet & Maxwell Ltd v Universal
News Service Ltd;116 and Woodar Investment Development Ltd v Wimpey Construction
UK Ltd,117 which firmly lay down the principles that a party who bona fide relies upon
an express provision in a contract in order to rescind or terminate a contract, should
not, by that fact alone, be treated as having repudiated his contractual obligations if he
turns out to be mistaken as to his rights.
4.142 Partly to cater for these problems associated with non-payment, legislative solutions
have been introduced in various common law jurisdictions, starting with the enactment
of the UK Housing Grants, Construction and Regeneration Act 1996. A statutory right
to suspend works on non-payment of contractual sums otherwise due is conferred
on a contractor engaged in a construction contract118 by virtue of s 112 this 1996
Act. When a sum due under a construction contract is not paid in full by the final
date for payment,119 this right becomes exercisable by giving a seven-day notice of
intention to suspend performance, stating the ground(s) on which it is intended to
suspend performance, unless an effective notice to withhold payment has been given
to the contractor. This right to suspend work continues until the party in default makes
payment in full of the amount due.
4.143 For calculating time under the construction contract, any period during which
performance is suspended in pursuance of the right conferred by this section shall
be disregarded in computing, for the purposes of any contractual time limit, the
time taken by the party exercising the right or by a third party to complete any work
directly or indirectly affected by the exercise of the right.120 By requiring the use of
notice to withhold payment, no one may withhold payment of money due to the other
party without giving him advance notice of the intention to do so.121 Further, contract
conditions which provide that pay-when/if-paid arrangements are also prohibited
except in circumstances where the non-payment arises from insolvency of the upper
tier payer.122 Coupled with the use of statutory adjudication for interim binding
resolution of disputes,123 the 1996 Act aims at reducing disputes in construction
114
In such a case, the innocent contractor can only sue for damages for the breach associated with the non-payment
and, normally, can only recover interest for late payment.
115
[1953] 1 WLR 106.
116
[1964] 2 QB 699.
117
[1980] 1 WLR 277.
118
This is defined in s 104 of the UK Housing Grants, Construction and Regeneration Act 1996.
119
Sections 109 to 113 of the UK Housing Grants, Construction and Regeneration Act 1996 govern the matters of
payment. In gist, in any contract that lasts more than 45 days, payment must be by instalments (not one lump
sum), and there must be a clear mechanism in the contract for determining what and when payment becomes due.
120
Also, where the contractual time limit is set by reference to a date rather than a period, the date shall be adjusted
accordingly.
121
See s 111 of the UK Housing Grants, Construction and Regeneration Act 1996 for details.
122
123

contracts and moving them upstream for resolution as early as practicable, on a

provisional interim basis.124
Since 1996, legislations similar to the above have been enacted in various other common 4.144
law jurisdictions. These include the Building and Construction Industry Security of
Payment Act of 1999 in New South Wales,125 of 2002 in Victoria126 and of Queensland in
2004;127 the Construction Contracts Act 2004 in Western Australia;128 the Construction
Contracts Act 2002 in New Zealand;129 and of the Building and Construction Industry
Security of Payment Act 2004130 in Singapore. In Malaysia, a legislative move towards
the enactment of the Construction Industry Payment and Adjudication Act 2007 is
also in progress. Though operational details differ, all of these models of legislation
have, inter alia, one common feature – a mechanism to confer a statutory right on the
contractor to a construction contract that allows the contractor to suspend carrying out
the works when payment due is not effected in time.131
(v) Pointless to proceed

Thus, a breach of contract is a cause of discharge only if its effect is to render it 4.145
pointless to the innocent party for it to proceed further with performance. If either one
of the parties shows to the other an intention to no longer be bound by the contract or
breaks some stipulation fundamental to the continuing performance of the contract,
further performance by the innocent party becomes pointless. This is because the very
foundation of the contract has been destroyed.
(d) Remedies for breach
(i) Purpose of damages

The purpose of damages for breach of contract is to compensate the innocent party for 4.146
damage, loss or injury that it has suffered as a result of that breach. As remarked in
Photo Production Ltd v Securicor Transport Ltd:132
“Every failure to perform a primary obligation is a breach of contract. The

secondary obligation on the part of the contract-breaker to which it gives rise
by implication of the common law is to pay monetary compensation to the other
party for the loss sustained by him in consequence of the breach.”
124
See Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93.
125
This is available at http://www.legislation.nsw.gov.au/, visited 21 February 2011. See also the New South Wales
Building and Construction Industry Security of Payment Regulation 2001.
126
This is available at http://www.austlii.edu.au/, visited 21 February 2011, with amendments in 2007 and see also
the Victoria Building and Construction Industry Security of Payment Regulation 2003.
127
This is available at http://www.austlii.edu.au/ visited 21 February 2011.
128
This is available at http://www.slp.wa.gov.au/ visited 21 February 2011.
129
This is available at http://www.legislation.govt.nz/ visited 21 February 2011.
130
This is available at http://www.bca.gov.sg/ visited 21 February 2011. See also the Singapore Building and
Construction Industry Security of Payment Regulations 2005.
131
This is s 112 of the UK Housing Grants, Construction and Regeneration Act 1996; Art 11 of the Northern Ireland
Construction Contracts (Northern Ireland) Order 1997; s 27 of the New South Wales Building and Construction
Industry Security of Payment Act 1999; s 72 of the New Zealand Construction Contracts Act 2002; and s 26 of
the Singapore Building and Construction Industry Security of Payment Act 2004.
132
[1980] AC 827. See Ng Chung Man v Rever Expression Salon Ltd [2005] 2 HKLRD 193. See also Hayes t/a
Orchard Construction v Gallant [2008] EWHC 2726 (TCC).

4.147 Thus, the nature of damages is compensatory. The general principle is that the innocent
party is to be placed, as far as money can do, in the same position as if the contract
had been performed. The time for assessment of loss is at the time of the breach.
For example, in a sale of goods contract, the compensation may be through damages
representing the market price for non-delivery or the difference in market price for
defective delivery, ie difference in value.
(ii) Cost of repair
4.148 Another possible way of calculating damages is by way of cost of repair. This may be
significantly greater than the measure of difference in value and may not be allowed
on the grounds of being disproportionate. This can be illustrated in Ruxley Electronics
and Construction Ltd v Forsyth,133 where a swimming pool at a house was built with a
maximum depth of 6 feet 9 inches, rather than 7 feet 6 inches as specified. The court
awarded general damages of £2,500 for loss of pleasure and amenity. The cost of
rebuilding the pool at £21,560 was not allowed; it being considered as unreasonable
since the expenditure would be out of all proportion to the good to be obtained. It should
be noted that, generally speaking, no damages are allowed for any distress, frustration,
anxiety, displeasure, vexation, tension or aggravation to the innocent party resulting
from a breach of contract. The scope of the exception to this rule has been extended
by the decision in Farley v Skinner,134 in that damages can be awarded where a major
or important object of the contract is to provide pleasure, relaxation or peace of mind.
(iii) Losses consequential to breach

4.149 Apart from the above, damages may also be awarded for those losses consequential
upon the breach. The limit of damages recoverable is governed by whether the loss is
caused by the breach; and whether such loss is not too remote a consequence of the
breach to be recoverable. The answer to the former question is a mental concept and
is a question of common sense. Yet, problems may arise where concurrent causes are
in operation, for example, in relation to concurrent delays and disruptions that are
frequently encountered in construction contracts. The answer for the latter question is
133
[1996] AC 344. See East Ham Corporation v Bernard Sunley & Sons Ltd [1966] AC 406, where it was noted that
there are in fact three possible bases of assessing damages, namely, the cost of reinstatement; the difference in
cost to the builder of the actual work done and work specified; or the diminution in value of the work due to the
breach of contract. In Bellgrove v Eldridge (1954) 90 CLR 613, the High Court of Australia remarked:
“The measure of the damages recoverable by the building owner for the breach of a building contract is ... the
difference between the contract price of the work or building contracted for and the cost of making the work
or building conform to the contract … In none of these cases is anything more done than that work which is
required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part,
or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already
mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the
building owner’s loss. The qualification, however, to which this rule is subject is that, not only must the work
undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.”
See also Pamax Ltd v Cross Max Interiors Ltd [2008] HKEC 532; Hong Kong Housing Authority v Hsin Yieh
Architects & Associates Ltd [2005] HKEC 1378; and Jessleton Ltd v Joseph Sy & Associate Ltd [2001] HKEC
1442. See further McLaren Murdoch & Hamilton Ltd v Abercromby Motor Group Ltd (2003) 100 ConLR 63;
Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1; and Freeman v Niroomand (1996) 52 ConLR 116.
134
[2001] 3 WLR 899. See Centaline Property Agency Ltd v Lai Yuk Chun [2003] 1 HKLRD B2.

one of a concept of law and it depends on whether such loss is reasonably foreseeable
at the time of the contract.
(iv) Foreseeability of damage

A leading two-limb test for assessing foreseeability of damage is provided in Hadley 4.150
v Baxendale.135 In that case, it was remarked that:
“Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of contract should
be such as may fairly and reasonably be considered either [1] arising naturally, ie
according to the usual course of things from such breach of contract itself, or [2]
such as may reasonably be supposed to have been in the contemplation of both
parties at the time they made the contract, as the probable result of the breach of it”.
Thus, in gist, damages under the first limb are recoverable if they are likely to result; 4.151
damages under the second limb are recoverable if there is additional or special
knowledge. The ultimate criterion is the reasonable anticipation of the defendant, in
light of the circumstances known to it at the time of contract. In Victoria Laundry v
Newman Industries,136 the boiler sold to a laundry company was delivered late and
the company claimed damages for loss of profit during the period of delay and other
government contracts that it could and would have accepted. It was held that profit
for such government contracts was not allowed as the defendant was without such
knowledge. In Balfour Beatty v Scottish Power137 the Board that supplied temporary
power to an aqueduct constructed by continuous concrete pour was held not to have
knowledge of such concreting practice.
When put to operation, the Hong Kong Court of Final Appeal observed in Chen v 4.152
Lord Energy Ltd138 that the demarcation between the two limbs of the rule in Hadley
v Baxendale was sometimes blurred, particularly in the case where knowledge of a
certain matter was imputed to the defaulting party, and that there might be an overlap
between the first and second limb of the rule. Hence, it was held that it was unnecessary
to categorise it as falling strictly within either limb of the rule.
(v) Repudiation or recovery of damages

Where a breach is of such a nature as to effect a discharge of the contract, ie where 4.153
repudiation is involved, the innocent party has to make an election between two courses
of conduct. It may choose to accept the repudiation and rescind the contract. In such a
135
(1854) 9 Ex 341. See Penta-Ocean Construction Co Ltd v CWF Piling & Civil Engineering Co Ltd [2007] 3
HKLRD 233; Falcon Construction Engineering Ltd v Kirin Civil Engineering Contractors Ltd [2006] HKEC
599; United Building Material (Hong Kong) Ltd v E Man Construction Co Ltd [2006] HKEC 164; and Richlam
Trading Co Ltd v Ashley Trading Ltd [2001] HKEC 348.
136
[1949] 2 KB 528. See Yan Ho Chiu v Charmgold International Ltd [2006] HKEC 622; Richlam Trading Co Ltd
v Ashley Trading Ltd [2001] HKEC 348; and Ajax Pong Machinery Leasing Ltd v Redland Concrete Ltd [1999]
HKEC 740.
137
(1994) 71 BLR 20. See Citiscape (HK) Co v Kwei Kee Construction Ltd [2005] HKEC 1692. See also Skanska
Construction UK Ltd (formerly Kvaerner Construction Ltd) v Egger (Barony) Ltd [2004] EWHC 1748 (TCC).
138
[2002] 1 HKLRD 205. See Donpower Trading Ltd v Apexcom Ltd [2010] 1 HKLRD 915 and Forever Business
Ltd v Long Surplus International Investment Ltd [2007] 2 HKLRD 700.

case, the innocent party is excused from further performance of the contract and may
seek to recover any money paid or property transferred, ie to seek rescission of the
contract. The innocent party is also entitled to sue for the recovery of damages. The
innocent party may also choose to claim on a quantum meruit basis for the value of
the work that it has already done, instead of seeking the recovery of general damages.
4.154 As illustrated in Eu Asia Engineering Ltd v Wing Hong Contractors Ltd,139 where a
contractor wrongfully repudiated a subcontract, the subcontractor will be entitled to
the price of work done and to damages for the wrongful repudiation. Naturally, many
disputes, as they arise in the construction industry, call for a determination on which
party has validly repudiated the contract.
4.155 In Driltech Ground Engineering Ltd v Group Plan Contractors Ltd,140 the contractor
notified its piling subcontractor that it would be inviting tenders to carry out the
remaining piling work on the basis of the failure of the subcontractor to respond to
earlier correspondence, asking also for clarification of a rumour that the subcontractor
would soon be wound up. Hence, the contractor assumed that the subcontractor
would have difficulty carrying out the remaining work. The piling subcontractor
responded by a later letter, denying any difficulty in carrying out the remaining work
and demanding clarification as to whether the contractor had suggested in the earlier
letter, that it had terminated or would terminate the contract and, if that were so, that
it would amount to a breach or an anticipatory breach and was a repudiation of the
contract that the subcontractor had accepted. The court at first instance found that the
contractor had by its earlier letter wrongfully repudiated the contract. When the matter
came before the Hong Kong Court of Appeal, it was held that the earlier letter of the
contractor was plain and unequivocal, stating in bald terms that it was seeking others
to carry out the remaining works and that additional costs would be for the account
of the subcontractor. Thus, the Court of Appeal took the view that, by that letter, the
contractor declared that it was no longer contractually bound to have the piling work
done by the subcontractor and, as such, the contractor had repudiated the contract.
4.156 It should be stressed that, unless and until the repudiation is accepted, the contract
continues in existence since, as noted in Howard v Pickford Tool Co,141 “… an
unaccepted repudiation is a thing writ in water”. An acceptance of a repudiation has
to be clear and unequivocal and it cannot be withdrawn once it is made, as in Scarf v
Jardine.142 It does not require consideration to support it.
139
[1993] HKLY 839. In the judgment of Kaplan J, it was highlighted that:
“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents.
These are usually prepared in good faith before a dispute has arisen or at any rate crystallised. It is a
particularly devious contractor, employer or sub-contractor who systematically manufactures documents to
assist in a future dispute. Fortunately, such instances are rare. I accept that once a dispute has been identified
it is necessary to pay careful attention to the documents created after that time because it is only natural that
parties will reflect their grievances and justification for actions taken in those documents.”
See Onway Engineering Ltd v Chinney Construction Co Ltd [2005] HKEC 1880 and Pamax Ltd v Cross Max
Interiors Ltd [2008] HKEC 532.
140
[2002] HKLRD (Yrbk) 204.
141
[1951] 1 KB 417. See New China Hong Kong Group Ltd v AIG Asian Infrastructure Fund LP [2009] HKEC 207
and Charter View Development Ltd v Golden Rich Enterprises Ltd [2000] HKLRD (Yrbk) 161.
142
(1882) 7 App Cas 345. See Guangdong Native Produce Co Ltd v Tam Tze Ying (2008) 11 HKCFAR 455.

(vi) Principle of election

In the context of a contract, the principle of election applies when a state of affairs 4.157
comes into existence in which one party becomes entitled to exercise a right, and
has to choose whether to exercise the right or not. Its election has generally to be
an informed choice, made with knowledge of the facts giving rise to the right. Its
election, once made, is final; it is not dependent upon reliance on it by the other party.
Therefore, where an innocent party has knowledge of the breach and elects to treat
the contract as continuing or to accept the defective performance when tendered, it is
usually taken as having affirmed the contract.
Affirmation can be by way of express act or be implied from conduct. It must be 4.158
unequivocal and total. An innocent party who continues to press for performance, or
accepts performance, by the other party after becoming aware of the breach, runs the
risk of being held to have affirmed the contract. Yet, mere inactivity after knowing the
breach does not of itself amount to affirmation. Once made, affirmation is permanent
and cannot be withdrawn.
(vii) Duty to mitigate own loss

Though there is a breach, the innocent party is still under a duty to mitigate its loss 4.159
arising from the breach. This means that the innocent party is under a duty to take
all reasonable steps to mitigate the loss consequent on the breach and debars it from
claiming any part of damage that is due to its neglect to take such steps.
Yet, this does not impose on the innocent party an obligation to take any step that a 4.160
reasonable and prudent man would not ordinarily take in the course of his business.
Also, as in Jewelowski v Propp,143 a person is under no obligation to risk money in
order to mitigate the damage. The party who suffers damage is only bound to act in
the ordinary course of its business and the burden of proof is on the defaulting party
to prove that the innocent party did not minimise its damage.
However, if the innocent party can in fact avoid or mitigate the loss consequent to the 4.161
breach, it cannot recover for such avoided loss. In British Westinghouse v Underground
Railways Co,144 the turbines which were purchased in place of defective turbines
were more efficient than the defective turbines supplied by the plaintiff, even though
those turbines had been in accordance with the specification in their contract with
the railway company. As a result, the railway company obtained benefits over and above
their contractual entitlement, though it was a reasonable and prudent choice to make
under the circumstances. It was held that the pecuniary advantage that the railway
company derived from the superiority of the substituted turbines was a relevant matter
for consideration in assessing the damages.
(viii) Court order for performance

An order for specific performance is a court order compelling actual performance of 4.162
an obligation under the contract. Breach of such an order may be visited by a prison
sentence or monetary penalties for contempt of court.
143
[1944] 1 KB 510. See Pacific Interlink Sdn Bhd v Owner of the Asia Sta [2009] 2 Lloyd’s Rep 387.
144
[1912] AC 673. See Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm).

4.163 This is an equitable remedy and hence is subject to the discretion of the court. The
court will normally not grant specific performance where the common law damages
will adequately compensate the claimant, nor where the court cannot properly
supervise performance, as noted in Co-operative Insurance Society Ltd v Argyll Stores
(Holdings) Ltd.145 Thus, as in Wilkinson v Clements,146 the court will not normally
compel the building of houses. On the other hand, it was held in Johnson v Agnew147
that damages may be granted in lieu of specific performance. On the other hand, in
Carpenters Estates Ltd v Davies,148 it was held that specific performance could be
ordered in building work if the work is sufficiently defined by contract for the court
to see its exact nature; there is a substantial interest, not adequately compensated by
damages, in having the contract performed; and the land was in possession for work
to be done.
(ix) Injunction
4.164 Another form of remedy available in case of a breach of contract is an injunction. An
injunction is an equitable remedy ordering a person to do something, or restraining a
person from doing a wrong.
4.165 For reasons similar to the grant of specific performance, it is not common that an
injunction would be granted between parties to civil engineering contracts. However,
it is not uncommonly granted against a third party to prevent trespass or nuisance or
contravention of legislation caused by building operation, particularly as an interim
measure of protection.
4.166 The governing principles for the grant of an injunction in the interim period pending
trial are set out in American Cyanamid Co v Ethicon Ltd.149 Where there is a serious
question to be tried and damages are not an adequate remedy, if the defendant is
protected against the effect of an injunction by the plaintiff’s undertaking as to damages,
an injunction may be granted upon consideration of the balance of convenience.
An illustration of this in the context of the construction industry can be seen in Yau
Fook Hong Co Ltd v Man Cheong Construction Co,150 where the employer sought an
injunction to repossess the site following the termination of a building contract on
the grounds of the contractor’s delay in proceeding regularly and diligently with the
work. The contractor, in this case, contended that there was delay in payments by the
employer and that the termination of the contract was on invalid grounds, amounting
to a repudiation of the contract. The court held that, on the balance of convenience,
it was clear that damages would not be an adequate remedy for the employer but the
contractor could be compensated in damages. Since there was a serious question to
145
[1998] AC 1. See HT Chang Ltd v Vong Fah Kee & Co [1958] HKLR 363.
146
(1872) LR 8 Ch 96. See Manchester and District Housing Association v Fearnley Construction Ltd (In
Liquidation) (2000) 97(32) LSG 39.
147
[1980] AC 367. See Lau Suk Ching Peggy v Ma Hing Lam [2010] 3 HKLRD 247; Sun Lee Kyoung Sil v Jia Weili
[2010] 2 HKLRD 30; and Diamond Jubilee Investment Ltd v Chan Yiu Chung Sidney [2010] 1 HKLRD 638. See
also Carleton (Earl of Malmesbury) v Strutt & Parker (A Partnership) (2007) 116 ConLR 38; and Astea (UK) Ltd
v Time Group Ltd [2003] EWHC 725 (TCC).
148
[1940] Ch 160. See also Hounslow LBC v Twickenham Garden Developments Ltd [1971] Ch 233.
149
[1975] AC 396.
150
[1981] HKLR 60.

be tried and it could not be said that the employer had no real prospect of success
for a permanent injunction, an interlocutory injunction was granted restraining the
contractor from remaining on site.
In another case, Kwan Toi Ming v Man Kit Construction Co Ltd,151 an interim injunction 4.167
restraining the continuation of site formation works, allegedly resulting in flooding on
the adjacent land was discharged on balance of convenience.
(x) Quantum meruit

Quantum meruit is one category of remedy for restitution. This is available when 4.168
a party has provided a benefit but for some reason cannot obtain payment under a
contract. In such circumstances, that party may recover the reasonable value of the
benefit so provided. It means “the amount he deserves” or “what the job is worth”.
There can be quantum meruit in the absence of contract. In British Steel Corporation
v Cleveland Bridge & Engineering Co Ltd,152 as requested, work had begun before
all elements of the contract had been agreed and no contract was later entered into.
Where work was outside the scope of the existing contract, there can be quantum
meruit despite the contract, as in Parkinson v Commissioners of Works.153 This can be
in operation when no price is fixed or there is an agreement to pay a reasonable sum
in the contract. In Goarm Engineering Ltd v Shimizu Corp,154 where the subcontractor
stepped in and completed the excavation and structural frameworks left over from an
earlier subcontract that had been terminated, it was held that there was no agreement
on the price and the completion date and, hence, the work done was valued on a
quantum meruit basis.
In assessing the reasonable sum, the court adopts an approach based on a sum equal 4.169
to the net costs reasonably incurred, ie after deductions for defects and contra charges,
plus a reasonable profit. Indeed, there are no rigid guidelines to be applied in the
assessment of a reasonable sum although it is clear that the contractor should be paid
a fair commercial rate for the work done, in all relevant circumstances. The basis
for any such assessment of a reasonable sum can be a source of controversy. The
employer may wish to confine recovery to the contractor’s actual or tender costs; the
contractor may want a reasonable sum to reflect the value of its work to the employer.
In some instances a reasonable sum will be calculated on the basis of actual cost plus
an increase for profit and overheads. This matter can be of importance in the particular
151
[2003] 2 HKLRD G3.
152
[1984] 1 All ER 504. See Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004)
7 HKCFAR 79, Comtech Engineering & Consultant Co Ltd v Thorn Security (Hong Kong) Ltd [2003] HKEC
528 and Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering & Construction Ltd
[2003] 1 HKLRD 653. See also Traditional Structures Ltd v HW Construction Ltd [2010] EWHC 1530 (TCC),
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753 and Whittle Movers Ltd
v Hollywood Express Ltd [2009] 2 CLC 771.
153
[1949] 2 KB 632. See Hall v Van Der Heiden [2010] EWHC 586 (TCC) and S&W Process Engineering Ltd v
Cauldron Foods Ltd [2005] EWHC 153 (TCC). See also Cana Construction Co v The Queen (1973) 37 DLR (3d)
418.
154
[2002] HKEC 1489. See Chow Sin Yee v Tang Chi Tak [2010] HKEC 785; Jets Technics Ltd v TOP Contracting
Ltd [2010] HKEC 232; Ma Liu Sha v Pollard Construction Co Ltd [2008] HKEC 1826; BSC Interior Contract
and Engineering Co Ltd v Shinta Ltd [2008] HKEC 1601; Mission & Associates Ltd v Chu Yin Sang [2007]
HKEC 2222; and Profit Boat Development Ltd v Craft Projects (HK) Co Ltd [2007] HKEC 1615.

case where, for example, the contractor has obtained its resources at an especially low
cost and will be obliged to share that benefit with the employer, or where the price in
the tender may be particularly low in the circumstances.
(xi) Extinction of remedies

4.170 A right for remedy for breach of contract may be extinguished by lapse of time under
the Limitation Ordinance (Cap 347).
4.171 Section 4 of the Limitation Ordinance (Cap 347) provides that actions founded on
simple contract, ie a contract not under seal, shall not be brought after the expiration
of six years from the date on which the cause of action accrued, and an action upon a
contract under seal cannot be brought after the expiration of 12 years from the accrual
of the cause of action.
4.172 The statutory period begins to run when a breach of contract is committed and the fact
that actual damage is not suffered until some later date does not extend the time, as
illustrated in Howell v Young.155 In general, subject to exceptional circumstances such
as fraud, the mere fact that the breach of contract has not been discovered until after
the expiration of the statutory period does not prevent extinction of the remedy.
4.173 The importance of having a construction contract under seal lies in the fact that
the cause of action for breach of contract is extended from 6 to 12 years. This will
be relevant in relation to latent defects that do not surface until sometime after the
construction works are completed. An illustration for the risks associated with latent
defects in construction work is found in the case of Bank of East Asia Ltd v Tsien Wui
Marble Factory Ltd,156 where the cause of action in contract had expired when the
defects or their extent became apparent.
10. MISREPRESENTATION
(a) General
(i) Types of pre-contract statements

4.174 Pre-contract statements can be mere puff or terms of the contract or representation
depending on the circumstances.
(ii) Mere puff

4.175 Mere puff does not normally carry any legal effect even if what is stated turns out
to be untrue. A statement is puff if, by its nature or in its surrounding context, it is
not intended to have legal effect. In Jessleton Ltd v Joseph Sy & Associate Ltd,157
a statement that the renovation work would be ‘first class’ or that the client would
definitely like the result of the renovation work was held to be mere puff.
155
(1826) 5 B&C 259. See Tesco v Costain Construction Ltd [2003] EWHC 1487 (TCC) and Henderson v Merrett
Syndicates Ltd (No 1) [1995] 2 AC 145.
156
[2000] 1 HKLRD 268. See Murphy v Brentwood District Council [1991] 1 AC 398.
157
[2001] HKEC 1442.

MISREPRESENTATION 91
(iii) Term of contract

In contrast, a term of contract if not performed amounts to breach. In construction 4.176
contracts, for instance, the ground investigation reports of the site are usually stated
expressly to not form part of the contract. In Cooperative Insurance Society Ltd v
Henry Boot (Scotland) Ltd,158 the contractor had agreed to carry out works to a property
owned by the employer pursuant to a contract on JCT 1980 private with quantities
terms. The central issue in the preliminary hearing was whether an earlier site survey
report had been incorporated into the contract on the basis that it had been referred to
in contract drawings. It was held that the report had not been so incorporated since it
had not been identified or marked as a contract document and, given the nature of the
site survey, it was unlikely that the parties would have wished to incorporate it in any
event. If such site surveys do become incorporated into the contract, the contractor
may claim for loss resulting from their inaccuracy.
(iv) Representation
As to representation, it is a statement made by one party to the other, before or at the 4.177
time of entering into the contract, with regard to some existing fact or some past event,
which is one of the causes that induce the contract. A misrepresentation is simply a
representation that is false.
(v) Misrepresentation of opinion

A mere misrepresentation on a matter of opinion is not, of itself, treated as a 4.178
misrepresentation. As stated in Smith v Land & House Property Corporation,159
“[b]ut if the facts are not equally known to both sides, then a statement of opinion
by the one who knows the facts best involves very often a statement of a material
fact, for he impliedly states that he knows facts which justify his opinion”.
Thus, as observed in Brown v Raphael,160 it is not necessary that one party must know 4.179
all the facts since,
“it suffices for the application of the principle if it appears that, between the two
parties, one is better equipped with information or the means of information than
the other is”.
(vi) Misrepresentation of intention

Likewise, as to a representation of intention, there will of course be no liability if there 4.180
are reasonable grounds for believing that it could be fulfilled, even if in the event it is
not. Yet, in appropriate circumstances, a representation of intention may carry with it
158
(2002) 84 ConLR 164.
159
(1884) 28 Ch D 7. See Yili Concepts (HKG) Limited v Lee Wai Chuen [2000] HKEC 1043. See also IFE Fund SA v
Goldman Sachs International [2007] 2 Lloyd’s Rep 449 and Freer v Unwins Ltd [1976] Ch 288.
160
[1958] Ch 636. See Yili Concepts (HKG) Limited v Lee Wai Chuen [2000] HKEC 1043. See also Masri v
Consolidated Contractors International Co SAL [2010] 1 AC 90.

a further implied representation that the intention is at least capable of being fulfilled,
which is, in itself, a statement of fact. Thus, as illustrated in Ray v Sempers,161 for
example, if a person orders a meal in a restaurant, he is impliedly representing not
only that he will pay for the meal, but also that he is able to do so. Similarly, in Tudor
Grange Holdings Ltd v Citibank NA,162 Browne-Wilkinson VC said: “A representation
as to future conduct has no effect unless it constitutes a contract.”
(vii) Misrepresentation of law

4.181 Also, the general rule laid down in Beattie v Lord Ebury163 is that a false representation
of law cannot be treated as misrepresentation, unless made fraudulently. One rationale
in support of this is that a person is taken to know the law. Yet, this general rule is
subject to the same exception as in the case of a representation of opinion and the
question whether a representation is one of law or of fact can give rise to uncertainty.
However, subsequent to the House of Lords decision in Kleinwort Benson Ltd v
Lincoln City Council164 in relation to the situation of a mistake in law, it is doubted
in the first instance decision of Vraj Pankhania, Joshna Pankhania v The London
Borough of Hackney, The Receiver for the Metropolitan Police District165 whether a
false representation in law may now be regarded as a misrepresentation.
(viii) Effect of misrepresentation

4.182 The effect of misrepresentation is to make to the contract voidable. This means that
the contract is valid but may become legally voided at the option of one of the parties.
Obviously, the wrongdoer who brings about the misrepresentation does not have the
choice and it is for the wronged party to elect whether the contract should be voided
or not.
4.183 To have such effect, the misrepresentation has to be made with the intention of inducing
a contract and must be relied upon by the party to whom the misrepresentation was
made. In Wo Kee Hong Ltd v Sanju Enterprises Ltd,166 the seller claimed for the price
of air conditioners sold and delivered. The buyer’s defence was that there had been
a misrepresentation that the air conditioners were in high demand in Hong Kong,
that they could be easily disposed of at $2,000 each at least, and that they could be
sold within a year. The court held that it was unreasonable for the buyer, who was an
experienced dealer trading in air conditioners in Hong Kong for at least 13 years, to
have relied on the alleged misrepresentation, even if made.
161
[1974] AC 370. See Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] 2 All ER (Comm) 287.
162
[1992] Ch 53.
163
(1872) LR 7 Ch App 777. In this case, Mellish LJ said:
“Of course, a representation that something will be done in the future cannot either be true or false at the
moment it is made, and although you may call it a representation, if it is anything, it is a contract or promise.”
See Lee Yu Yee v Yau Siu Yuet Alias Yau Po Check (1949) 33 HKLR 23. See also Fitzroy Robinson Ltd v Mentmore
Towers Ltd [2009] BLR 505.
164
[1999] 2 AC 349. See Deutsche Morgan Grenfell Group Plc v Inland Revenue Commissioners [2007] 1 AC 558
and Brennan v Bolt Burdon [2005] QB 303.
165
[2002] EWHC 2441 (Ch). See Brennan v Bolt Burdon [2005] QB 303.
166
[2001] HKEC 3.

In Pepsi-Cola International Ltd v Charles Lee,167 a tenant incurred expenses in improving 4.184
vacant land surrounding the house, to create a garden, after the agent of the landlord
misrepresented that such land was included in the tenancy. Building construction works
took place in the garden four months after occupation. The court held that the tenant
was induced to take the tenancy since he had a wife and four children in or approaching
their teens, and was used to and fond of outdoor life and gardens.
(b) Types of misrepresentation
(i) Remedies based on type

The party to whom the representation is made (representee) can claim remedies 4.185
depending on the type of misrepresentation. Misrepresentation can be classified into
three types – fraudulent, negligent and innocent.
(ii) Fraudulent misrepresentation

Fraudulent misrepresentation, as defined in Derry v Peek,168 is a statement made with 4.186
the knowledge of its falsity or without belief in its truth, or made recklessly, not caring
whether it is true or false. A claim of fraudulent misrepresentation is serious in nature
and is often associated with criminal activities. In Polaroid Far East Ltd v Bel Trade
Co Ltd,169 the supply of film in reliance upon continuing misrepresentations that the
film would be sold to and used only in the People’s Republic of China and would not
be exported or re-exported to any area outside was found to be fraudulent, where such
film was supplied at a special discounted price with free cameras also supplied, and
where the defendant then re-exported 96 per cent of the purchased film to the higher-
priced markets of North America and Europe.
(iii) Negligent misrepresentation

A negligent misrepresentation is one covering a negligent act or omission. In 4.187
Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd,170 a civil
engineering contractor entered negotiations with a hirer for the hire of two sea-going
barges for carrying vast quantities of clay out to sea. At a meeting, the hirer’s manager
orally represented to the contractor that the capacity of the barges was 1,600 tonnes
deadweight, basing that figure on his recollection. The correct deadweight capacity
was 1,055 tonnes, which could have been ascertained from the ship’s document. The
contractor continued negotiations without obtaining any other figure for the vital
matter of deadweight capacity, and took the barges into use under a charter party, which
167
[1974] HKLR 13.
168
(1889) 14 App Cas 337. It was there decided that in order for fraud to be established, it is necessary to prove the
absence of an honest belief in the truth of that which has been stated. In the words of Lord Herschell,
“fraud is provided when it is shown that a false representation has been made: (1) knowingly; or (2) without
belief in its truth; or (3) recklessly, careless whether it be true or false”.
A plaintiff alleging fraud must prove the absence of honesty, which is a decisive factor. See Earnest Property
Agency Ltd v Lim Chee Keong [2007] HKEC 2309 and Win Wave Industrial Ltd v Gosbon Industries Ltd [2009]
HKEC 649.
169
[1990] 2 HKLR 447. See Chu Wai Ha v Tse Ki Po [2003] HKEC 547.
170
[1978] 2 WLR 515. See Bottin (International) Investments Ltd v Venson Group Plc [2004] EWHC 135 (Ch).

included an exception clause that the charterers’ acceptance at handing over the barges
should be conclusive that they had examined them and found them fit for their purpose.
After about six months’ use, the correct capacity was discovered and they refused to
pay any more than already paid for the hire. The hirer withdrew the barge and claimed
for outstanding hiring charges. The court, on appeal, held that there was no reasonable
grounds for such a misrepresentation and the hirer could not escape liability by reliance
on the exception clause, since it was a provision which came within the operation of
the Misrepresentation Act 1967, the counterpart legislation in Hong Kong being the
Misrepresentation Ordinance (Cap 284), and was therefore of no effect unless the court
allowed reliance upon it as being fair and reasonable. In this connection, s 3(1) of the
Misrepresentation Ordinance is relevant and it reads as follows:
“Where a person has entered into a contract after a misrepresentation has been
made to him by another party thereto and as a result thereof he has suffered loss,
then if the person making the misrepresentation would be liable to damages in
respect thereof had the misrepresentation been made fraudulently, that person
shall be so liable notwithstanding that the misrepresentation was not made
fraudulently, unless he proves that he had reasonable grounds to believe and did
believe up to the time the contract was made that the facts represented were true.”
4.188 Thus, where a person is induced to enter into a contract as a result of a misrepresentation,
there is no need to establish any duty of care and the party to whom the representation
was made will have an action for damages under the legislation.
(iv) Innocent misrepresentation

4.189 An innocent misrepresentation arises when a representation that is false is made
neither fraudulently nor negligently.
(v) Principal remedies

4.190 The principal remedies for misrepresentation are rescission and damages. Rescission is
available in principle to all types of misrepresentation. A claim for rescission is to have
the contract set aside, restoring the parties to the position they were in before the contract
was made. Where rescission is available, it may be possible to recover an indemnity,
which provides compensation for expenditure occurring as a result of the contract.
(c) Remedies for misrepresentation
(i) Fraudulent misrepresentation

4.191 For fraudulent misrepresentation, rescission and damages are available. As in
Doyle v Olby (Ironmongers) Ltd,171 it is accepted that damages for fraudulent
misrepresentations are to be measured as if the misrepresentations had not been made
and the objective of the court is to put the plaintiff, as far as it is possible, into the same
position financially as if it had not entered into the contract at all. Underpinning this
objective is restoration in the sense of compensation, not punitive damages. Thus, the
171
[1962] 2 QB 158. See Sunbeam Investment Ltd v Mannitop Investment Co Ltd [2007] HKEC 1464, Cheung King Sum
v Bright Lamp Industries Ltd [2005] HKEC 1329 and Manek Bharati Savjibhai v Wu Yat Choi [2001] HKEC 419.

general rule is that the party defrauded is to recover the loss it has suffered, no more
and no less. Proof of fraud, therefore, permits a greater measure of recovery and takes
the situation outside the court’s discretion to award damages in lieu of rescission under
s 3(2) of the Misrepresentation Ordinance (Cap 284), which provides:
“Where a person has entered into a contract after a misrepresentation has been
made to him otherwise than fraudulently, and he would be entitled, by reason
of the misrepresentation, to rescind the contract, then, if it is claimed, in any
proceedings arising out of the contract, that the contract ought to be or has been
rescinded the court or arbitrator may declare the contract subsisting and award
damages in lieu of rescission, if of opinion that it would be equitable to do so,
having regard to the nature of the misrepresentation and the loss that would be
caused by it if the contract were upheld, as well as to the loss that rescission
would cause to the other party.”
(ii) Negligent misrepresentation

For negligent misrepresentation, there can be a claim in tort for negligent statement 4.192
and a claim for damages under s 3(1) of the Misrepresentation Ordinance (Cap 284),
which allows a party who suffered loss in these circumstances to claim damages unless
the representor proves that he had reasonable grounds to believe and did believe up to
the time of the contract that the representation was true. Also, the remedy of rescission
is available and the court can similarly award damages in lieu of rescission under s 3(2)
of the Misrepresentation Ordinance.
(iii) Innocent misrepresentation

For innocent misrepresentation, the remedy of rescission is available. There is no right 4.193
to damages for innocent misrepresentation. Yet, the court has a discretion under s 3(2)
of the Misrepresentation Ordinance (Cap 284) to award damages in lieu of rescission.
Also, as to the discretion to award damages under s 3(2) of the Misrepresentation 4.194
Ordinance (Cap 284), it was held in Green Park Properties Ltd v Dorku Ltd172 that the
Ordinance conferred on the court a broad discretion to declare a contract subsisting
and award damages in lieu of rescission and to do what was equitable. A number of
factors are in issue here, as in William Sindall Plc v Cambridgeshire County Council,173
including the nature of misrepresentation, the loss caused if the contract is not set
aside and the loss caused to the representor if the contract is set aside.
(iv) Loss of remedy of rescission

So far as the remedy of rescission is concerned, it may be lost in a variety of circumstances. 4.195
First, the right to rescind is lost if the contract is affirmed by the representee after
discovering the true state of affairs. Affirmation here means an indication to the representor
172
[2001] 1 HKLRD 139. See Widely Success (HK) Ltd v Hollywood Land Ltd [2010] HKEC 1512; Advance Pacific
Investments Ltd v Zen Chung Hei Hayley [2009] HKEC 1053; and Chun Sue Kwan v Sky Harvest Ltd [2007]
HKEC 450.
173
[1994] 1 WLR 1016. See Cheung King Sum v Bright Lamp Industries Ltd [2005] HKEC 1329 and Okachi (Hong
Kong) Co Ltd v Nominee (Holding) Ltd [2005] 4 HKLRD 447.

to continue with the contract, despite the misrepresentation, by express words or conduct.
Second, the right to rescind is lost through lapse of time, after the misrepresentation is
discovered in fraudulent misrepresentation, or after the contract is entered into in negligent
or innocent misrepresentation. Third, as in Armstrong v Jackson,174 the right to rescind is
lost if restitution to positions before the contract was made is no longer possible. Also,
rescission is a personal remedy. Thus, the right to rescind will be lost if the interest of a
third party is involved. Lastly, a representation, other than one of a fraudulent nature, may
be rescinded in equity, giving rise to a right to damages. There is no discretion at common
law to award damages in lieu of rescission if the remedy of rescission is lost.
11. MISTAKE AND RECTIFICATION

(a) General
(i) Effect of mistake

4.196 Mistake in the law of contract has several different effects. Generally speaking, at
common law, a mistake may nullify the consent, rendering the contract void from the
very beginning; in equity, a mistake may entitle a party to rescind the contract or to
have a written contract rectified to reflect the true agreement.
(ii) Types of mistake

4.197 Mistakes are commonly classified into mutual mistake and unilateral mistake. A
mutual mistake is one that is shared by both parties. A mistake as to the existence of
the subject matter of the contract by both parties is a mutual mistake. For instance,
in Couturier v Hastie,175 there was a mistake that a cargo of corn was being shipped
in transit to the United Kingdom which had indeed been sold in Tunis already. A
unilateral mistake arises where a mistake is made by one of the parties alone and the
other party knows or ought reasonably to have known of such a mistake. An example
of this is in Smith v Hughes176 where a seller sold a quantity of oats to a buyer, when
the seller knew that the buyer had erroneously believed them to be old oats and that
the buyer would not have bought them otherwise.
4.198 There are also instances where the parties to the contract are each mistaken, both
not knowing that the other party has made such a mistake. For instance, in Raffles v
Wichelhaus,177 the parties meant different ships when they entered into a contract for
174
[1917] 2 KB 822. See Rayden v Edwardo Ltd (In Members’ Voluntary Liquidation) [2008] EWHC 2689 (Comm)
and Capcon Holdings Plc v Edwards [2007] EWHC 2662 (Ch).
175
(1852) 8 Ex 40. See NCT Hong Kong Ltd v Sinochem International Chemicals (Hong Kong) Ltd [2006] HKEC
1194. See also Associated British Ports v Ferryways NV [2008] 2 Lloyd’s Rep 353 and Walker Crips Stockbrokers
Ltd v Savill [2007] EWHC 2598 (QB).
176
(1871) LR 6 QB 597. See Hussain Ghalib v Man’s Brothers Construction Co Ltd [2010] HKEC 790; Etacol
(Hong Kong) Ltd & Others v Sinomast Ltd [2007] HKEC 113; and Chu Suk-Chun v Ma Fuk-Sang t/a Ling Chi
Medicine Store [1965] HKDCLR 1.
177
(1864) 2 H&C 906. See Tang Wai Kuen Raymond v Asia Landscaping Ltd [2010] HKEC 1437. See also AGCO
International Ltd v Service Co AG [2005] EWHC 1206 (Comm) and NBTY Europe Ltd (formerly Holland &
Barrett Europe Ltd) v Nutricia International BV [2005] 2 Lloyd’s Rep 350.

MISTAKE AND RECTIFICATION 97
sale of cotton involving the vessel Peerless from Bombay, because two ships named
Peerless sailed from Bombay one in October and the other in December. In such cases,
the parties are at cross-purposes and no contract will exist.
The traditional rule is that the mistake needs to be one of fact rather than of law, for these 4.199
principles to become operative. Yet, since the House of Lords decision in Kleinwort Bension
Ltd v Lincoln City Council,178 it seems that a mistake of law may sometimes be sufficient.
(iii) Mutual mistake

A mistake of fact may operate so as to negative a true consent of the parties, as in Bell 4.200
v Lever Brothers179 where there was no meeting of the minds on the issue.
The mistake must render the subject matter of the contract essentially and radically 4.201
different from the subject matter that the parties believed to exist. The common law rules
as to a mistake regarding the quality of the subject matter are designed to cope with the
impact of unexpected and wholly exceptional circumstances under apparent contracts.
Such a mistake in order to attract legal consequences must substantially be shared by
both parties, and must relate to facts as they existed at the time the contract was made.
Yet, in Associated Japanese Bank (International) Ltd v Credit Du Nord SA,180 it was 4.202
also held that a party cannot be allowed to rely on a common mistake where the mistake
consists of a belief which is entertained by him without any reasonable grounds for
178
[1999] 2 AC 349.
179
[1932] AC 161. In Jan Albert (HK) Ltd v Shu Kong Garment Factory Ltd [1988] HKLY 120, it was noted that the
leading case of Bell v Lever Bros Ltd [1932] AC 161 was open to at least two interpretations – the narrower interpretation
that common mistake only voided a contract, where the mistaken assumption was the existence of the very subject
matter of the contract, and the wider interpretation that common mistake also voided a contract where the parties had
proceeded on a false and fundamental assumption irrespective of the character of the facts assumed to be true.
180
[1989] 1 WLR 255. In the judgment, Steyn J said:
“The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly,
the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules
regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional
circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must
substantially be shared by both parties, and must relate to facts as they existed at the time the contract was
made. Fourthly, and this is the point established by Bell v. Lever Brothers Ltd. ... the mistake must render the
subject matter of the contract essentially and radically different from the subject matter which the parties
believed to exist. While the civilian distinction between the substance and attributes of the subject matter of
a contract has played a role in the development of our law (and was cited in speech of Bell v. Lever Brothers
Ltd.) the principle enunciated in Bell v. Lever Brothers Ltd. is markedly narrower in scope than the civilian
doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord
Atkin and Lord Thankerton represent the ratio decidendi of Bell v. Lever Brothers Ltd. Fifthly, there is a
requirement which was not specifically discussed in Bell v. Lever Brothers Ltd. What happens if the party, who
is seeking to rely on the mistake, had no reasonable grounds for his belief? An extreme example is that of the
man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that
it is a good speculative risk. In my judgment a party cannot be allowed to rely on a common mistake where
the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief. ...
That is not because principles such as estoppel or negligence require it, but simply because policy and good
sense dictate that the positive rules regarding common mistake should be so qualified. Curiously enough this
qualification is similar to the civilian concept where the doctrine of error in substantia is tempered by the
principles governing culpa in contrahendo. More importantly, a recognition of this qualification is consistent
with the approach in equity where fault on the part of the party adversely affected by the mistake will generally
preclude the granting of equitable relief: Solle v. Butcher ...”.
See, however, Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace) [2003] QB 67,
which rejected the equitable doctrine expounded by Lord Denning in Solle v Butcher.

such belief. This principle was applied in China Resources Metals v Minerals Company
Limited and Ananda Non-Ferrous Metals Limited,181 where it was held that a party had
no reasonable grounds under the circumstances to come to a conclusion that, at the
time of entering into the contract or at the time they were appointing the arbitrator,
there was a domestic arbitration agreement, instead of an international one.
4.203 Likewise, in Jan Albert (HK) Ltd v Shu Kong Garment Factory Ltd,182 in relation to an
alleged mistake in quota restrictions in the sales of goods to Europe, the Hong Kong
Court of Appeal held that a contract would be void for mistake only where the mistake
rendered the subject matter of the contract essentially and radically different from the
subject matter that the parties believed to exist. In that case, the subject matter was not
in fact radically different, and there was insufficient evidence before the judge upon
which he could make a finding that a mistake had been made by the parties.
4.204 Nonetheless, if the mistake is one regarding the quality of the subject matter, it does
not normally render the contract void. In Bell v Lever Brothers Ltd,183 it was remarked
that a mistake of quality that did not make the subject matter essentially different
without the existence of such quality would not render the contract void.
(iv) Unilateral mistake

4.205 Where the mistake is unilateral in nature, it need not relate to the essential subject
matter of the contract to render the contract void. It is sufficient if such a mistake
merely goes to a fundamental term of the contract.
4.206 Thus, if a contract makes a unilateral mistake in its tender price or if there are individual
errors in pricing or building-up the tender, it is bound by such errors unless, before
the tender is accepted, the employer discovers the error or ought to have discovered
the error. This is what occurred in W Higgins Ltd v Northampton Corporation184 and
Riverlate Properties Ltd v Paul.185 Conversely, in the Canadian case of McMaster
University v Wilchar Construction Ltd,186 the employer who knew there was an error
in the tender could not accept the tender so as to create a binding contract. In this case,
the contractor had omitted the first page of the tender containing the price fluctuation
clause. In Henry Boot Construction Ltd v Alstom Combined Cycles Ltd,187 it was held
that, in relation to clause 52 of the ICE conditions of contract (6th edition), which
provided, inter alia, that “where work is not of a similar character or is not executed
181
[1995] 1 HKLR 37. See Shung King Development Co Ltd v Optical Outlet (Hong Kong) Ltd [2005] HKEC 1926.
182
[1990] 1 HKLR 317.
183
[1932] AC 161. See Smithson v Hamilton [2008] 1 WLR 1453, Conlon v Simms [2006] 2 All ER 1024 and Great
Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679. Contrast Item Software (UK) Ltd v
Fassihi [2004] BCC 994 and Bligh v Martin [1968] 1 WLR 804.
184
[1927] 1 Ch 128. See also Joscelyne v Nissen [1970] 2 QB 86.
185
[1975] Ch 133. See Citilite Properties Ltd v Innovative Development Co Ltd [1998] HKLRD 705. See also Kemp
v Neptune Concrete Ltd (1989) 57 P & CR 369; Laimond Property Investments Co Ltd v Arlington Park Mansions
Ltd [1989] 14 EG 70; and Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505.
186
(1971) 22 DLR (3d) 9. See Commission for the New Towns v Cooper (Great Britain) Ltd (formerly Coopind UK)
[1995] Ch 259.
187
[2000] BLR 247. See Hong Kong Housing Authority v Leighton Contractors (Asia) Ltd [2005] HKEC 414.
See also Reliance Industries Ltd v Enron Oil and Gas India Ltd [2002] 1 All ER (Comm) 59 and Weldon Plant
Ltd v Commission for the New Towns [2000] BLR 496.

under similar conditions … the rates and prices in the bill of quantities shall be used
as the basis for valuation so far as may be reasonable”, the basis for such valuation
could not be displaced even on the ground that the rates or prices in a bill of quantities
had been inserted by mistake. In Traditional Structures Ltd v HW Construction Ltd,188
a subcontractor had mistakenly omitted the price of cladding from the contract. The
contractor was aware of the omission but failed to notify the subcontractor, thereby
benefiting from the mistake. Applying Thomas Bates & Son Ltd v Wyndham’s
(Lingerie) Ltd189 and Baden v Societe Generale pour Favoriser le Developpement du
Commerce et de l’Industrie en France SA190 the court held that the subcontract was to
be rectified on the ground of unilateral mistake.
The court may also refuse to order specific performance of the contract where the 4.207
unilateral mistake has not been induced by the other party.
(v) Non est factum

This is a doctrine of ancient origin, concerning documents mistakenly signed and 4.208
means “it is not my deed”. Mistakes of this sort prevent the formation of the contract
and create an exception to the general rule that people are bound by their signatures to
a document, whether they read it or understand it. In Thoroughgood’s Case,191 a person
who could not read but executed a deed after it had been incorrectly read over to him
was not bound by it.
188
[2010] EWHC 1530.
189
[1981] 1 WLR 505. In the judgment of Buckley LJ, he said:
“For this doctrine — that is to say the doctrine of A Roberts & Co Ltd v Leicestershire County Council — to
apply I think it must be shown: first, that one party A erroneously believed that the document sought to be
rectified contained a particular term or provision, or possibly did not contain a particular term or provision
which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion
and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice
of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated
to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist
rectification to give effect to A’s intention on the ground that the mistake was not, at the time of execution of
the document, a mutual mistake.”
190
[1993] 1 WLR 509. In the judgment of Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265, he said:
“Knowledge may be provided affirmatively or inferred from circumstances. The various mental states which
may be involved were analysed by Peter Gibson J. in Baden’s case [1993] 1 WLR 509 as comprising: (i) actual
knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such
inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate
the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest
and reasonable man on inquiry. According to Peter Gibson J., a person in category (ii) or (iii) will be taken to
have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt
the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v)
are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is
essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the
question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it,
had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed
to make inquiries because ‘he did not want to know’ (category (ii)) or because he regarded it as ‘none of his
business’ (category (iii), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot
complain if, for the purpose of civil liberty, they are treated as if they had actual knowledge.”
191
(1548) 2 CoRep 9a. See Cheer Giant International Ltd v Wo Ming Engineering Ltd [2007] HKEC 777. See also
Tsavliris Salvage (International) Ltd v Guangdong Shantou Overseas Chinese Materials Marketing Co (The Pa
Mar) [1999] 1 Lloyd’s Rep 338 and Barton (Alexander) v Armstrong (Alexander Ewan) [1976] AC 104.

4.209 The present operation of this doctrine is severely restricted. First, it is restricted to persons
who are somehow unable to have any real understanding of a particular document or
who are tricked into signing it, as in Gallie v Lee.192 Second, it is necessary that there
was a serious mistake regarding the difference in practical result, rather than to details.
Third, the person signing the document must not be acting carelessly when signing.
4.210 Thus, in Saunders v Anglia Building Society,193 which involved a widow aged 78 who
signed a mortgage document, it was remarked that the plea of non est factum could
not be available to anyone who signed without taking the trouble to find out at least the
general effect of the document; nor could it be available to a person whose mistake was
really a mistake as to the legal effect of the document. Hence, there must be a radical
or fundamental difference between what was signed and what it was thought that was
being signed.
4.211 The defence of non est factum is not uncommon, but it is not always successful. In Sun
Fook Kong (Civil) Ltd v Wellead Construction and Engineering Co Ltd,194 the defence
of non est factum was raised but abandoned at trial. In Pearldelta Group Ltd v Huge
Winners International Ltd,195 in relation to a subscription and investment agreement
FOR convertible bond, Saunders J summarised the principles:
“150. Non est factum is a category of mistake. It is described in the following

way in Chitty on Contracts 30th Edn Vol 1 para 5–101: ‘The general rule is that
a person is estopped by his or her deed, and although there is no such estoppel in
the case of ordinary signed documents, a party of full age and understanding is
normally bound by his signature to a document, whether he reads or understands
it or not. If, however a party has been misled into executing a deed or signing a
document essentially different from that which he intended to execute or sign, he
can plead non est factum in an action against him’
151. The plea is not lightly to be allowed where a person of full age and capacity
has signed a written document embodying contractual terms. In exceptional
circumstances it will be available so long as the person signing the document had
made a fundamental mistake as to the character or effect of the document: Chitty
para 5–104.
192
[1969] 2 Ch 17. See Burbank Securities Ltd v Wong [2008] EWHC 552 (Ch) and Norwich and Peterborough
Building Society v Steed (No.2) [1993] Ch 116.
193
[1971] AC 1004. See Yen Wing Choi & Lee Shui Chi Shirley v Match Power Investment Ltd [2009] HKEC 2115,
in the judgment of Chu J, it was highlighted:
“It has been laid down in Saunders v. Anglia Building Society [1971] AC 1004 that in order for the doctrine to
apply, it must be shown that: (i) the party relying on it is under a disability (whether permanent or temporary);
(ii) there is a radical difference between what was signed and what the person thought he was signing; and
(iii) he had not acted negligently in appending his signature. Fraud or misrepresentation is not a necessary
ingredient of the plea. Although, as a matter of law, the doctrine is available to persons who are of full age and
capacity, the House of Lords had emphasized that this will be exceptional and rare: see 1016C, 1023B and
1027B. Ultimately, it is a question of fact and reasonableness of conduct of the party seeking to rely on the
doctrine.”
See also Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334.
194
[2004] HKEC 1274.
195
[2010] HKEC 601.

152. A rare example of the plea succeeding, and a good illustration of the true
nature of the plea, is contained in Petelin v Cullen [1975] 132 CLR 355, where
the High Court of Australia accepted the defence in circumstances where a person
signed a form in the belief it was a simple receipt, when in fact the document
purported to extend an option to the sale of land.
153. But the plea is not available to someone who is negligent. At para 5-106,
Chitty goes on to say: ‘A person who signs a document may not be permitted
to raise the defence of non est factum where he has been guilty of negligence in
appending his signature.’”
(vi) Rectification
Where there is a mistake in the written expression of the agreement of the parties, 4.212
either of the parties may apply to the court for the rectification of the written contract
so as to make it accord with the true agreement of the parties. This is different from a
mistake that prevents the formation of a contract.
In case of common mistake, rectification is available where parties to a contract 4.213
intended to reproduce the terms of their agreement in a document and that document
fails to express this. Convincing proof, as noted in Joscelyne v Nissen,196 is required. The
burden on the party seeking rectification in establishing the knowledge of the mistake
on the part of the one resisting rectification is a heavy one, akin to convincing proof,
although probably not as high as beyond reasonable doubt. The court must be cautious
in granting rectification since the effect of rectification is to rewrite an agreement to
which the parties have on the face of the document, never intended or agreed.
For the contract to be rectified, all that is required is that it should be clear that something 4.214
had gone wrong with the language and that it should be clear what a reasonable person
would have understood the parties to have meant.197
In the case of unilateral mistake, the remedy of rectification imposes a heavy burden 4.215
on the party seeking rectification. What needs to be shown is the conscious taking
advantage of the recognised error of the other party that in itself amounts to a sharp
practice or affects the conscience of the parties, which invites intervention by the court.
Otherwise, no rectification is granted. In the Hong Kong Court of Appeal decision in
Citilite Properties Ltd v Innovative Development Co Ltd,198 which involved a mistake
as to the meaning of the saleable area in the sale and purchase of a commercial
property, it was held that, in instances in which rectification of a formal agreement
was sought, where it was alleged that one party had taken advantage of the mistake
of the other, the court should be hesitant to expand the requisite degree of knowledge
beyond the categories of actual knowledge.
196
[1970] 2 QB 86. See Penta-Ocean Construction Co Ltd v CWF Piling & Civil Engineering Co Ltd [2007]
3 HKLRD 233 and Dixie Engineering Co Ltd v Vernaltex Co Ltd [2002] HKEC 980. See also Surgicraft Ltd v
Paradigm Biodevices [2010] EWHC 1291 (Ch) and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101.
197
See Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, applying Investors Compensation Scheme Ltd
v West Bromwich Building Society (No 1) [1998] 1 WLR 896; East v Pantiles (Plant Hire) [1982] 2 EGLR 111;
and KPMG v Network Rail Infrastructure Ltd [2007] EWCA Civ 363.
198
[1998] 2 HKLRD 705.

4.216 Rectification would be refused if the point had been simply overlooked; the written
agreement must then be read and construed as it stands.
4.217 An illustration of the operation of rectification in the context of construction contracts
can be seen in A Roberts & Co Ltd v Leicestershire County Council,199 where there
was a unilateral mistake by the contractor as to the contract period in believing it to
be 30 months rather than 18 months and the conduct of the employer was found to
be inequitable to object to the rectification of the documents. The law on rectification
in the case of unilateral mistake was recently discussed in Citilite Properties Ltd v
Innovative Development Co Ltd 200 where Le Pichon J adopted that:
“By what appears to be a species of equitable estoppel, if one party to a transaction

knows that the instrument contains a mistake in his favour but does nothing to correct
it, he will be precluded from resisting rectification on the ground that the mistake
is unilateral and not common. Under this head the evidence of the knowledge and
intention of the defendant must be such as to involve him in a degree of sharp
practice, or at least the conduct must be such as to affect the conscience of the party
who has suppressed the fact that he has recognised the presence of a mistake.”
4.218 As to the meaning and the requirement of sharp practice, Le Pichon J also adopted
and approved the observation of Buckley LJ in Thomas Bates Ltd v Wyndham’s Ltd,201
where it was stated:
“Undoubtedly, I think in any such case the conduct of the defendant must be such
as to make it inequitable that he should be allowed to object to the rectification of
the document. If this necessarily implies some measure of ‘sharp practice’, so be
it; but for my part I think that the doctrine is one which depends more upon the
equity of the position. The graver the character of the conduct involved, no doubt
the heavier the burden of proof may be; but in my view, the conduct must be such
as to affect the conscience of the party who has suppressed the fact that he has
recognised the presence of a mistake.”
4.219 Thus, for rectification along this line, it needs to be established:
• firstly, that one party erroneously believed that the document sought to be
rectified contained a particular term or provision, or possibly did not contain
a particular term or provision which, mistakenly, it did contain;
• secondly, that the other party was aware of the omission or the inclusion and
that it was due to a mistake on the part of the former party;
199
[1961] Ch 555. See Ni Tiee Bor v Golden Crane Industries Ltd [2000] HKEC 293 and Lau Chun Kam v Lai
Tak Shing [2008] HKEC 2095. See also Traditional Structures Ltd v HW Construction Ltd [2010] EWHC 1530
(TCC) and George Wimpey UK Ltd (formerly Wimpey Homes Holdings Ltd) v VI Construction Ltd (formerly VI
Components Ltd) [2005] BLR 135.
200
[1998] 2 HKLRD 705. The decision was upheld on appeal. See Citilite Properties Ltd v Innovative Development
Co Ltd [1998] 2 HKLRD 705. See also Lau Chun Kam v Lai Tak Shing [2008] HKEC 2095.
201
[1981] 1 WLR 505.

DURESS AND UNDUE INFLUENCE 103
• thirdly, that the latter party had omitted to draw the mistake to the notice of
the former party; and
• fourthly, that the mistake must be one calculated to benefit the latter party.
If these requirements are satisfied, the court may regard it as inequitable to allow the 4.220
latter party to resist rectification to give effect to the intention of the former party
on the grounds that the mistake was not, at the time of execution of the document, a
mutual mistake.
12. DURESS AND UNDUE INFLUENCE
(a) Undue influence
Undue influence arises where a contract has been made as a result of some improper 4.221
pressure put on one of the parties. The party relying on undue influence to avoid the
contract bears the burden of proof, but a presumption of undue influence comes into
operation where a certain relationship exists. Yet, such a presumption can be rebutted
with evidence to the contrary. These relationships include those of parent and child,
husband and wife, doctor and patient and solicitor and client.
A typical example occurs where a husband induced his wife to enter into personal 4.222
guarantees with a bank in respect of a company of which both were directors and
shareholders, as in Re Lai Yin Shan, Ex p Hong Kong And Shanghai Banking Corp Ltd.202
In finding undue influence existed, the bank was put on inquiry in these circumstances,
and the Hong Kong Court of Appeal held that where it was proved that the complainant
placed trust and confidence in the other party in relation to the management of the
complainant’s financial affairs coupled with a transaction which called for explanation,
it would normally be sufficient, failing satisfactory evidence to the contrary, to discharge
the burden of proof that there had been undue influence. Yet, in a similar situation in
ABN Amro Bank NV v Mody & Another203 where the loan facilities were granted to the
husband and the wife jointly and the bank did not know that they were solely for the
use of the husband, the transaction was not affected by any undue influence that existed.
In Ahmed Altaf v Yuen Wui Engineering Ltd,204 a worker maintained that he signed the 4.223
recovery declaration in relation to a claim for employees’ compensation under undue
pressure exerted on him without any knowledge of its contents due to his illiteracy.
(b) Economic duress
The problem of duress, or economic duress to be exact, may be of more importance 4.224
in the daily activities in construction contracts. A person who enters into a contract
202
[2002] 3 HKLRD 500. See also ABN Amro Bank NV v Mody [2003] 1 HKLRD A10 and Lai Yin Shan Ex p
Hong Kong v Shanghai Banking Corp Ltd [2002] 3 HKLRD 500.
203
[2003] 1 HKLRD A10.
204
[2010] HKEC 699.

because of compulsion or coercion can avoid the contract. To constitute economic

duress and so render a contract voidable there must be pressure of such a nature as
to lead to a coercion of the will, which vitiates. There are hence circumstances in
which a contract may be avoided on the ground of economic duress. Thus, money paid
under economic compulsion can be recovered in an action for money as in Astley v
Reynolds,205 where the compulsion had to be such that the party was deprived of “his
freedom of exercising his will”.
4.225 An illustration of the operation of economic duress can be seen from seamen cases in
early times. In such cases, there were only two parties – the seaman and the captain.
In Harris v Watson,206 during the voyage the captain promised the seaman five guineas
over and above his common wages if he would perform some extra work. It was
thought that if the seaman’s claim to be paid the five guineas was supported “it would
materially affect the navigation of this kingdom”. It was feared that seamen in times
of danger might insist “on an extra charge on such a promise”. The court refused to
enforce the promise.
4.226 Of course, the operation of economic duress may appear on a more significant
scale. In Pao On & Others v Lau Yiu-Long & Another,207 a guarantee concerning a
sum of HK$5,392,800 for the sale of shares of a company owning a building under
construction was complained of as being obtained through the abuse of a dominant
bargaining position under the circumstances. No economic duress was found on the
facts of this case but the Privy Council remarked that:
“American law (Williston, op. cit.) now recognises that a contract may be avoided
on the ground of economic duress. The commercial pressure alleged to constitute
such duress must, however, be such that the victim must have entered the contract
against his will, must have had no alternative course open to him, and must have
been confronted with coercive acts by the party exerting the pressure: Williston,
op. cit. para.1603. American judges pay great attention to such evidential matters
as the effectiveness of the alternative remedy available, the fact or absence of
protest, the availability of independent advice, the benefit received, and the speed
with which the victim has sought to avoid the contract. Recently two English
judges have recognised that commercial pressure may constitute duress the
pressure of which can render a contract voidable: Kerr J in The Siboen [1976]
1 Lloyd R. 293 and Mocatta J in North Ocean Shipping Co Ltd v Hyundai
Construction Co Ltd [1978] 2 All ER 1170. Both stressed that the pressure must
be such that the victim’s consent to the contract was not a voluntary act on his
part. In their Lordships’ view, there is nothing contrary to principle in recognising
economic duress as a factor which may render a contract voidable, provided
always that the basis of such recognition is that it must amount to a coercion
of will, which vitiates consent. It must be shown that the payment made or the
contract entered into was not a voluntary act.”
205
(1731) 2 Str 915. See Pao On v Lau Yiu-Long [1979] HKLR 225. See also Atlas Express Ltd v Kafco (Importers
and Distributors) Ltd [1989] QB 833.
206
(1791) Peake 102.
207
[1979] HKLR 225.

ILLEGALITY 105
As recognised in Maskell v Horner,208 in determining whether there was a coercion of 4.227

will such that there was no true consent, it is material to inquire whether the person
alleged to have been coerced did or did not protest; whether, at the time the person
was allegedly coerced into making the contract, it did or did not have an alternative
course open, such as an adequate legal remedy; whether it was independently advised;
and whether after entering the contract it took steps to avoid it. All these matters are
relevant in determining whether it acted voluntarily or not.
In the construction context, an example where a promise to pay is avoided is given 4.228
in B&S Contracts and Design v Victor Green Publications,209 where money paid
by the employer to avoid a breach of a contract by the contractor was paid under
duress and was recoverable. In this case, a contractor agreed to erect stands for an
exhibition important to the employer. Under the contract, there was a force majeure
clause, which provided that the contractor would make every effort to carry out
the contract, but that it was subject to variation or cancellation in the event of a
strike. The contractor intended to use staff from its insolvent subsidiary in Wales,
but the workforce refused to work until its demand for £9,000 severance pay, to
which they were not entitled, was met. The workforce rejected an offer of £4,500
by the contractor who then told the employer that the contract would be cancelled
unless the employer paid the remaining £4,500, not as an advance on the contract
price but as an additional sum to meet the workers’ demands. The employer paid
the sum and the contract was performed but the employer deducted £4,500 from the
contract price before it was paid. The Court of Appeal in England and Wales found
that the cancellation of the contract would have caused such serious damage to the
economic interests of the employer that it had no choice but to pay the sum, and so
it was paid under duress.
13. ILLEGALITY
(a) General
As a general principle, it can be said that the courts will not enforce contracts that are 4.229
tainted with illegality. The notion of illegality covers a wide range of factors. These
factors have little in common and they are more concerned with public policy where
the public interest prevails over whatever may be the intentions of the parties.
There can be many examples of an illegal contract. A contract to commit a crime is 4.230
clearly illegal, so is a contract for giving false evidence and one to oust the jurisdiction
of the courts. A contract to procure the marriage of another at a fee is illegal. A contract
to induce a woman to become one’s mistress is unenforceable.
208
[1915] 3 KB 106. See Re Vong Pak Cheong, Ex p China International Water & Electric Corp [2004] HKEC 443.
See also Ying Ho Co Ltd v Secretary for Justice (2004) 7 HKCFAR 333.
209
[1984] ICR 419. See Emeraldian Ltd Partnership v Wellmix Shipping Ltd [2010] EWHC 1411 (Comm).

(b) Court’s position
4.231 As in Saunders v Edwards,210 where issues of illegality are raised, the court has to
choose between two unacceptable positions. It is unacceptable that any court should
aid or lend its authority to a party seeking to enforce an agreement which the law
prohibits; and it is equally unacceptable that the court should, on the simple indication
of unlawfulness affecting any aspect of a transaction, refuse all assistance to a party,
no matter how serious the party’s loss or how disproportionate the loss is in regards to
the unlawfulness of the party’s conduct.
(c) Effect based on weight of illegality
4.232 The effect of illegality varies according to the weight of the illegality as viewed by
the court. In general, in the case in which one party to a contract seeks performance
of an obligation under the contract by the other party, it is now well established that
the contract entered into with the object of committing an illegal act is unenforceable;
if both parties enter that contract with that objective, neither can enforce it. Yet, if
one of the parties does so and the other is unaware of the illegal purpose, the party
whose object is illegal cannot enforce the obligation of the other. In Hall v Woolston
Hall Leisure Ltd,211 Gibson LJ said that in two types of cases it was well established
that illegality rendered a contract unenforceable from the outset – one was where the
contract was entered into with the intention of committing an illegal act; the other was
where the contract was expressly or implicitly prohibited by statute. Thus, a party who
is innocent in relation to the illegality will normally be able to enforce the contract.
(d) Quantum meruit claim
4.233 A claim for quantum merit may however be allowed as in Mohamed v Alaga & Co,212
where, in relation to a contract for the introduction of immigration clients contrary to
the practice rules for solicitors, the middleman was without knowledge of such rules.
In that case, Lord Bingham CJ said:
“But the preferable view in my judgment is that the plaintiff is not seeking to
recover any part of the consideration payable under the unlawful contract, but
simply a reasonable reward for professional services rendered. I accept that as an
accurate description of what on this limited basis the plaintiff is, in truth, seeking.
It is furthermore in my judgment relevant that the parties are not in a situation
in which their blameworthiness is equal. The defendant is a solicitors’ firm and
bound by the rules. It should reasonably be assumed to know what the rules are
and to comply with them. If, in truth, it made the agreement as alleged, then
it would seem very probable that it acted in knowing disregard of professional
rules binding upon it. By contrast the plaintiff, on the assumption made (which
210
[1987] 1 WLR 1116. See Tang Wai Cho v Tang Wai Leung [2010] HKEC 691.
211
[2001] 1 WLR 225. See Tsang v Cathay Pacific Airways Ltd [2002] 2 HKLRD 677. See also Townsend v
Persistence Holdings Ltd [2008] UKPC 15.
212
[2000] 1 WLR 1815. See Homechant Ltd v Incorporated Owners of Rich Building [2010] HKEC 221.

ILLEGALITY 107
I have no difficulty in accepting), was ignorant that there was any reason why
the defendant should not make the agreement which he says was made. In other
commercial fields, after all, such agreements are common.
In any event, however, there is a crucial distinction between a case in which a

plaintiff is in effect suing on a contract of loan and a case in which the plaintiff is
not suing on any contract but simply for the value of work done. On that limited
basis I would for my part allow the appeal and reinstate the action to the extent
of permitting the plaintiff to pursue a quantum meruit claim for reasonable
remuneration for professional services rendered.”
(e) Enforceability of illegal contract

Where a contract is not prohibited by statutes but is performed in an illegal manner, it 4.234
can still be enforceable by the party who is not a party to the illegal performance, as in
Archbolds (Freightage) Ltd v Spanglett Ltd,213 but not by the party who performs the
contract illegally, as in Anderson Ltd v Daniel.214 In some cases the penalty provided in
statutes may be considered as sufficient sanction, so that the contract may be enforced
by both innocent and guilty parties, as in St John Shipping Corporation v Joseph Rank
Ltd.215 On the whole, the courts tend to adopt a pragmatic approach to these problems.
In the context of the construction industry, there are likewise instances where a 4.235
contract may be affected by illegality rendering it void and unenforceable. For
example, in Bostel Brothers Ltd v Hurlock,216 a claim for the balance of the repair
works done to a house in excess of the extent of a licence failed, since the prohibition
on doing unlicensed work was absolute irrespective of the state of the builder. In
Talyor v Bhail,217 a claim by a contractor failed where he carried out repair works for
a school, which were covered by insurance, and agreed to inflate the price by £1,000
when told by the headmaster of the school that, if the contractor inflated the price, he
would see that the contractor got the work. The Court of Appeal in England and Wales
observed that the contract here could not be identified and enforced separately from
the fraudulent arrangements of which it had formed an integral part.
In the Hong Kong case of James Lau & Associates Ltd v Tom Ip & Partners Architects, 4.236
Engineers & Development Consultants Ltd,218 the plaintiff over the years was engaged
by the defendant on many construction sites around Hong Kong for the provision of
professional services for design works and site supervision. The plaintiff’s case was
that it had submitted invoices totalling HK$2,816,736.31 for these types of service,
which remained unpaid. Among such services were those classes of supervision
213
[1961] 1 QB 374. See Tiu Sum Fat v Shun Sing Development Ltd [2010] 1 HKLRD 553.
214
[1924] 1 KB 138. See Shahdan Ltd v Rich Life International Ltd [2008] HKEC 2085.
215
[1957] 1 QB 267. See New Hall Ltd v Yiu Wing Sau [2003] HKEC 740.
216
[1949] 1 KB 74. See Artlane Designers & Decorators (Scotland) Ltd v Ellis 1957 SLT 229.
217
(1995) 50 ConLR 70.
218
[2001] HKCFI 710.

required by the Building Authority under the Buildings Ordinance (Cap 123), labelled
as Class A and Class C, which required different levels of expertise and qualifications.
There was no dispute either that the plaintiff provided these services or that the plaintiff
had been paid for these services in most of the contracts. The major outstanding
payment related to the services rendered at one location. The defence submitted that
the contract under which the supervision was provided was tainted with illegality and
therefore unenforceable. Under the provisions of s 17(1) of the Buildings Ordinance,
the authorised person was to employ a suitably experienced person independent from
the contractor who was to be resident full time on site during the carrying out of the
excavation works to check that the works were being carried out as specified and, prior
to seeking consent, the name and professional details of the person proposed was to be
submitted to the Building Authority for agreement. The objection being taken was that
in respect of that project, the contractor was a company, which was a family business
run by the plaintiff’s personnel, and the employees of the plaintiff acted in the Class
C supervisory capacity. The court held that it was the defendant who, as authorised
person, employed the supervisors, and the plaintiff in truth was suing for services
reasonably, properly and professionally provided. As such, the defendant was held
liable for all invoices regarding such supervision.
4.237 In Sit Kam Tai v Gammon Iron Gate Co Ltd,219 the defence of illegality was raised
in relation to a cartel agreement in respect of steel gates supplied to the Hong Kong
Housing Authority. As a result of the cartel, there was no genuine competition
amongst the approved suppliers of gates to the Hong Kong Housing Authority. The
suppliers predetermined the lowest tender price. The closed market of the approved
gate suppliers could not function at all. They made the tendering process a farce. But
the Hong Kong Housing Authority and the main contractors were kept in the dark. The
Hong Kong Housing Authority and the main contractors thought that the tendering
process was working well and that the market forces were in operation. They were also
misled into believing that there was genuine competition in a closed market. Relying
on North Western Salt Co Ltd v Electrolytic Alkali Co Ltd,220 the plaintiff argued that
forming a cartel is not against the criminal law unless there is dishonesty or other
aggravating factors. The court rejected the plaintiff’s claim on the ground of public
policy.
219
[2010] HKEC 1207.
220
[1914] AC 461.

1. EXTENT OF OBLIGATIONS
Once the parties to a contract have agreed in the same terms on the subject matter, 5.001
neither can, generally speaking, rely on some unexpressed qualification or reservation
to show that it had not in fact agreed to the terms to which it had objectively appeared to
agreed. Subjective reservations of one party therefore do not prevent the incorporation
of the terms in the formation of the contract. On the other hand, a contract will not
be concluded, unless the parties are agreed as to its material terms. There must be
consensus ad idem.1
Although a valid contract has been made, it may still be necessary to ascertain the exact 5.002
language and its meaning in the contract so as to determine the extent of obligations.
This may involve a dispute as to the exact terms as expressed or incorporated in the
contract. This is a matter of proof. The court may also be involved in ascertaining the
sense and meaning that should be attributed to the terms in the circumstances. This is
a matter of interpretation of the contract.
Moreover, the contents of a contract are not necessarily confined to those that appear 5.003
on its face. To concentrate solely on the express language of the contract may run the
risk of ignoring the background of commercial or local usage whose implications have
been tacitly assumed. On top of those express terms, there are also terms implied into
the contract, whether by necessary inference from agreement, by operation of law or
by legislation, that significantly impact on the extent of the obligations between the
parties.
2. EXPRESS TERMS
(a) General principles
Where a contract is made orally only, the ascertainment of its terms is a mere question 5.004
of fact as to what the parties said. In Smith v Hughes,2 the court was invited to decide
whether there was an oral contract of sale of “good oats” or “good old oats”. In
Statoil ASA v Louis Dreyfus Energy Services LP,3 the court decided that a settlement
agreement was found superseded by an oral agreement made during a telephone
conversation.
1
Hartog v Colin & Shields [1939] 3 All ER 566. The defendants in this case offered for sale to the plaintiffs
hare skins, but by mistake offered them the skins at so much per pound instead of so much per piece. The
previous negotiations between the parties had proceeded on the basis that the price was to be assessed as so
much per piece as was usual in the trade. The plaintiffs purported to accept the offer and sued for damages
for non-delivery. Singleton J determined that this was a mistake on the part of the defendants and that
anyone with any knowledge of the trade must have realised that there was a mistake. Hence the plaintiffs
must have known that the offer did not express the true intention of the defendants. The contract was
therefore void.
2
(1871) LR 6 QB 597.
3
[2008] All ER (D) 116 (Sep).

112 CONTENTS OF CONTRACT
5.005 Yet, whether the parties have reached agreement on the terms is not determined by
evidence of the subjective intention of each party. It is largely determined by making
an objective appraisal of the exchanges between the parties.4 As per Blackburn J:5
“If, whatever a man’s real intention may be, he so conducts himself that a
reasonable man would believe that he was assenting to the terms proposed by the
other party, and that other party upon that belief enters into the contract with him,
the man thus conducting himself would be equally bound as if he had intended to
agree to the other party’s terms.”
5.006 For construction contracts in Hong Kong, quite a number of those subcontracts are still
made orally, notwithstanding that millions of dollars are in issue. Such cases give rise to
heated disputes as to what the express terms of the contracts are. It may well be noticed
that the resolution of these disputes normally takes place some years after the incident
of contract and perhaps with some of the personnel involved having already left the
picture. This is what happened in Grand Choice Construction Co Ltd v Dillingham
Construction (HK) Ltd,6 where dispute arose between the main contractor and the
subcontractor in relation to an expansion project for the Hong Kong International
School, where it was alleged that the provisions of the main contract were expressly
agreed to be binding on the subcontractor and payment to the subcontractor would
be upon receipt of payment by the main contractor from the employer. As one of the
people involved in the subcontract had left the main contractor, the court had to deal
with the matter based on what it was alleged that he said or agreed without hearing
from him. In the circumstances, the court held that no such express terms had been
incorporated into the contract. Likewise, in the case of another context of Professional
Associates v Polytek Engineering Co Ltd,7 for example, an architect firm had to claim
for its fees for service provided to a subsequently abandoned hotel project based on
an oral contract, since the joint-venture company for the project had not been formed
before the project was abandoned.
5.007 In Taigo Ltd v Kwok Kwai Chuen Simon t/a Jade Top Design & Engineering Co,8 the
Hong Kong Court of Appeal was asked to decide whether there was agreement on oral
terms for payment to be made after approval by the quantity surveyor of the metal
parts of a racking system and locking pins, the final measurement of the weight of
metal parts actually delivered, and the completion of whole of the building projects.
There were contracts, written in Chinese, between the parties, providing for payment
to be made within 30 days of invoice. The court observed that these alleged oral terms
undermined, entirely, the written terms of the contracts and evidence of the alleged
oral contract would be inadmissible.
4
Shogun Finance Ltd v Hudson [2003] 1 WLR 1371. It should be noted, however, that the objective test is subject
to the limitation that it does not apply in favour of a party who knows the truth. See also Etacol (Hong Kong) Ltd
v Sinomast Ltd [2007] HKEC 113.
5
Smith v Hughes (1871) LR 6 QB 597 at 607.
6
(unrep, HC Con List 13 of 1989). See also its Court of Appeal decision Grand Choice Construction Company
Limited v Dillingham Construction (HK) Limited [1991] HKEC 64.
7
[1986] HKLR 20.
8
[2005] HKCU 933.

EXPRESS TERMS 113
The issue of express oral terms may also arise from collateral contracts or oral 5.008
variations to existing contracts.9
Where a contract is, or appears to be, reduced in writing, the court will not normally 5.009
look beyond the writing to determine what the express terms are. Neither of the parties
is allowed to put forward extrinsic evidence, ie evidence external to the document such
as what was said or intended at the time of the contract, to vary or qualify the written
document. This rule that parol evidence cannot be given to contradict the terms of a
written agreement is known as the parol evidence rule.10
In Consort Engineering Co Ltd v Leung Wai Ying alias Tommy Leung trading as 5.010
Kin Ming Company,11 in respect of a written subcontract between a main contractor
and an electrical works contractor, a statement made to the main contractor after the
signing of the subcontract that low voltage work would not be included was found to
be extrinsic evidence and, as such, could not be accepted as part of the subcontract.
Another illustration of the operation of the parol evidence rule is in the case of Yeung
Wai Hon v Ho & Partners Architects Engineers & Development Consultants Ltd
[2002] HKLRD 425, where supervisors employed to work on a construction project,
with their written contracts requiring them to work “up to the substantial completion
day of the project” claimed that the true agreements reached by the parties orally were
that the respective contracts were all for a fixed term, ie up to the tentative substantial
completion date. The court held that the parol evidence rule prevented such alleged
oral agreements from being taken into account in finding out the agreements between
the parties. However an exception to this rule is collateral contract. As noted in Paul
Y Management Ltd v Eternal Unity Development Ltd,12 the parol evidence rule only
applies where the parties to an agreement reduce it to writing, and agree or intend that
the writing shall be their agreement. It has no application until it is first determined
that the terms of the parties’ agreement are wholly contained in the written document.
Whether the parties did so agree or intend is a matter to be decided by the court upon
consideration of all the evidence relevant to this issue. Thus, even though the parties
intended to express the whole of their agreement in a particular document, extrinsic
evidence may nevertheless be admitted to prove a contract or warranty collateral to
that agreement.13 The reason is that the parol agreement neither alters nor adds to the
written one, but is an independent agreement. Such evidence is certainly admissible in
respect of a matter on which the written contract is silent.
9
Fung Cheung formerly trading as Cheung Kee Construction Co v Kwan Lee Construction Co Ltd [1995]
HKEC 217.
10
See Cheer Giant International Ltd v Wo Ming Engineering Ltd [2007] HKEC 777. See also Wai Kam Chiu v
Chim Siu Fan [2008] HKEC 1071, where Hon Cheung JA noted at para 18 that:
“In a number of older cases it was stated that evidence of such a contract or warranty must not contradict the
express terms of the written contract. However, more recently, the courts have admitted evidence to prove
an overriding oral warranty or to prove an oral promise that the written contract will not be enforced in
accordance with its terms.”
11
(unrep, DCCJ No 11356 of 2001).
12
[2008] HKEC 1359. In this case, the Hong Kong Court of Appeal allowed the appeal against the grant of
summary judgement in respect of a loan agreement that was only one of the agreements entered into between the
parties.
13
Wai Kam Chiu v Chim Siu Fan [2008] HKEC 1071.

5.011 The rule also applies to cheques which are in nature an unconditional order to the bank
for payment. In a leading case concerning the bounced cheques of SY Chan Ltd v Choy
Wai Bor,14 the defendant issued a cheque, drawn in favour of the plaintiff. However,
the defendant later countermanded payment and the cheque was not honoured. When
P commenced action to recover the sum due, the defendant denied the contract on the
terms of the cheque and argued that there was an oral agreement between the parties
that the cheque would not be presented for payment at all. Such extrinsic evidence was
held inadmissible to prove that the terms of payment differed from those expressed in
writing on the cheque.
5.012 This rule is not confined to oral evidence but extends to cover extrinsic matter in
writing such as drafts, preliminary agreements and letters of negotiations.
5.013 The operation of the parol evidence rule is subject to several important exceptions.
Extrinsic evidence is admissible to prove that the contract is invalid for reasons such as
misrepresentation, mistake, lack of consideration or non est factum.15 Extrinsic evidence
is also admissible to prove collateral agreements or warranties, to establish custom or
trade practice or to aid construction of the contract. In Smith v South Wales Switchgear
Ltd,16 the purchase note for the annual maintenance work at a factory stated that it was
to be subject to “our General Conditions of Contract 24001 obtainable on request”,
but there were three versions of such conditions of contract all numbered 24001. No
request was made. When a dispute arose as to which version was incorporated into
the contract, if at all, the court took into account evidence regarding the version that
was reasonably expected to be supplied if requested and held that a reference in a
contractual document to the contract being subject to general conditions “available
on request” was sufficient to incorporate into the contract the terms contained in the
current edition of such conditions.
5.014 There can be further complications, where a contract is made partly orally and partly
in writing. It is not always easy to decide whether the parties have or have not intended
to reduce their agreement to the precise terms of a written agreement. An oral contract
collateral to a written agreement with the sole effect being to vary or add to the terms
of the written contract is viewed with suspicion by the law and it must be strictly
proved. Not only the terms of such contracts, but the very existence of an intention
to contract on the part of all parties involved muse be clearly shown. This approach
to collateral contract has been applied by the Privy Council in Universal Dockyard
14
[2001] 3 HKLRD 145. See also Mightfort Engineering (HK) Ltd v Chester Construction Co Ltd [2006] HKEC
1123.
15
In Cheer Giant International Ltd v Wo Ming Engineering Ltd [2007] HKEC 777, the defendant asserted that, as
he did not understand English, he was not aware that the content of the contract was not in line with their verbal
agreement. The court rejected this defence, noting that:
“This is, in effect, a claim of non est factum. In considering such a plea in the case of Wing Hang Bank Ltd v
Liu Kam Ying [2002] 2 HKC 257, Ma J, as he then was, rejected such a plea, coming from a man of full age
and capacity on the basis that if he did not read the terms, that was negligent on his part and the defence of non
est factum was unavailable.”
16
[1978] 1 WLR 165. See also Glory Duty Investment Limited v Secretary for Justice (unrep, HCMP No 1968 of
1998) (Findlay J).

EXPRESS TERMS 115
Ltd v Trinity General Insurance Co Ltd17 and also by the Hong Kong Court of Appeal
in Bank of India v Surtani Murlidhar Parmanand t/a Ajanta Trading Corp.18 In Man
Keung Co Ltd v Prosperity Machinery Manufacturers Ltd,19 the court rejected the
suggestion that there was a collateral contract whereby in consideration of the buyer’s
entering into the contract with the seller, the seller agreed that the goods supplied
under the contract would be of the British Standard and that the seller would supply
a certificate to show that the goods complied with the British Standard. The court
observed that, even if there were discussions regarding British Standard at the time of
contract, the parties did not intend to create a contractual relationship as such by way
of a collateral contract and that, if the parties had wanted a contract for the supply of
goods meeting the British Standard, they would have done so by expressly stipulating
such requirement in the purchase orders.
In Chan and Wong Ltd t/a Luen Wah Machine Welding & Iron Works v Vicform Co 5.015
Ltd,20 a collateral, oral agreement regarding settling the contract price with a lesser
payment in a sale and purchase contract of stainless metal doors was rejected. In
Brilliant (Man Sau) Engineering Ltd v Prosperity Construction and Decoration Ltd,21
the court refused to find an oral agreement and a collateral guarantee in relation to
payment of refurbishment works to a hotel to the sub-subcontractor.
The terms of a contract may be contained in more than one document. The parties may 5.016
purport to incorporate one document in another by express reference. For example,
this may occur where there is a clause in the conditions of contract incorporating
the terms in the bills of quantities into a construction contract. In this regard, the
general rule is that the terms of a contract must be brought to the attention of the
other party before the contract is formed. As in Olley v Marlborough Court Ltd,22 a
notice on the wall of a hotel room seeking to absolve the hotel from liability for theft
was ineffective, as the notice was at the reception desk before entering the room. Yet,
where a contract is in writing, a failure to actually read its terms and conditions does
not, in itself, make those terms and conditions inapplicable. In some types of standard
contracts, they may belong to a class of terms and conditions which a party receiving
them will expect to be contractual conditions.23
17
[1989] 2 HKLR 160.
18
[1994] 1 HKC 7.
19
(unrep, HCA No 12158 of 1997) (Recorder Chan SC).
20
(unrep, DCCJ No 4023 of 2006). See other examples as Tung Kee Garden Horticulture Ltd v Wong Wang Tat
t/a Tsui Park Garden (unrep, DCCJ No 2699 of 2005) and Leyland Engineering Ltd v Winfast Engineering Ltd
[2006] HKEC 1727. See also Wealthy Gate Architects & Associates Ltd v The SYW Trustee Holdings Corporation
[2006] HKEC 627.
21
[2006] HKEC 1244. See also BSC Interior Contract and Engineering Co Ltd v Shinta Ltd [2008] HKEC 1601.
22
[1949] 1 KB 532. See also Orient Technologies Ltd v A Plus Express (HK) Ltd [2004] 4 HKC 72.
23
See the decision in the case of Flying Transportation (Macau) Ltd v Pacific Air Freight (Hong Kong) Ltd(unrep,
HCA No 6187 of 2000) where it clearly accepts that “freight forwarding contracts and airway bills are documents
of a class which a party receiving them would expect there were contractual conditions”. In such situations, it is
no answer for defendants to say that they did not read either the notice drawing their attention to the conditions
or the conditions themselves, since, if a businessman chooses to conduct himself without knowing the terms of
his contract, that is his problem. See also Federal Express Pacific Inc v Tung Sau Kam [2008] HKEC 467.

5.017 In A Davies & Co (Shopfitters) v Old (William),24 the main contractor‘s order was
mainly typewritten on a standard printed form and below the signature were the
words “this order is subject to the terms and conditions set forth overleaf ”. One of
the various printed conditions overleaf stated that the main contractor was not to be
liable to the nominated subcontractor to pay any moneys, which had not been paid
by the employer. The nominated subcontractor accepted the order for work to be
done in accordance with the tender. On the employers becoming insolvent and not
paying for certain work done by the nominated subcontractor, the main contractor
successfully denied that it was obliged to pay the nominated subcontractor under the
terms of the contract. However, where what is in issue is of a particularly extraneous
or wholly unusual nature, there needs to be reasonable effort to bring such conditions
to the notice of the other party. In this case, whether or not sufficient notice has
been given is a question which also involves broad considerations of fairness and
reasonableness, having regard to the nature and effect of the conditions and the
circumstances relied upon as constituting notice that the contract is to contain a
condition of such a nature and effect. For instance, in the case a holidaymaker
required to sign a long small print document in order to hire a family car at an
airport, if the relevant document proved on close reading to contain a provision of
an extraneous or wholly unusual nature, it is possible that other arguments can also
be advanced, such as that the nature or effect of the document had been impliedly
misrepresented.
5.018 In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd,25 a delivery note
stating that there was to be a holding fee of £5 per photograph per day for transparencies
not returned in time was held as not forming part of the contract.
5.019 In the context of the construction industry, there is a whole list of express terms that
are of particular relevance since they are not uncommonly incorporated into such
contracts for a variety of reasons and purposes. These include exemption or exclusion
clauses, liquidated damages clauses, time bar clauses and forfeiture clauses.
(b) Exemption clauses
5.020 Exemption clauses are an integral part of commercial contracts which regulate
business dealings. Commercial contracts are negotiated between parties capable of
looking after their own interests and of deciding how risks inherent in the performance
of various kinds of contract can be most economically borne, generally by insurance.
5.021 With the use of standard form contracts, such commercial agreements can be
regarded as a formalised system of delineating rights and duties, with exemption
clauses performing the role of assigning and allocating understood and recognisable
risks, with a view that the other party concerned should take necessary precautionary
measures.
24
113 SJ 262.
25
[1989] QB 433.

EXPRESS TERMS 117
An exemption clause may purport to limit or reduce the otherwise obligation toward 5.022
a party, for example, by limiting liability to wilful neglect or default or by binding
a purchaser of property to take it up on an “as-is” basis irrespective of the errors of
descriptions previously given. An exemption clause may purport to exclude or restrict
the right of a party in case of a breach of contract, for example, by taking away the
right to rescind the contract. Also, an exemption clause may exclude or limit the duty
towards the full indemnity of the loss, for example, by limiting the amount of damages
recoverable.
For exemption clauses to be effective, they must be clear and unambiguous. In Photo 5.023
Production Ltd v Securicor Transport Ltd,26 for a modest charge, the defendant
contracted with the plaintiff to provide a night-patrol service at the plaintiff ’s factory.
An employee of the defendant who had been satisfactorily employed by them for some
three months deliberately started a small fire in the factory and the fire got out of control
and burned down the factory. Although the starting of the fire was deliberate, it was not
intended to destroy the factory. The contract contained an exemption clause excluding
liability on the defendant for default of any employee of the defendant unless such
default could have been foreseen and avoided by the exercise of due diligence on the
part of the defendant. The exemption also excluded the liability for any loss suffered
through fire or any other cause except being solely attributable to the negligence of
the defendant’s employees acting within the cause of their employment. Before the
House of Lords, it was held that the exemption clause was effective in excluding
the defendant from liability. This decision was reached through consideration of the
wording of the clause and the surrounding circumstances, including the very modest
charge for the service. Thus, whether an exclusion clause is apt to exclude or limit
liability is a matter of construction of the contract and, generally, parties to a contract,
when they bargain on equal terms, should be at liberty to apportion liability in the
contract as they see fit.
In the Hong Kong Court of Final Appeal case, Bewise Motors Co Ltd v Hoi Kong 5.024
Container Services Ltd,27 there was an exemption clause excluding liability otherwise
than for wilful neglect or default in the contract for the delivery of cars to be shipped
in containers. The cars were stolen from the container depot due to negligence. It was
held that, given the plain meaning of the clause, there was no compelling reason to
depart from this construction, as there was no resulting absurdity or countervailing
rules or principles of law. Under the circumstances, even the expectations of honest
men were not permitted to be used as a tool of construction.
26
[1980] AC 827.
27
[1998] 2 HKLRD 645. In this case, Bohkary PJ adopted the view of Taylor LJ in Circle Freight International Ltd
v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427 at 433:
“... it is not necessary to the incorporation of trading terms into a contract that they should be specifically set
out provided that they are conditions in common form or usual terms in the relevant business. It is sufficient if
adequate notice is given, identifying and relying upon the conditions and they are available on request. Other
considerations apply as if the conditions or any of them are particularly onerous or unusual.”

5.025 Thus, in a contractual setting, the effectiveness or otherwise of an exemption clause,

especially involving a commercial contract where there is no inequality of bargaining
power, is purely a matter of its construction.28
5.026 The effectiveness of operation of exemption clauses is controlled by legislation in
certain areas29. The key legislation in Hong Kong is the Control of Exemption Clauses
Ordinance (Cap 71) and the Unconscionable Contracts Ordinance (Cap 458). In
relation to business liability, s 7 of the Control of Exemption Clauses Ordinance
prohibits the exclusion or restriction of liability for death or personal injury resulting
from negligence and requires all exclusion or restriction of other liability for negligence
to satisfy the requirement of reasonableness. The reasonableness test, as detailed in s 3
and Sch 2 of the Control of Exemption Clauses Ordinance, requires the consideration
of factors such as relative bargaining power, the inducement given to agreement, the
notice of the terms and the extent of exclusion or restriction intended by the clause.
Likewise, in a more general context, under s 5 of the Unconscionable Contracts
Ordinance,30 in respect of a contract for the sale of goods or supply of services in
which one of the parties is the consumer, the court may refuse to enforce the contract
or any part of it or limit its application where the court finds the contract or any part
of the contract to have been unconscionable under the circumstances relating to the
contract at the time it was made.
5.027 In determining whether a contract or part of a contract is unconscionable under the
circumstances relating to the contract at the time it was made, s 6 of the Unconscionable
Contracts Ordinance (Cap 458) entitles the court to regard factors similar to those in
the Control of Exemption Clauses Ordinance (Cap 71) regarding reasonableness.31
5.028 As to the interaction of exemption clauses and the statutory control in practice in
the construction industry regarding defects, a term which excludes all liability for
damages and merely provides for a limited defects correction obligation for a short
28
See the Hong Kong Court of Final Appeal decision in Carewins Development (China) Ltd v Hecny Shipping Ltd
[2009] 5 HKC 160; [2009] 3 HKLRD 409. As remarked by Ribeiro PJ:
“The correct approach in this context was summarised by Lord Wilberforce in Ailsa Craig Fishing Co Ltd
v Malvern Fishing Co Ltd, in the following terms: ‘Whether a clause limiting liability is effective or not is
a question of construction of that clause in the context of the contract as a whole. If it is to exclude liability
for negligence, it must be most clearly and unambiguously expressed, and in such a contract as this, must be
construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further
qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I
think that the appellants have striven to do. The relevant words must be given, if possible, their natural, plain
meaning.’ ... Two related aspects of the principle so expressed should be underlined. First is the emphasis it
lays on the requirement that the exempting words be devoid of any ambiguity, with the clause being construed
against the person relying on the exemption. Secondly, the principal stresses the need to construe the clause in
the context of the contract as a whole, taking into account its nature and object. As Lord Wilberforce pointed
out in the Suisse Atlantique case, the principle is “that the contractual intention is to be ascertained ... not just
grammatically from words used, but by consideration of those words in relation to commercial purpose ...”
29
See May Tik Decoration Co Ltd v Ronacrete (Far East) Ltd [2009] HKEC 670. See also Yau Hing Machinery Ltd
v Kin Shing Construction Co Ltd [2008] HKEC 1421, in relation to exemption clauses in an agreement for rental
of machines. See, however, Fairlite Industries Ltd v Fosroc Hong Kong Ltd [2008] HKEC 397.
30
See Shum Kit Ching v Caesar Beauty Centre Ltd [2003] 3 HKC 235.
31
In deciding whether a contract or part of a contract was unconscionable or not for the purpose of s 5 of the
Unconscionable Contracts Ordinance (Cap 458), the court must have regard to all circumstances relevant to that
issue and also take into account the factors set out in s 6(1)(a) – (e) of the Unconscionable Contracts Ordinance
(Cap 458) as appropriate.

EXPRESS TERMS 119
period following the completion of the contract will usually be found not to satisfy
the reasonableness test laid down in the Control of Exemption Clauses Ordinance
(Cap 71),32 as supported by a number of decisions including Rees Hough Ltd v Redland
Reinforced Plastics Ltd33 where the repair obligation only applied if defects were
notified within three months of delivery; Charlotte Thirty Ltd v Crocker Ltd (1990)
ConLR 46, where the warranty period was six months; Edmund Murry Ltd v BSP
International Foundations Ltd,34 where the repair or replacement was to be within six
months of delivery; and British Fermentation Products Ltd v Compare Reavell Ltd
[1999] BLR 352, where condition 11 of the Model Form of General Conditions Form
C (1975 edition) was upheld despite a limitation of remedies to making good within
12 months after delivery because other conditions protected the purchaser. The overall
requirement is for the court to look at all the circumstances prevailing at the date of
the contract and take an overall view as to the term’s reasonableness.35 Thus, a party’s
knowledge of the existence of the exemption during the negotiations and an ability
to take legal advice as to the meaning and extent of the exclusion before committing
itself to the contract are factors that may tell against a court finding a term to be
unreasonable. Ordinarily, negotiated terms will not be held to be unreasonable when
negotiated by businesspeople. Yet, as in Watford Electronics Ltd v Sanderson CFL
Ltd,36 a term is capable of being held unreasonable, even if it has been negotiated, if it
is so unreasonable that its meaning and effect cannot properly have been understood.
(c) Liquidated damages clauses

Parties to a contract may agree beforehand what sum shall be payable by way of 5.029
damages in the event of breach. For example, a contractor agrees that it will pay
HK$1,000 a day every day when the work remained unfinished after the contractual
date for completion.
For a liquidated damages clause to be valid, it cannot be in truth of the nature of a 5.030
threat in terrorem, ie acting as a mere security to the promisee that the contract will
be performed. In such a situation, whatever label being given, the stipulated sum
becomes a penalty. Thus, whether a clause is one for liquidated damages or one for
a penalty is of prime importance as to its legal validity in effect. The distinction
between them depends on the intention of the parties, which should be gathered from
the whole of the contract: if the intention is to secure performance of the contract
by the imposition of a fine or penalty, then the sum specified is a penalty; but if the
intention is to assess the damages for breach of contract, it is liquidated damages. As
remarked in Dunlop Pneumatic Tyre Co v New Garage and Motor Co,37 the label of
32
See also Mostcash plc and others v Fluor (No 2) [2002] All ER (D) 154 (Apr).
33
(1984) 2 ConLR 109.
34
(1992) 33 ConLR 1.
35
In determining whether the relevant exclusion is fair and reasonable, regard is to be had to the circumstances
which were, or ought to reasonably have been, known by the parties when the contract was made. Thus, a party’s
knowledge of the existence of the exclusion during the negotiations and an ability to take legal advice as to the
meaning and extent of the exclusion before committing itself to the contract may however be factors which can
tell against a court granting relief.
36
[2001] BLR 143.
37
[1915] AC 79.

“penalty” or “liquidated damages” that the parties affixed to the clause, though not
to be disregarded in total, was not conclusive and the court still looked behind the
label to see whether the sum stipulated was a genuine forecast of the probable loss.
Thus, whether a sum stipulated is a penalty or not is a question of construction to be
decided upon by the terms and inherent circumstances of each particular contract,
judged at the time of the making of the contract.38 In Dunlop Pneumatic Tyre Co
v New Garage and Motor Co, the plaintiff supplied tyres to the defendant under
an agreement by which the defendant bound itself to sell such tyres in a stipulated
manner only and to pay £5 by way of liquidated damages for every tyre sold or
offered in breach of such an agreement. Various variants on that have developed in
construction cases.39
5.031 The case of Robophone Facilities Ltd v Blank40 explains the function and purpose
that a liquidated damages clause can serve. That case concerned a rental contract
for telephone recording machines with a clause providing that if the rental
agreement was terminated the hirer was to pay all outstanding accrued rentals
due and “also by way of liquidated or agreed damages a sum equal to 50 per cent
of the total of the rentals which would thereafter have become payable”. This was
held, by a majority of two to one in the Court of Appeal in England and Wales,
to be valid as a liquidated damages clause, since the figure of 50 per cent was
supported by calculation as estimates of loss and damage. In his judgment Diplock
LJ observed that:
“It is good business sense that parties to a contract should know what will be the
financial consequences to them of a breach on their part, for circumstances may
arise when further performance of the contract may involve them in loss. And
the more difficult it is likely to be to prove and assess the loss which a party will
suffer in the event of a breach, the greater the advantages to both parties of fixing
by the terms of the contract itself an easily ascertainable sum to be paid in that
event. Not only does it enable the parties to know in advance what their position
will be if a breach occurs and so avoid litigation at all, but if litigation cannot
be avoided, it eliminates what may be the very heavy legal costs of proving the
loss actually sustained which would have to be paid by the unsuccessful party.
The court should not be astute to descry a “penalty clause” in every provision of
a contract which stipulates a sum to be payable by one party to the other in the
event of a breach by the former.”
5.032 It may be noted, as in this case, that a liquidated damages clause may be of particular
help in saving costs since it often arises in situations where proof of damage is
extremely complex, difficult or expensive.
38
See, for example, Chow Kee v Transway Construction & Engineering Ltd [2006] HKEC 2314. The material
time is not at the time of the breach. See also Public Works Commissioner v Hills [1906] AC 368 and Webster v
Bosanquet [1912] AC 394.
39
Bramall & Ogden Ltd v Sheffield City Council (1983) 29 BLR 76.
40
[1966] 1 WLR 1428. See also Seng Sun Development Co Ltd v Hong Kong Resources Investment Co Ltd [2009]
HKEC 1332, where the court upheld liquidated damages for late delivery at RMB100,000 per month.

EXPRESS TERMS 121
The onus of showing that such a stipulation is a penalty clause lies upon the party 5.033
who is suing upon it.41 The terms of the clause may themselves be sufficient to
give rise to the inference that it is not a genuine estimate of damage likely to be
suffered but is a penalty. It will be held to be a penalty if the sum stipulated for is
extravagant and unconscionable in amount in comparison with the greatest loss that
could conceivably be proved to have followed from the breach.42 This inference is
yet rebuttable on evidence to the contrary. In Clydebank Engineering Co v Don Jose
Yzquierdo y Castaneda,43 the question of time of delivery of torpedo boat destroyers
to be built was of utmost importance since the government of Spain at the time was
in the position that very significant interests might be jeopardised if its maritime
strength was not adequate to meet the contingencies with which it was threatened.
The defendant itself named a sum of £500 per week and the bargain was closed on
these terms. The defendants were thus placed in the position that, whatever the actual
damage was, only £500 a week could be claimed against them. Taking into account the
background, the House of Lords held that the clause was not a general penalty clause,
but a specific agreement that sums of money, graduated according to time, were to be
paid as penalties for delays in delivering these vessels.
Indeed, it seems impossible to lay down an abstract rule as to what would render 5.034
a clause so extravagant and unconscionable that it would become a penalty. An
obvious point of reference may be the greatest loss that could possibly follow from
the concerned breach. For instance, as illustrated in Kemble v Farren,44 if a party is in
breach of an obligation to pay a certain sum of money and it is agreed that, if it fails to
do so, it is to pay a even larger sum, then this larger sum is a penalty. This is because
the damage arising from such a breach is capable of exact definition.
In Webster v Bosanquet,45 it was held that, where a contract provided that on breach 5.035
thereof a specified amount should be paid “as liquidated damages and not as a penalty”,
its true construction had to have regard to the particular circumstances of the case
and not be such as to render it unconscionable and extravagant. It was also held that
where it was impossible at the date of contract to foresee the extent of uncertain injury
which might be sustained by its breach or the cost and difficulty of proving it and the
stated amount was reasonable, it should be recovered as liquidated damages. That case
concerns a liquidated damages clause covering damage arising from a breach of an
agreement to sell a crop of Ceylon tea at a fixed price over a ten-year period.
As a rule of thumb, if there is only one event upon which the stipulated sum is to be 5.036
paid, that sum is liquidated damages. In Law v Local Board of Redditch,46 a contract
for the construction of sewerage works provided that the works should be completed
in all respects by a specified date and required, if in default of such completion, the
contractor to pay a sum of £100 and £5 for every seven days during which the works
41
Seng Sun Development Co Ltd v Hong Kong Resources Investment Co Ltd [2009] HKEC 1332.
42
Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6. See also
Yan Ho Chiu v Charmgold International Ltd [2006] HKEC 622.
43
[1905] AC 6.
44
(1829) 6 Bing 141.
45
[1912] AC 394.
46
[1892] 1 QB 127.

should be incomplete after the said date as and for liquidated damages. It was held
that such sums were payable on a single event only, which is the non-completion of the
works, and, as such, they were to be regarded as liquidated damages, not as penalties.
5.037 In his Court of Appeal judgment Lopers LJ remarked that:
“There is a canon of construction which has been referred to by the Master of

the Rolls, according to which, if the sum is payable on the happening or non-
happening of one event, it is to be regarded as liquidated damages; but if, on the
other hand, it is payable on the happening of several events, some of which would
entail very trifling damage, then it is to be regarded as a penalty.”
5.038 In Hong Kong, the legal position of liquidated damages clauses has been considered
in Philips Hong Kong Limited v The Attorney General of Hong Kong.47 In the case,
the plaintiff contractor was engaged by the Hong Kong Government for the design,
supply, testing, delivery, installation and commissioning of the approach roads and
tunnels as part of a major highway project. The plaintiff’s contract was one of seven
interlinking contracts for the highway project and the contract contained flow charts
that identified as key dates interfaces with other contracts. If these key dates were not
met by a contractor, then the contract specified a liability to pay liquidated damages
to the government at a daily rate. The government’s approach to liquidated damages
was by calculating them using a formula to ascertain what was anticipated would be
the value of interfacing contracts. Further, the whole of the contract work was required
to be completed within a specified time and if this was not met, the contract provided
that the contractor was required to pay additional liquidated damages also at a daily
rate. The contract was in a standard form and clause 29 of the contract provided that:
“If the Contractor shall fail to complete the Works or any Section thereof or shall
fail to achieve a Specified Degree of Completion within the time prescribed by
Clause 27 or extended time, or shall fail to complete or shall unduly delay the
Tests on Completion then the Contractor shall pay to the Employer the sum or
sums stated in the Appendix to the Form of Tender as liquidated damages for
such default and not as a penalty for every day or part of a day which shall elapse
between the time prescribed by Clause 27 or extended time, as the case may be,
and the date of completion of the Works or the relevant Section thereof or the
relevant Specified Degree of Completion.”
5.039 The contractor initiated proceedings in court seeking to obtain a ruling of the Court
on the preliminary issues as to the validity of the liquidated damages clauses and
clause 29. The court pointed out that the purpose of liquidated damages clauses was
to enable contracting parties to know for the one party the extent of its protection in
the event of breach by the other and to enable that party who might subsequently be
in breach to quantify in advance the extent of its liability for such breach. It was held
that an approach to liquidated damages clauses by the court which would defeat their
47
[1993] 1 HKLR 269.

EXPRESS TERMS 123
purpose should not be adopted, except possibly in the case of situations where one of
the parties to the contract was able to dominate the other as to the choice of the terms
of the contract.
It was also observed that in order to establish that a provision was objectionably penal, 5.040
it would normally be insufficient to merely identify situations where the application
of the clause could result in a larger sum being recovered by the injured party than
its actual loss. Indeed, it seems clear that, so long as the sum payable in the event
of non-compliance with the contract is not extravagant, having regard to the range
of losses that could reasonably be anticipated that it would have to cover at the time
the contract was made, it can still be a genuine pre-estimate of the loss that would be
suffered and so a perfectly valid liquidated damage provision. It was also considered
that the use in argument of unlikely illustrations could therefore not assist a party to
defeat a provision as to liquidated damages. It was also recognised that there could be
difficulty where the range of possible loss is broad, and where it should be obvious that
in relation to part of the range, the liquidated damages were totally out of proportion to
certain of the losses which might be incurred. The reason was that those losses could
result in the liquidated damages not being recoverable and the court had to carefully
balance between too stringent a standard and the express agreement of the parties,
without leading to undesirable uncertainty, especially in commercial contracts.
Liquidated damages means that it shall be taken as the sum which the parties have 5.041
by the contract assessed as the damages to be paid, whatever may be the actual loss
and damage in case of a breach of contract. Liquidated damages should therefore
represent a genuine pre-estimate of such loss and damage that will be caused to one
party if the contract is breached in the concerned manner by the other party. When
such a breach happens, the liquidated damages constitute the amount, no more or no
less, that may be recovered without need of any proof of actual damage. In Polyset Ltd
v Panhandat Ltd,48 the Court of Final Appeal stated that, unlike deposits, liquidated
damages focused on the loss considered likely to result from foreseeable breaches and
aimed to quantify in advance the damages payable and that they also represented the
agreed sum of damages payable regardless of the actual loss.49
In construction contracts, liquidated damages claims and extension of time claims 5.042
often, but not always, go hand in hand. Contractual requirements regarding deadlines
differ greatly in status and on the consequences that flow from their breach. Failures
to meet deadlines for performance may attract sanctions ranging from repudiation to
damages; failure to meet deadlines for payment may result in determination or payment
of interest; failures to give notices regarding time may lead to loss of entitlement.
The contractual scheme for dealing with deadlines in construction contracts can be 5.043
summarised in plain terms. There are cases where the loss should be assessed, and
there are cases where it should be wholly borne by the employer; there are also cases
which do not fall within either of these conditions and which are the fault of the
contractor where the loss of both parties is wholly borne by the contractor. But in cases
48
(2002) 3 HKLRD 319.
49
See also Real Maker Development Ltd v Cobow Contracting & Engineering Co Ltd [2005] HKEC 947.

where the fault is not that of the contractor, the scheme clearly is that in certain cases
the loss is to be shared, ie the loss lies where it falls. Yet, in other cases, the employer
has to compensate the contractor in respect of the delay, and that category should
clearly comprise of cases where there is fault upon the employer or fault for which the
employer can be said to bear some responsibility.
5.044 A typical liquidated damages clause in construction contracts is to entitle the
employer to deduct or ask for the payment of a stipulated amount per day or week for
the period during which the works remain uncompleted. Then, the total amount of
liquidated damages payable or deductible is calculated based on the period between
the actual date of completion and the agreed or ascertained date of completion of
the work.
5.045 Obviously, the exact nature and effect of a liquidated damage clause depends on
its construction. Some such clauses carry with them the legal effect of being an
exhaustive remedy for the covered breach, and the party concerned cannot go beyond
the liquidated damages clause to claim for general damages instead. For instance,
there may be situations in some charterparties where a breach gives rise to losses of
more than one character and remedy under those demurrage or liquidated damages
clauses are not exhaustive. However, in other situations, particularly in the context of
construction contracts, the stipulated sum in a liquidated damages clause is both the
ceiling and minimum amount that can be recovered in respect of the covered breach
of contract.
5.046 In Chow Kee James v Transway Construction & Engineering Ltd,50 liquidated damages
under a main contract for water mains works were held to be intended to be exhaustive.
Hence, liquidated damages will normally be the employer’s sole and exclusive remedy
for delay of any kind to practical completion, and the employer cannot claim for any
general damages to which it may otherwise be entitled. This is illustrated in a number
of cases including Pigott Foundations Ltd v Shepherd Construction Ltd51 and Peak
Construction (Liverpool) Ltd v McKinney Foundations Ltd.52 The question to ask,
however, is still what the parties had agreed on the proper construction of the contract.
For example, in respect of a liquidated damages clause where “nil” was inserted, it
was held in the case of Temloc Ltd v Errill Properties Ltd53 that it was the parties’
agreement that there should be no damages for delay. Yet, in the Australian case of
Baese Pty Ltd v RA Bracken Building Pty Ltd,54 which concerned a similar situation, it
was held that the employer was still entitled to pursue general damages as if there was
no liquidated damages clause.55
5.047 Thus, where a liquidated damages clause becomes invalid, subject to the wordings of
the contract, the parties may revert back to establish general damages.
50
[2008] HKEC 852.
51
(1993) 67 BLR 48.
52
(1970) 1 BLR 114.
53
(1987) 39 BLR 30.
54
(1989) 52 BLR 130.
55
In Associated Engineers Limited v Lee Shing Yue Construction Company Limited (unrep, HCA No A13014 of
1998) (Keith J).

EXPRESS TERMS 125
(d) Time bar clauses
The Limitation Ordinance (Cap 347) regulates the time limits within which a claim 5.048
has to be brought.56 The usual time is 6 years from the date of the breach of contract or
12 years if the contract is under seal.
Parties cannot by agreement withdraw from the court the decision of a question of 5.049
law. Yet, the parties to a contract may lawfully agree that any claim must be made
within a shorter time limit than that allowed in the Limitation Ordinance (Cap 347). In
Atlantic Shipping Co Ltd v Louis Dreyfus & Co,57 it was held that such a clause would
be valid, however short the stipulated time was. In that case, a ship was chartered for
a voyage with a full cargo of linseed, with the charterparty providing an arbitration
clause stating:
“Any claim must be made in writing and claimants’ arbitrator appointed within
three months of final discharge and where this provision is not complied with the
claim shall be deemed to be waived and absolutely barred.”
The charterer brought an action against the shipowners in respect of damage alleged 5.050
to have been occasioned to part of the cargo during the voyage by reason of the
unseaworthiness of the ship but failed to appoint its arbitrator within three months of
the discharge of the ship. It was held that such an arbitration clause was not open to
objection on the grounds that it ousted the jurisdiction of the court and, as such, was
valid.
As illustrated in Smeaton Hanscomb & Co Ltd v Sassoon I Setty, Son & Co (No 1),58 5.051
instead of barring the right to arbitration, the parties may also completely bar the claim
if it is not made within a limited period of time.
In Matalimex Foreign Trade Corp v Eugenie Maritime Ltd,59 when the plaintiff 5.052
charterer brought a claim for moneys due for dispatch under a charterparty with the
defendant shipowners, the defendant successfully defeated the claim by raising as
a point of defence a clause in the charterparty that any claim thereunder had to be
made in writing within six months after final discharge. The charterparty contained
no provision for the effect of failure to give such notice. It was observed that the
commercial intention underlying this clause was plainly to ensure that claims were
made by the shipowners within a short period of final discharge so that the claims
could be investigated and if possible resolved while the facts were still fresh. This
object could only be achieved if the charterers were put in possession of the factual
material which they required in order to satisfy themselves whether the claims were
well founded or not. Yet, a clause of this sort will be narrowly construed.
56
See Onway Engineering Ltd v Shun Wing Construction & Engineering Co Ltd [2009] HKEC 222, where the
Hong Kong Court of Appeal upheld the decision to strike off a claim arising out of a government maintenance
term contract involving a licence-borrowing agreement.
57
[1922] 2 AC 250.
58
[1953] 1 WLR 1468.
59
[1962] 1 Lloyd’s Rep 378.

5.053 Apart from the Atlantic Shipping clause, the parties to a contract can also agree, in
case of arbitration, to provide clauses labelled as “Scott v Avery” clauses so that the
award of an arbitrator is to be a condition precedent to the right to bring an action on
the contract. Such clauses originated from the case of Scott v Avery,60 which function
by postponing the parties’ right to have access to court.61
5.054 In Guangdong Water Conservancy & Hydro-Power Engineering Development Co Ltd
v Ming An Insurance Co (HK) Ltd,62 a building contractor whose works were damaged
by fire accepted a sum of money from the defendant insurers in full satisfaction but
later sought to make a further claim in respect of the same event. The insurer disclaimed
liability to this claim. The policy contained a clause providing a claim was to be treated
as abandoned if not referred to arbitration within 12 months of disclaimer. Under s 29
of the Arbitration Ordinance (Cap 341), the contractor made an application for relief
from the time-bar three months after the expiry of that deadline. The court refused to
grant an extension of time for bringing such claim, considering the serious delay and
the contractor’s own fault for such delay.
(e) Forfeiture clauses
5.055 A contract may provide for payment of the price in instalments and add that on default
to pay any instalment those already paid shall be forfeited. This sort of clause is
commonly labelled a forfeiture clause. Yet, the term forfeiture clause is a loose term
and can be used to refer to a variety of clauses in different industries governing the
rights of the parties in case of the termination of the contract.63 Indeed, construction
contracts commonly contain clauses entitling one party to bring the contract to an end
in certain circumstances, ie loosely called ‘forfeiture clauses’. These clauses modify
and overlap with the circumstances that the party may lawfully bring the contract to
an end at common law.
5.056 For example, Mei Kee Plastic Factory Ltd v IBT International Business & Technology
Ltd,64 in a sale of some sealing machines to a plastic manufacturer at a total price of
HK$668,000, the sale of goods agreement provided that if the seller failed to deliver
the machines to the buyer, the buyer should have the whole sum it paid to the seller
refunded within seven days. The buyer paid the seller a total sum of HK$601,200
by way of deposit. The machines were not delivered to the buyer. The seller claimed
that the buyer had given it instructions for the machines to be modified and that the
seller had, accordingly, spent HK$317,200 in ordering new moulds for the machines.
However, four months later, the buyer said that the modifications were no longer
necessary. The buyer sought damages against the seller in the amount of HK$601,200.
The court found in favour of the buyer and held that the seller was not entitled to
forfeit the deposit paid. The court observed that there was no credible evidence that any
agreement was made for the payment of HK$317,200, nor that all of the new moulds
60
(1856) 5 HLC 811.
61
See, for illustration, Ryoden Engineering Co Ltd v New India Assurance Co Ltd [2008] 2 HKC 409.
62
[1990] 2 HKLR 557. See also Kan Kin Man v Min Xin Insurance Co Ltd [2002] HKEC 951.
63
See, for example, Wesco China Ltd v Liu Fu Tien [2007] 1 HKC 576.
64
[2003] 1 HKLRD A19.

EXPRESS TERMS 127
were ever produced. Thus, in a contract for sale, if there is no express forfeiture clause
and the seller terminates the contract upon the buyer’s default, the buyer might recover
any prepayment or instalments paid in part payment of the price.
A deposit of such nature is earnest money which guarantees performance of 5.057
the contract. It follows that if, on a true construction of the contract, the parties
intended the advance payment as a deposit, they are taken to have agreed that it
is to be forfeited if the payer fails to complete. This is to be distinguished from
mere advance payments, which is generally recoverable. The use of a forfeiture
clause in the sale and purchase of property has been reviewed in the Hong Kong
Court of Final Appeal in the decision in Polyset Ltd v Panhandat Ltd.65 In this
case, the plaintiff purchaser entered into an agreement to purchase a commercial
property from the defendant vendor for HK$115 million during a period of sharply
rising property prices. As completion was not to take place until nine months after
execution of the contract, a higher than usual deposit was agreed at HK$40.25
million, amounting to 35 per cent of the purchase price. The agreement further
provided that it was an important commercial term that in the light of the unusual
long duration for completion, the defendant was entitled to forfeit the deposit if the
purchaser defaulted. The sale and purchase was not completed and the purchaser
sought to have the amount of the deposit in excess of actual loss suffered by the
vendor refunded. The court observed that where parties abused the concept of
a deposit by attaching that label to a penalty, thereby escaping the general rule
rendering penalties unenforceable, the court would intervene to prevent forfeiture
and the applicable test was whether the sum was reasonable as earnest money.
Hence, the court only allowed the vendor to retain the portion of the deposit
representing the actual loss suffered.
Thus, where parties abuse the concept of a ‘deposit’ by attaching that label to a penalty, 5.058
thereby escaping the general rule rendering penalties unenforceable, the court will
intervene to prevent forfeiture. The applicable test is whether the sum was ‘reasonable
as earnest money’.
Deposits should also be distinguished from liquidated damages. Unlike deposits, 5.059
liquidated damages focus on the loss considered likely to result from foreseeable
breaches and aim to quantify in advance the damages payable. They also represent the
agreed sum of damages payable regardless of the actual loss, whereas a forfeiture of
deposit clause does not preclude the vendor from claiming damages in respect of any
loss suffered over and above the value of the deposit.
Thus, the real issue regarding the validity of a forfeiture clause is whether the 5.060
overriding purpose of the deposit is to impose a penalty upon the contract breaker
so unreasonable in its nature as to invite the intervention of equity. The jurisdiction
exercised by equity is a flexible one but the threshold for the court’s intervention is
high. Also, where businesses are dealing with each other at arm’s length, their freedom
to contract as they please is something the court respects and protects.
65
[2002] 3 HKLRD 319.

5.061 Forfeiture clauses in construction contracts are a species of their own. In their common
form, a party is empowered to bring the construction contract to an end on the
occurrence of certain specified events or circumstances.
5.062 Such contractual powers are added on top of the common law powers that entitle a
party to terminate the contract under the body of the substantive contract law.66 Under
common law, very briefly, a party is allowed to terminate the contract if there is a
breach of the contract so fundamental that it goes to the very root of the contract. A
recent example is Creatiles Building Materials Co Ltd v To’s Universe Construction Co
Ltd.67 A typical forfeiture clause in construction contracts sets out the circumstances
when there is a right to termination, the procedure for termination and the impact
of termination over the respective positions of the employer and the contractor. The
principal objectives of these clauses are two-fold. First, they define those situations
where the right to terminate a contract arises; second, they set out the ancillary right
and remedies for regulating the obligations and liabilities of the parties.68
5.063 The right to forfeiture entitles the employer to terminate the contract or the contractor’s
engagement and to evict the contractor from the site or to take the work out of its hands.69
Events leading to such a right on the part of the employer may or may not amount to
repudiation and often include not proceeding with the works to the satisfaction of
the engineer or architect as in Davies v Swansea Corp;70 not proceeding with due
diligence as in Canterbury Pipe Lines v Christchurch Drainage;71 not completing the
work on time as in Marsden v Sambell;72 or not complying with the instructions of the
engineer or architect as in Hunt v SE Railway73.
5.064 In such circumstances of termination, the license to occupy the site for the purposes
of the contract is revoked.74 Such forfeiture may be backed up by an interlocutory
injunction forcing the contractor to leave the site.75 Examples of forfeiture clauses
66
Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656, where the court accepted
that
“… in the absence of express provision, contractual determinations by either party are not intended as a
substitute for, or to exclude, the common law rights to rescind. While some standard form determination
clauses contain express ‘without prejudice to other rights or remedies’ wording, this is not in fact necessary,
and it is submitted that, in the context of construction contracts generally, neither owners’ nor contractors’
determination clauses should be treated as impliedly excluding the parties’ common law rights.”
67
[2003] 2 HKLRD 309. See also Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd
[2005] HKEC 1264 and Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive Technology Ltd (Third Party) [2005]
HKEC 2152.
68
Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656.
69
For recent examples, see Aggressive Construction Co Ltd v Data Form Engineering Ltd [2009] HKEC 1555.
Hong Kong Housing Authority v Rotegear Corp Ltd [2009] HKEC 1224 and Wing Hing Engineering Investment
Ltd v Foric Ltd [2008] HKEC 1968.
70
(1853) 22 LJEx 297.
71
(1979) 16 BLR 76.
72
(1880) 43 LT 120.
73
(1875) 45 LJQB 87.
74
Joshua Henshaw & Sons v Rochdale Corp [1944] KB 381.
75
Compare London Borough of Hounslow v Twickenham Garden Developments Ltd (1970) 7 BLR 81 (where the
application for an injunction by the employer was refused) and Mayfield Holdings Ltd v Moana Reef Ltd [1973]
1 NZLR 309 (where an injunction was granted). See also American Cyanamid Co v Ethicon [1975] AC 396 and
the latest case of its application in Society for Protection of the Harbour Ltd v Chief Executive in Council [2003]
HKEC 1198 and Society for Protection of the Harbour Ltd v Town Planning Board [2003] 2 HKLRD 787.

EXPRESS TERMS 129
include “not proceeding with the works to the satisfaction of the Engineer”,76 “not
complying with the Engineer’s orders” and “not proceeding with due diligence”. There
may also be agreed provisions as to the consequences following the exercise of a
right of forfeiture but these are subject to the operation of insolvency and other laws,
eg direct payment provisions to nominated subcontractors. The commonly included
provisions in construction contracts include the plant and material vesting clause
(vesting the property in unfixed materials or plant in the employer).
Upon forfeiture, the employer is entitled to enter and complete the work, using the 5.065
contractor’s materials or plant and holding the retention money. Yet, the employer
needs to act reasonably and is under a duty to account to the contractor.77
The employer’s right to damages depends on the wording of the contract78 and the 5.066
employer may recover damages for the increased cost to complete if the breach upon
which the termination of the contract is based amounts to a repudiation or the contract
so provides.79
So far as validity is concerned, a forfeiture clause is valid unless it otherwise is contrary 5.067
to the law or calls for the intervention of equity. A forfeiture clause in construction
contracts may be in breach of the laws of insolvency. As illustrated in Re Harrison,
Ex p Jay,80 a clause providing that, in case of the insolvency of the contractor, the
unfixed materials or plant should be forfeited and vested in the employer was void.
As to the mode, the stipulated procedures in a forfeiture clause have to be strictly 5.068
complied with for the right to be validly conferred.
Central Provident Fund Board v Ho Bock Kee81 concerned notices served on a 5.069
contractor who was alleged to be in default. The relevant provision referred to certain
types of default, and provided that: “if any such default shall continue for 7 days
after a notice sent by registered post ... specifying the same, the superintending
officer may ... by notice sent by registered post determine this contract”. Both a
default notice and a termination notice were given, but in each case this was done
not by registered post, but by delivery to a member of the contractor’s staff by
hand. The parties’ dispute went to arbitration, and thereafter certain questions of
law came before the courts of Singapore by special case. At first instance, it was
held that each notice was invalid on account of its not having been sent by registered
post. This was confirmed by the Singapore Court of Appeal. Also, in the Scottish
case of Muir Construction Ltd v Hambly Ltd,82 question arose as to whether the
determination of a building contract by the employer of a site for carrying out
development work was valid. The contract was in the form of the JCT standard
form of building contract (1980 edition). The forfeiture clause provided that the
76
Davis v Swansea Corp (1853) 22 LJ Ex 297; Roberts v Bury Commissioners (1870) LR 5 CP 310 and Hunt v SE
Railway (1875) LJQB 87.
77
See, eg Ranger v GW Railway (1854) 5 HLC 72.
78
Thomas Feather & Co (Bradford) Ltd v Keighley Corporation (1953) 52 LGR 30.
79
See, eg Architectural Installation Services Ltd v James Gibbons Windows Ltd (1989) 16 ConLR 68.
80
(1880) 14 ChD 19.
81
(1981) 17 BLR 21.
82
1990 SLT 830.

contractor “may ... by notice by registered post or recorded delivery to the Employer
or Architect forthwith determine the employment of the Contractor”. The notice was
served by hand delivery and not by registered post or recorded delivery. It was held
that the notice of determination served by hand was invalid and there was nothing
contrary to common sense in concluding that precise words in carefully structured
provisions were intended by the parties to have a precise effect in carefully structured
procedures.
(f ) Set-off clauses
5.070 Set-off operates to enable deduction of sums otherwise due. It is a direct and logical
remedy immediately available but it has various labels, such as apportionment,
counterclaims or cross-claims. In the context of the construction industry, it commonly
appears when, for example, a subcontractor claims against the contractor for outstanding
balance of work done, the contractor cross-claims against the subcontractor for a
deduction, whether on the basis of defective works or contra charges, so as to set this
off against the claim of the subcontractor.
5.071 At common law, claims and cross-claims between the same parties can be set-off
against each other if they both arise out of and are inseparably connected with a single
transaction. Yet, this is a matter of degree and the fact that they both arise out of the
same contract may sometimes be insufficient to provide the close connection required
to enable set-off. In Dole Dried Fruit & Nut Co v Trustin Kerwood,83 the plaintiff
sued for the price of goods sold and delivered to the defendant under a series of sale
contracts entered into in the course of the parties’ relations under an earlier agreement
by which the plaintiffs appointed the defendants their sole and exclusive agents for the
importation of prunes and raisins in England. The defendants had earlier commenced
proceedings against the plaintiffs for repudiation of that agreement. They sought and
were permitted to set off their claim for damages against the plaintiff’s claim. There is,
thus, no universal rule that claims arising out of the same contract may be set against
one another in all circumstances. The test is whether a cross-claim is flowing out of
and inseparably connected with the dealings and transactions which also give rise to
the claim.
5.072 In construction contracts, there are often express provisions governing the operation
of set-off between the parties. For example, in the 1988 edition Hong Kong
Government standard form of subcontract for civil engineering works, it is provided
that “[t]he Contractor shall notwithstanding anything in this Sub-contract be entitled
to deduct from or set off against any money due from him to the Sub-contractor,
including any Retention Money, nay sum which the Sub-contractor is liable to pay to
the Contractor under the Sub-contract”. Such set-off clauses can be very important
in practice in relation to the right to deduct or withhold sums otherwise due to
subcontractors.
83
[1990] 2 Lloyd’s Rep 309. Generally speaking, where the claim and counterclaim are sufficiently closely
connected so that it would be manifestly unjust to enforce one without regard to the other, a right to an equitable
set-off may arise. See also Charmway Development Ltd v Long China Engineering Ltd [2001] 3 HKC 515.

EXPRESS TERMS 131
The case of Paul Y Construction Co Ltd v The Attorney General of Hong Kong84 5.073
concerns the question whether, as between the same parties, sums certified owing under
one contract could be set-off against sums certified due under another contract and it
was held that there was no sufficiently close connection between the two contracts so
as to make it fair and just that a set-off could be raised. In Ryoden Engineering Co Ltd
v Paul Y Construction Ltd,85 where an electrical works subcontractor sought summary
judgment in the sum of HK$1,146,500, being the sum total of certificates 21 – 23
and the main contractor denied liability and proposed a stay of the proceedings
pending arbitration. It was held that the provisions of the contract did not exclude any
common law rights to set-off and, hence, the main contractor could put forward the
contention that there could be set-off at common law for damages suffered from the
alleged delays of the subcontractor, although not certified by the architect as required
under the subcontract.
In the classic case of Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) 5.074
Limited,86 it was made clear that unless the common law right to set-off has been
excluded by the terms of the contract, such a right remains and operates parallel to
any contractual right to set-off. In a building project using RIBA standard forms, the
main contract and the nominated subcontract for steel work provided that sums were
payable to the subcontractor as directed by the architect’s certificate, less only sums
the main contractor was entitled to deduct under the terms of the subcontract and sums
due to the main contractors in respect of delay by the subcontractor. The subcontract
also provided that
“if the sub-contractor fails to comply with any of the conditions of this sub-
contract the contractor reserves the right to suspend or withhold payment ... the
contractor also reserves the right to deduct from any payments certified as due
... the amount of any bona fide contra accounts and/or other claims which he, the
contractor, may have against the sub-contractor in connection with this or any
other contract.”
The architect certified as due £14,532. The main contractors paid only £10,000, 5.075
alleging claims against the subcontractors for loss of £3,137 caused by delay, and of
£1,862 for defective work. It was held by the House of Lords that the contractor was
entitled to deduct such bona fide contra account/or claim. In that case, it was remarked
that an architect’s certificate under a building contract did not create a debt of a special
character, against which claims for damages could not be set off. Thus, if it is intended
to exclude the common law right to set-off and counterclaim then that must be done by
the contract in clear and unequivocal words.
As regards set-off arising from defects, generally where, after completion, there are 5.076
defects in the works, the employer will be entitled to damages equal to the costs
of making them good. Thus, in the absence of any specific stipulation as to the
84
[1992] 2 HKLR 120.
85
[1994] 2 HKC 578.
86
[1973] 3 WLR 421.

reinstatement of defects, the position would be that defects found after the date of
substantial completion would entitle the defendant to an abatement or set-off of the
contract price or any instalment payable on completion.87
5.077 It is not uncommon for set-off clauses to be included in subcontracts, particularly
when there are ongoing businesses between the same subcontractor and the contractor.
They typically allow the contractor to deduct money otherwise due from another
subcontract. Subject to wording, they may not, by themselves, create a stand alone
right to payment if no money is indeed otherwise due in another subcontract88.
3. IMPLIED TERMS
5.078 The entering into a contract is not an isolated act but is the conduct of business or
in the framework of some more general relation. The intention of the parties may
have to be gathered not only from their actual language but also from the surrounding
environment in which they have conducted their negotiations. A contract will
frequently need to be set against a background of trade practice, customs or previous
dealings that are familiar to all involved in such negotiations and affect understanding
of the meaning of the language used in an individual agreement.
5.079 Under the circumstances, there are cases in which the law implies a term in a contract
although it is not expressly included in the contract by the parties. Generally speaking,
these implied terms can be implied under legislation such as the Sales of Goods Ordinance
(Cap 26) and the Supply of Services (Implied Terms) Ordinance (Cap 457); they can also
be implied based on an intention imputed to the parties from their actual circumstances.
(a) Statutory implication
5.080 In Hong Kong, the Sales of Goods Ordinance (Cap 26) codifies the common law
relating to merchant goods. This is based on the Sale of Goods Act 1893 in the United
Kingdom. Goods, under s 2(1) of the Sales of Goods Ordinance, means all personal
chattels other than things in action and money and includes emblements, industrial
growing crops and things attached to or forming part of the land which are agreed to
be severed before sale or under the contract of sale. Goods, here, do not include land
or chattels attached to land as fixtures.
5.081 In theory, the Sales of Goods Ordinance (Cap 26) does not apply to contracts for work
and materials. A contract for work and materials is one in which goods may be included
but the main reason for the contract is the carrying out of services or the performance
of work involving skill. In Robinson v Graves,89 a contract to paint a portrait was a
contract for work and materials in view of the skill of the artist involved and the labour
87
See Pharos Co Ltd v Hillco Ltd [2005] HKEC 1053, where a counterclaim to set-off the costs incurred in
rectifying allegedly defective work was raised in a claim for outstanding balance for work done.
88
Sun Fook Kong (Civil) Ltd v Wellead Construction and Engineering Co Ltd [2004] HKEC 1274.
89
[1935] 1 KB 379. See also Mak Ping Kui t/a Yet Hing Knitting Garment Factory v Millionice Limited t/a Blessings
Trading Company [2001] HKEC 460.

IMPLIED TERMS 133
provided was the most important element of the contract; in Lee v Griffin,90 a contract
for two sets of false teeth was held to be a contract for the sale of goods. However,
the Supply of Services (Implied Terms) Ordinance (Cap 457) applies to confer similar
effects in respect of a contract for work and materials or for goods. Many contracts
for work and materials closely resemble contracts of sale. This is where the employer
contracts for the supply and installation of a machine or other article: the supply of the
machine may be the main element and the work of installation may be a comparatively
small matter. In such situations, a warranty as to the fitness of the goods will not be
implied unless it is reasonable. In Young & Marten Ltd v McManus Childs Ltd,91 the
contractor agreed with the subcontractor regarding the roofing of certain houses and
specified a particular tile made by only one manufacturer. The subcontractors duly
obtained the tiles in the ordinary course of trade and fixed them. Owing to faulty
manufacture, the particular tiles used had an undetectable defect which made them
liable to break in frosty weather. The subcontract was held to be one for work and
materials. It was held that though it was the contractor who specified the tiles made by
only one manufacturer, it did not, in itself, follow that the ordinary implied warranty
of quality on the part of the subcontractors would be excluded.
The Australian case of Deta Nominees v Viscount Plastic Products92 and the Hong 5.082
Kong case of Tin Tsun Lithographers v United Battery Service and Oversea Battery
Factory93 contain a review of the authorities on this point.
The gist is that, regarding business transactions, where the Sales of Goods Ordinance 5.083
(Cap 26) applies, there are certain terms implied into the contract for the sale of
goods.
Section 12 of the Sales of Goods Ordinance (Cap 26) provides that prima facie 5.084
stipulations as to time of payment are not deemed to be of the essence. This is subject
to different intentions appearing from the terms of the contract. In Tralaco Ltd v Active
Telecom Ltd,94 the plaintiff was a specialist contractor in supplying computer room
equipment and providing installation, and the defendant was a building contractor. The
court reviewed the circumstances surrounding the signing of the contract and held that
the time of payment of the deposit was the essence of the contract.
Section 14 of the Sales of Goods Ordinance (Cap 26) implies a term as to the right 5.085
of the seller to sell and a term as to the quite possession of the goods. In Microbeads
AC v Vinhurst Road Markings Ltd,95 in respect of three Swiss road marking machines,
the buyer complained that these machines infringed the patent granted to an English
company and, thus, they were not of good title and free from disturbance by the owner
of the patent. It was held that the patent was granted after the contract for the sale of
the machines was entered and, hence, the seller was able to observe the implied term
at the time of contracting.
90
(1861) 1 B&S 272.
91
[1969] 1 AC 454.
92
[1979] VR167.
93
(1937) 29 HKLR 16.
94
[2001] HKCFI 138.
95
[1975] 1 All ER 529.

5.086 Another term requiring the goods to correspond with the description or the sample
given to them as a condition is implied by s 15 of the Sales of Goods Ordinance
(Cap 26). In Winner Co (HK) Ltd v Arthur A Seidman & Co,96 it was held that the
goods sold had to correspond with the sample and the buyer was entitled to reject the
goods if they did not. In that case, a manufacturer for textiles made a sale by sample
of a considerable quantity of cloth to an importer in the US. The importer alleged that
the goods did not correspond in quality to the sample supplied and in consequence
were rejected by his intended customer. It was held that the manufacturer was liable
for consequential damages incurred by the importer, including the payment of interest
by it to its bank as a loss flowing naturally from the breach of contract.
5.087 The more frequently invoked term is that under s 16 of the Sales of Goods Ordinance
(Cap 26) regarding the merchantable quality and fitness of the goods.97 Where the
seller sells goods in the course of a business and the buyer, expressly or by implication,
makes known to the seller any particular purpose for which the goods are being bought,
there is an implied condition that the goods supplied under the contract are reasonably
fit for that purpose, except where the circumstances show that the buyer does not rely
or it is unreasonable for it to rely on the seller’s skill or judgment.
5.088 In Nippon Kanzai Centre Co Ltd v Ho Biu Kee Construction Engineering Co Ltd,98
the supplier of nipples with unidentified markings supplied to a contractor for housing
development by the Hong Kong Housing Authority was found in breach of an implied
duty to ensure that they would be reasonably fit for use at the site where there was tight
quality control over the materials used on site. Also, where the seller sells goods in the
course of a business, there is an implied condition that the goods supplied under the
contract are of merchantable quality, except that there is no such condition as regards
defects that are drawn to, or ought to have been revealed on examination by, the buyer.
In Camewould Electrical Ltd v Eureka Manufacturing Co Ltd,99 the issues concerned
heating tubes sold and delivered for the use in the manufacturing of grill pans by the
buyer. The buyer complained that the pans manufactured failed a hi-pot test which
was carried out to check the insulating property of an electrical appliance and, hence,
the heating tubes failed to satisfy the requirements as to fitness for purpose. The court
found that the seller knew the heating tubes to be supplied to the buyer would be used
in grill pans for export to Europe. The court also found that the buyer had relied on the
96
[1972] HKLR 86. See also Taurus Importgesellschaft J Seebohm MBH v Wide Loyal Industries Ltd [2009] HKEC
1236, involving the sale and purchase of ‘CE Approved’ ropelights, and Technology Innovation Manufacturing
Ltd v Good Power International Ltd [2007] HKEC 1779, involving the sale by sample of integrated circuits.
97
See also Fairlite Industries Ltd v Fosroc Hong Kong Ltd (unrep, HCA No 3893 of 2002); Bright Fashion Ltd v
Corland Industrial Ltd [2008] HKEC 1066; Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive Technology Ltd
(Third Party) [2005] HKEC 2152; and Maxking Concrete Co Ltd v China Civil-Road & Bridge Joint Venture
[2007] HKEC 839. In sales of goods, the material time for assessing any breach of such terms should generally
be, unless otherwise provided, at the time at which property passes, as illustrated in Cheng Wo Hung t/a Hung Yick
Knitting Factory v Yip Shing Diesel Engineering Co Ltd (unrep, HAC No 19252 of 1999), involving the supply
of electricity generators for a garment fitting business that brought about fire due to defects.
98
[2006] HKEC 2341. The court relied on the judgment of Lord Wright in Cammell Laird and Co Ltd v The
Manganese Bronze and Brass Co, Ltd [1934] AC 402 for support of the proposition that the duty of a seller
extends not only to what the seller actually knew, but that the seller has a duty to find out the relevant requirements,
if the purpose was made known to him.
99
[2003] HKEC 297.

IMPLIED TERMS 135
seller’s skill and judgment to supply heating tubes reasonably fit for use in such grill
pans. As a result, the court found that there was an implied term for fitness of purpose
in the contract.
Regarding merchantable quality, s 2(5) of the Sales of Goods Ordinance (Cap 26) 5.089
provides that goods of any kind are of merchantable quality within the meaning of
this Ordinance if they are fit for the purpose or purposes for which goods of that kind
are commonly bought, of such standard of appearance and finish, as free from defects
(including minor defects), as safe and as durable to the extent as it is reasonable to
expect having regard to any description applied to them, the price and all the other
relevant circumstances.
In Global Asis Ltd v Lucky Forest Ltd,100 the merchantable quality of an expensive and 5.090
precision printing machine in which advanced waterless offset printing technology
was employed was in dispute but the buyer failed to discharge the burden of proof that
the machine was not of merchantable quality.
Section 5 of the Supply of Services (Implied Terms) Ordinance (Cap 457) provides 5.091
that, for a contract for the supply of a service where the supplier is acting in the course
of a business, there is an implied term that the supplier will carry out the service with
reasonable care and skill. In Alcatel Cable Contracting Norway AS v Titan Logistic(S)
PTE Ltd,101 regarding the loading and lashing of cargo onto flat rack containers, it
was held that there was an implied term of the contract between a contractor and a
cargo owner, under s 5 of the Supply of Services (Implied Terms) Ordinance, that the
contractor would carry out the service with reasonable care and skill to ensure that the
cargo was sufficiently lashed and secured to withstand the carriage.
These implied terms under the Sales of Goods Ordinance (Cap 26) and the Supply 5.092
of Services (Implied Terms) Ordinance (Cap 457) cannot be excluded in contracts
involving dealings with consumers. In cases of non-consumer transactions, their terms
may only be excluded if such exclusion is fair and reasonable.
In Incorporated Owners of Greenville Gardens of Shiu Fai Terrace v Win-Tech 5.093
Engineering Co Ltd,102 the burglar alarm system installed was not functioning when
it kept ringing and could not be re-set to silence. The plaintiff claimed, inter alia, for
breach of implied terms in relation to a security system installed by the defendant.
The court accepted that the contract was not a contract for sale of goods alone and
found the implied terms that the system would be of merchantable quality, it would be
installed in a proper and workmanlike manner and it would be reasonably fit for the
purpose of being used as burglar alarm system.
(b) Necessary implication and obvious inference
Where a party seeks to imply a term to the contract, the court is prepared to infer 5.094
that the parties must have intended the term in question as arises from the language
100
[2001] HKEC 191.
101
[2000] 3 HKLRD 720.
102
[2004] HKEC 902.

of the contract itself and the circumstances under which the contract is entered into.
An implication of this nature may arise if it is necessary to give business efficacy
to the transaction or where it is an obvious inference from the agreement of the
parties.
5.095 The question whether a term is to be implied into a contract is always one of law. As
to the so-called “business efficacy” test which was explained in The Moorcock,103 the
basis of that test is that the contract is unworkable without the suggested term. The
defendant in that case owned a wharf and made a contract to allow the plaintiff to
unload its ship at the wharf. The ship was damaged by settling at low water on the
ridge of hard ground. It was held that the defendant was liable for this damage as it was
in breach of an implied term that it would take reasonable care to see that the berth was
safe. In the words of Bowen LJ:
“… an implied warranty, or, as it is called a covenant in law, as distinguished

from an express contract or express warranty, really is in all cases founded on the
presumed intention of the parties, and upon the reason. The implication which the
law draws from what must obviously have been the intention of the parties, the
law draws with the object of giving efficacy to the transportation and preventing
such a failure of consideration as cannot have been within the contemplation of
either side; and I believe if one were to take all the cases, and they are many, of
implied warranties or covenants in law, it will be found that in all of them the
law is raising an implication from the presumed intention of the parties with
the object of giving to the transaction such efficacy as both parties must have
intended that at all events it should have.”
5.096 It has been held in Wai Sing Engineering Co v Walsunion Industries Ltd104 that
a contractor for laying wooden floor boards who laid such boards with wrong
alignment or failure to lay out the boards in an aesthetically acceptable and orderly
manner would be in breach of an implied term as to workmanship. In Samake
Construction Co Ltd v Incorporated Owners of Lai Wan Building105 it has been
held that, in relation to a renovation contract of a building, the employer had to
cooperate and enable the contractor to access a restaurant during reasonable hours
to execute the works, or if the employer required the work to be carried out at
a time which was unreasonable, then it went without saying that the contractor
was to perform the work at such time as might be required and be paid overtime.
It was held in Johnstone v Bloomsbury Health Authority106 that there was an
implied obligation on the employer not to require the doctor to work for so many
hours in excess of his standard working week as would foreseeably injure his
health, notwithstanding an express clause in the employment contract of a doctor
providing that he might be called on to work up to maximum of 88 hours a week
including overtime.
103
(1889) 14 PD 64. See also John Mowlem & Co plc v Eagle Star Insurance Co Ltd (1992) 62 BLR 126.
104
105
[2001] HKEC 1509.
106
[1992] QB 333.

IMPLIED TERMS 137
On the other hand, in Universal Dockyard Ltd v Ho King-Sang, Nicholas,107 it was held 5.097
that there was no implied term that a pro rata gratuity would be paid in the event of
premature termination of an employment contract. In Ashby, Ltd v. Cazaly, Mills & Co,
Ltd,108 it was held that there was no implied term that the contractor should be entitled
to make a higher charge for “double” bricks instead of “single” bricks in the contract
between a wharfing contractor and a shipping agent for discharging a cargo of mixed
bricks.
In Venco Engineering Ltd v Tai Fong Engineering Hong Kong Co Ltd,109 the court gave 5.098
unconditional leave to defend in an application for summary judgment against a claim
involving an alleged implied term of paying over 65 per cent of the maintenance and
repair contract price for works done to government buildings by a ‘shell borrowing’
subcontracting arrangement.
On another approach, a term may be implied if it is a matter of obvious inference that it 5.099
must have been intended. In this sense, the court is searching for what must be implied.
This is the so-called “officious bystander” test in Shirlaw v Southern Foundries (1926)
Ltd.110 According to this test, the term will be implied if it is so obvious that it goes
without saying. In the words of Mackinnon LJ:
“Prima facie that which in any contract is left to be implied and need not be
expressed is something so obvious that it goes without saying; so that, if while the
parties were making their bargain, an officious bystander were to suggest some
express provision for it in their agreement, they would testily suppress him with
a comment ‘Oh, of course!’”.
As in Luxor (Eastbourne) Ltd v Cooper,111 a term as such will not be implied unless, 5.100
as reasonable men, both parties would have agreed to it had it been suggested to them;
as in Trollope & Colls Ltd v NW Metropolitan Regional Hospital Board,112 it must also
be a term that must have been intended by the parties.
There may be a third basis for implying a term in contracts that fall within a particular 5.101
generic class when it may be necessary to imply the term in order to make the contract,
being one within that class, operate properly.113 This is illustrated in Liverpool City
Council v Irwin114 where such a term was implied for necessity. In that case, the
landlords of multi-storey dwellings retained control of the common parts of the
107
[1979] HKLR 199.
108
(1928) 31 Ll L Rep. 29.
109
[2007] HKEC 1737.
110
[1939] 2 KB 206. See also Hip Hing Construction Co Ltd v Hop Lee Iron Work Ltd [2002] HKEC 820, a
term was implied by the ‘officious bystander’ test that arbitration under a subcontract could be proceeded with
because there would be no further reason for withholding arbitration, when the subcontract was never going to
be completed.
111
[1941] AC 108. See Industry Automation LDC v Uni Link Ltd [2008] HKEC 204 and Tin Shui Wai Development
Ltd v Yiu Sun Hung and Woo Kwan Lee & Lo Solicitors (Third Party) [2005] HKEC 75. See also Luk Wing Chin
v Chan Chi Shing [2008] HKEC 963.
112
[1973] 1 WLR 601.
113
See however Microsport Gmbh & Co Kg v Pactland Ltd [2006] HKEC 44 for an example on the limited scope
for implying a term as regards the duty of the seller or contractor to comply with the relevant laws or regulations.
114
[1977] AC 239.

buildings and it was found that, by necessary implication, there was an obligation
on them to take reasonable care to maintain the common stairs and the lighting, the
lifts and communal rubbish chutes in reasonable repair, unless such an obligation was
avoided by express exclusion in the contract of letting. Lord Cross said that:
“[w]hen it implies a term in a contract the court is sometimes laying down a

general rule that in all contracts of a certain type … some provision is to be
implied unless the parties have expressly excluded it.”
5.102 The case of Kenworth Engineering Ltd v Airport Authority,115 the subcontractor
provided a performance bond to the authority. There were delays in the works and
this prompted a meeting between the subcontractor, the contractor and the authority,
whereby it was agreed that the subcontractor would take special measures to achieve
substantial completion. The contractor issued a letter to this effect, countersigned
by the subcontractor but not by the authority. There were further delays. The
authority made a call on the bond and the contractor terminated the subcontract. The
subcontractor claimed that the letter created a direct contractual relationship between
such that the authority had to promptly assess its actual loss and return overpayments
under the bond directly to the subcontractor instead of to the bondsman. It was
also asserted that the authority should make additional payments for the special
measures undertaken, purportedly over and above the subcontract. The subcontractor
claimed these separate contractual arrangement should be implied into the bond. In
the judgment of Kwan J, it was held that there was no compelling reason to imply
the terms into the bond since, inter alia, it was not reasonable or equitable to do so
because such terms related to the underlying subcontract under which the bond was
given and it was not obvious from the officious bystander test that these terms had to
be implied. It was further observed that implying the terms into the bond would be
ineffective since the bond was between the authority and the bondsman and there was
no privity of contract. Also in the case of Tridant Engineering Co Ltd v Mansion Fire
Engineering Co Ltd,116 there was the usual course in a subcontract for mechanical and
electrical works for a commercial building in Guangzhou that the subcontractor was
to proceed regularly and diligently. The court was ready to imply into the contract a
term that the subcontractor was to proceed with reasonable diligence as a matter of
business efficacy. It was observed that an obligation to complete work by a certain
date, in itself, was of little value to the employer if there was serious delays during
the construction period indicating that the completion date could not be achieved.
The overriding objective was then to enable early actions to be taken and this resulted
in the widely accepted use of express terms requiring the diligence of a contractor
throughout the progress of the works.
5.103 For a term to be implied, as observed by Lord Bingham in Phillips Electronique v
BSB,117
115
[2002] 1 HKLRD 796.
116
[2000] HKEC 656. See also the Hong Kong Court of Appeal decision of Tridant Engineering Co Ltd & Another
v Mansion Holdings Ltd [2001] HKEC 845.
117
[1995] EMLR 472.

IMPLIED TERMS 139
“…the essence of much learning on implied terms is distilled in the speech of

Lord Simon of Glaisdale on behalf of the majority of the Judicial Committee
of the Privy Council in BP Refinery (Westernport) Pty Ltd v The President,
Councillors and Ratepayers of the Shire of Hastings (1978) 52 ALJR 20 at
26: ‘Their Lordships do not think it necessary to review exhaustively the
authorities on the implication of a term in a contract which the parties
have not thought fit to express. In their view, for a term to be implied, the
following conditions (which may overlap) must be satisfied: (1) it must be
reasonable and equitable; (2) it must be necessary to give business efficacy
to the contract, so that no term will be implied if the contract is effective
without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must
be capable of clear expression; (5) it must not contradict any express term of
the contract.’”
This formula of Lord Simon has been approved by the Hong Kong Court of 5.104
Appeal in First Shanghai Enterprises Ltd v Dahlia Properties Pte Ltd118 and Yau
Chin Kwan & Another v Tin Shui Wai Development Ltd.119 In using this formula,
it should be noted that the court’s usual role in contractual interpretation is, by
resolving ambiguities or reconciling apparent inconsistencies, so as to attribute the
true meaning to the language in which the parties themselves have expressed their
contract, but the implication of contract terms involves a different and altogether
more ambitious undertaking in that the interpolation of terms to deal with matters
for which the parties themselves have made no provision. For this, the law imposes
strict constraints on the exercise of this extraordinary power and whether a term
should be implied, and if so what, almost inevitably arises after a crisis has been
reached in the performance of the contract. In such a situation, the court would, and
should, not seek to impose a term which will reflect the merits of the situation as they
then appear, with the benefit of hindsight.
In Trollope & Colls Ltd v North-West Metropolitan Regional Hospital Board,120 a 5.105
building contract based on the JCT 63 form provided for works to be carried out in
three phases, each with a separate contract sum and its own set of conditions. Phase III
was to be completed by a specified date but the date of commencement of Phase III
was to be fixed by reference to the completion of Phase I. There was express provision
for the granting of an extension of time for the completion of Phase I, but there was
no provision for the granting of an extension of time for the completion of Phase III
if Phase I was delayed. The contractor contended that a term for extending the date
for completion of Phase III in these circumstances should be implied. The United
Kingdom House of Lords held that no such term could be implied since the express
terms of the contract were clear and unambiguous.
In the context of construction contracts, there are a few special types of implied terms 5.106
that are of more relevance.
118
[2002] 3 HKLRD 461.
119
[2003] 2 HKLRD 1.
120
[1973] 1 WLR 601.

(c) Duty to cooperate

5.107 The court will readily imply a term in any contract that the parties shall co-operate to
ensure the performance of their bargain. However, the degree of cooperation required
is to be determined with reference to the obligations imposed upon each party by the
contract itself.121
5.108 In construction contracts,122 there may be certain acts that one party has to perform,
without which the other party cannot perform its part of the contract. For instance,
the contract may require the approval of a certain material by the employer. The
contractor cannot go forward without such an approval; the employer, in turn,
requires reasonable opportunity for dealing with such an approval. In these
circumstances, there can be implied that a duty to cooperate with each other exists
under the contract.
5.109 It has been said in Luxor (Eastbourne) Ltd v Cooper 123 that “[g]enerally speaking,
where B is employed by A to do a piece of work which requires A’s cooperation … it
is implied that the necessary cooperation will be forthcoming”. In the Scottish case of
Mackay v Dick & Stevenson,124 Lord Blackburn also remarked that:
“I think I may safely say, as a general rule, that where in a written contract
it appears that both parties have agreed that something shall be done, which
cannot effectually be done unless both concur in doing it, the construction of
the contract is that each agrees to do all that is necessary to be done on his part
for the carrying out of that thing, though there may be no express words to that
effect.”
5.110 An illustration of this is in the case of Yue Po Engineering Co Ltd v Ocean Industrial
Co,125 which concerned the supply and installation of commercial kitchen equipment
to the a restaurant in Nanjing. Applying the principle in Mackay v Dick & Stevenson,126
the court was satisfied in the circumstances of the case that it could be an implied
term of the contract that delay caused by the defendant in not placing the site in a
fit condition for the plaintiff to be able to perform its role under the contract would
excuse any delay by the plaintiff occasioned by that.
121
See [2004] HKEC 648 where it was noted that the duty to co-operate was to be determined, not by what
was reasonable, but by the obligations imposed upon each party to the agreement, and by the surrounding
circumstances.
122
See W Hing Construction Co Ltd v Boost Investments Ltd (unrep, HCCT No 1 of 2006), where it was remarked
that
“One of the principal complexities of construction law is that previously decided case law is rarely
determinative, even of an identical issue for the simple reason that the conditions of contract are rarely identical;
and increasingly so, in modern times, where the various standard form contracts are almost invariably heavily
amended by the S.C.C. for each particular contract.”
123
[1941] AC 108. See Rank Profit Industries Ltd v Director of Lands [2008] HKEC 774. See also Liverpool City
Council v Irwin [1977] AC 239.
124
(1881) 6 App Cas 251.
125
[2001] HKEC 1435.
126
(1881) 6 App Cas 251.

IMPLIED TERMS 141
As explained by Thomas J in North Sea Energy Holdings NV v PTT:127 5.111
“Although the Court will often readily imply a term that the parties should co-
operate to ensure performance of their bargain, it is clear that such a term must
satisfy the test for implication and that implication is not inevitable. ... what is
made clear in all the cases is that a duty to co-operate will only arise if a term
can be implied to that effect. Thus the issue is whether the implied term …
satisfies the legal test of strict necessity. In doing so, it is useful to apply the
‘officious bystander: or the ‘business efficacy’ tests as an aid in this task (see
Society of Lloyd’s v Clementson [1995] LRLR 307, at p. 330). I must also have
in mind the consideration that the law can enforce co-operation only in a limited
degree and to the extent that is necessary to make the contract workable: see
Mona Oil Equipment and Supply Co Ltd v Rhodesia Railways Ltd (1949) 83 Ll
L Rep 178 at 187).”
Therefore, an employer has to appoint an engineer or architect to discharge the 5.112

functions conferred on him under the contract as in Hunt v Bishop;128 an employer
is to call on the engineer or architect to properly perform the function as a certifier
under the contract if he fails to apply the terms of the contract properly as illustrated
in the Australian case of Perini Corporation v Commonwealth of Australia129 and the
New Zealand case of Canterbury Pipe Lines Ltd v Christchurch Drainage Board.130
This may lead to an obligation on the employer to replace a defaulting engineer or
architect if such defaults persist as in Panamena v Leyland131 or to re-nominate a
nominated subcontractor that had withdrawn from the works as in Percy Bilton Ltd v
Greater London Council.132 Yet, the employer must not trespass over the line that leads
to interference with the proper performance of the engineer or architect in discharging
the duties under the contract as in Minister Trust Ltd v Traps Tractors Ltd.133
The scope of the implied term also covers those things that the engineer or architect 5.113
has to carry out to enable the work to be performed by the contractor. These include the
issuing of instructions, drawings, design details in reasonable time to the contractor.
Regard has to be given to consider all the circumstances, particularly the respective
127
[1997] 2 Lloyd’s Rep 418. In Reilly Ltd v Belfast Corporation [1970] NI 68, it was observed that:
“It is not enough for the court to conclude, (and I guard myself against doing so), that such a term would have
made the contract more reasonable; terms will be implied not in order to make for the parties a contract which
the court considers fair, but only to make effective the contract which the parties have made for themselves.
The principle is clearly and authoritatively stated in Luxor (Eastbourne) Ltd v. Cooper [1941] A.C. 108, and
even in Devonald v. Rosser [1906] 2 K.B. 728, which may at first sight appear to give a more liberal expression
to the doctrine, one finds on analysis a loyal adherence to the rule of necessary implication in the passage
(at p. 743) where Farwell L.J. asks, ‘What, then, are we to infer would be a reasonable bargain such as the
parties, being businessmen, must have intended to make?’ Hughes and anor v Greenwich London Borough
Council [1994] 1 AC 170 at page 177, for which the demise was made ... per Parker J in Browne v Flower
[1911] 1 Ch 219 at 226.”
128
(1853) 8 Ex 675.
129
(1969) 12 BLR 85.
130
(1979) 16 BLR 76.
131
[1947] AC 428.
132
[1982] 1 WLR 794.
133
[1954] 1 WLR 963.

knowledge of the employer or the notice by the contractor, in order to decide what is
reasonable. In Neodox Ltd v Borough of Swinton and Pendlebury,134 in relation to an
implied term, Diplock J observed that the time for provision of information did not
depend solely upon the convenience and financial interests of the contractor, but also
upon the point of view of the architect, his staff, and the employer. These observations
deal with requests that are either premature or made late and cause inconvenience.
5.114 In J & J Fee Ltd v The Express Lift Co Ltd,135 in respect of a domestic subcontract,
a term was implied to provide the subcontractor with information concerning the
subcontract work in such a manner and at such times as was reasonably necessary
for the subcontractor to have it in order to fulfil the obligation under the subcontract.
No doubt in most cases, in which information is requested, the perceived need of a
contractor will coincide with actual need, but this may not be such a case. In The Royal
Brompton Hospital National Health Service Trust v Hammond & Others,136 it was
remarked that, when implying such a term, what had to be construed was to impose
an obligation to provide the drawings when necessary in the sense that the drawings
had to be provided when actually necessary as opposed to when they were perceived
to be necessary.
5.115 In relation to the obligation on the contractor towards the employer to warn it against
design failures, it may also be regarded as a manifestation of the duty to cooperate.
In Equitable Debenture Assets Corporation v Moss,137 referring itself to the case of
Duncan v Blundell,138 the court held that a contractor engaged to construct a new
office block had a duty to warn the employer architect of design defects of which the
contractor knew. The relevant defects were in curtain walling to the building, which
was designed, supplied and fixed by a subcontractor. In the judgment, it was remarked
that:
“I think that if on examining the drawings or as the result of experience on site

Moss formed the opinion that in some respects the design would not work, or
would not work satisfactorily, it would have been absurd for them to have carried
on implementing it just the same. In my view if the Directors of [the employer]
and of [the contractor] had been asked at the time when the contract was made
what [the contractor] should do in those circumstances, they would have agreed
at once that [the contractor] should communicate their opinion to [the architect].
I think, therefore, that in order to give efficacy to the contract the term requiring
[the contractor] to warn of design defects as soon as they came to believe that
they existed was to be implied in the contract.”
5.116 Yet, it seems that the implied term must not be one that is too loose to be implied. In
Long Art Investment Ltd v Kam Chiu Fei,139 in respect of a breach of contract owing
134
(1958) 5 BLR 34.
135
(1993) 34 ConLR 147.
136
[2002] EWHC 2037.
137
(1984) 1 ConLJ 131.
138
(1820) 3 Stark 6. See also Plant Construction plc v Clive Adams Associates [2000] BLR 137.
139
[2003] HKEC 1220.

IMPLIED TERMS 143
to late and non-delivery of certain garments, the implied term that “[the plaintiff
and/or their agents or servants shall cooperate with [the recipient of the garments]
so as to enable them to discharge the obligations …” was held to be too loose as a
term to be implied. On the other hand, in the Scottish case of Scottish Power plc v
Kvaerner Construction (Regions) Ltd,140 which concerned a mechanical and electrical
subcontract in a construction project, the court upheld that there was, inter alia, an
implied term that, subject to the express terms of the contract to regulate the timing
and continuity of the subcontract works, all reasonable steps, which were necessary
to enable the subcontractor to execute the subcontract works should have been taken.
On the other hand, in Design Consultants Ltd v Chan Wen Mee May,141 the court, not 5.117
agreeing that it was an obvious design problem after considering expert evidence,
refused to find the contractor a duty to warn against a design problem by not providing
drainage channel in building the filtration system for a waterfall in the swimming pool
area.
The effect of a breach of the implied term to cooperate has been considered in Mona 5.118
Oil Equipment and Supply Co Ltd v Rhodesia Railways Ltd.142 Where a party fails to
perform a condition which he is obliged to perform, one of two consequences may
follow – in certain cases that obligation is to be deemed to have been performed; in
other cases the aggrieved party may have a cause of action arising from the failure to
perform that obligation. In his judgment, Delvin J remarked that:
“... If the breach of the implied term prevents the plaintiff from performing a
condition binding upon him, he is to be taken as having fulfilled that condition;
and if the condition is one on which his right to payment depends, he may
therefore sue for payment instead of damages.”
The implied duty to co-operate was accepted in Lee Chau Mou t/a Chau Mou 5.119
Engineering & Co v Kin Sing Engineering (HK) Co Ltd143 in relation to the application
for permits by the main contractor in a subcontract for laying water mains. In Luk
Wing Chin v Chan Chi Shing,144 the Hong Kong Court of Appeal upheld the implied
terms as between a contractor and its subcontractor for the supply and installation of
signage works. These included the duty not to hinder or prevent the subcontractor from
performing the subcontracts and from carrying out the subcontracted works in a regular
and orderly manner; and the duty to timely deliver to the subcontractor all relevant
information, instructions and drawings; and to cooperate with the subcontractor so as
to facilitate the execution of the subcontracted works.
In recent years, there has been a growing emphasis of good faith in construction 5.120
contracts. The use of the good-faith dispute resolution techniques such as partnering
is gathering force in Hong Kong and new forms of standard contracts, such as the
140
1999 SLT 721.
141
[2009] HKEC 1142.
142
[1949] 2 All ER 1014.
143
(unrep, HCCT No 3 of 2006).
144
[2008] HKEC 963.

New Engineering Contract (NEC) in the United Kingdom do include express clauses
providing, for example, that all involved “… shall act as stated in this Contract and in
a spirit of mutual trust and co-operation…”.
5.121 In many common law jurisdictions, such as England and Wales, there is no generally
applicable doctrine of good faith, as in the case of legal systems like those in the
United States or Germany. Yet, implied terms have been utilised to somehow bypass
the harshness of the situation. For instance, in Timeload v British Telecommunications
Plc,145 at the time when the defendant was the sole provider of a directory enquiries
service for telephone subscribers, it was implied into the contract with the plaintiff
who was allotted the number 0800 192192 which was very similar to the defendant’s
own directory enquiries number that the defendant should not be able to exercise power
under the contract to terminate the contract without demonstrable reason or cause for
doing so. In some construction contracts, provisions for parties acting in good faith
are expressly provided. These may mean that the obligation of good faith requires the
parties to act honestly with each other and to take reasonable steps to cooperate in
relation to matters where the contract does not define rights and obligations or provide
any mechanism for the resolution of disputes.146
5.122 In Philips Electonique Grand Public SA v British Sky Broadcastng Ltd,147 the court
suggested that a term to act in good faith could be implied into the agreement for the
manufacture of special receivers for decoding satellite signals. In this case, the court
placed particularly reliance on the facts that the subject matter was a high risk venture
and the supply of information was important. In Balfour Beatty Civil Engineering Ltd
v Docklands Light Railway,148 where the employer amended the ICE standard form of
contracts by replacing the engineer with the employer itself and deleting the dispute
resolution clause, thereby depriving the contractor of its right to arbitration. On
appeal, the court, relying on the then authority of Northern Regional Health Authority
v Crouch Construction Co Ltd149 for the proposition that the court did not have power
to open up or review the engineer’s certificate, it was noted that a duty on the part of
the employer to act fairly and reasonably was expressly admitted by the employer.
5.123 Whether this may or may not affect the operation of the duty to cooperate is yet to
been seen. However, the code of conduct as expected from an employer and from a
contractor is evolving to suit the changing culture and circumstances that now are
affecting the construction process.
(d) Duty not to prevent completion

5.124 The duty not to prevent and the duty to cooperate may be seen as two sides of the same
coin. Thus, as noted in Stirling v Maitland:150
145
[1995] EMLR 459.
146
See, for example, the decision of the Supreme Court of Western Australia in Thiess Contractors Pty Ltd v Placer
[Granny Smith] Pty Ltd (2003) 196 ALR 257.
147
[1995] EMLR 472.
148
[1996] 12 ConLJ 259.
149
[1984] QB 43.
150
(1864) 5 B&S 840.

IMPLIED TERMS 145
“if a party enters into an arrangement which can only take effect by the continuance
of a certain existing state of circumstances, there is an implied engagement on
his part that he shall do nothing of his own motion to put an end to that state of
circumstances under which alone the arrangement can become operative”.
Likewise, in McCarrick v Liverpool Corporation,151 it was said that: 5.125
“... in any contract, whatever its nature, it is a general rule that, if the thing agreed
to be done cannot effectually be done unless both parties concur in it, the proper
construction of the contract requires the implication of a term that each agrees to
do all that is necessary to be done on his part for the carrying out of that thing.”
Whether these implications are made is still dependant upon the nature of the contract. 5.126
For illustration, it seems that such a term can be implied on the employer to not act
to disqualify the engineer or the architect as in Sutcliffes v Thackran.152 Likewise,
there can be an implied duty on a superior contractor not to prevent or hinder the
subcontractor from carrying out subcontract works in accordance with the subcontract
as in Jardine Engineering Corp Ltd v Shimizu Corp,153 where Kaplan J set an example
by stating:
“In my judgment, where you have a time clause and a penalty clause, it is always
implied in such clauses that the penalties are only to apply if the builder has, as
far as the building owner is concerned, and his conduct is concerned, that time
accorded to him for the execution of the works which the contract contemplates
he should have.”
On the other hand, an employer does not impliedly warrant the fitness of the site 5.127
regarding compliance with health and safety requirements as in Alridge v Grand
Actual;154 an employer is not normally responsible for the delay by a nominated
151
[1946] 2 All ER 646.
152
[1974] 2 AC 727.
153
[1992] 2 HKC 271. See Sun Kai Engineering Co Ltd v Tileman Asia (HK) Ltd [2000] HKEC 257, where Recorder
Kotwewall SC observed:
“At page 314 of his judgment, Kaplan J considered and accepted submissions based on the decision in Wells
v. Army & Navy Co-operative Stores Ltd [1903], Hudson’s Building Cases, 4th Ed. at page 354. The learned
judge said this: As his final position Mr Lloyd submitted that, on the agreed facts, it is clear that (subject
to causation and remoteness) the defendant is in breach of contract by depriving the plaintiffs (however
unintentionally) of their rights to have the time within which to execute and complete the sub-contract works
as are set out in part III of the appendix of the sub-contract. …If a party is given 100 days to complete a piece
of work and the other party tells him to suspend work for 10 days, then he has only been given 90 days to
complete the work. True it is that he will get an extension of time for 10 days and this is designed to assist the
employer because without the extension of time the liquidated damages clause would go on the doctrine of
employer’s prevention. The extension of time provision is very much to the benefit of the employer. However,
on this factual scenario, the extension of time does not cure all the damage suffered because although it gives
10 days’ extension, it does not compensate the contractor for the extra 10 days’ cost involved. A 100-day
contract becomes a 110-day contract and this, in all probability, would be a more expensive proposition. If this
is correct and subject to causation and remoteness, I do not see why the plaintiffs cannot recover it as a matter
of law.”
154
(1996) 55 ConLR 91.

subcontractor chosen by it as in Leslie & Co Ltd v The Managers of the Metropolitan

Asylums District.155 Interference with the third party may also be sufficient ground to
find a breach of the implied duty not to prevent completion as in Acrow (Automation)
Ltd v Rex Chainbelt Inc.156
5.128 This “prevention” principle has been discussed by the Hong Kong Court of Final
Appeal in the case of Kensland Realty Ltd v Whale View Investment Ltd,157 which is
a case concerning the sale and purchase of a property. The vendor was selling as a
confirmor. The sale and purchase agreement provided that time was of the essence.
In the agreement, there was a clause that the vendor could direct how the balance of
the purchase price was to be paid but that clause was silent as to when such direction
was to be given. Completion of the sale and purchase was due to take place by 1 pm
but, despite earlier requests, it was not until after 11 am that the vendor’s solicitors
gave a split cheque direction. The cashier orders to were not delivered to the vendor’s
solicitors until 1:06 pm and the vendor refused to accept them as the deadline for
completion had passed. It was held that, if the agreement was silent as to when the split
cheque direction should be given, business efficacy demanded that there be an implied
term that the direction be given so as to allow the purchaser’s solicitor reasonable time
to comply with it, prior to the time for completion.
5.129 It was also held that in assessing what was a reasonable time, account must be taken
of all matters which both parties were, or might objectively be taken to be, aware of at
the time of making the contract. In the judgment of Ribeiro PJ, it was remarked that
these facts bring into play rules derived from the long established legal principle that
“a person is not permitted to take advantage of his own wrong”. After reviewing the
authorities, Ribeiro PJ said, in Kensland Realty Ltd v Whale View Investment Ltd &
Another,158 that:
“On the basis of the foregoing discussion, it seems clear, based on the underlying
principle that a person is not permitted to take advantage of his own wrong, that a
contractual party who is in breach of an obligation owed to the other party, will be
prevented from asserting rights or claiming benefits which arise in consequence
of his breach. The cases also show that where this ‘prevention principle’ applies,
it may be given effect in different ways.
In many cases, it will be appropriate to implement it as a substantive principle
of law that precludes the wrongdoer from taking advantage of his own wrong,
whatever the contract may say and however clearly the contract may appear to
confer on the wrongdoer an unqualified right to enjoy such advantages. Cases
like Rede v Farr (1817) 6 M & S 121 and New Zealand Shipping Co Ltd v
Sociiti des Ateliers et Chantiers de France [1919] AC 1, may be considered
examples.
155
(1901) 68 JP 86.
156
[1971] 1 WLR 1676.
157
[2002] 1 HKLRD 87.
158
[2002] 1 HKLRD 87.

IMPLIED TERMS 147
In other cases, where appropriate, the courts give effect to the principle as one of 5.130
construction, holding that the contractual terms with which they are concerned
must be construed by applying the principle as a canon or presumption of
construction: see Lewison, The Interpretation of Contracts (2nd ed.) (Sweet &
Maxwell) para.6.08.
Another possible manifestation of the underlying principle may be detected in

cases where one party’s conduct is the cause of the other party’s failure to meet
a condition precedent. Here, the principle has in some cases been given effect by
deeming the condition to have been met.
The operation of an implied duty not to prevent the carrying out of the contract is 5.131
connected to the contractual right to complete the works, once the contract has been
entered into. This is illustrated by Greatworth Industrial Ltd v Chevalier (Construction)
Co Ltd,159 where the Hong Kong Court of First Instance considered an implied term
that a subcontractor was not to be hindered or prevented from performing the contract
for the supply and installation of steel gates to two housing blocks. There was a
variation clause in the contract between the contractor and the employer, empowering
the employer to order any amendment to the works, including omitting the gates. The
employer cancelled the works in relation to the steel gates under its contract with the
contractor. Referring to the right under the contract to complete the works, it was
submitted that the contractor was under an implied duty not to prevent the carrying
out of the supply and installation of the gates. In his judgment, relying on BP Refinery
(Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings,160
Deputy Judge Muttrie observed that:
“The term for which [the sub-contractor] contends meets those conditions, in
my view. I do not see that it is to be regarded as contradicting Clause.4, which
is, I think, the only reason put forward for finding that it is not to be implied.
A similar term was implied in Jardine Engineering Corporation Ltd v. Shimizu
Corporation [1992] 2 HKC 271 … It follows that, although it was the Housing
Authority which deleted the gates, Chevalier did not have the right to cancel
the sub-contract. Like the main contractor in the Jardine case, it was put into
involuntary breach of contract by the actions of the Housing Authority.”
There are however two limitations in relation to the operation of this principle. First, it 5.132
is necessary to show that the relevant party’s ‘wrong’ involves its breach of the contract
in respect of an obligation owed to the other party. Thus, in Luxor (Eastbourne) Ltd
v Cooper,161 where an estate agent was engaged on terms that he would be paid
commission if he brought about a sale, the House of Lords refused to imply a term
to inhibit the owners from disposing of their property themselves or through other
159
[2005] HKEC 2136.
160
[1978] 52 ALJR 20.
161
[1941] AC 108.

channels, thereby preventing the agent from earning commission. It was stressed that
the owners were quite entitled to dispose of their property and, in doing so other than
through the agent, breached no obligation owed to the agent. Also, as illustrated in
Cheall v Association of Professional, Executive, Clerical and Computer Staff,162 breach
of a duty owed to a third party to the contract, whether contractual or non-contractual,
does not in itself suffice. Second, it is necessary to show that the contractual rights
or benefits which the party in question is seeking to assert or claim arise as a direct
consequence of that party’s prior breach.
5.133 This requirement is illustrated in the Australian case of Nina’s Bar Bistro Pty Ltd
v MBE Corp (Sydney) Pty Ltd,163 which is a case involving the sale of a restaurant
subject to the parties’ obtaining consent from the lessor for the restaurant’s lease to be
assigned to the purchaser and the parties’ being under an obligation to use their best
endeavours to secure such consent. Such consent was not obtained and the purchaser
was held to be in breach of the best endeavours obligation. The question was whether,
in such circumstances, the purchaser was entitled to terminate the contract. On the
facts, the court was not satisfied that the purchaser’s failure to obtain consent of the
lessors was causally related to such breach, the probability being that such consent
would in any event not have been given. The purchaser was therefore held entitled to
terminate notwithstanding its prior breach.
(e) Other implied terms
5.134 There are other common terms that are readily implied into a construction contract.
5.135 For instance, a contractor is usually taken to have impliedly agreed that it will do its
work in a good and workmanlike manner164 and that it will supply good and proper
materials. As to the standard of workmanship, it may be defined in considerable detail
in the contract, usually by reference to the code of practice and trade standard. The
contractor has to do the work with the proper skill and care and, in deciding what
degree of skill is required, the court will consider all the circumstances of the contract.
5.136 In Hancock v BW Brazier (Anerley) Ltd,165 a purchaser bought from a builder a house
under construction. It was held that terms should be implied into the contract between
the parties that the builder would supply good and proper materials and that the house
would be reasonably fit for human habitation on completion. While it is usually a
term of a construction contract, by implication if not expressly, that the contractor
will supply materials of good quality as illustrated in Young & Marten v McManus
Childs,166 this is not invariably so, in particular if the contractor has been directed by
his client to enter into a contract with a third party to obtain particular materials on
terms which exclude or limit liability for defects.
162
[1983] 2 AC 180.
163
[1984] 3 NSWLR 613.
164
See, for example, Hanison Construction Co Ltd v Diamond Term Ltd [2006] HKEC 565, where such an implied
term was readily accepted in a contract for the renovation and improvement works.
165
[1966] 1 WLR 1317.
166
[1969] 1 AC 454.

IMPLIED TERMS 149
In Gloucestershire CC v Richardson (t/a WJ Richardson & Son),167 under the terms 5.137
of the contract for the building of a house, the contractor was bound to use concrete
columns purchased from a designated manufacturer, and it was also provided that
the contractor was obliged to obey the employer’s architect’s written instructions.
The contractor purchased the columns from the manufacturer as required. Yet, the
contractor never saw the structural details of these columns, but the actual columns
were approved by the employer’s architect. Due to hidden defects, the columns were
unsuitable. In compliance with written instructions from the employer’s architect,
the contractor ceased the work connected with the columns for a month and then the
contractor terminated the contract on the ground that the work had been delayed for
over one month by the architect’s written instructions. In deciding liability for the
cause of such delay, the House of Lords observed that, since the design, materials,
specification, quality and price of the columns were all fixed without reference to the
contractor and the remedies that the contractor had against the manufacturer in their
contract, which the contractor was obliged to accept, any warranty by the contractor
of the quality or fitness of the columns supplied by the designated manufacturer was
excluded.
In relation to materials used in repairing contracts, it has been noted in Young & 5.138
Marten v McManus Childs168 that
“… less cogent circumstances may be sufficient to exclude implied warranty

of quality where the use of spare parts is only incidental to what is in essence
a repairing operation where the customer’s main reliance is on the skill of the
tradesman, than in a case where the main element is the supply of an article, the
installation being merely incidental.”
The duty on the contractor may however be a continuing one. In Lintest Builders Ltd 5.139
v Roberts,169 a contractor properly terminated its employment under the contract in
RIBA standard form on the grounds that the employer failed pay the amounts certified
as due to the contractor within the stipulated period for honouring certificates. Yet,
disputes arose as to how the work done by the contractor was to be valued. The
contractor contended that all work done was to be valued without allowance being
made for any defects in that work since it was the employer who was in default.
The Court of Appeal in England and Wales held that the employer was entitled to
the proper credit in respect of defective work since the employer acquired a right at the
time the defective work was done. Thus, such a right can be enforced by requiring the
contractor to remedy the defects.
Where the contract is a design and build contract, the contractor may also be taken to 5.140
have impliedly agreed or warranted that the work will be reasonably fit for its intended
purpose. For example, in Test Valley Borough Council v Greater London Council,170 a
contractor for the design and construction of a house was held to have impliedly agreed
167
[1969] 1 AC 480.
168
[1969] 1 AC 454.
169
(1980) 13 BLR 38.
170
(1979) 13 BLR 63.

that the house would be reasonably fit for human habitation. The same principle may
become more readily applicable where a design element is provided by the contractor
or where the expertise of a specialist contractor is relied on, as in Adams v Richardson
and Starling Ltd.171
5.141 Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners172 deals with the
existence of such a term in a situation where there is an element of design involved.
However, in Bellefield Computer Services v E Turner & Sons Ltd173 May LJ pointed
out that:
“There is a blurred borderline between architectural design and the construction

details needed to put it into effect. Borderlines of responsibility cannot be
defined in the abstract. A carpenter’s choice of a particular nail or screw is in
a sense a design choice, yet very often the choice is left to the carpenter and
the responsibility for making it merges with the carpenter’s workmanship
obligations. In many circumstance[s], the scope of an architect’s responsibility
extends to providing drawings or specifications which give full construction
details. But responsibility for some such details may rest with other consultants,
e.g. structural engineers, or with specialist contractors or subcontractors,
depending on the terms of their respective contracts and their interrelationship.
As with the carpenter choosing an appropriate nail, specialist details may be left
to specialist subcontractors who sometimes make detailed ‘design’ decisions
without expecting or needing drawings or specifications telling them what to
do. In appropriate circumstances, this would not amount to delegation by the
architect of part of his own responsibility. Rather that element of composite
design responsibility did not rest with him in the first place.”
5.142 Yet, there is normally no implied term regarding fitness for purpose where, as in Lynch
v Thorne,174 the contractor merely undertakes to build to a particular specification
already, at the date of the relevant contract, devised by or on behalf of the employer,
and it must follow that there is no such implied term if the contractor agrees to build in
accordance with plans or specifications to be produced in the future by others.
5.143 Also, as recently illustrated in Yeung Wut Chiu v Hing Cheong Furniture & Decoration
Co,175 there is no implied term entitling the employer to withhold 10 per cent of the
contract price as retention money, and this has to be proved, whether as a trade custom
or otherwise, on a case-by-case basis.
171
[1969] 1 WLR 1645.
172
[1975] 1 WLR 1095.
173
[2002] EWCA 1823.
174
[1956] 1 WLR 303.
175
[2005] HKEC 988.

1. GOAL OF INTERPRETATION
(a) Objective intention of parties
Construction or interpretation of a contract is the ascertainment of the meaning of 6.001

a contract term or provision. The interpretation of a contract is a matter decided
ultimately by the court or arbitrator tribunal and not by the parties to the contract
themselves. This is a matter of law and is approached objectively, leaving aside the
subjective intention of the parties. The goal in contract interpretation is to ascertain
from the contract the objective intention of the parties to the contract at the time the
contract was entered into. The actual intention, motive, purpose, desire or state of
mind of the parties or either of them at the time of contract is not what the focus is on.
As Lord Diplock noted in Pioneer Shipping v BTP Tioxide Ltd (The Nema) (No 2),1
the goal to be achieved is
“ … to ascertain … what each party would have led to the other reasonably to
assume were the acts that he was promising to do or to refrain from doing by
works in which the promises on his part were expressed”.
In interpreting a contract, it is a fundamental principle that the contract has to be 6.002

considered as a whole, giving effect to all of its parts. Also, the task is to find out the
intention of the parties expressed at the time of entering into the contract. This is by
examining the language that the parties chose when they wrote out the contract.2
In Mitsui Construction Co Ltd v Att-Gen of Hong Kong,3 the contractor for a tunnel 6.003
of 3,277 metres in length was claiming additional payment from the Hong Kong
Government due to difficult ground conditions resulting in delay of completion of two
years. The contract already contained different unit rates for tunnel linings designed to
suit various types of ground conditions and was of a re-measurement type akin to the
ICE Conditions of Contract (4th edn). Yet, the design provided for much of the length
of the tunnel to be driven through rock that could be self-supporting, but it turned
out that the tunnel had to be elaborately lined with steel supports and concrete. Thus,
there had been substantial increase in items for steel and concrete tunnel lining and
decrease in tunnel lining through rock sections. The contractor claimed that, due to the
substantial increase of quantities in excess of quantities in the priced bills, the billed
rate for the lining should be increased as it was unreasonable or inapplicable relative
to the nature or amount of the works. The contractor contested that the engineer had
power under the terms of the agreement to grant additional time for completion and
1
[1982] AC 724.
2
In Bank of Credit and Commerce International SA v Ali & Others [2002] 1 AC 251, Lord Bingham summarised
the principles:
“To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words
used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the
relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties’ intentions the
court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment
based on the materials already identified.”
3
[1987] 1 HKC 31. See also Jets Technics Ltd v Hong Kong Jockey Club [2010] HKEC 1085.

154 CONSTRUCTION OF CONTRACT
to agree to pay the contractor additional amounts for the extra materials needed to
complete the project. In contrast, the Government contended that the terms of the
agreement cast upon the construction company all risks associated with difficult ground
conditions, including the risk that the quality and quantity of tunnel lining required
would differ, no matter to what extent, from the estimates in the bill of quantities. The
Hong Kong Court of Appeal, in a majority decision, held in favour of the Government;
and the contractors appealed to the Privy Council. Clause 74(4) of the conditions of
contract read:
“If the nature or amount of any omission or addition relative to the nature or
amount of the works or to any part thereof shall be such that in the opinion of
the engineer the rate contained in the contract for any item of the works is by
reason of such omission or addition rendered unreasonable or inapplicable then
a suitable rate shall be agreed upon between the engineer and the contractor.”
6.004 The Privy Council held that the differences between the actual quantities and the billed
quantities were such as to give jurisdiction to the engineer to agree a suitable rate with
the contractors or to fix a rate under the terms of the agreement and, hence, allowed
the appeal. In the judgement of Lord Bridge, it was remarked that the contract was a
badly drafted contract but that still afforded no reason to depart from the fundamental
rule of construction of contractual documents that the intention of the parties had to
be ascertained from the language they had used interpreted in the light of the relevant
factual situation in which the contract was made.4 In this regard, the Privy Council
expressly stated that, in cases such as this, “… comparison of one contract with
another can seldom be a useful aid to construction”.
6.005 However, the construction of contractual documents is not to be a quintessential
game with words.5 As commercial documents, contracts must be construed in a
business fashion and there must be ascribed to the words a meaning that will make
good commercial sense in order to provide a commercially sensible construction6
and the court is often willing to imply a term that the parties shall co-operate to
ensure performance of their bargain.7 In a commercial contract it is certainly right
4
See also Japsignal Property Management Co Ltd v Incorporated Owners of Prat Mansion [2010] HKEC 496.
5
See also Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896;
Bank of Credit and Commerce International SA v Ali & Others [2002] 1 AC 251; and Ying Ho Co Ltd & Others
v Secretary for Justice (2004) 7 HKCFAR 333. See also Jumbo King Ltd v Faithful Properties Ltd (1999) 2
HKCFAR 279 at 296 and Jets Technics Ltd v Hong Kong Jockey Club [2010] HKEC 1085.
6
In Goldlion Properties Ltd v Regent National Enterprises Ltd [2008] 3 HKLRD 104, in the construction of
a termination clause in a sale and purchase agreement for property, Tang LJ referred to the need to construe
the clause in its factual matrix, given a commercially sensible construction, in light of its purpose to avoid
protracted litigation if disputes arose. See also Swire & Maclaine Limited v Kentucky Fried Chicken International
Corporation [1995] HKEC 361.
7
In Ying Ho Co Ltd & Others v Secretary for Justice (2004) 7 HKCFAR 333, the Hong Kong Court of Final Appeal
was asked to consider the contractual discretion available to the Director of Lands over the design, disposition
and height clause in a Government lease and held that the contractual discretion in question in the clause had to
be construed so as not to undermine the express and implied contractual rights in question and that this involved
a construction of the contract, which was to be an orthodox exercise involving the objective ascertainment of the
parties’ intentions rather than reference to any extra-contractual expectations of the parties. Riberiro PJ, at 379,
referred to the often cited case of Mackay v Dick (1881) 6 App Cas 251 and noted that the court is often willing
to imply a term that the parties shall co-operate to ensure the performance of their bargain.

GOAL OF INTERPRETATION 155
that the court should know the commercial purpose of the contract, and, this in turn,
presupposes knowledge of the genesis of the transaction, the background, the context
and the market in which the parties are operating.8 The natural and ordinary meaning
will apply unless the relevant surrounding circumstances demonstrate otherwise.9
Where parties failed to express themselves well or clearly, such circumstances may
be of particular value. Yet, if detailed semantic and syntactical analysis of words in
a commercial contract is going to lead to a conclusion that flouts business common
sense, it must yield to business common sense.10
(b) Determination of correct meaning
Thus, the general principles for interpreting contracts equally apply in the 6.006
interpretation of construction contracts. There are no special rules that are applied to
the interpretation of construction contracts. In the construction industry, the contract is
the connector for all construction participants. It is the foundation of every relationship
in the construction industry. One of its functions is to act as a means of communication
for the exchange of expectations. However, many construction disputes turn on what
a particular contract term or provision means. The role of the court or the arbitral
tribunal in such a situation is to determine the correct meaning of the contract and to
apply it to the situation before it in that particular case. In doing so, some ground rules
have been developed in finding out that correct meaning. Hence, obviously, all parties
to a construction or participants involved in its administration should possess at least
a basic understanding of these rules of contract interpretation.
In relation to construction contracts, many common concepts engaged in day-to-day 6.007
use on site and in contract supervision are without a definite boundary. Examples
of these can range from matters such as the completion of the works, that is to say
the meaning of substantial or practical completion, to what exactly a subcontract
made “back-to-back” in relation to a main contract covers. The difficulties in finding
the correct meaning of a term in construction contracts are enhanced by the volume
of documents involved and the method the industry generally adopted in using the
standard forms of contract in the drafting process. In construction contracts of normal
size, the contract documents may include general and special conditions of tender,
general and special conditions of contract, general and special specifications, bills
of quantities, standard methods of measurements, drawings, method statements,
programmes or the like. These may be prepared from drawing together or borrowing
bits and pieces from other contracts and often by more than one person or team of
persons. All these factors contribute to the risks of errors or inconsistencies when
these documents so prepared in advance are put to use in the real world. Hence,
construction contracts are more exposed to the risks of ambiguity and, in such cases
the principles of contract interpretation need to be reverted to in order to help resolve
the dispute.
8
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995H – 996A.
9
Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222.
10
Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296.

2. PRINCIPLES OF INTERPRETATION
(a) General
6.008 The purpose of interpreting a contract is to discover the intention of the parties. If
the words used are plain, clear and obvious then they will be given their ordinary
meaning and the parties will be presumed to have intended that result. All the terms
of the contract have to be considered even though the dispute before the court may
concern only one of them.11 This obviously can only take place after the documents
forming the contract have been ascertained.12 Apart from evidence on what the
contract terms are, evidence outside the contract is generally only admissible when
the terms of the contract are ambiguous or contradictory.13 Hence, if the words
have a clear and fixed meaning and can only be given one interpretation, no outside
evidence will be allowed. In practice, the court will seek to see the objectives of the
parties in entering into the contract but, once having concluded that the contract
contains all the terms bargained for and agreed between the parties and that the
terms are clear, the court will go no further to look at other evidence in interpreting
the meaning of the contract terms.
6.009 In order to interpret contracts with some consistency and to provide contracting
parties with a legal framework, which provides a measure of predictability, the court
has to bind the parties by their objectively expressed intention. In doing so, the court,
having regard to all the circumstances, adopts an interpretation that corresponds to
that expressed intention. Yet, the words expressed are what must be considered, not the
subjective intentions of the contracting parties.14 As Huggins JA said in Hong Kong
& Shanghai Bank Hong Kong (Trustee) Limited v Chan Lai Wah [1980] HKLR 570,
it is not of concern so much to ascertain the intention of the parties as to ascertain the
intention expressed by the parties, and if they have expressed their intention in words
which are perfectly clear and positive in themselves, the court may depart from the
literal meaning only if it produces results which are repugnant or absurd. The principles
are summarised in the judgment of Lord Hoffmann in Investors Compensation Scheme
Ltd v West Bromwich Building Society.15
11
As remarked in Wong Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521, the meaning that the contract
conveys to the reasonable man could only be ascertained by reading all the contract documents as a composite
whole.
12
See, for example, Headwin Engineering Ltd v United Soundfair Engineering Co Ltd [2008] HKEC 591, where
there were various revised quotations in a subcontract for structural steel and other works and the court had to
decide on what documents formed the contract.
13
However, as noted by Sakhrani J in Hongkong Underground Engineering Limited v Wellcome Construction
Company Limited [2005] HKEC 1264,
“… [it] is common ground that evidence of the conduct of the parties after the making of the contract is
admissible to show what the terms of the contract were but such evidence is not admissible to interpret a
written agreement.”
In that case, as the contract was written, it was held that the parties’ subjective intentions and the subsequent
conduct of the parties were not relevant and therefore inadmissible in construing the contract.
14
Skk (Hong Kong) Co Ltd v Hon Fung Engineering Ltd [2005] HKEC 114.
15
[1998] 1 WLR 896 at 912 – 913. These are endorsed by Sir Ivor Richardson NPJ in Ying Ho Co Ltd & ors v
Secretary for Justice (2004) 7 HKCFAR 333 at 406 – 407.

PRINCIPLES OF INTERPRETATION 157
(b) Examination of express terms
In finding the objectively expressed intention, the first thing to look at is the express 6.010
terms of the contract. Express terms in a contract are of more importance than other
matters such as the previous course of dealing, the custom or trade practices of the
industry or the subsequent course of performance. In Falcon Building Materials Co
Ltd v Fine View Engineering Ltd, the payment term in a subcontract for an automatic
door system and accessories for a hospital provided for 80 per cent of the price of the
work to be settled by the main contractor’s receipt of final payment from the employer
within 45 days from the completion of testing and commissioning and the acceptance
of the works by the employer, which was quite common practice in the industry.
Applying the natural and ordinary meaning in the context of the factual matrix, in
deciding whether the payment term was a ‘pay-if-paid’ provision,16 it was held that
this provision dealt with the time of such payment and did not amount to a condition
precedent to the main contractor’s liability to pay the 80 per cent.
The ordinary meaning of terms in a contract will be adopted by the court unless there 6.011
is anything in the context of the contract that tends to suggest that a special meaning
should be given to such terms. As noted in Caledonian Railway v North British
Railway,17 the grammatical and ordinary sense of the words is to be adhered to unless
that will lead to some absurdity, or some repugnance or inconsistency with the rest of
the contract and, if that is the case, the grammatical and ordinary sense of the words
will be modified to no further extent than to avoid that absurdity or inconsistency. In
this regard, the contract must be read as a whole and not as a series of isolated parts
and it must also be read in an attempt to give reasonable meaning to each and every
provision. No provision in the contract can be arbitrarily regarded as meaningless.
The true meaning of the agreement is to be gathered, according to the well-known 6.012
rule, from the four corners of the agreement itself. In Mills v Dunham,18 the contract
in issue was the employment agreement of the defendant as the plaintiff’s traveller,
which provided that, in the event of the termination of the agreement, that he should
not, either on his own account or for any employer, “call upon, or directly or indirectly
solicit orders from, or in any way deal or transact business with” the customers
of the plaintiff. It was contended on one side that that clause meant literally what
it said and, according to that construction, it would preclude the defendant from
having communication with any of the customers of the plaintiff’s on any business
whatsoever; would forbid his calling on any of those customers to solicit orders for
16
In Wo Hing Engineering Ltd v Pekko Engineers Ltd [1999] HKEC 845, it was held that clear and unambiguous
words were required to deprive the subcontractor of the right to payment as opposed to the time at which payment
was to be made.
17
(1881) 6 App Cas 114. See Grey v Pearson (1857) 6 HLC 61, where Lord Wensleydale said:
“In construing wills and indeed statutes and all written instruments, the grammatical and ordinary sense of the
words is to be adhered to, unless that would lead to some absurdity, or some repugnancy or inconsistency with
the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so
as to avoid that absurdity and inconsistency, but no further.” See also Club Lusitano v Director of Public Works
[1961] HKLR 554 and Moon Yik Co Ltd & Anor v Attorney General [1977 – 1979] HKC 433.
18
[1891] 1 Ch 576. See also The Procureur General in Hongkong of the Societe Des Mission Etrangeres v The
Canton Nanyang Brothers Tobacco Co Ltd (1922) 17 HKLR 19.

a watchmaker or an umbrella-maker. Such a provision, if construed as being so wide

and unreasonable, would be unenforceable as a restraint of trade clause. The plaintiff
said that the other clauses of the agreement had to be looked at as well to see what
the parties were driving at, and that this clause had to be limited to business similar
to that carried on by the plaintiff, and that to give it any wider operation, though not
doing violence to the language of the clause, would be doing violence to the spirit of
the agreement. In the judgement of the Court of Appeal in England and Wales, finding
in favour of the plaintiff, Kay LJ remarked that, notwithstanding that the defendant
ought to have the benefit of the doubt, “[i]t is also a settled canon of construction that
where a clause is ambiguous a construction which will make it valid is to be preferred
to one which will make it void”.
(c) Court preference for non-voidable meaning
6.013 Thus, in choosing a meaning that will render a clause void and one that will not, the
latter is to be preferred by the court, assuming that there should be valid meaning
expressed in that clause. Also, as noted in Gold v Patman & Fotheringham Ltd,19
it will be rare where a contract is so obscure and so incapable of any definite or
precise meaning that the court is unable to attribute to the parties any particular
contractual intention. That case involved a contract for the erection of a building
in the standard Royal Institute of British Architects form, which required the
builders to effect special insurance against subsidence or collapse for the adjoining
premises. In the course of erecting the building, damage was caused to adjoining
landowners, who brought an action against the employer for removal of support,
who thereupon brought an action against the builders for breach of contract,
alleging that the contract required the builders to effect an insurance which covered
not only themselves but also the employer. It was held that, on a true construction
of the contract, the builders were required to effect an insurance only to cover
themselves.
(d) Non-standard or technical meanings
6.014 Terms may acquire non-standard or technical meanings in certain industries or trades.
For these technical terms or terms of art or trade, the court will give effect to their
technical, trade or customary meaning if the circumstances indicate that the parties
intended to use the technical meaning of the term.20 In Produce Brokers Co Ltd v
19
[1958] 1 WLR 697. This is applied in Fenice Investments Inc v Jerram Falkus Construction Ltd (2009) 128
ConLR 124, where a fundamental and irreconcilable conflict in a construction contract between the inclusion
of two different interim payment mechanisms contained in the employer’s requirements and the JCT conditions
incorporating the JCT Design & Build Contract (Revision 1) 2007 form of contract was resolved in favour of the
JCT conditions which, by virtue of a clause providing for the hierarchy of several contractual documents, took
precedence.
20
In China Complant Development (HK) Ltd v Ng Shing Fat [2007] HKEC 770, the meaning of ‘completion date’
in a guarantee concerning various construction contracts was held to mean the contractual completion date of the
respective contracts as adjusted by any extension of time approved in accordance with the terms of the contract.

Olympia Oil & Cake Co Ltd,21 the House of Lords considered the situation where
such custom in the trade was not inconsistent with the terms of the contract. In his
judgement, Lord Atkinson said:
“The language expressing a trade custom is taken to be imported into the

language used by the contracting parties, whether written or verbal, because
it is presumed that they had the usage in their minds when they made their
contract, made it in reference to that usage, and intended that the usage or
custom should form part of it. If they have used language in their contract
inconsistent with the custom, that is one of the most effectual ways of negativing
this presumption, excluding the custom, and declaring that their contract is
unaffected by it.”
In Yeung Wai Hon v Ho & Partners Architects Engineers & Development Consultants 6.015
Ltd,22 the meaning of the well-known phrase of ‘substantial completion’ in construction
contracts was in issue. The claimants succeeded before the Labour Tribunal in asserting
their entitlement to four weeks’ written notice of termination or payment in lieu. They
were work supervisors on a construction project with their employment contracts
requiring them to work “up to the substantial completion day of the project” with
stated tentative dates for such completion. Their contracts provided for extension of
employment and specified four weeks’ written notice or payment in lieu to terminate
employment during the contractual period. The project was not completed by the
tentative dates, and the claimants continued to work for the defendant without a new
tentative substantial completion date being fixed. They were later told that the project
was completed and their contracts had ended. In allowing the appeal of the defendant,
Deputy Judge Cheung took into account the legal test for substantial completion and
concluded that, as the date of substantial completion could not be fixed beforehand,
only an estimated date could be given. Hence, in the circumstances, the court held that
the provision for extension of employment referred to the extension beyond the actual
date, rather than the tentative date, of substantial completion. As the claimants were
asked to leave on the actual date of substantial completion, no issue of extension of
their employment became relevant.
In Yuen Chong Fire Engineering Co Ltd v Ngo Kee Construction Co Ltd,23 the 6.016
subcontractor claimed for outstanding payment. One of the issues was whether
there had already been practical completion such that works carried out were not
21
[1916] 1 AC 314. The existence of such custom or trade meaning needs to be proved. See General Reinsurance
Corporation and Others v Forsakringsaktiebolaget Fennia Patria [1983] QB 856.
22
[2002] HKLRD 425. This should be contrasted with Attorney General v Costain International Ltd [1983]
2 HKC 110 where, in relation to the words ‘certificate’ and ‘order’ under the ICE conditions of contract, the
court held that a certificate was a document which spoke to the truth of some existing fact or an existing state of
affairs while an order directed the doing of some act in the future. See also Masri v Consolidated Contractors
International UK Ltd [2006] All ER (D) 444 (Jul) where it was held that the phrase ‘Contractor oil entitlements’
in an agreement relating to an oil concession in the Masila block in Yemen was not a term of art to cover all cost
recovery; and Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] All ER
(D) 222 (Mar), where the ‘seat’ of arbitration, which was Glasgow, agreed by the parties was held to mean the
place of the hearings of the arbitration as the parties also agreed to have English law to apply.
23
[2007] HKEC 345.

arising out of the subcontract and hence not covered by an arbitration clause. In
holding that works had already been practically completed under the subcontract,
the District Court of Hong Kong accepted the works could be practically complete
notwithstanding that there are latent defects; that a certificate of practical completion
might not be issued if there were patent defects since the defects liability period was
provided in order to enable defects not apparent at the date of practical completion to
be remedied; that practical completion meant the completion of all the construction
work that had to be done; however, the architect was given a discretion to certify
practical completion where there were very minor items of work left incomplete, on
“de minimis” principles.
6.017 A term in a contract may also be a term of art, which is a term that has acquired a
precise legal meaning ordinarily applied by the court. In Mariner International Hotels
Ltd v Atlas Ltd,24 the Hong Kong Court of Final Appeal considered the meaning of
‘practical completion’ in a sale agreement of a hotel and held that it meant, as used
in building contracts in Hong Kong a state of affairs In which the works had been
completed free from patent defects other than ones to be ignored as trifling and this
was distinct from the concept of substantial performance.25
6.018 In this aspect, it should however be noted that, for contracts not prepared by lawyers
or other likewise professionals, the parties may have meant by using the words
something different from the term of art meaning, as noted in Sydall v Castings
Ltd,26 Also, as illustrated in Schuler (L) AG v Wickman Machine Tool Sales Ltd,27
the word ‘condition’ was interpreted in the context of a long-term agency contract
for sale of panel presses and the House of Lords held that a construction that gave
it the meaning of a condition in the strict legal sense, the breach of which would
allow repudiation of the contract, was so unreasonable that the parties could not have
intended it.
(e) Contract presumed a consistent document
6.019 A contract is presumed to be a consistent document of its own. The same terms are
regarded as bearing the same meaning throughout the contract and different terms in
the contract are treated as referring to different matters. Thus, it is to be presumed that
a legal draftsman does not use words or phrases synonymously. In John Jarvis Ltd v
Rockdale Housing Association Ltd,28 the court construed that the term “the contractor”
24
[2007] 1 HKLRD 413.
25
See Westminster Corp v J Jarvis & Sons Ltd & Another [1970] 1 WLR 637 at 646; P&M Kaye Ltd v Hosier &
Dickinson Ltd [1972] 1 WLR 146 at 165; HW Nevill (Sunblest) Ltd v William Press & Son Ltd (1981) 20 BLR 78
at 87; Emson Eastern Ltd v EME Developments Ltd (1991) 55 BLR 114 at 119 – 122. See also Hoenig v Isaacs
[1952] 2 All ER 176; Bolton v Mahadeva [1972] 1 WLR 1009; and Big Island Contracting (HK) Ltd v Skink Ltd
[1990] 1 HKC 69 which was overruled.
26
[1967] 1 QB 302.
27
[1974] AC 235.
28
(1986) 36 BLR 48. See also Ferrara Quay Ltd v Carillion Construction Ltd [2009] BLR 367 and Reinwood Ltd
v L Brown & Sons Ltd [2007] BLR 10.

in the JCT 1980 Standard Form of building contract should include all servants and
agents of the contractor despite the absence of any “servants or agents” wording.
The court held that it was reasonable to assume that each contractual term had been
carefully considered and weighed by the legal draftsman involved, so that construction
of the contract might safely be aided by use of the presumption that different words
import different concepts.
(f ) Interpretation of ambiguous term
In interpreting the terms of a contract, if the term is ambiguous and one interpretation 6.020
will lead to an unreasonable result, the court will be unwilling to adopt that
interpretation if a sensible and reasonable one is available. In Permtek Ltd v China
Resources Machinery & Equipment Co Ltd,29 the plaintiff was a supplier of water
treatment plants and the defendant was a buying authority for entities in Mainland
China. The parties signed a contract regarding a new brewery plant, which included
a water treatment plant. The contract contained a clause providing for payment to be
made by way of an irrevocable letter of credit before a stated date. Yet, the contract
also contained a term providing that the contract would come into force beginning
after receipt of the letter of credit. The defendant argued that a condition was precedent
to the formation of a contract and that, until such time as the letter of credit was
received, there was no binding contract at all. If adopting this, the contract was of
an optional nature and no binding contract took effect unless a letter of credit was
willingly provided. This was rejected by the Hong Kong Court of Appeal, which held
that the first clause should prevail and the latter clause should be modified. This, as
Hunter JA said in the judgement, was most closely to mirror the apparent intention
of the parties objectively assessed, and to do less violence to the language of the
document: the outcome seemed to produce a commercial conclusion and avoid a
wholly unreasonable result.
It is necessary in some cases to reject some printed conditions of a contract as 6.021
inconsistent with other provisions.30
(g) Unreasonable terms not voidable, if unambiguous
This does not however entitle a re-write of those contract terms that, although 6.022
unreasonable, are not ambiguous. In general the contractor assumes the risk of many
uncertainties and difficulties associated with work in his field. In general it is not a
valid excuse for non-performance if the work proves unexpectedly difficult or onerous.
A contractor may still be liable in damages for failing to do something which was
29
[1989] 2 HKLR 349. See First Shanghai Enterprises Ltd v Dahlia Properties Pte Ltd [2002] 3 HKLRD 461 and
Incorporated Owners of Hip Wo House v Daily Trend Ltd [2008] HKEC 1431.
30
Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715. See, however, also Fenice Investments Inc v
Jerram Falkus Construction Ltd (2009) 128 ConLR 124.

impossible at the time of contracting and this was the view expressed in the cases of
Jones v St John’s College Oxford 31and Clifford v Watts32.
6.023 Thus, contractors will be held to harsh terms of plainly worded contracts. For example,
it is up to the parties to agree to a “pay-when-paid” clause that can be upheld by the
court, as in the New Zealand case of Smith & Smith Glass Ltd v Winstone Architectural
Cladding Systems Ltd,33 though very clear wordings are necessary. In that case, the
court seemed to have drawn a distinction between clauses which make payment to the
main contractor a condition precedent to an obligation to pay on to a subcontractor,
as opposed to those clauses which acknowledge that there was already an obligation
for the main contractor to pay the subcontractor, but that the receipt of money by the
main contractor simply affected the timing of that obligation. It was stressed that very
clear words indeed should be used to deprive a subcontractor of its right to payment
absolutely.
6.024 In Massford (HK) Ltd v Wah Seng General Contractors Ltd,34 in relation to an
application for summary judgment by a nominated subcontractor for the payment of
an outstanding amount in respect of the supply of ironmongery and sanitary fittings,
the court was asked to decide whether the subcontractor would only be paid in full
for the goods it delivered to the contractor until and unless the contractor received
full payment from the employer under the architect’s payment certificates. The terms
of payment provided “80% Balance upon delivery of goods, submission of invoice,
and to be paid within 14 days after honouring of Architect’s Payment Certificate by
the Employer” and “Terms of Payment are on a back to back basis. i.e. your invoice/
payment application should be submitted to us on time which will be included in
our (Main Contractor) payment application and your payment is subject to Architect’s
Payment Certificate and the honouring of Payment Certificate by the Employer.” The
Hong Kong Court of Appeal held that the terms of the contract appeared to be so clear
that the terms of payment had been made on a back-to-back basis and expressly made
31
(1870) LR 6 QB 115. See also Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973]
1 WLR 601, where the works were divided into three phases and the contractor was to start phase III six months
after the date of issue of the certificate of practical completion of phase I and to complete it by a designated date,
subject to an extension of time clause that did not include delay in the completion of phase I. It was held that
notwithstanding that phase I was delayed, the contractor was still obliged to complete the works by the designated
date without any grant of extension of time for the completion of phase III.
32
(1870) LR 5 CP 577 at 586, noting:
“Where the performances of the thing covenanted to be done is not made impossible by the law of this country,
the case falls within the principle laid down in the leading case of Paradine v Jane (1647) Aleyn 26: 82 ER
897 where the defendant in an action for rent, sought to excuse himself by reason of his having been expelled
from the premises by alien enemies and his plea was held insufficient. The natural resolution of the Court was,
that where the law creates a duty or charge, and the party is disabled to perform it, without any default in him
and had no remedy over, there the law will excuse him; but where the party by his own contract creates a duty
or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable
necessity, because he might have provided against it by his contract; and therefore if the lessee covenant to
repair, though it be burnt by lightning or thrown down by enemies, yet he ought to repair it. Where a thing
becomes impossible of performance by the act of the third person, or even by the act of God, its impossibility
affords no excuse for its non-performance: it is the defendant’s own folly that has led him to make such a
bargain without providing against the possible contingency.”
33
(1993) CILL 898.
34
[2006] 1 HKC 58.

PAROL EVIDENCE RULE 163
subject both to the architect payment certificate and the honouring of the payment
certificate by the employer.
3. PAROL EVIDENCE RULE

(a) Operation of parol evidence rule
The purpose of the parol evidence rule protects explicitly written terms of the contract. 6.025
That protection extends to the rules of construction of contracts. The express terms
of a contract are to be interpreted solely on an objective basis with no allowance
entertained for the subjective intention of the parties.
In the classic case of Prenn v Simmonds,35 it was held by the House of Lords that 6.026
evidence of negotiations or the parties’ intentions was not receivable by the court
as evidence in constructing a written agreement. However, evidence of the factual
background known to the parties at or before the date of contract could go before the
court as evidence in constructing the written agreement.
The operation of this rule can be illustrated in Happy Dynasty Ltd v Wai Kee (Zens) 6.027
Construction & Transportation Co Ltd & Others,36 where the concerned defendants
counterclaimed against the plaintiff on the grounds of breach of contract and contractual
duty of care in respect of five emulsion blasts that occurred whilst drilling and blasting
works were being carried out. The plaintiff brought in the third party for an indemnity
or contribution. The issue that arose in the counterclaim action was whether there
was already a full and final settlement agreement between the plaintiff and the third
party with regards to the emulsion blasts. It was alleged that the settlement agreement
was contained in two letters, the first letter stating that, to resolve all outstanding
issues, the third party would reimburse the plaintiff a sum and offer a total discount
of HK$80,000 on the future purchases of emulsion and the second letter stating the
plaintiff ’s acceptance, as final settlement for the five emulsion blasts and confirming
that there would not be any further claims. The plaintiff argued that the effect of such
a compromise was merely for potential dispute that had not arisen at the time and that
actual dispute was excluded. The court held that parol evidence was inadmissible in
this case. In the judgement of Yam J, he remarked that once the transactions had been
reduced to or recorded in writing by agreement of the parties, extrinsic evidence was
inadmissible to contradict, vary, add to or subtract from the terms of the documents.
The court recognised the only exceptions to this were where there was a dispute as to
the subject matter, the parties or the true nature of the transaction, where the words
used were unclear or ambiguous, the completeness of terms, due execution, collateral
agreements and warranties, statutory exceptions or where the contract was invalid or
35
[1971] 1 WLR 1381. See Investors Compensation Scheme Ltd and West Bromwich Building Society [1998] 1
WLR 897; Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 WLR 379; and Reardon Smith Line
Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989. See also Jumbo King Ltd v Faithful Properties Ltd & Ors
[1999] 4 HKC 707; Ying Ho Co Ltd & ors v Secretary for Justice (2004) 7 HKCFAR 333; and China Complant
Development (HK) Ltd v Ng Shing Fat [2007] HKEC 770.
36
[1998] 1 HKLRD 309. See also Centaline Property Agency Ltd v Suen Wai Kwan Samantha [2004] 4 HKC 294.

conditional. Accordingly, it was held that the court would receive extrinsic evidence
only as to the genesis and aim of the transaction where it was necessary to put the
transaction in its context.
(b) Summary of principles
6.028 The principles37 have been applied in Professional Builders Investment Ltd v Wabo
Ltd,38 where Deputy Judge Muttrie held as follows:
“(1) Interpretation is the ascertainment of the meaning which the document

would convey to a reasonable person having all the background knowledge
which would reasonably have been available to the parties in the situation in
which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the
‘matrix of fact’, but this phrase is, if anything, an understated description of
what the background may include. Subject to the requirement that it should
have been reasonably available to the parties and to the exception to be
mentioned next, it includes absolutely anything which would have affected
the way in which the language of the document would have been understood
by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations
of the parties and their declarations of subjective intent. They are admissible
only in an action for rectification. The law makes this distinction for reasons
of practical policy and, in this respect only, legal interpretation differs from
the way we would interpret utterances in ordinary life. The boundaries of
this exception are in some respects unclear. But this is not the occasion on
which to explore them.
(4) The meaning which a document (or any other utterance) would convey
to a reasonable man is not the same thing as the meaning of its words.
The meaning of words is a matter of dictionaries and grammars; the
meaning of the document is what the parties using those words against
the relevant background would reasonably have been understood to mean.
The background may not merely enable the reasonable man to choose
between the possible meanings of words which are ambiguous but even
(as occasionally happens in ordinary life) to conclude that the parties must,
for whatever reason, have used the wrong words or syntax (see Mannai
Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352,
[1997] 2 WLR 945.)
37
Per Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
at 912 – 913, and endorsed by Sir Ivor Richardson NPJ in Ying Ho Co Ltd & ors v Secretary for Justice (2004)
7 HKCFAR 333 at 406 – 407. See also Prenn v Simmonds [1971] 1 WLR 1381 and Reardon Smith Line Ltd v
Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989.
38
[2002] HKEC 173. See also the appeal dismissed in Professional Builders Investment Ltd v Wabo Ltd [2003] 1
HKLRD C19.

FACTUAL MATRIX AND BUSINESS SENSE 165
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’
reflects the common sense proposition that we do not easily accept that
people have made linguistic mistakes, particularly in formal documents. On
the other hand, if one would nevertheless conclude from the background
that something must have gone wrong with the language, the law does not
require judges to attribute to the parties an intention which they plainly
could not have had. Lord Diplock made this point more vigorously when he
said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984]
3 All ER 229 at 233, [1985] AC 191 at 201:
‘... if detailed semantic and syntactical analysis of words in a commercial contract
is going to lead to a conclusion that flouts business common sense, it must be
made to yield to business common sense.’”
In Lam Geotechnics Ltd v Milichich, in relation to a contract for trawling of demersal 6.029
samples, the court applied the above principles and examined the correspondence
passing between the parties and the purposes of the contract, in coming to the judgment
that the contract was for nine trawl events over some four years, at a lump sum price
per event.
4. FACTUAL MATRIX AND

BUSINESS SENSE
(a) Scope of factual matrix
The scope of the matrix of facts allowed in aid of the interpretation of a written 6.030
document is by no means free from controversy. It has long been the common
understanding that such a factual matrix would permit the reference to extrinsic
or outside circumstances such as evidence of industrial and commercial practice,
technical terminology as understood by experts and professionals, market conditions
and market surveys to explain or clarify the precise meaning of the express terms.
Indeed, there can be no exhaustive list of circumstances that would fall within or
outside of the factual matrix.
Helpful guidelines for the extent of factual matrix have been set out by the Court of 6.031
Appeal in England and Wales in New Hampshire Insurance Co v MGN Ltd.39 Firstly,
nothing is relevant unless it was known to or reasonably capable of being known to
both parties at the time when the contract was made. An undisclosed intention held
by one of the parties would not be admissible. Thus, all revolves around the ostensible
and ascertainable. Secondly, the court will look first at the literal terms of the written
document and determine what the terms mean from the ordinary language used. Where
39
[1999] CLC 1962. See also Youell v Bland Welch & Co [1992] 2 Lloyds Rep 127 at 133, where it was remarked:
“The notion is [that] what the parties had in mind, and the Court is entitled to know, [is] what was going on
around them at the time when they were making the contract. This applies to circumstances which were known
to both parties, and to what each might reasonably have expected the other to know.”

it is pleaded that the words carried a customary or technical connotation, evidence

could be allowed to that extent. Evidence may be admitted in order to explain technical
expressions or to identify the subject matter of an agreement or to resolve a latent
ambiguity. Yet, it is trite law that ambiguity in this context is not to be equated with
difficulty of construction, even difficulty to a point where judicial opinion as to meaning
has differed. Thirdly, the court may also have regard to the surrounding circumstances
or the matrix of facts, the market conditions in which the parties were transacting and
the ostensibly expressed purpose of the enterprise. Any evidence introduced to support
this must satisfy the first conditions set out in the above. Lastly, unless falling within
the exceptions, evidence of prior negotiations is strictly disallowed.
6.032 It is to note that the boundary of what may be considered surrounding circumstances is
unfortunately not easy to draw. All too often a great deal of evidence is produced under
that head which is of little or no help in interpretation.40
6.033 In Bank of Credit and Commerce International SA v Ali & ors (No 1)41 Lord Hoffmann
remarked:
“The background is however very important. I should in passing say that when,
in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]
1 WLR 896, 913, I said that the admissible background included ‘absolutely
anything which would have affected the way in which the language of the
document would have been understood by a reasonable man’, I did not think
it necessary to emphasise that I meant anything which a reasonable man would
have regarded as relevant. I was merely saying that there is no conceptual limit to
what can be regarded as background. It is not, for example, confined to the factual
background but can include the state of the law (as in cases in which one takes
into account that the parties are unlikely to have intended to agree to something
unlawful or legally ineffective) or proved common assumptions which were in
fact quite mistaken. But the primary source for understanding what the parties
meant is their language interpreted in accordance with conventional usage: ‘we
do not easily accept that people have made linguistic mistakes, particularly in
formal documents’. I was certainly not encouraging a trawl through ‘background’
which could not have made a reasonable person think that the parties must have
departed from conventional usage.”
(b) Common sense approach
6.034 In Jumbo King Ltd v Faithful Properties Ltd & Others,42 Lord Hoffmann however
advanced a common sense approach and said:
40
Ng Chun Kong v First Star Development Ltd [2007] 3 HKLRD 281.
41
[2002] 1 AC 251 at 269. In Chok Yick Interior Design & Engineering Co Ltd v Lau Chi Lun [2010] HKEC 967,
in relation to a subcontract for tiling work and painting waterproof material, the court refused to find a waterproof
guarantee in the subcontract, taking into account that the subcontract was for labour only. See also Headwin
Engineering Ltd v United Soundfair Engineering Co Ltd [2008] HKEC 591 and Wong Chuk Kin v Millennium
42
[1999] 2 HKCFAR 279. See also China Complant Development (HK) Ltd v Ng Shing Fat [2007] HKEC 770.

FACTUAL MATRIX AND BUSINESS SENSE 167
“The construction of a document is not a game with words. It is an attempt

to discover what a reasonable person would have understood the parties to
mean. And this involves having regard, not merely to the individual words they
have used, but to the agreement as a whole, the factual and legal background
against which it is concluded and the practical objects which it was intended to
achieve. Quite often this exercise will lead to the conclusion that although there
is not reasonable doubt about what the parties meant they have not expressed
themselves very well. Their language may sometimes be careless and they may
have said things which, if taken literally, mean something different from what they
obviously intended. In ordinary life people often express themselves infelicitously
without leaving any doubt about what they mean. Of course in serious utterances
such as legal documents, in which people may be supposed to have chosen their
words with care, one does not readily accept that they have used the wrong
words. If the ordinary meaning of the words makes sense in relation to the rest of
the document and the factual background, then the court will give effect to that
language, even though the consequences may appear hard for one side or the
other. The court is not privy to the negotiation of the agreement – evidence of such
negotiations is inadmissible – and has no way of knowing whether a clause which
appears to have an onerous effect was a quid pro quo for some other concession.
Or one of the parties may simply have made a bad bargain. The only escape from
the language is an action for rectification, in which the previous negotiations can
be examined. But the overriding objective in construction is to give effect to what
a reasonable person rather than a pedantic lawyer would have understood the
parties to mean. Therefore, if in spite of linguistic problems the meaning is clear,
it is that meaning which must prevail.”
The effect of this common sense approach is, of course, that each contract has to be 6.035
construed in the light of its own wording and its own factual matrix. However, this
approach is also in line with what Lord Hoffmann said in the House of Lords case of
Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1),43 which
seems to allow absolutely anything that has affected the way in which the language of
the document would have been understood by a reasonable man.
(c) Technical versus commercial meanings
In the context of construction disputes, it is possible that parties can be drawn into 6.036
a dispute as to whether a term should be given a technical or commercial sense. The
ground rule is always to attribute a meaning to the term to effectuate the intention of
the parties, even though such a meaning may differ from its technical meaning.
In case of uncertainty, the court may apply business common sense to help find the 6.037
meaning. Indeed, in Mitsui Construction Co Ltd v Att-Gen of Hong Kong,44 it was
remarked by the Privy Council that:
43
[1998] 1 WLR 896. See also Ying Ho Co Ltd & ors v Secretary for Justice (2004) 7 HKCFAR 333.
44
[1987] 1 HKC 31.

“But the poorer the quality of the drafting, the less willing any court should be
to be driven by semantic niceties to attribute to the parties an improbable and
unbusinesslike intention, if the language used, whatever it may lack in precision,
is reasonably capable of an interpretation which attributes to the parties an
intention to make provision for contingencies inherent in the work contracted
for on a sensible and businesslike basis. As already stated, the ground conditions
which would largely dictate the scope of the tunnel lining works required were
unpredictable.
…
To have interpreted the agreement in the manner contended by the Government
would have introduced a large element of wagering into the contract.
Tenderers gambling on favourable ground conditions would risk a large loss,
while conversely, if all tenderers anticipated the worst case, but in the event
reasonable conditions were encountered, the Government would be the losers.
It was improbable that a responsible public authority on the one hand and
responsible engineering contractors on the other, contracting for the execution
of public works worth many millions of dollars, should deliberately embark on a
substantial gamble.”
6.038 There are of course limits as to what assistance business common sense can provide in
the interpretation of a term in the contract. An example of this is in B+B Construction
Co Ltd v Sun Alliance And London Insurance Plc,45 where at issue before the Hong
Kong Court of Final Appeal was whether, on a true construction of an insurance
policy, the indemnity provided under the employees’ compensation policy effected by
a subcontractor covered the contractor as well. The contractor attempted to displace
the natural language of the policy by reliance on commercial reality and the common
sense approach but failed.
5. CONTRA PROFERENTEM RULE

(a) Application of contra proferentem rule
6.039 There are other rules of interpretation such as the contra proferentem rule, which
can be invoked in case of ambiguity in a document. This rule is secondary in
nature and has no application if a clear meaning can be found using other means of
contract interpretation on careful reading. According to this rule of interpretation,
in cases of doubt over an ambiguous term, that term will be construed against
the party who has prepared and put forward the term in issue or the contract
containing it.
6.040 In brief, the contra proferentem rule is applicable to the resolution of an ambiguity
in an agreement that cannot be resolved by other principles of interpretation and the
45
[2001] 3 HKLRD 135. See also Attorney General v Costain International Ltd [1983] 2 HKC 110 and Masri v
Consolidated Contractors International UK Ltd [2006] All ER (D) 444 (Jul).

CONTRA PROFERENTEM RULE 169
ambiguity is resolved against the party responsible for putting it forward or benefiting
from its inclusion in the agreement.46 This is usually a rule of late, if not last, resort
and can only come into play if the court finds itself unable to reach a sure conclusion
on the construction of the provision in question. Thus, this rule is not a factor that may
be taken into account by the court in reaching that conclusion.
(b) Rationale of contra preferentum rule
The rationale for the contra proferentem has been described by Lord Mustill in Tam 6.041
Wing Chuen v Bank of Credit and Commerce Hong Kong47 based on the fact that the
words in dispute were put into the document by one party and that party therefore
might be assumed to have looked after its own interests so that if the words leave room
for doubt about whether it was intended to have a particular benefit there was reason
to suppose that it was not.
The application of the contra proferentem rule has been considered in interpreting 6.042
in favour of the contract the provisions for liquidated damages and extension of time
under printed forms of contract in Peak Construction (Liverpool) Ltd v McKinney
Foundations Ltd.48 In Mak Kee Ltd v Sam Woo Bore Pile Foundation Ltd,49 the
supplier sold and supplied goods to a contractor on credit. There was a dispute over
the arrears and the contractor sent to the supplier a list of its outstanding indebtedness
for confirmation, stating that it would constitute the full and final settlement
indebtedness of the contractor. That was countersigned and returned by the supplier.
Yet, the supplier later commenced proceedings against the contractor before the
Small Claims Tribunal for the payment of five invoices not included on the list. In
the judgement of deputy Judge Cheung, it was remarked that the contra proferentem
rule has a role to play in the construction of agreements in general and compromise
agreements in particular. The court was of the view that both parties were responsible
for the resulting ambiguity in the agreement and that the agreement was as important
to the supplier as to the contractor. It was hence difficult to say who was the person
for whose benefit the particular term being construed was inserted. As such, it was
held that there was no role for the application of the contra proferentem rule in the
circumstances of the case.
46
See Dixie Engineering Co Ltd v Vernaltex Co Ltd [2003] HKEC 980, where the Hong Kong Court of Appeal
remarked that:
“… the rule that a clause is to be construed against the proferens is based on the reasoning that the person who
inserts the clause in the contract, which clause was important for his own benefit, must have done so with his
own benefit in mind vis-à-vis the other contracting party and therefore, it would be fair for the court to construe
that clause against him in case of ambiguity.”
47
[1996] 2 BCLC 69. Lord Mustill said:
“… a person who puts forward the wording of a proposed agreement may be assumed to have looked after his
own interest so that if the words leave room for doubt about whether he is intended to have a particular benefit
there is reason to suppose that he is not.”
48
(1970) 1 BLR 111.
49
[2002] 2 HKLRD 206. See Tang Wai Kuen v Asia Landscaping Ltd [2008] HKEC 1101 and Dixie Engineering
Co Ltd v Vernaltex Co Ltd [2003] HKEC 980.

(c) Rule not applicable to standard form contract terms
6.043 The use of standard forms of contracts in the Hong Kong construction industry is
prevailing and some public authorities also devise their own standard forms. For
standard forms of construction contracts used by employers, they are often drafted
with the relevant representation or consultation of representative bodies of contractors.
It is suggested that the contra proferentem rule has no role of application in such
circumstances. In practice, due to the modifications made to such standard forms,
argument in reliance on the application of the contra proferentem rule does feature
from time to time.
6. EJUSDEM GENERIS RULE

(a) Application of ejusdem generis rule
6.044 This rule provides that, where in a document there are general words following
particular and specific words, the general words must be confined to things of the
same kind as those specified.50 Thus, if it is found that things described by particular
words have some common characteristic which constitutes them a genus, the general
words which follow them ought to be limited to things of that genus.51 It seems that
the ejusdem generis rule can have no application where the general words precede the
enumeration of particular instances.
6.045 In Attorney General v Harbour Engineering Co Ltd,52 it was held that ejusdem generis
does not apply to a situation where the general words “structure and works” were
followed by the specific words setting out the instances that come within the general
definition and therefore the work relating to the laying of a telephone wire was found
to be construction works under s 2(1) of the Factories and Industrial Undertakings
Ordinance (Cap 59).
6.046 The application of the principle presupposes that it is possible to identify, from the
matters enumerated in the legal text under scrutiny, a genus that precedes the general
words. The search is essentially for a sufficiently common element to permit the
identification of a recognisable class.
6.047 Thus, for the ejusdem generis rule to apply, the specific words must constitute
a category, class or genus and the general words must not by their nature exclude
themselves from the category, class or genus, so that, for example a superior thing will
not be held to be within a class of inferior things. If the particular words exhaust the
whole genus, the general works must be construed as referring to some larger genus.
50
See J & V Ltd v ISS Eastpoint Property Management Ltd [2010] HKEC 1250, where this rule is applied to
interpret a deed of mutual covenant. See also Fairview Park Property Management Ltd v Fu Chung Fu [2008]
HKEC 411.
51
Decoma UK Ltd v Haden Drysys International Ltd [2005] All ER (D) 401 (Jul), where it was remarked that:
“… the main argument of construction which justifies the application of the rule is the presumption against
surplusage; for if the general words have unrestricted meaning, the enumerated items are surplusage”
52
[1986] HKLR 613. See also Chan Ki v David Sassoon & Co Ltd (1908) 3 HKLR 40.

PARTICULAR PRINCIPLES 171
In Herman v Morris,53 it was held that the use of ‘et cetera’ or ‘etc’ created too vague 6.048
a class to allow the operation of this rule. Likewise, in the Australian case of General
Constructions Pty Ltd v Peterson,54 the court decided that the words ‘by fencing or
otherwise’ meant by fencing or by some other means, the words ‘or otherwise’ not
being limited ejusdem generis with fencing. Thus, words or phases of these types will
be given their ordinary meaning. It has also been suggested in Henry Boot v Central
Lancashire New Town DC 55 that the ejusdem generis rule, which ordinarily applied to
deeds and statutory documents, should be of much less force in the interpretation of a
commercial contract.
7. PARTICULAR PRINCIPLES
(a) Priority of words written, typed and deleted
Where the contract is contained in a printed form with terms inserted or filled in, 6.049
those written words are entitled to have a greater effect attributed to them than the
printed words, in as much as the written words were the immediate language and terms
selected by the parties themselves for the expression of their meaning. Thus, where
all other things are equal, a term specifically drafted for a particular contract will take
precedence over a standard term.56
This principle has been applied in Chung Nam Medicine Co Ltd t/a Chung Po 6.050
Medicinal Co v Tai Ping Insurance Co Ltd,57 where the insurance policy covering
burglary for a shop contained an endorsement in Chinese limiting liability to violent
entry to the premises.
In Gold v Patman & Fotheringham Ltd,58 the employer entered into a contract with 6.051
a firm of builders for the erection of a building on his land. The contract was in the
standard Royal Institute of British Architects form. Under the contract the builders
were required to effect insurances specifically required by the bills of quantities. These
bills provided for insurance of adjoining premises against subsidence or collapse. In
the course of erecting the building, damage was caused to adjoining landowners, who
brought an action against the employer for removal of support. The employer thereupon
brought an action against the builders for breach of contract, alleging that the contract
required the builders to effect an insurance which covered not only themselves but the
employer. One of the issues that arose concerned condition 10 of the RIBA form, which
provided: “ … but save as aforesaid nothing contained in the said bills of quantities
shall override, modify or affect in any way whatsoever the application or interpretation
of that which is contained in these conditions”. It was held that condition 10 overrode
53
(1919) 35 TLR 574. Larsen v Sylvester & Co [1908 – 10] All ER Rep 247 and Ambatielos v Anton Jurgens
Margarine Works [1922] 2 KB 185.
54
(1962) 108 CLR 251.
55
(1980) 15 BLR 1.
56
However, it is important to note that that rule will not apply to every contract, for example where that rule is
negated by express terms. See Fenice Investments Inc v Jerram Falkus Construction Ltd (2009) 128 ConLR 124.
57
[1987] HKLR 397.
58
[1958] 1 WLR 697.

a provision in the bills of quantities that was inconsistent with the insurance provisions
contained in condition 15 of the RIBA form.
6.052 Therefore, if the printed form contains words to the effect that the printed form is to
prevail over any other written or typed words, it is not always straightforward to say
whether the written or typed words should prevail or not. In appropriate cases, the
general principle that written or typed words should prevail over printed words may
contradict the express provision of the printed form that the typed or written words are
to give way to the printed conditions. Another example of this is English Industrial
Estates Corporation v George Wimpey & Co Ltd,59 where the same condition was used
to exclude reference to provisions in the bills of quantities as an aid to the construction
of a RIBA condition.
6.053 In a similar vein, the effect of deleting clauses from the standard forms of contract has
been considered by a number of authorities. In Inglis v Buttery,60 it was held that where
specific terms of a standard form of contract were deleted, the effect was the same as
if the deleted words had never formed part of the print at all.
6.054 In Wates Construction (London) Ltd v Franthom Property Ltd,61 the court regarded
the fact that clause 30.5.3 of the JCT 1980 form, which expressly obliged the
employer, if so requested by the contractor, to set aside the retention fund in a
separate bank account, had been deleted by the parties was of no assistance in
construing what remained of the contract since the parties might well have had
different reasons for deleting that provision and it was not possible to draw from
the fact of deletion a settled intention of the parties common to each of them that
the ordinary incidence of the duties of trustee as created by that clause were to be
modified or removed.
6.055 It should be noted that, in earlier cases, the fact of deletion from a standard form can
been taken into account by the court to ascertain the meaning of the contract in a
doubtful case, as in Mottram Consultants Ltd v Bernard Sunley & Sons Ltd.62
6.056 Construction contracts are normally built-up of various parts, such as the conditions of
contract, specifications, bills of quantities and drawings. It is frequently provided that
a certain order of priority is to be applied in interpreting the meaning of the contract
terms. For example, it may expressly be provided that the conditions of contract shall
take priority over other parts of the contract in case an ambiguity or conflict arises
between the conditions of contract and other parts of the contract. This provides a
59
[1973] 1 Lloyd’s Rep 118. In that case, condition 12 of the RIBA form was used to exclude reference to provisions
in the bills of quantities as an aid to the construction of a RIBA condition. Stephenson LJ, at 127, said:
“To apply the general principle that type should prevail over print seems to me to contradict the express
provision of clause 12 that the reverse is to be true of this particular contract: the special conditions in type are
to give way to the general conditions in print.”
See Gold v Patman & Fotheringham Ltd [1958] 1 WLR 697; North West Metropolitan Regional Hospital Board
v T A Bickerton & Son Ltd [1970] 1 WLR 607; and Alford v West Bromwich Building Society, Armitage v West
Bromwich Building Society [1998] 1 All ER 98. See also Fenice Investments Inc v Jerram Falkus Construction
Ltd [2010] All ER (D) 47 (Jan).
60
(1878) 3 AC 552.
61
(1991) 53 BLR 23. See Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222.
62
[1975] 2 Lloyd’s Rep 197. See Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222.

PARTICULAR PRINCIPLES 173
convenient working formula for the parties and participants involved in the contract
to follow for the execution of the works. As in Brodie v Cardiff Corporation,63 such a
practice can be done expressly by indicating that certain clauses or documents are to
prevail over others in case of inconsistency.
Yet this, coupled with the principles in respect of the written or typed words in a 6.057
printed standard form of contract, does not come within legal uncertainty. In some
other standard forms of contract, such as those based on the common ICE civil
engineering forms, there is express provision for interpreting the contract documents
as a whole.
(b) Incorporation of documents
Sometimes, there is dispute over what constitutes the contract and it is usual for a 6.058
contract the size of a construction contract to spell out expressly what is included as
contract documents. Parties in the Hong Kong construction industry often bind up and
seal much pre-contract correspondence in the bundle of documents that they believe
constitute the construction contract. Yet, the mere fact that a document is attached to a
contract does not necessarily make it part of the contract.
In Davis Contractors Limited v Fareham UDC,64 a covering letter was attached 6.059
to a tender, the tender itself being referred to in and incorporated into the
contract. Obviously, if it was not properly incorporated into the contract it neither
formed part of the contract nor was it generally admissible to aid the court in the
interpretation of the contract. The court held that the covering letter formed no part
of the contract.
Difficulties may also arise as to what has been, and in particular what has not been, 6.060
incorporated into a subcontract made “back-to-back” to the main contract. This on
the one hand can substantially extend the scope of materials to be examined when
interpreting the subcontract. On the other hand, it requires the court to also review
the contractual matrix and relationship among those concerned as an aid to the
interpretation of the contract terms.
In Astel-Peiniger Joint Venture (A Joint Venture Partnership) v Argos Engineering 6.061
& Heavy Industries Co Ltd,65 it was held that such a formula incorporated also an
arbitration clause. In reaching the decision, the court took account of the fact that all
others in the contractual chain had agreed to an arbitration clause in their respective
contracts.
63
[1919] AC 337. In this case, the contract provided that the employer was not to become liable for the payment
of any charges for additions, alterations or deviations unless instructions for them were given in writing by the
engineer. There was a widely drafted arbitration clause. The arbitrator held that the engineer had improperly
refused to give orders in writing for the extras. The employer argued that the absence of such orders was a defence
to the contractor’s claim to be paid for them. The House of Lords held that the arbitrator had power to award that
the items in question should be paid for as extras, despite the absence of any orders in writing by the engineer.
See also Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 3 All ER 932.
64
[1956] AC 696.
65
[1995] 1 HKLR 300.

(c) Impossibility
6.062 It is trite law that if the defendant has made such an absolute contract he must abide by
it, though the performance has become impossible. In Taylor v Caldwell,66 Blackburn
J said:
“There seems no doubt that where there is a positive contract to do a thing, not
in itself unlawful, the contractor must perform it or pay damages for not doing
it, although, in consequence of unforeseen accidents, the performance of his
contract has become unexpectedly burthensome or even impossible. ... But this
rule is only applicable when the contract is positive and absolute, and not subject
to any condition express or implied.”
6.063 Also, if the parties have expressly addressed their minds to such eventualities and
made provision in the contract for a supervening event, which in fact occurs, such an
event cannot be labelled as unforeseen. Thus, Lord Simon in National Carriers Ltd v
Panalpina (Northern) Ltd67 said:
“Frustration of a contract takes place when there supervenes an event

(without default of either party and for which the contract makes no sufficient
provision) which so significantly changes the nature (not merely the expense or
onerousness) of the outstanding contractual rights and/or obligations from what
the parties could reasonably have contemplated at the time of its execution that
it would be unjust to hold them to the literal sense of its stipulations in the new
circumstances; in such case the law declares both parties to be discharged from
further performance.”
6.064 So far as interpretation of contract is concerned, the question usually turns on

whether there is such an absolute contract in that sense. In Wong Lai-Ying & Others v
Chinachem Investment Co Ltd,68 it was held that notwithstanding the clause providing
for ‘any unforeseen circumstances’ in a contract for the sales and purchase of property,
the Privy Council was of the view that such general words could not be construed
as making provision for the possibility of the landslide, which was an unforeseen
contingency having the consequences of fundamentally changing the character and
the duration of the performance of the contract.
6.065 Thus, in considering a term providing expressly for the an event of impossibility or
otherwise frustrating the contract, the court will still determine whether the event in issue
is so abnormal or of such a nature that it falls outside the operation of the express term.
66
(1863) 3 B & S 826.
67
[1981] AC 675. See also Massford (HK) Ltd v Wah Seng General Contractors Ltd [2006] 1 HKC 58.
68
[1980] HKLR 1.

1. OVERVIEW
(a) Types of collateral agreements
A collateral agreement arises when a contract is made between two parties and then 7.001
one of those parties makes a contract, with a third party or the same other party, which
is dependent on or related to the existence or performance of the principal contract. It
is, in that sense, collateral to the principal contract.
A contract between two parties may be accompanied by a collateral agreement 7.002
between them. It is normal to expect that the parties raise various matters with each
other during the course of negotiation prior to entering into the contract. Such matters
may take the form of mere representations that have not been incorporated into the
first agreement. Yet, the course of negotiation may produce successive agreement on
terms until the final contract is concluded. In a perfect world, the finalised principal
contract would embrace all such agreements reached. In practice, it seldom does.
Thus, these other agreements collateral to the principal contract may be formed either
orally or in writing or partly orally or partly in writing, or even by conduct. In the
Hong Kong construction industry, particularly due to that fact that many subcontracts
are not entered into using standard forms of contracts, the principal contract is usually
contained in a series of exchanged correspondence. It is therefore possible and indeed
not unusual that there is an agreement on matters collateral to the principal contract
that can be found in other correspondence or verbal exchanges between the same
parties.
A contract between two parties may also be accompanied by a collateral agreement 7.003
between one of them and a third party. A collateral contract may in effect allow a
third party to enforce the main contract (between the original contracting parties).
A common example of collateral agreements with a third party can be found in a
contract for the sale of goods. Where the buyer buys goods from the seller, there
may be a collateral contract between the buyer and the manufacturer in the form
of a guarantee.1 Such forms of collateral agreements have been used as a means of
rendering exclusion clauses enforceable by a third party and are extensively used in
the construction industry as a way of extending to subsequent owners or tenants the
benefits of a builder’s or architect’s or engineer’s contractual obligations.
In relation to construction disputes in Hong Kong, particularly those involving 7.004
subcontractors, since the use of standard form subcontracts is not popular, it is not
uncommon for a contractor or subcontractor to raise the issue of using an oral or
collateral agreement.2
1
These may sometimes be termed ‘collateral warranties’, where obligations or duties not otherwise covered by the
principal contract are dealt with.
2
See, for illustration, Paul Y Management Ltd v Eternal Unity Development Ltd [2008] HKEC 1359; Cheer Giant
International Ltd v Wo Ming Engineering Ltd [2007] HKEC 777; and Mightfort Engineering (HK) Ltd v Chester
Construction Co Ltd [2006] HKEC 1123.

178 COLLATERAL AGREEMENTS
2. AGREEMENT BETWEEN SAME PARTIES
(a) Application of parol evidence rule
7.005 For a collateral agreement alleged between the same party, it is frequently the case
that the parties have executed a formal document that purports to contain a complete
contract. With the existence of this document, the law accepts it as a strong basis for
the presumption that this is the whole of the agreement and its content is intended to
supersede any previous agreements during the negotiation process. This hinders the
attempt of a party in seeking to characterise the alleged contract terms outside the
written document as a separate or collateral contract.
7.006 In addition to this, there is the parol evidence rule, which prevents parties who have
intended to set out their agreement in more than one contract, from using a collateral
contract to add to, vary or contradict the principal written contract. Under the long-
standing parol evidence rule as set out in Goss v Lord Nugent,3 where the parties
appear to have embodied their agreement in a written document, it is a rule of law
that verbal evidence is not allowed to be given to vary or qualify the written contract.
In the words of Lord Morris in Bank of Australasia v Palmer,4 parol testimony cannot
be received to contradict, vary, add to or subtract from the terms of a written contract,
or the terms in which the parties have deliberately agreed to record any part of their
contract. This parol evidence rule extends to exclude even written extrinsic materials,
such as drafts, preliminary agreements or letters of negotiation.5
7.007 The parol evidence rule has been applied in, for example, Consort Engineering Co Ltd
v Leung Wai Ying Alias Tommy Leung trading as Kin Ming Company,6 in respect of a
claim by an electrical works contractor against a building contractor, constructing the
Pak Kong Treatment Works Laboratory Building, for payment for work done in the
sum of HK$163,801. The parties entered into a written agreement covering the works
in issue, on a ‘back-to-back’ basis. Applying the parol evidence rule, the court did
not allow the plaintiff to rely on a statement said to have been made to the defendant
after the signing of the subcontract that certain work would not be included in the
subcontract. Indeed, it has long been established by Evans v Roe7 that it would render
written agreements useless if conversations that take place at the time could be let in
to vary them.
3
(1833) 5B and Ad 58. See also Consort Engineering Co Ltd v Leung Wai Ying alias Tommy Leung trading as Kin
Ming Company [2002] HKEC 542.
4
[1897] AC 540. See also Prenn v Simmonds [1971] 1 WLR 1381.
5
Prenn v Simmonds (1971) 1 WLR 1381. Evidence of negotiations, or of the parties’ intention ought not to be
received, and evidence should be restricted to evidence of the factual background known to the parties at or
before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.
6
(unrep) DCCJ No 11356 of 2001). In Cheer Giant International Ltd v Wo Ming Engineering Ltd [2007] HKEC
777, the court refused to allow parol evidence in an opposition to the grant of summary judgement for payment
of services rendered by the plaintiff for preparing documents for application for extension of time. The defendant
subcontractor alleged that it was induced to sign the agreement by the plaintiff and the director of the defendant
further said he did not understand English and was not aware that the content of the agreement was not in line
with the verbal agreement.
7
(1872) LR 7 CP 138.

AGREEMENT BETWEEN SAME PARTIES 179
Likewise, in Tung Wing Steel Co Ltd, Plaintiff and George Wimpey International 7.008
Limited,8 the contractor was a well known international civil engineering contractor
and was awarded a contract by the Mass Transit Railway Corporation to build an
overhead station and associated external works at Chai Wan for the then new Island
Line. For the works, the contractor obtained the supply of substantial quantities of steel
reinforcing bars from the defendant supplier. This was based on a written agreement on
the supplier’s standard form, stating the unit price for the steel but containing nothing
regarding the quantity to be delivered for the period from 1982 to 1984. During that
period, due to the weakening of the Hong Kong currency and the need to purchase
the steel in US dollars, the supplier lost heavily on this agreement when around
75 per cent of the steel had already been supplied. In December 1983, the supplier
wrote to the contractor stating that it was no longer prepared to sell the steel bars at
the old price but would sell further ones using current prices. Despite protest, the
contractor did enter into a new written agreement at approximately 25 per cent higher
prices, with specified quantities. After the steel bars were delivered, the contractor
withheld a sum of the exact amount of the difference between the old and new prices.
The supplier sued for that difference. Before the court, the contractor submitted that
there should be an implied agreed term in the original agreement that the supplier
agreed to sell to the contractor at the agreed price all steel bars it required for the
project. In support of such an allegation, the contractor sought to rely on evidence on
what happened in the negotiations immediately preceding the signing of the original
agreement. The court noted that a heavy burden of proof rested upon the party who
alleged that a seemingly complete instrument is incomplete and treated this as an
attempt to sidestep the parol evidence rule. Thus, the contractor was ordered to pay
back the withheld sum, with costs and interests.
(b) Exceptions to parol evidence rule
There are, however, various exceptions to the application of the parol evidence 7.009
rule. The effect of these exceptions is that the written document cannot be taken as
conclusive evidence of the contract alleged to be embodied in it.
These include, for instance, situations where the validity or effectiveness of the written 7.010
document is in question.9 Also, evidence otherwise excluded by the parol evidence rule
can be admitted as to the true nature of the agreement.10 More importantly, evidence
as to the existence of a supplementary or collateral agreement can also be admitted.
8
(unrep, HCA No 3285 of 1984).
9
See, for example, Great Sincere Trading Co Ltd v Swee Hong & Co [1968] HKLR 660; Suen Ho Sun v Kamenar
International Ltd [1989] 1 HKC 135; Prosperity Lamps & Components Ltd v Rotegear Corporation Ltd [2000]
2 HKC 638; and SY Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145, in relation to parol evidence regarding
conditional delivery of cheques. See also D Heung & Associates, Architects & Engineers Ltd v Eternal Unity
Properties Ltd [2002] HKEC 511.
10
See, for example, Lord Romilly MR in Murray v Parker (1854) 19 Beav 305, where rectification may be allowed
if a contract has by reason of a mistake common to the contracting parties been drawn up so as to militate against
the terms intended by both as revealed in their previous oral understanding.

7.011 For instance, in Ashdown v Rightfairs Development Ltd (t/a Funtex Construction &
Engineering Co),11 in relation to the employment contract of a project manager with
a contractor, the letter of appointment was silent on the possibility of termination
of the work contract through the contractor’s own default, as it was not a possibility
which would have been in the parties’ contemplation at the time. The subcontract was
terminated prematurely, leading in turn to the premature termination of the employment
of the project manager. The project manger’s evidence that the employment should last
for the duration of the works contract due to be completed explained the nature of the
terms in the written letter of appointment and such evidence was held to be admissible
as an exception to the parol evidence rule.
7.012 The general rule is that parol evidence cannot be given to contradict the terms of a
written agreement. However, an exception to this rule is a collateral contract. As a
matter of reasoning, the parol agreement neither alters nor adds to the written one,
but is an independent agreement. Such evidence is certainly admissible in respect of a
matter on which the written contract is silent. In a number of older cases, it was stated
that evidence of such a contract or warranty must not contradict the express terms of
the written contract. However, more recently, the courts have admitted evidence to
prove an overriding oral warranty or to prove an oral promise that the written contract
will not be enforced in accordance with its terms.12 In Wai Kam Chiu v Chim Siu
Fan,13 the Hong Kong Court of Appeal considered the exceptions to the parol evidence
rule in the context of a tenancy agreement and upheld a collateral contract which
contradicted the written terms of a provisional tenancy agreement.
7.013 The operation of the parol evidence rule may also arise in different contexts within
a construction dispute. In the case of Kwong Key Construction & Engineering Ltd v
Sunlink Ltd,14 the plaintiff was the defendant’s subcontractor for piling works. After it
had carried out the piling work, the parties entered into an agreement over the completion
of works under the subcontract. In this agreement, there was a verified and agreed final
calculation of the sum due to the plaintiff for the work done and it stated that there would
be no further requests for compensation and payment. The defendant failed to pay and
the plaintiff sought summary judgment. The defence advanced by the defendant was
that the agreement was made after a meeting between the parties at which the plaintiff
stated that it was anxious to have confirmation of the sums due and, at that stage, it
was not possible to know whether the work needed any rectification and therefore, the
defendant had made it clear that payment of the sum was conditional upon a finding that
the quality of the work was satisfactory. Such a defence was found to be ‘shadowy’ by the
judge first hearing the case since it was based on unsubstantiated assertions. Yet, as the
judge viewed that it might still be sufficient in law to provide an exception to the parol
evidence rule, leave to defend was granted, conditional upon the defendant’s paying the
11
[1992] HKLY 171.
12
See City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129. As the collateral contract introduced
terms which add to or vary the terms of the provisional agreement, the courts usually view such collateral contract
with suspicion and require strict proof of the oral terms. See Bank of India v Surtani Murlidhar Parmanand t/a
Ajanta Trading Corp [1994] 1 HKC 7 and Cheuk Tze-kwok v Leung Yin-king and Another [1993] 2 HKLR 169.
13
[2008] HKEC 1071.
14
[2003] 3 HKLRD K9.

AGREEMENT BETWEEN SAME PARTIES 181
full amount of the plaintiff’s claim into court. The defendant appealed against such an
order. The Court of Appeal dismissed the defendant’s appeal and remarked that what the
defendant sought to do was to mount a case qualifying if not actually contradicting the
express words of the agreement. The Court of Appeal accepted that whether or not such
parol evidence should be permitted in the present case to explain the true nature of the
agreement was a matter of law, which would be a matter for trial. In the circumstances,
the order granting the conditional leave to defend was upheld.
Also, the scope of the parol evidence rule may be much narrower that it appears at 7.014
first sight. Its application is limited to the situation when the parties have reduced the
agreement in writing, or agree or intend the writing shall be their agreement. In Paul
Y Management Ltd v Eternal Unity Development Ltd,15 the plaintiff obtained summary
judgement against the defendant based on a loan deed which was effected to assist a
project in Beijing. The defendant contended that there was another agreement reached
to set off the amount involving the consulting fee due in respect of another project.
There was no ‘entire contract’ clause in the loan deed, which indeed came into being
in a series of other agreements. On that basis, the court refused to hold that the plea of
collateral contract was unavailable as a defence.
Yet, the other side of the coin is that the inclusion of an ‘entire contract’ clause is 7.015
generally conducive to certainty as they define and confine the parties’ rights and
obligations within the four corners of the written document, thereby precluding
any attempt to qualify or supplement the document by reference to pre-contractual
representations.16 The effect of each clause is essentially a matter of contractual
interpretation and will necessarily depend upon its precise wording and context. The
issue is the extent to which an entire agreement clause precludes reliance on oral
collateral contracts or pre-contractual representations alleged to have been made in
the course of negotiations. Thus, an entire agreement clause may preclude recourse to
the ‘factual matrix’.17
15
[2008] HKEC 1359.
16
See Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611 at 614, per Lightman J, where it was noted:
“The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing
through the undergrowth, and finding, in the course of negotiations, some (chance) remark or statement
(often long-forgotten or difficult to recall or explain) upon which to found a claim, such as the present, to
the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search
and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a
search. For such a clause constitutes a binding agreement between the parties that the full contractual terms
are to be found in the document containing the clause and not elsewhere, and that, accordingly, any promises
or assurances made in the course of the negotiations (which in the absence of such a clause, might have effect
as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in
that document … [T]he formula used is abbreviated to an acknowledgment by the parties that the agreement
constitutes the entire agreement between them. That formula is, in my judgment, amply sufficient to constitute
an agreement that the full contractual terms to which the parties agreed to bind themselves are to be found in
the agreement and nowhere else. That can be the only purpose of the provision.”
See also MacMillan v Kaiser Equipment Ltd [2004] BCJ 969; Master Strike Sdn Bhd v Sterling Heights Sdn Bhd
[2005] 3 MLJ 585; John v Price Waterhouse [2002] EWCA Civ 899; and Natamon Protpakorn v Citibank NA
(unrep, CACV No 78 of 2008).
17
It is a perennial issue whether the recorded agreement is exhaustive or whether it can be augmented by implicit or
collateral undertakings. See, for example, the discussion in the Singapore case of Lee Chee Wei v Tan Hor Peow
Victor [2008] 2 LRC 27.

(c) Determining whether a collateral agreement exists
7.016 The issue of collateral agreements can indeed arise in a variety of forms in the
construction industry. Frequently, contractors and particularly subcontractors qualify
their quotations or tenders and negotiate alternatives and deductions. These alternations
do not always appear on the signed contract documents. Likewise, verbal statements or
representations often occur in the negotiation process or during the query stage, which
may be expected by at least one of the parties to have binding effects.18
7.017 To decide whether such a collateral contract or agreement exists, one has to examine
the intention of the parties to contract. A collateral agreement is more readily found
in a case where it is linked directly to the very entering of the principal contract. This
can be illustrated in Dick Bentley Productions Ltd and Another v Harold Smith Motors
Ltd.19 That was a case involving misrepresentation of the mileage of a second-hand
car. It was held that if a representation is made in the course of dealings for a contract,
for the very purpose of inducing the other party to act on it, and if it actually induces
him to act on it, it is prima facie grounds for inferring that the representation was
intended as a warranty, collateral to the contract of sale.
7.018 Thus, when a person gives an oral promise or assurance to another, intending that
the other person should rely on it by entering into a contract and does so act on it by
entering into the contract, this can be binding contractually.
7.019 Yet, as noted by Lord Moulton in Heilbut Symons & Co v Buckleton,20 such
collateral contracts, the sole effect of which was to vary or add to the terms of the
principal contracts, were therefore viewed with suspicion by the law and they had
to be proved strictly. This approach has been followed in many subsequent cases,
including Jonathan Wren & Co Ltd v Microdec plc.21 In that case, the defendant was
an established but fairly small company, holding itself out as producing specialist
software for use by staff recruitment agencies. The most important functions of
that software were to make a speedy match between jobs vacant and people able
to fill the vacancies and to provide prospective employers with information about
candidates in a helpful format. The claimant contracted with the defendant for
the provision and installation of the software, which turned out to be defective.
While the defendant asserted that its standard terms and conditions should apply,
the claimant alleged that there was a collateral warranty regarding the proper
performance of the software given by the defendant to its subsidiary, which took
part in the pre-contract negotiations. The court rejected both suggestions and
remarked that it would be very dangerous for commerce if collateral contracts were
spelt out at negotiations without clear evidence that there was an intention at the
18
The evidence necessary to satisfy the court as to the existence of a collateral agreement can vary depending on
the nature of proceedings. In To Kwan Chak & Another t/a Elite Construction Co v City Top Engineering Ltd
[2006] 3 HKC 455, in dismissing a winding-up petition, the court considered the overall contractual setting and
formed the view that whether the alleged collateral agreement existed “… cannot be resolved without the benefit
of cross-examination.”
19
[1965] 1 WLR 623.
20
[1913] AC 30.
21
(1999) 65 ConLR 157.

AGREEMENT WITH THIRD PARTY 183
time to make such a collateral contract and that, as with other contracts, for there to
be an enforceable collateral contract there must be an intention to contract, an offer,
acceptance and consideration.
The timing when the collateral agreement comes into being may vary from case 7.020
to case. In Brilliant (Man Sau) Engineering Ltd v Prosperity Construction and
Decoration,22 the parties were both subcontractors to the refurbishment works at a
hotel. In denying the existence of the alleged collateral agreement with the sub-sub-
subcontractor, whereby payments for carrying out the works were guaranteed, the head
subcontractor said that it was in any event not supported by consideration. The court
held that the plaintiff had failed “... miserably in discharging the burden of proofing ...”
the collateral guarantee and, as such, the issue of lack of consideration did not even
arise. In any event, construction of such an addition or collateral term must be
construed in the light of the factual matrix. Lord Hoffman in Investors Compensation
Ltd v West Bromwich Building Society 23 said that the factual matrix comprises all the
background knowledge which would reasonably have been available to the parties in
the situation in which they were at the time of the contract.
3. AGREEMENT WITH THIRD PARTY
(a) Collateral warranty
Collateral agreements, more commonly termed collateral warranties, are gaining 7.021
popularity in today’s construction industry to fix liability for third parties who
otherwise have no legal standing to claim over the works in issue. Developers,
financing institutions, employers, contractors and professional team members can all
be increasingly involved in the giving or receiving of warranties and will have to deal
with them at some point.
In the United Kingdom, the use of collateral warranty has been an intrinsic part of 7.022
the commercial world since the 1980s. In the construction industry, the rising use of
collateral warranties may be contributed to by the development in the law of torts in
respect of negligent liability over economic loss, rather than physical damage. After
the decisions in D & F Estates Ltd v Church Commissioners for England;24 Murphy
v Brentwood District Council;25 and Department of the Environment v Thomas Bates
& Son Ltd;26 it appears that the liability in tort for negligence of contractors and
consultants to third parties, other than their own employers or clients, for financial loss
arising from construction defects is practically nonexistent. Therefore, third parties
will now usually demand collateral warranties from contractors and consultants.
22
[2006] HKEC 1244.
23
[1998] 1 WLR 896 at 912 – 913. See Chin So Hang v Lee Chee Kin [2006] HKEC 1613.
24
[1989] AC 177.
25
[1991] AC 398.
26
[1991] 1 AC 499

Indeed, the Contracts (Rights of Third Parties) Act 199927 in England and Wales was
introduced partly with the hope of limiting the uses of collateral warranties.
7.023 In a conventional construction project, where the employer engages a consultant to
design the works and a contractor to construct them in accordance with that design,
collateral warranties may be required from the contractor and consultants concerned
in favour of the funding institutions, future purchasers or tenants. Such warranties
may be demanded from more than one consultant, eg structural engineers as well
as architects. Also, in design and build or ‘turnkey’ projects, where the contractor
designs as well as constructs, the warranties required will differ, because it will be the
contractor, not the employer, who will act as the client of the consultant. Therefore,
the consultant may be requested to enter into warranties with the employer, as well as
with the funding institutions, purchasers or tenants. At present, collateral warranties
are still in a stage that calls for standardisation, and current practices regarding them
differ very widely.
(b) Use of collateral warranty in Hong Kong
7.024 In Hong Kong, the use of collateral warranties in such format is still, at most, in a
stage of development. Hence, likewise provisions in the standard forms for designer
or contractor’s liabilities are not commonly encountered in the traditional set-up of
a construction project. This may be due to the somewhat different approach in the
financing of construction projects and the bargaining powers of the ultimate purchasers
or tenants of premises in Hong Kong. Therefore, with no such special provisions, the
position is normally still governed by the common law.
7.025 Yet, among the standard forms of construction contracts in Hong Kong, the use of
collateral warranty can also be found in design and build contracts. For example,
in the Hong Kong Government General Conditions of Contract for Design and
Build Contracts (1999 edn), the contractor is required under cl 4(8) to submit to the
employer within 14 days of the appointment of the independent consultant a warranty
duly executed by the independent consultant in favour of the employer in the stipulated
form. Thus, in giving or receiving such third-party warranty, it would be prudent to
have regard to those issues such as the scope of the warranty, the length of time the
warranty lasts or whether the warranty’s benefits can be assigned to others.
4. COLLATERAL WARRANTY REGARDING THE DESIGNER
(a) Responsibility of the designer
7.026 The responsibility taken up by a designer, such as an engineer or architect, is obviously

regulated by the contract of engagement. In some contracts, for example design and
build contracts in the construction industry, the contractor expressly accepts the
27
See Report on Privity of Contract, 2005, The Law Reform Commission of Hong Kong.

COLLATERAL WARRANTY REGARDING THE DESIGNER 185
additional risks over the design in comparison with the traditional form of contract.
Also, in Hong Kong, the Supply of Services (Implied Terms) Ordinance (Cap 457)
regulates the terms to be implied in contracts for the supply of services. Under s 5 of
this Ordinance, in a contract for the supply of a service where the supplier is acting in
the course of a business, there is an implied term that the supplier will carry out the
service with reasonable care and skill.
Indeed, this to a certain extent also reflects the position at common law in relation 7.027
to a designer’s liability. Yet, the issue of collateral warranties may alter the whole
situation. For instance, in Gloucestershire Health Authority v MA Torpey &
Partners,28 an engineer with extensive experience was required to provide two
boilers as part of a design and supervision contract for an incineration plant. In
the client’s brief, the required performance of the boilers was specified. Yet, the
boiler failed to meet such specifications. The court declined the suggestion that the
engineer should be held to a higher standard of care in the provisions of his services
in these circumstances and, hence, judged his standard against that of a general
mechanical and building services engineer. Yet, the court also indicated that, if the
engineer should be assessed as a particular specialist, a higher standard of skill and
care could be at issue. Such a situation could happen if the word ‘specialist’ was
used explicitly in the engagement contract.
(b) Usual level of competence
Also, it is common to imply a collateral term or agreement to provide design services 7.028
of the usual level of competence as an obligation. This can be illustrated in relation to
cases involving the use of new technology. In Victoria University, Manchester v Hugh
Wilson and Lewis Womersley (a firm) & Pochin (Contractors) Ltd,29 in considering the
use of innovative materials or techniques, the court remarked that:
“For architects to use untried, or relatively untried materials or techniques

cannot in itself be wrong, as otherwise the construction industry can never make
any progress. I think, however, that architects who are venturing into the untried
or little-tried would be wise to warn their clients specifically of what they are
doing and to obtain their express approval.”
(c) Designer’s liability for fitness of purpose
The leading case on this topic of designer’s liability regarding fitness for purpose is 7.029
the House of Lords decision in Independent Broadcasting Authority v EMI Electronics
Limited and BICC Construction Limited,30 which concerned the collapse of a 1,250 feet
high aerial mast. It collapsed in 1969 in icy weather conditions. The plaintiff claimed
against the defendant for damages in contract and negligence. It was held that the
28
(1997) 55 ConLR 124.
29
(1984) 2 ConLR 43
30
(1980) 14 BLR 1. See also the Australian case of Voli v Inglewood Shire Council [1963] ALR 657.

designer’s tender for the design and construction was incorporated into the contractor’s
tender and, as such, the contractor had impliedly undertaken to supply a mast which
would be reasonably fit for its intended purpose. In his judgment, Lord Scarman stated
that:
“[i]n the absence of any term (express or to be implied) negativing the obligation,
one who contracts to design an article for a purpose made known to him
undertakes that the design is reasonably fit for the purpose”.
7.030 In this case, though not necessary to decide this point, the court also remarked that the
designer, engaged by the contractor to carry out the design, might have owed a similar
duty to the contractor.
7.031 Likewise, in Greaves & Co (Contractors) Limited v Baynham Meikle and Partners,31
the contractor was engaged in terms of a ‘package deal’ to design and construct a
warehouse. It was agreed between the parties that the floor of the warehouse would be
expected to be subject to vibrating loads. The contractor employed another structural
engineer to design the structure. It turned out that the floors of the warehouse were not
in fact adequately designed to resist these loads and cracking occurred. The liability of
both the contractor and the structural engineer was considered by the Court of Appeal
in England and Wales, which held that the contractor was liable to ensure that the
building would be fit for its intended purpose. In respect of the structural engineer,
notwithstanding that the usual legal implication of the use of reasonable skill and care
did not cover a warranty that the design would necessarily be fit for the designated
purpose, it was held in the factual circumstances of the case that there was an implied
warranty that if the works were completed in accordance with the design, it would be
reasonably fit for use and, as such, the structural engineer was found liable toward the
contractor.
31
[1975] 3 All ER 99. See Happy Dynasty Ltd v Wai Kee (Zens) Construction & Transportation Co Ltd [1998] 1
HKLRD 309 and Centaline Property Agency Ltd v Suen Wai Kwan [2004] HKEC 1267. See also A Pub (HK) Co
Ltd v Tang Yuk Lun [2008] HKEC 1929.

1. ESTOPPEL AND WAIVER
(a) Definition
Estoppel and waiver are two different but interrelated equitable doctrines that are 8.001
raised from time to time in construction disputes. In many cases, they may be just
two sides of the same coin. The boundaries of these doctrines is quite loose but the
resulting impact on the resolution of the disputes can be critical.
One common scenario in construction contracts is to make contract provisions 8.002
regarding a written requirement for ordering changes to the works. Such provisions
frequently provide that no variation to the works may be carried out by the contractor
unless there is prior written instruction for such changes from the engineer or the
architect. In practice, execution of many changes to the works are proceeded with by
the contractor based solely on the verbal instructions from frontline personnel of the
supervision team, expecting the same to be covered by a written site instruction later
on. In some cases, the contract may even provide that, in such cases, the contractor
should seek written confirmation of the verbal instruction. Notwithstanding all these,
many contractors have the habit of going ahead with the changes to the works, without
insisting on or seeking to obtain a written instruction for such changes. Such a practice
needs to be understood in the context that contractors either do not want to create an
adversarial working environment or do not sufficiently appreciate the impacts and
difficulties that may come with it. At the end of the day, due to the absence of written
instructions or non-compliance with the contract requirements, dispute often arises as
to the entitlement of the contractor to be paid for such changes executed, where the
contractor may raise the issue of estoppel or waiver in defence or reply.
In brief, the doctrine of estoppel provides a way such that a party is prevented or 8.003
estopped from successfully asserting what would or might otherwise be its legal rights.
It has an important impact on a contract but it is a general doctrine that operates in
all sorts of areas. It derives from the principle established by the English courts of
equity – that it would be inequitable for a person to go back on her or his word, or to
act inconsistently with her or his previous representations or deeds, whether these are
express or implied, when another has acted thereon to her or his detriment. It has been
noted in the early case of Cave v Mills:1
“A man shall not be allowed to blow hot and cold – to affirm at one time and deny
at another – making a claim on those whom he has deluded to their disadvantage,
and founding that claim on the very matters of the delusion. Such a principle has
its basis in common sense and common justice, and whether it is called ‘estoppel’,
or by any other name, it is one which the Courts of law have in modern times most
usefully adopted.”
1
(1862) 7 Hurl & N 913 at 927 – 928; 158 Eng Rep 740. See Smith v Baker (1873) LR 8 CP 350; Verschures
Creameries Ltd v Hull and Netherlands Steamship Co [1921] 2 KB 608; and Ambu Nir v Kelu Nair (1933) 60 IA
266. See also Unruh v Seeberger [2007] 2 HKC 609.

190 ESTOPPEL AND WAIVER
8.004 From historical development, estoppel takes on various forms and labels, such as
estoppel by deed, which may arise between the parties to a deed under seal and prevent
them from denying the facts stated in the deed; estoppel by record, which may prevent
the same issue to be re-litigated between the parties after it has been decided by the
court; and proprietary estoppel, which arises when a person takes a certain action that
is to her or his detriment or prejudice, such as taking possession of property to carry
out work therein, and another clearly accepts or acquiesces in that action. For those in
the construction industry, the more important forms of estoppel may be those termed
as estoppel by conduct and as promissory estoppel.
8.005 As to a waiver,2 this is of an even more obscure nature than estoppel; yet this is a
principle that parties in construction litigation frequently seek to rely on. The conduct
or words constituting a waiver must be unequivocal and capable of one construction,
namely, that the representor has chosen to forgo his rights and that the representor
makes the representation with knowledge of the facts that give rise to such rights,
the right to forgo such rights and the connection between the two3. The legal effect
of a waiver is that a party who knowingly has not insisted on its legal rights may be
prohibited in the future to claim such rights retrospectively.
(b) Distinction between estoppel and a waiver
8.006 There are basically two distinctions between the doctrine of estoppel and the doctrine
of waiver. First, estoppel looks to the future, that is to say that a party’s rights in the
future are affected; a waiver looks to the past, that is to say a party’s rights in the
past are affected. Second, a waiver is more often applied to rights akin to those
of a procedural nature, as compared to substantive rights. This can be illustrated
in the case of Charles Rickards Ltd v Oppenheim,4 where the defendant ordered
the plaintiff to build the body of a car on to the chassis of a Rolls Royce, to be
2
See Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (‘The Kanchenjunga’) [1990]
1 Lloyd’s Rep 391. In that case the charterers nominated an unsafe port under the terms of a charterparty.
However, the owners chose to comply with it. The ship arrived at the port. The master gave notice of readiness
but withdrew the ship from the port to a place of safety. It was held that the owners had elected not to reject the
nomination but had retained the right to claim damages.
3
Citiscape (HK) Co v Kwei Kee Construction Ltd [2005] HKEC 1692. As noted in Alan & Co Ltd v El Nasr Export
and Import Co [1972] 2 QB 189 at 213, per Lord Denning MR:
“The principle of waiver is simply this: If one party, by his conduct, leads another to believe that the strict
rights arising under the contract will not be insisted upon, intending that the other should act on that belief,
and he does act on it, then the first party will not afterwards be allowed to insist on that strict legal rights when
it would be inequitable for him to do so: see Piasticmoda Societa per Azioni v. Davidsons (Manchester) Ltd.
[1952] 1 Lloyd’s Rep. 527, 539. There may be no consideration moving from him who benefits by the waiver.
There may be no detriment to him by acting on it. There may be nothing in writing. Nevertheless, the one
who waives his strict rights cannot afterwards insist on them. His strict rights are at any rate suspended so
long as the waiver lasts. He may on occasion be able to revert to his strict legal rights for the future by giving
reasonable notice in that behalf, or otherwise making it plain by his conduct that he will thereafter insist on
them: Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [1955] 1 W.L.R. 761. But there are
cases where no withdrawal is possible. It may be too late to withdraw: or it cannot be done without injustice to
the other party. In that event he is bound by his waiver. He will not be allowed to revert to his strict legal rights.
He can only enforce them subject to the waiver he has made.”
4
[1950] 1 KB 616.

ESTOPPEL BY CONDUCT 191
delivered by a specified date. The work could not be finished on time. Despite this,
the defendant still kept on pressing for the delivery. When the defendant learnt from
the plaintiff that the body of the car would not be ready by a date some six months
after the originally specified date, the defendant cancelled the order. The plaintiffs
completed the car on 18 October 1948, but delivery was refused by the defendant.
The plaintiffs thereupon brought an action claiming the price of the body of the car.
Though the court held that the plaintiff ’s claim failed on the ground that it failed to
deliver the car within a reasonable time after notice from the defendant, the court
also held that the initial stipulation of the contract making time of the essence was
waived by the defendant’s subsequent requests for delivery. Thus, in this case, the
obligation to deliver the car, ie the substantive right, had not been changed by the
defendant’s waiver of the ‘procedural’ rights as to the date for such delivery. The
defendant’s wavier here only changed the obligations of delivery from that by a
stipulated date to one within a reasonable time after notice.
As pointed out by Citiscape (HK) Co v Kwei Kee Construction Ltd,5 there is an 8.007
important similarity between the two principles, waiver and estoppel, in that each
requires an unequivocal representation, in some cases perhaps because each may
involve a loss, permanent or temporary, of the relevant party’s rights. But there are
important differences as well. The party making a waiver is communicating his
choice whether or not to exercise a right which has become available to him. The
party to an estoppel is representing that he will not in future enforce his legal rights.
His representation is therefore in the nature of a promise which, though unsupported
by consideration, can have legal consequences. In that case, the subcontractor for the
installation of facilities along a hiking trail alleged a waiver on the part of the main
contractor to claim damages for late delivery of such facilities by accepting them.
The court did not accept the continuation of the subcontract and the subsequent
taking over of the works amounted to an unequivocal representation to create such
a waiver.
2. ESTOPPEL BY CONDUCT
(a) Forms of estoppel by conduct
Estoppel by conduct may take one of two common forms: estoppel by convention or 8.008
agreement and estoppel by representation.
(b) Estoppel by convention or agreement
For estoppel by convention or agreement, this occurs when two parties agree as to an 8.009
existing state of facts and each of them is then estopped from denying the state of facts
as agreed. Such statement of facts may be based on assumptions that they mutually
5
[2005] HKEC 1692.

accept and may be different from what the facts really are.6 The key element for this
to operate is that it is unjust or unconscionable to permit either of them to resile from
such an agreement. Estoppel by convention can also arise if there is simply a mutual
assumption without any explicit agreement. The object of this estoppel is to avoid or
prevent a detriment to the party asserting the estoppel by compelling the opposite party
to adhere to the assumption upon which the former acted or abstained from acting.7
8.010 In Jones Engineering Services Ltd v Balfour Beatty Building Ltd,8 an enforceable
arbitration agreement was brought into existence as a result of an estoppel by
convention. In Whittal Builders v Chester-le-Street DC,9 a building contract was found
to exist by reason of an estoppel by convention.
8.011 The requisite elements to found a case of estoppel by convention have been conveniently
summarised by Cheung J in Yuen Ching Yuen v Union Insurance Society of Hong Kong
Ltd.10 He stated that, for an estoppel by convention to apply, there must be a common
mistaken assumption by both parties as to the existence of a state of affairs or as to the
construction of a document; that mistaken assumption must have been communicated
to each other; further, both parties must have conducted themselves on the basis of
such a mistake; in addition, it would be unjust to allow one party to go back on that
assumption; and, also, once an understanding was shown to be a mistaken one, the
estoppel would not apply to future dealings between the parties. That case concerned
the continuing entitlement of commission payment under a memorandum agreement
to an agent for introduction of insurance business after the plaintiff ceased to be an
employee.
8.012 An estoppel by convention can arise in a construction contract in a manner akin to
that in the United Kingdom House of Lords case of Actionstrength Ltd v International
Glass Engineering IN GL EN SpA and Another.11 In that case, the claimant was a
labour-only subcontractor to the contractor, who had contracted to build a factory for
the employer and, not uncommonly, the subcontractor suffered from late payment by
6
In the Australian case of Thompson v Palmer (1933) 49 CLR 507 at 547, it was remarked that:
“The object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted
by another as the basis of some act or omission which, unless the assumption be adhered to, would operate
to that other’s detriment. Whether a departure by a party from the assumption should be considered unjust
and inadmissible depends on the part taken by him in occasioning its adoption by the other party. He may be
required to abide by the assumption because it formed the conventional basis upon which the parties entered
into contractual or other mutual relations, such as bailment; or because he has exercised against the other party
rights which would exist only if the assumption were correct … or because knowing the mistake the other
laboured under, he refrained from correcting him when it was his duty to do so; or because his imprudence,
where care was required of him, was a proximate cause of the other party’s adopting and acting upon the
faith of the assumption; or because he directly made representations upon which the other party founded the
assumption.”
7
Grundt v The Great Boulder Proprietary Gold Mines Ltd (1937) 59 CLR 641. This means that the real detriment
or harm from which the law seeks to give protection is that which would flow from the change of position if the
assumption were deserted that led to it.
8
(1992) 42 ConLR 1.
9
(1987) 40 BLR 82.
10
[1998] 1 HKLRD 650. See also Unruh v Seeberger [2007] 2 HKC 609.
11
[2003] 2 AC 541.

ESTOPPEL BY CONDUCT 193
the contractor at the outset. After six months a substantial sum was left unpaid. After
the subcontractor brought up the matter with the employer, the subcontractor said
that an oral agreement was made between it and the employer that, in consideration
of the claimant not withdrawing its labour from the site, the employer would attempt
to persuade the contractor to meet its obligations to the subcontractor and, failing
that, would withhold monies due from the employer to the contractor and pay the
claimant itself out of such monies. The work therefore continued but, when it became
clear that the contractor was unable to meet its liability to the subcontractor and that
the employer would not make such payment, the claimant withdrew its workforce
from the site and commenced proceedings for recovery of the sums due against the
contractor under the contract and against the employer under the alleged agreement.
The factual allegations were disputed but the employer also claimed that in any event
the agreement as alleged amounted to a guarantee which was, in the absence of any
written note or memorandum, unenforceable by reason of the Statute of Frauds 1677.
The subcontractor averred that the employer, having by its promise encouraged the
claimant to remain on site to its detriment, was estopped from relying on the Statute
of Frauds. The Court of Appeal in England and Wales found that the agreement was
unenforceable in the light of Statute of Frauds. In dismissing the subcontractor’s
appeal before the United Kingdom House of Lords, Lord Bingham observed that
there was no representation by the employer that it would honour the agreement
despite the absence of writing, or that it was not a contract of guarantee, or that it
would confirm the agreement in writing. It should be noted that in Hong Kong, the
laws of guarantee are different from the United Kingdom position in respect of the
requirement of writing. Thus, the same factual scenario, albeit that it may suffer
from similar difficulties, as observed by Lord Bingham, may have a different result
with the doctrine of estoppel by convention in operation.
As highlighted in by the Hong Kong Court of Final Appeal in Unruh v Seeberger,12 an 8.013
estoppel by convention is not a source of legal obligation. However, such an estoppel
may, in the circumstances of the particular case, result in an otherwise ineffective or
incomplete cause of action being made viable. The doctrine therefore does not play a
wholly defensive role in litigation.13
(c) Estoppel by representation

Another form of estoppel by conduct is estoppel by representation, which concerns the 8.014
reliance of one party on a representation made to it by another party. Where the party
making the representation wishes to deny the truth of that representation, the effect of
the estoppel is that the party who made the representation is estopped from denying
the truth of it. The representation can be as to existing facts or as to future conduct,
but not to intention. A descriptive account of estoppel by representation can be found
in the judgement of Lord Cairns in Hughes v Metropolitan Railway Co,14 who stated:
12
[2007] 2 HKC 609.
13
See also Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 1 QB 84.
14
(1877) 2 AC 439. See also Bestkey Development Ltd v Incorporated Owners Of Fine Mansion [1999] 3 HKC 275
and Dixie Engineering Co Ltd v Vernaltex Co Ltd [2003] HKEC 180.

“... if parties who have entered into definite and distinct terms involving certain
legal results – certain penalties or legal forfeiture – afterwards by their own act
or with their own consent enter upon a course of negotiation which has the effect
of leading one of the parties to suppose that the strict rights arising under the
contract will not be enforced, or will be kept in suspense, or held in abeyance,
the person who otherwise might have enforced those rights will not be allowed to
enforce them where it would be inequitable having regard to the dealings which
have thus taken place between the parties”.
8.015 In the commercial context, where the relationship between the parties is that of main
contractor and subcontractor, there may be circumstances that make it obvious to
the main contractor as time goes by and the work continues to completion that the
subcontractor is labouring under the delusion that its quotations or invoices will
be paid for. In such cases, the main contractor may owe a duty not to keep silent
about the matter; otherwise a situation of estoppel by representation may arise. In
Morison, Son & Jones (Hong Kong) Ltd v Yiu Wing Construction Co Ltd,15 a roof
light contractor, for the supply and installation of a skylight on the project, sued
the main contractor for the outstanding balance under a subcontract for the original
works under the subcontract and for additional works. The main contractor, via
correspondence with the roof light contractor, directed it to get on with the additional
work, for which quotations had been received months before, without any hint from
the main contractor that they were not accepted. The roof light contractor sent the
main contractor an invoice in respect of the additional works, with an increased
amount as a result of three items of extra cost attributed to additional freight and
packing, additional installation cost and additional handling. The invoice for these
additional items was sent at least six months before the work was completed. Yet, the
defendant maintained silence and stood by for about six months while the work was
in progress and until it was completed. Furthermore it was not until litigation had
been threatened that the roof light contractor was informed that the main contractor
would only pay for any of the additional work if the claim was approved by the
architect. The Hong Kong Court of Appeal found that, in these circumstances, the
main contractor, by its silence, was estopped from arguing that it had not agreed to
pay for the extra works carried out by the subcontractor.
8.016 To found estoppel, the representation must be unequivoval. In Ryoden Lift Services
Ltd v Incorporated Owners of Rialto Mansion,16 the plaintiff contractor put in
a tender to dismantle and replace the four lifts, during the currency of an existing
maintenance agreement with the defendant. The plaintiff did not succeed in its tender
and sued for damages for premature termination of the agreement. The court held that
the submission of tender per se could not be an unequivocal representation that the
plaintiff did not intend to perform the maintenance agreement or to insist on its right
under the agreement.
15
[1989] 1 HKLR 432.
16
[2009] HKEC 979.

PROMISSORY ESTOPPEL 195
From another perspective, there cannot be any estoppel unless the alleged representor 8.017
has said or done something, or failed to do something, with the result that, across
the line between the parties, her or his action or inaction has produced some belief
or expectation in the mind of the alleged representee, so that, depending on the
circumstances, it would thereafter no longer be right to allow the alleged representor
to resile by challenging the belief or expectation which he or she has engendered.17
3. PROMISSORY ESTOPPEL
(a) The purpose of promissory estoppel
The object of promissory estoppel is to make a promise binding in equity, without 8.018
the presence of consideration. In the words of Lord Denning MR in his judgement in
Crabb v Arun District Council,18 if a person
“by his words or conduct, so behaves as to lead another to believe that he will
not insist on his strict legal rights – knowing or intending that the other will act
on that behalf – and he does so act; that again will raise an equity in favour of
the other; and it is for a court of equity to say in what way the equity may be
satisfied”.
(b) Operation of promissory estoppel
Promissory estoppel may be the type of estoppel most closely associated with a 8.019
contract. In theory, a promissory estoppel may arise out of any promise that strict legal
rights will not be enforced. Frequently, it deals with the re-negotiation of contracts and
concerns the variation of existing legal rights. Thus, a promissory estoppel may operate
even though the party acting on the representation merely performs a pre-existing duty
and so suffers no detriment in the sense of doing something that it was not previously
bound to do. Also, the operation of promissory estoppel is quite limited in that it
applies only to a suspension of existing contractual rights and, as such, may only be
temporary in nature.
(c) Defensive in nature
Promissory estoppel is, however, defensive in nature, that is to say it cannot give rise 8.020
to a cause of action but can only be invoked as a defence. The remedy offered by it
has been limited to preventing the enforcement of existing legal rights, as held in
17
See The August Leonhardt [1985] 1 Lloyd’s Rep 28 at 35, per Kerr LJ. See also the Privy Council judgment
of Attorney General v Humphreys Estate (Queen’s Gardens) Ltd [1986] HKC 592 and Champion Ray Ltd &
Another v Incorporated Owners of Workingberg Commercial Building [2006] HKEC 1254.
18
[1976] Ch 179.

Combe v Combe.19 In Central London Property Trust Ltd v High Trees House Ltd,20 a
landlord represented to a tenant that, during the war, the rent would be reduced. The
landlord later went into receivership and the receiver demanded the full payment of
the rent at the rate prior to the reduction and the tenant claimed that the landlord was
estopped from demanding rent at the higher rate or had waived its right to do so. The
court held in favour of the tenant and found that, the parties having entered into an
arrangement intending to create legal relations between them and, in pursuance of
such arrangement, the promise made by the landlord to the tenant was made with
the knowledge that it would be acted upon and which was in fact acted upon by the
tenant. Thus, the court treated that promise as binding on the landlord to the extent
that it would not allow it to act inconsistently with it even though the promise was not
supported by consideration in the strict sense and the effect of the arrangement made
was to vary the terms of a contract.
8.021 In Humphrey’s Estate (Queen’s Gardens) Ltd v Attorney General,21 in the negotiations
between the Hong Kong Government and a group of companies, including the respondent,
for a mutual exchange of properties for concerned developments, no agreement was
reached, though the exchange of properties was agreed in principle but such an agreement
was made subject to contract. The Hong Kong Government and the group of companies
took possession of each other’s properties and respectively expended substantial sums
on them. The group of companies withdrew from the negotiations and the Hong Kong
Government claimed that the group was estopped from withdrawing from the agreement
in principle. This claim was rejected by the Privy Council on the ground that the Hong
Kong Government failed to show that the group created or encouraged a belief or
expectation on the part of the Hong Kong Government that there would be no withdrawal
from the agreement in principle, nor that the Hong Kong Government relied on that
belief or expectation. In the judgement, it was observed that it was unlikely, though still
possible, for a party to negotiations, which are set out in a document expressed to be
‘subject to contract’, to be able to satisfy the court that the parties had subsequently
agreed to convert that document into a contract or some form of estoppel had arisen.
Thus, it seems that mere failure to fulfil a promise does not of itself amount to estoppel,
if without some form of wrong. These may need, as suggested by Humphreys Estate, the
creation or encouragement by the party estopped in the party, who acted thereon, of an
assumption that a promise will be performed.
8.022 The law on promissory estoppel in Hong Kong is quite well settled. In Luo Xing Juan
Angela v The Estate of Hui Shui See Willy, Deceased & Ors,22 Ribeiro PJ summarised23
the principles as follows:
19
[1951] 2 KB 215.
20
[1947] KB 130. See also Hughes v Metropolitan Railway (1877) 2 App Cas 469.
21
[1986] HKLR 669.
22
(2009) 12 HKCFAR 1. See also Dixie Engineering Company Ltd v Vernaltex Company Ltd [2003] HKEC 180,
where the Hong Kong Court of Appeal upheld that decision of the judge at first instance that, with the plaintiff
having conducted itself in a way consistent with the acceptance of a deduction of 42 per cent, instead of 38 per
cent as per the contract, as the management fee in respect of the works done, it had become inequitable to allow
insisting on the 38 per cent as the contractual right.
23
Luo Xing Juan Angela v The Estate of Hui Shui See Willy, Deceased & Ors (2009) 12 HKCFAR 1 at para 55.

PROMISSORY ESTOPPEL 197
“A promissory estoppel may be said to arise where
(i) the parties are in a relationship involving enforceable or exercisable rights,

duties or powers;
(ii) one party (‘the promisor’), by words or conduct, conveys or is reasonably
understood to convey a clear and unequivocal promise or assurance to the
other (‘the promisee’) that the promisor will not enforce or exercise some
of those rights, duties or powers; and
(iii) the promisee reasonably relies upon that promise and is induced to alter
his or her position on the faith of it, so that it would be inequitable or
unconscionable for the promisor to act inconsistently with the promise.”
In Marco Consultants Ltd v Kitak Machinery Engineering Co Ltd,24 the court did 8.023
not find promissory estoppel in relation to the amount of a claim for unpaid service
fees for the provision of consultant services over construction claims. The contractor
said that the consultant was estopped from claiming more than the sums paid, as
the consultant had issued an invoice for an amount calculated by the contractor and
accepted the cheque in that amount. The court remarked that the issue of the invoice
did not convey a clear and unequivocal assurance that the consultant would not seek to
recover the full amount otherwise due.
(d) Development of estoppel in Australia
It may be noted that, in Australia, development on estoppel is travelling on a new path 8.024
that is quite different from that in other common law jurisdictions. In Waltons Stores
(Interstate) Limited v Maher,25 the High Court of Australia attempted to draw together
the various strands of estoppel into one overarching doctrine. Promissory estoppel
was recognised as a general principle which could operate in any circumstances of
legal relations, not just existing contractual relations and, instead of being invoked as a
‘shield’, ie as a defence, promissory estoppel was allowed to be used also as a ‘sword’,
ie as the basis of a claim. To invoke such an estoppel, it was held that what needed to
be established was that the plaintiff assumed that a particular legal relationship then
existed between it and the defendant or expected that a particular legal relationship
would exist between them and, in the latter case, that the defendant would not be
free to withdraw from the expected legal relationship; that the defendant induced the
plaintiff to adopt that assumption or expectation; that the plaintiff acted or abstained
from acting in reliance on the assumption or expectation; that the defendant knew
or intended her or him to do so; that the plaintiff’s action or inaction will occasion
detriment if the assumption or expectation is not fulfilled; and that the defendant has
failed to act to avoid that detriment whether by fulfilling the assumption or expectation
or otherwise.
24
[2010] HKEC 685.
25
(1988) 164 CLR 387. See Polorace Investments Ltd v Director of Lands [1997] 1 HKC 373 and Unruh v
Seeberger [2007] 2 HKC 609. See also Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA
[2003] 2 AC 541.

4. WAIVER
(a) Distinction between waiver and election
8.025 There is a lot of confusion about the boundaries between waiver and election. They
are two different concepts and operate in different spheres of legal circumstances and
effects. The concept of election is reasonably clear. It is about making a choice between
two or more inconsistent courses of action. For example, a party to a contract may have
to choose whether to rescind or terminate the contract when the circumstances arise or
whether to continue on. The doctrine of election simply says that the party has to make
the choice reasonably promptly and that once that choice is made, the party is bound
by the decision and cannot go back.
8.026 The difference can be illustrated in the Court of Appeal case of Trafalgar House
Construction (Asia) Ltd and Another v The Owners and/or Demise Charterers Of Mv
“Thor Scan”,26 where it was held that, for a wavier to operate, at least in the present
context, it had to be shown that a party had a right under a contract or by operation
of law; it knew of the existence of the right or the facts giving rise to such right; and
it had, by conduct, clearly and unequivocally abandoned its right or indicated that it
was not exercising such right and, further, that, where it had a number of alternative
or inconsistent courses open to it, its right could be waived by making an election.
Thus, no issue of reliance would come into the consideration. That case concerned the
dispute arising out of the shipment of cargo to the steelwork subcontractors used in the
construction of the extension of the Hong Kong Convention and Exhibition Centre.
The Hong Kong Court of Appeal held that the appellant, by commencing litigation in
the Netherlands rather than in Antilles, had waived its right to commence litigation
again in Antilles as required under the bill of lading contract.
(b) Changes to performance of contract
8.027 Waiver may arise in relation to changes to the performance of a contract. Yet, there is
a distinction between a variation to the contract and a waiver of the performance of
it. Variation occurs when, by mutual agreement and supported by consideration, for
the benefit or convenience of both parties or either of them, there is a later alternation
of an original agreement. Waiver, on the other hand, is where the change is for the
benefit or convenience of one party only, and the other party is said to acquiesce in
such change, not necessarily supported by consideration, in the original terms of the
contract. In both situations, there is a later agreement between the parties affecting
their earlier transaction. In Sheffin Development Ltd v KA Construction Co Ltd,27 in
a contract for the supply and installation of granite slabs, described as Italian natural
26
[1999] 2 HKLRD 136. In Aggressive Construction Co Ltd v Data Form Engineering Ltd [2009] HKEC 1555, it
was remarked that as a general principle, a party may unilaterally waive its right under a term of an agreement if
the effect of that contractual term is entirely to its benefit. In that case, it was held that there was no waiver of the
terms of the arbitration agreement which was clearly for the benefit of both parties.
27
[2002] HKEC 432. See also the judgment of the Hong Kong Court of Appeal Sheffin Development Ltd v Ka

WAIVER 199
granite, the contractor denied liability to pay the supplier on the ground that the
granite was not of Italian origin. The granite was not delivered to the site as scheduled
upon instructions of the contractor and the contractor later terminated the contract
without taking delivery. The supplier attempted to sell the granite in mitigation, with
little success. The court found in favour of the supplier and held that such requests
discharged it from the obligations to make delivery of the material on site and to
commence installation work in accordance with the time stipulated in the contract.
As highlighted in Aggressive Construction Co Ltd v Data Form Engineering Ltd,28 8.028

waiver is a unilateral act by one party not supported by consideration moving from the
other party. The basis of a waiver is best explained on principles analogous to those
of equitable forbearance or promissory estoppel. Thus, where a waiver is alleged by
one party of a contract, it must prove some promise or conduct by the other party,
which is sufficient under the doctrine such as equitable estoppel or promissory
estoppel. To be sufficient to amount to a waiver, such promise or conduct must be clear
and unequivocal, and the claimant must have suffered detriment by having altered
its position in reliance on such a promise such that it would be unjust to allow the
promisor to go back on his promise.
(c) Insistence on strict compliance

Another instance of waiver arises in respect of the right of a party to subsequent 8.029
insistence on the strict compliance with the contract procedures. In UBC (Construction)
Limited v Sung Foo Kee Ltd,29 the plastering subcontractor claimed against the main
contractor for sums due to it arising out of 26 variation orders and day works. The
main contractor had put forward no positive case at all but left it for the subcontractor
to prove. Among other things, the main contractor argued that the subcontractor had
failed to follow the contract requirements for written agreements or confirmation in
respect of such works. The court accepted that the main contractor had by its conduct
waived strict compliance with the contract as regards written requirements and held
that, in order to constitute a waiver, there had to be conduct which led the other party
reasonably to believe that the strict legal rights would not be insisted upon. In this
case, the subcontractor had actually threatened to walk off of the site because of the
problems it had in getting paid. Due to the tight labour situation then prevailing in
Hong Kong, the subcontractor was unwilling to work at a reduced rate and actually
told the main contractor to get quotes for such works elsewhere or use temporary
workers from elsewhere. Some of the variation orders were also paid in full and it
was never stated that the written requirements were not complied with when such
payments were made.
28
[2009] HKEC 1555. In Royston Urban District Council v Royston Builders, Ltd 177 EG 589, it was remarked:
“On one view it is a case of creditors putting in in perfect good faith claims for extras to which they were not
entitled, and the debtor, the council, inadvertently but in good faith, paying them. But in my view that course
of conduct does not give rise to any representation that the amounts so claimed are due.”
29
[1993] 2 HKLR 207. See also Wong Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521.

1. LAW OF TORTS
(a) Definition of tort
Construction projects are complex undertakings, involving many participants and 9.001
affecting the public. During the construction process, events may occur that affect
persons or their property and economic interests outside the ambit of other legal
relationships such as contract. In such situations, the law of torts is often used
to govern the involved interests and control the proper conduct of the persons
concerned.
The word ‘tort’ comes from Norman French and indicates a wrong. Underlying the tort 9.002
system is the belief that those who have sustained harm due to a civil wrong should be
restored to their pre-injury position and that the responsibility for that compensation
should lie with the wrongdoer. It is a good in itself that tortious wrongdoers should
be legally responsible for putting right the harm they have caused to others. It follows
that compensation, but no more than compensation, for injury caused by a wrong, is
the primary function of tort law. Tort law determines when the person who causes the
harm must pay compensation to the person who suffers it. This is dependent upon the
nature of the conduct of the person who caused harm and the nature of the harm and
the circumstances in which the harm was inflicted.
Indeed, harm is the signature of tort. In general, a tort consists in some act done or 9.003
omission made by the defendant whereby it has without just cause or excuse caused
some form of harm to the plaintiff. A convenient example is where a worker is injured
in an accident on site which was caused by a working platform that collapsed when in
use by other workers. The harm in that case may be the result of improper use due to
lack of instructions given to the other workers, or the material failure of the working
platform. The contractor who failed to give proper instructions, or the manufacturer
of the working platform may be liable in tort for the injury sustained by the victim
worker. In the analysis of Lord Hoffmann in the Kuwait Airways Corp v Iraqi Airways
Co,1 cited with approval by Lord Bingham of Cornhill in Fairchild v Glenhaven
Funeral Services,2 he stated that:
“There is no uniform causal requirement for liability in tort. Instead, there are
varying causal requirements, depending upon the basis and purpose of liability.
One cannot separate questions of liability from questions of causation. They
1
[2002] 2 AC 883.
2
[2003] 1 AC 32. This case concerns an exception to the usual rule of causation in claims for damages for
asbestos induced mesothelioma in relation to claimants having been exposed to asbestos dust when working
for more than one employer. The employers were found liable as the wrongdoing of each employer had
materially increased the risk to the employee that he might contract the disease. See Bailey v Ministry of
Defence [2009] 1 WLR 1052, where it was held that there was to be an essential condition for the operation of
this exception that the impossibility of proving that the defendant caused the damage arose out of the existence
of another potential causative agent that operated in the same way. See also Sienkiewicz v Greif (UK) Ltd
[2010] 2 WLR 951.

204 TORT
are inextricably connected. One is never simply liable; one is always liable for
something and the rules which determine what one is liable for are as much
part of the substantive law as the rules which determine which acts give rise to
liability.”
(b) Function of the law of torts
9.004 Compensation is the principal function of the law of torts.3 Yet, the law of torts still
has a number of other functions. One of these is to lay down a blueprint of conduct
that serves the changing social and economic conditions and system.4 Obviously, its
prime aim is to compensate the victim for a wrong or fault done. This concept of
compensation necessitates the view on loss or damage, since only loss or damage can
be compensated. To achieve this, an ever-balancing exercise has to be made among the
interests of groups or persons. This is a principal reason why the law of torts is still
evolving.
(c) Tort versus contract
9.005 The law of tort is different from contract in that the duties in tort are primarily
fixed by the law, while the duties in contract are fixed by the parties themselves. In
tort, the duties are owed towards persons generally; in contract the duties are owed
towards a specific person or persons. Duties in tort and duties in contract are, as
such, of distinct legal sources. However, they also overlap with each other and can
still be of practical importance in limited aspects. In particular, the differentiation
between liability under tort and under contract is still of relevance in certain
aspects: limitation of action, quantum of damages and apportionment of liability for
contributory negligence under s 21 of Law Amendment and Reform (Consolidation)
Ordinance (Cap 23).5
(d) Interaction of tort and contract
9.006 The law of torts applies generally and is not simply supplementary to the law of
contract. Indeed, the concurrent liability in tort and contract has long been subject
to debates. In the nineteenth century and the first part of the twentieth century, most
believed that no one who was not a party to a contract could sue on it, or anything
arising out of it. Thus, if one of the parties to a contract was negligent in carrying
it out, no third person that was injured by that negligence could sue for damages on
that account. The reason given was that the only duty of care was that imposed by the
contract. It was owed to the other contracting party and to no one else. Time after time
3
Revenue and Customs Commissioners v Total Network SL [2008] 1 AC 1174.
4
Arthur J S Hall & Co (A Firm) v Simons [2002] 1 AC 615.
5
See Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 and a general review of it by Glofcheski, R
(1996) “Tort/Contract Concurrency: The Demise of Tai Hing Cotton Mill Ltd.” (1996) HKLJ 34. See also Bryan
v Maloney (1995) 182 CLR 609 and Astley v Austrust Ltd (1999) 197 CLR 1.

LAW OF TORTS 205
the injured plaintiffs sought to escape from the rigour of this rule. But they were met
invariably with the answer given in Winterbottom v Wright:6
“… If we were to hold that the plaintiff could sue in such a case, there is no point
at which such actions would stop. The only safe rule is to confine the right to
recover to those who enter into the contract: if we go one step beyond that, there
is no reason why we should not go fifty.”
Subsequently, such a restriction was done away with in the classic case on negligence 9.007
of Donoghue v Stevenson7 which is a case that dealt with the manufacturer of an
article. It took another 30 years, until the Northern Ireland case of Gallagher v N
McDowell Ltd,8 where this doctrine was extended to cover a builder to the effect
that a contractor who built a house negligently was liable to a person injured by his
negligence.
Ultimately, as confirmed in the House of Lords case Henderson v Merrett Syndicate 9.008
Ltd,9 the mere fact of a contractual relationship in existence between the same parties
does not preclude the finding of a duty in tort, although such a duty in tort may be a
modified one.
Hence, apart from those cases concerning accidents that occurred on a construction 9.009
site or involving infringement of interests in property or chattel, one area where
the law on torts has particular impact on the construction process is the negligence
associated with the execution of the works, which in usual circumstances are covered
with contractual relationships. Examples of these areas can involve consideration of
the exact scope of the agreed duty or the duty of engineers or architects to act properly
towards the contractor. All of these are governed by the law of torts in general and the
law of negligence in particular.
An illustration of the interface and interaction between tort and contract can be found 9.010
in the Hong Kong Court of Appeal decision of Bank of East Asia Ltd v Tsien Wui
Marble Factory Ltd.10 In that case, a tower block used as the headquarters of a bank
was discovered to have defective exterior granite cladding that was at the risk of falling
off, some years after its construction. The cladding was replaced and the bank sought
6
(1842) 10 M & W 109. Compare, eg Bagott v Stevens Scanlan [1966] 1 QB 197 and Ketteman v Hansel
Properties [1987] AC 189. See also Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC
1 and the Canadian cases of Central Trust Co v Rafuse (1986) 31 DLR 481 and British Columbia Hydro &
Power Authority v BG Checo [1993] 1 SCR 12. In New Zealand, however, there seems to be some uncertainty
as to whether concurrent liability can exist. See, eg the New Zealand cases of Bevan Investment Ltd v Blackhall
and Struthers (No 2) [1973] 2 NZLR 45; McLaren Maycroft & Co v Fletcher Development Co Ltd [1973] 2
NZLR 100, but compare Rowlands v Collow [1992] 1 NZLR 178. See also the position in Australia in Pullen v
Gutteridge [1993] 1 VR 27 and Macpherson & Kelly v Kevin J Prunty & Associates [1983] 1 VR 573.
7
[1932] AC 562.
8
(1961) NI 26.
9
[1995] 2 AC 145. See Hondon Development Ltd v Powerise Investments Ltd [2005] 3 HKLRD 605. See also
Chan Sze Sze Gabrielle v Tu Christopher [2009] HKEC 579, where it was summarised that:
“In order for any duty in tort to be established, there must be: (a) an assumption of responsibility, (b) recognition
that the party assuming such responsibility has “special skills”, and (c) which the complainant relies on.”
See also Yiu Chown Leung v Chow Wai Lam (2005) 8 HKCFAR 592.
10
[2000] 1 HKLRD 268. See also Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237.

206 TORT
to recover the replacement costs from the architect, who had been directly engaged
by it and who had approved the cladding, and from its nominated subcontractor
responsible for the design and installation of the cladding. By the time proceedings
were issued, the contractual remedy against the architects and the action on a collateral
warranty against the subcontractors was time-barred. The bank pursued against both
in tort on the ground of negligence. It was held among other things that the architect
was under a duty of care in tort to design the system of fixing the granite panels to
the concrete with care and skill and, in that case, when a party was under such a duty
to use care, it could not get rid of its responsibility by delegating the performance
of it to someone else, no matter whether the delegation be to an employee or to an
independent contractor.
9.011 It should be noted that, in some instances, professionals who are working as employees
may also personally be liable in tort to the clients of their employers.11 Tortious claims
can also be brought against public authorities.12
(e) Remedy in tort
9.012 The commonly awarded remedy in an action in tort is damages.13 It is intended to

represent fair and adequate compensation for the plaintiff’s loss or injury. What is
recovered is compensation, not restitution or punishment. In other words, the function
of damages is to put the person whose right has been invaded in the same position as
if it had been respected.
2. NEGLIGENCE
(a) Definition of negligence
9.013 Negligence here is a state of conduct, not a state of mind, which involves an
unreasonably great risk of causing damage. As defined by Alderson B in Blyth v
Birmingham Waterworks Co,14 negligence is
11
See Yazhou Travel Investment Co Ltd v Bateson [2004] 1 HKLRD 969; Formosa Taffeta Co Ltd v Banque
Indosuez [2009] 1 HKLRD 568; Merrett v Babb [2001] BLR 483; and Parkinson Engineering Services Plc (In
Liquidation) v Swan [2010] Bus LR 857.
12
In X (minor) v Bedfordshire County Council [1995] 2 AC 633, Lord Browne-Wilkinson remarked:
“Private law claims for damages can be classified into four different categories, viz: (A) actions for breach
of statutory duty simpliciter (i.e. irrespective of carelessness); (B) actions based solely on the careless
performance of a statutory duty in the absence of any other common law right of action; (C) actions based on
a common law duty of care arising either from the imposition of the statutory duty or from the performance of
it; (D) misfeasance in public office, i.e. the failure to exercise, or the exercise of, statutory powers either with
the intention to injure the plaintiff or in the knowledge that the conduct is unlawful.”
See also Lucky Chance Ltd v Commissioner for Television and Entertainment Licensing [2006] HKEC 2302;
Stovin v Wise [1996] AC 923; and Connor v Surrey County Council [2010] 3 All ER 905.
13
As per Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237, a cause of action in tort accrued
when the damage which resulted from the tortious conduct was real, as distinct from minimal and was actual,
as opposed to purely contingent. The concept of “damage” was broad. Whether damage had occurred was a
question of fact.
14
(1856) 11 Exch 781. See Barber v Somerset County Council [2004] 1 WLR 1089. See also Fung Mei Fan v Tung
Wah Group of Hospitals [2007] HKEC 867.

NEGLIGENCE 207
“… the omission to do something, which a reasonable man, guided upon those

considerations which ordinarily regulate the conduct of human affairs, would do,
or doing something which a prudent and reasonable man would not do”.
In Lochgelly Iron & Coal Co Ltd v McMullan,15 Lord Wright also gave a helpful 9.014
description of negligence saying:
“In strict legal analysis, negligence means more than heedless or careless
conduct, whether in omission or commission: it properly connotes the complex
concept of duty, breach and damage thereby suffered by the person to whom the
duty was owing.”
A working definition for negligence as a tort can be that it is the breach of a legal duty 9.015
to take care, which results in damage, undesired by the defendant, to the plaintiff. The
essentials of negligence are therefore: a legal duty; a breach of that duty; and damage
consequential to the breach of that duty.
(b) Duty of care
(i) Donoghue v Stevenson principle

The decision of the House of Lords in Donoghue v Stevenson16 treats negligence, 9.016
where there is a duty to take care, as a specific tort in itself. In that case, a manufacturer
of ginger beer had sold ginger beer in an opaque bottle to a retailer. The retailer sold
it to a person who treated a young woman and her friends to its contents. These
included the decomposed remains of a snail that somehow had found its way into
the bottle at the factory. The young woman alleged that she became seriously ill
and sued the manufacturer for negligence. Here, there was clearly no contractual
duty on the part of the manufacturer for negligence. The House of Lords held that
the manufacturer owed the young woman a duty to take care that the bottle did not
contain noxious matter. The famous formulation of the ‘neighbour principle’ by Lord
Atkin is:
“You must take reasonable care to avoid acts or omissions which you can
reasonably foresee would be likely to injure your neighbour. Who, then, is my
neighbour? The answer seems to be – persons who are so closely and directly
affected by my act that I ought reasonably to have them in contemplation as being
so affected when I am directing my mind to the acts or omission which are called
in question.”
15
[1934] AC 1. See also Venn v National Coal Board [1967] 2 QB 557.
16
[1932] AC 562. Such a duty can also be readily inferred from the classic statement of Brett MR in Heaven v
Pender (1883) 11 QBD 503:
“…whenever one person is by circumstances placed in such a position with regard to another that everyone of
ordinary sense who did think would at once recognise that if he did not use ordinary care and skill in his own
conduct with regard to those circumstances he would cause danger or injury to the person or property of the
other, a duty arises to use ordinary care and skill to avoid such danger.”

208 TORT
9.017 The principle in Donoghue v Stevenson has been applied generally to cover negligence
causing physical damage to property or individuals. For instance, in Clayton v
Woodman & Son (Builders) Ltd,17 a bricklayer was employed by a contractor who had
contracted with a hospital board to install a lift in the hospital under the supervision
of a firm of architects employed by the board. The architect employed by the firm
instructed the bricklayer to cut a chase in a gable, but did not tell him to shore up the
gable. The contractor knew that the chase was to be cut without shoring. The gable
collapsed on the bricklayer while he was cutting the chase. The court held that both the
contractor and the architect owed a duty of care in negligence towards the bricklayer
and that duty was breached. This case shows that where a person who carelessly gives
an order knowing that it is certain to be obeyed is liable in negligence to a person
carrying out such order and thereby sustaining reasonably foreseeable injuries.
9.018 A contractor is also liable if the plaintiff suffered personal injury as a result of the
contractor’s negligence. Such negligence can be in the form of positive conduct or
negative omission. As in Lai Kin Wah v Hip Hing Construction Co Ltd,18 a contractor
was liable to a formwork carpenter who was injured when he, as instructed, attempted
to move a bundle of threaded screws from a narrow platform, attached to a wall of
wooden formwork, on to a similar platform 15 feet directly above, on the same wall
of the formwork, without being provided with hoist or mechanical lifting device nor
assistance of another workmate. Also, in Leung Chun Pong v Cheng Man Tung t/a
Chun Yeung Machine,19 it was held that, whether the plaintiff worker was an employee
or subcontractor, the defendant, who was a well experienced mechanic was found
negligent in not seeing to it that the plaintiff was safe in holding a hose which flung
and injured the plaintiff when pressurised hydraulic fluid was applied since mere
warning was not enough.
(ii) Damage foreseeable by a reasonable man

9.019 Yet, a plaintiff can recover compensation as damages for the negligence of the
defendant, only if the resulting damage could have been foreseen by a reasonable man.
It is not enough that the damage was a direct consequence of the negligent act. This
is shown in the case of Overseas Tankship (UK) Ltd v Morts Dock and Engineering
Co Ltd (The Wagon Mound),20 where the negligent escape of oil into a harbour, which
caused a fire to spread to a wharf did not render a ship builder liable for such damage
17
[1962] 2 QB 533. In Makepeace v Evans Bros (Reading) [2000] BLR 287, it was held that a duty of care
could arise between a contractor and the employee of a subcontractor where an inherently dangerous piece of
equipment was loaned to that employee without the contractor making health and safety inquiries. See also
Hadden Construction Ltd v Midway Services Ltd 2008 SLT (Sh Ct) 12.
18
[1997] HKLY 437. See also San To Po Yuk v Wing Kwong Painting Co Ltd [2004] 2 HKLRD 169.
19
[2008] HKEC 1001.
20
[1961] AC 388. See Chua Ming Yuen v Hentron Investments Ltd [2006] HKEC 263, applying the classic statement
of Viscount Simonds in Overseas Tankship (UK) v Morts Dock and Engineering Co (The Wagon Mound) on
foreseeable damages, namely:
“It does not seen consonant with current ideas of justice or morality that for an act of negligence, however
slight or venial ..., the actor should be liable for all consequences, however unforeseeable and however grave,
so long as they can be said to be ‘direct.’ It is a principle of civil liability, subject to qualifications which have
no present relevance, that a man must be considered to be responsible for the probable consequences of his
act. To demand more of him is too harsh a rule, to demand less is to ignore that civilised order requires the
observance of a minimum standard of behaviour.”

NEGLIGENCE 209
since, applying the test of foreseeability, it could not reasonably be expected to have
known that the oil would catch fire. What must have been foreseen is not the precise
injury that occurred, but injury of a given description and the description is formulated
by reference to the nature of the risk that ought to have been foreseen.21 In Yeung
Tung Sang v Jamsart Cleaning Service Co Ltd,22 (Deputy Judge Fung), a cleaning
contractor was held liable to its employee for damages for personal injuries from an
unpredictable act of a third party who was quarrelling with another at the spot and
pushed the employee off a ladder. The court held that there was a breach of duty in
exposing the employee to unnecessary risk of injury and failing to prevent the danger
to him in relation to his fall from the ladder.
(iii) Physical damage to property

In relation to physical damage to property, as different from economic loss, it has been 9.020
remarked in Mobil Oil Hong Kong Ltd v Hong Kong United Dockyards Ltd23 that:
“In most claims in respect of physical damage to property the question of the
existence of a duty of care does not give rise to any problem, because it is self-
evident that such a duty exists and the contrary view is unarguable.”
Physical damage to property here generally means damage to property other than the 9.021
property that is the product of negligence. For instance, where a contractor erects a
building in a negligent way, resulting in a cracking of the building that calls for repair
but nothing more, such damage, though physical, is normally not regarded by the law
as damage to property that can support a claim in negligence. This is what was held
in the House of Lords decision of Murphy v Brentwood District Council.24 Thus, a
building with defects caused by negligent design or construction, for instance one
collapsing into itself due to defective foundations, seems an obvious case of physical
damage. Yet, in law, such a situation will rather fall within the ambit of economic loss
and the existence of duty has to be examined in that context.
(iv) Foreseeability, proximity and fairness

It has been settled in law that the elements of foreseeability and proximity, as well 9.022
as considerations of fairness, justice and reasonableness, are relevant to all cases,
whatever the nature of the harm sustained by the plaintiff.
21
In addition to the foreseeability of physical damage, it is necessary for a plaintiff to establish the necessary close
relationship between the parties, or degree of proximity, in order to establish a duty of care. See Marc Rich & Co
AG v Bishop Rock Marine Co Ltd [1996] AC 211.
22
[2004] 2 HKLRD 54. See also Lai Keung v Jetwell Engineering Co [2010] HKEC 1047.
23
[1991] 2 HKLR 62. In Marc Rich & Co AG v Bishop Rock Marine Co Ltd [1996] AC 211, it was held that a duty
of care to ensure that the proper procedure was followed in the event of a typhoon was owed by ship repairers
who had reserved the right to remove a vessel to a typhoon buoy, to the owners of an oil jetty terminal which was
severely damaged when the vessel broke her moorings.
24
[1991] 1 AC 398. See Linfield Ltd v Taoho Design Architects [2006] HKEC 547, affirming the first instance
decision at [2004] HKEC 1135; and Re Fully Well Investment Ltd [2003] HKEC 773. See also D & F Estates Ltd
v Church Commissioners [1989] AC 177; Department of the Environment v Thomas Bates [1991] 1 AC 491; and
Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd (1999) 2 HKCFAR 349. See also Shun Kai Finance Co Ltd
v Japan Leasing (Hong Kong) Ltd [2008] HKEC 1637.

210 TORT
9.023 In Anns v Merton London Borough Council,25 it was held that a local authority might
be liable in negligence for its failure to inspect building foundations properly or at
all, if it be shown that the action taken was carried out negligently and other than
in bona fide exercise of its discretion. A two-tier approach was advanced by Lord
Wilberforce for assessing the existence of a duty in negligence in novel situations by
asking whether there was a sufficient relationship of proximity or neighbourhood and
then whether there were any other considerations that ought to negate or reduce the
scope or extent of the duty. This decision was doubted in D&F Estates Ltd v Church
Commissioners for England,26 where it was held that a building contractor might have
a contractual or statutory duty to supervise the work of a subcontractor, but it had
no such duty in tort if in all the circumstances the imposition of such a duty would
be unjust or unreasonable. The decision of Anns v Merton London Borough Council
was an extension of the Donoghue v Stevenson principle that should not, as a matter
of policy, be affirmed. Anns v Merton London Borough Council was subsequently
overruled by Murphy v Brentwood District Council,27 where it was held that a local
authority, in supervising compliance with the building regulations or bylaws, was
under a common law duty to take reasonable care to avoid putting a purchaser of a
house in a position in which he would be obliged to incur such economic loss. Indeed,
as held by the House of Lords in Caparo Industries Plc Respondents v Dickman,28
what emerged as a three-stage test was that, in addition to the foreseeability of damage,
there should exist between the parties a relationship characterised by the law as one
of ‘proximity’ or ‘neighbourhood’, and that the situation should be one in which the
court considered it fair, just and reasonable that the law should impose a duty of a
given scope upon the one party for the benefit of the other. Of course, the concepts of
proximity and fairness embodied in these additional ingredients are not susceptible to
any such precise definition as would be necessary to give them utility as practical tests.
Indeed, Lord Bridge said:
“Whilst recognising the importance of the underlying general principles common

to the whole field of negligence, I think the law has now moved in the direction of
attaching greater significance to the more traditional categorisation of distinct
25
[1978] AC 728. This case has been overruled by Murphy v Brentwood District Council [1991] 1 AC 398. See
Sunface International Ltd v Meco Engineering Ltd [1990] 2 HKLR 193 and Leon Engineering & Construction
Co Ltd v Ka Duk Investment Co Ltd [1989] 2 HKLR 537. See also Spandeck Engineering (S) Pte Ltd v Defence
Science and Technology Agency [2007] 4 SLR 100.
26
[1989] AC 177. See Tam Kam Fai v Michael J Design Ltd [2006] HKEC 1450.
27
[1991] 1 AC 398. This decision was followed in Londonwaste Ltd v Amec Civil Engineering Ltd (1997) 83
BLR 136; Payne v John Setchell Ltd [2002] BLR 489; Lewisham LBC v MR Ltd [2003] BLR 504; and Calvert
v William Hill Credit Ltd [2009] Ch 330. See Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd (1999) 2
HKCFAR 349 and Linklaters Business Services (formerly Hackwood Services Co) v Sir Robert McAlpine Ltd
(2010) 130 ConLR 111.
28
[1990] 2 AC 605. Applying Carparo, in Galliford Try Infrastructure Ltd (formerly Morrison Construction Ltd) v
Mott MacDonald Ltd (2008) 120 ConLR 1, no duty of care was found as between a design and build contractor
and an engineering consultant in relation to information about bracing a pile wall and about supporting the
existing facade of the building which was being retained that was passed by the consultant to contractor at the
tender stage for the design and construction of a building development. See also Leung Alfred Cheuk Wah v Ernst
& Young LLP China/Hong Kong [2006] HKEC 1408.

NEGLIGENCE 211
and recognisable situations as guides to the existence, the scope and the limits of
the varied duties of care which the law imposes.”
What results is a piecemeal development of the law of negligence with a three-stage 9.024
test to be applied in novel situations. As described by Brennan J in the Australian case
Sutherland Shire Council v Heyman,29 it is preferable that the law should develop novel
categories of negligence incrementally and by analogy with established categories,
rather than by a massive extension of a prima facie duty of care restrained only by
indefinable considerations which ought to negate, reduce or limit the scope of the duty
or the class of person to whom it is owed.
In Attorney General of the British Virgin Islands v Hartwell,30 Lord Nicholls of 9.025
Birkenhead said that the concept of reasonable foreseeability embraced a wide range of
degrees of possibility, from the highly probable to the possible but highly improbable.
Thus, as the possible adverse consequences of carelessness increase in seriousness, so
will a lesser degree of likelihood of occurrence suffice to satisfy the test of reasonable
foreseeability.
(v) No duty of care

Certainly, it follows that there will be instances where the relationship between the 9.026
parties may not be sufficiently close or there is no assumption of responsibility to be
relied on such that imposing a duty of care is not just and reasonable.31 In Capital and
Counties Plc v Hampshire County Council,32 it was held that the fire brigade in the
United Kingdom was not under a common law duty to answer a call for help and was
not under a duty to take care to do so; in Gorringe v Calderdale Metropolitan Borough
Council,33 it was held that the council did not owe a duty of care to place a marking on
the road or to erect a sign, warning motorists to slow down on approaching the crest of
a road where the accident happened.
29
(1985) 60 ALR 1. See Leung Tsang Hung v Incorporated Owners of Kwok Wing House (2007) 10 HKCFAR 480.
30
[2004] 1 WLR 1273.
31
See, for example, Galliford Try Infrastructure Ltd (formerly Morrison Construction Ltd) v Mott MacDonald Ltd
(2008) 120 ConLR 1.
32
[1997] QB 1004. This was applied in Sandhar v Department of Transport, Environment and the Regions [2005]
1 WLR 1632, where it was held in relation to highway authorities that there was no common law duty of care to
prevent the formation of ice on trunk roads, but was distinguished in Kent v Griffiths (No 3) [2001] QB 36, where
it was held that an ambulance service could owe a duty of care to an individual member of the public, once an
emergency phone call providing the personal details of that person had been accepted by the service.
33
[2004] 1 WLR 1057. The provision of road signs or markings was quite different from keeping the highway in
repair. Lord Hoffmann said that reasonable foreseeability was insufficient to justify the imposition of liability
upon someone who simply does nothing: who neither creates a risk nor undertakes to do anything to avert
it, endorsing the comments of Lord Goff in Smith v Littlewoods Organisation Ltd [1987] AC 241, where His
Lordship said:
“I wish to emphasise that I do not think that the problem in these cases can be solved simply through the
mechanism of foreseeability. When a duty is cast upon a person to take precautions against the wrongdoing
of third parties, the ordinary standard of foreseeability applies; and so the possibility of such wrongdoing
does not have to be very great before liability is imposed … Per contra, there is at present no general duty at
common law to prevent persons from harming others by their deliberate wrongdoing, however foreseeable
such harm may be if the defender does not take steps to prevent it.”
See also Leung Tsang Hung v Incorporated Owners of Kwok Wing House (2007) 10 HKCFAR 480.

212 TORT
9.027 For factual situations that are not governed by precedents or authority, as noted in
Alcatel Cable Contracting Norway As & Another v Titan Logistic(s) Pte Ltd,34 a duty
of care only existed where there was not only foreseeability of harm, but a close and
direct relationship between the parties concerned and, in this regard, the court should
also have regard to what it considered just and reasonable in all the circumstances and
facts of the case. In that case, it was found not to be just and reasonable to impose a
duty on the subcontractor, who was engaged for loading cargo onto a ship, owed to the
cargo owner in view of the lack of knowledge on the part of the subcontractor on how
the cargo would be stowed on the ship.
9.028 In the context of construction contracts, not every situation may come with a duty
of care. The classic situation is in relation to the architects or the engineers as a
defendant in discharging their responsibilities under the construction contracts.
In Sutcliffe v Thackrah,35 the House of Lords was invited to consider whether an
architect could be found negligent in certifying interim payments to the contractor
under a RIBA form standard contract. It was held that, in issuing interim certificates
an architect did not, apart from specific agreement, act as an arbitrator between the
parties, and that he was under a duty to act fairly in making his valuation and was
liable to an action in negligence at the suit of the building owner. Yet, in Pacific
Associates Inc v Baxter,36 the Court of Appeal in England and Wales held that the
engineer employed to supervise the work, which the contractor had contracted with
the employer to do, was by agreement acting solely for the employer and was not,
under the terms of the contract, required to exercise due care to the contractor. In
that case, which concerned dredging and reclamation work in Dubai, the contractor
claimed that inaccurate information supplied by the engineer resulted in the work
being more difficult than expected and that the tender price was too low and, the
engineer wrongfully rejected claims for additional payments provided for in the
contract for encountering hard material not reasonably foreseeable. The court held
that, in the absence of any voluntary assumption of responsibility by the engineer to
the contractor, there could be imposed by law on the engineer a duty to take care to
34
[2000] 3 HKLRD 720.
35
[1974] AC 727. Prior to this decision, it was an established rule of law that an architect or engineer in ascertaining
the amount due by the employer to a contractor under a building contract occupied the position of an arbitrator
and, as such, no action could be founded on negligence on his part. See the cases of Stevenson v Watson (1897)
4 CPD 148 and Chambers v Goldthorpe [1901] 1 KB 624. See also Edward Mayers v Brian Dlugash [1994] 1
HKLR 442; Leon Engineering & Construction Co Ltd v Ka Duk Investment Co Ltd [1989] 2 HKLR 537; and
“Architects – Mere Casters of Figures?” (1974) HKLJ 271, 271 – 279 for further details. In Arenson v Arenson
[1977] AC 405, it was held that an immunity from liability for negligence may exist only if certain indicia are
satisfied. These indicia are as follows: (a) there is a dispute or a difference between the parties which has been
formulated in some way or another; (b) the dispute or difference has been remitted by the parties to the person
to resolve in such a manner that he or she is called upon to exercise a judicial function; (c) where appropriate,
the parties must have been provided with an opportunity to present evidence and/or submissions in support of
their respective claims in the dispute; and (d) the parties have agreed to accept the decision. See also MacDonald
Estates Plc v National Car Parks Ltd 2010 SC 250.
36
[1990] 1 QB 993. See Metrowell Holdings Ltd v Periwin Development Ltd [2001] 3 HKLRD 182 and Leon
Engineering & Construction Co Ltd v Ka Duk Investment Co Ltd [1989] 2 HKLR 537. See also John F Hunt
Demolition Ltd v ASME Engineering Ltd [2008] 1 All ER 180 and Galliford Try Infrastructure Ltd (formerly
Morrison Construction Ltd) v Mott MacDonald Ltd (2008) 120 ConLR 1. See however Metrowell Holdings Ltd
v Periwin Development Ltd [2001] 3 HKLRD 182.

NEGLIGENCE 213
avoid economic loss accruing to the contractor. It was further remarked that, in order
to find such a duty of care, the contractor had to satisfy the three requirements of
(a) foreseeability of harm; (b) proximity; and (c) it being just and reasonable to
impose the duty on the defendants.
These cases have been considered by the Hong Kong court in Leon Engineering 9.029
& Construction Co Ltd v Ka Duk Investment Co Ltd.37 The main contractor sued
the employer on a building contract and sought to join the architect as a second
defendant for a claim in negligence in that, as certifying architect under the contract,
it owed a duty of care to the main contractor to give proper, timely and impartial
consideration to its claims and issue all certificates in strict accordance with the
terms of the contract. It was alleged that the architect had negligently failed to
perform that duty, and that as a result the main contractor had been kept out of
monies to which it was and remained entitled. The building contract was in the usual
standard form in Hong Kong, ie Standard Form of Building Contract Private Edition
with Quantities 1976 Edition (May 1979 Revision). In the judgement of Bokhary J,
he said that the principles of Pacific Associates Inc v Baxter38 which should be
applied were that:
“[w]here, first, there is adequate machinery under the contract between the
employer and a contractor to enforce the contractor’s rights thereunder and,
secondly, there is no good reason at tender stage to suppose that such rights and
machinery would not together provide the contractor with an adequate remedy,
then, in general, a certifying architect or engineer does not owe to the contractor
a duty in tort coterminous with the obligation in contract owed to the contractor
by the employer.”
In coming to that conclusion, reliance was placed partly on the facts that there 9.030
was an arbitration clause in the building contract that entitled the arbitrator to
open up and review the architect’s decision on interim certificates for payment.
Of course, since the decision of Beaufort Developments (NI) Ltd v Gilbert-Ash NI
Ltd,39 which overruled the principle in Northern RHA v Derek Crouch Construction
Co Ltd40 that the court did not have the powers to open up, review or revise the
architect’s certificates, opinions, requirements or notices which were given to the
arbitrator, the importance of the existence of such an arbitration clause may need
to be reviewed.
37
[1989] 2 HKLR 537. This case was distinguished in Metrowell Holdings Ltd v Periwin Development Ltd [2001]
3 HKLRD 182, where the court found it open to argument as to whether the architect owed a purchaser a duty of
care for negligently extending time for completion of building under a sale and purchase agreement.
38
[1990] 1 QB 993.
39
[1999] 1 AC 266.
40
[1984] QB 644. See also London and Regional (St George’s Court) Ltd v Ministry of Defence [2009] BLR 20;
Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd [2006] BLR 113; and Henry Boot Construction
Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850. See, however, W Hing Construction Co Ltd v Boost
Investments Ltd [2009] 2 HKLRD 501.

214 TORT
(c) Breach of duty

(i) ‘Reasonable man’ test
9.031 The test for deciding whether there has been a breach of duty is that of a reasonable
man. This is in fact an abstract concept and a classic statement of this is given in Blyth
v Birmingham Waterworks Co,41 where the court said:
“Negligence is the omission to do something which a reasonable man, guided

upon those considerations which ordinarily regulate the conduct a human affairs,
would do, or doing something which a prudent and reasonable man would
not do.”
9.032 Whether the care that has been taken is or is not reasonable is a question whose answer
must vary with circumstances.42 In Glasgow Corporation v Muir,43 it was said that, in
determining whether conduct was reasonable or not, regard must be had to the balance
between the magnitude of the risk to which the defendant exposed the other person and
the importance of the object to be attained by the dangerous form of activity.
9.033 The standard of a reasonable man is one largely of objective nature. In determining
responsibility, the law eliminates the personal equation. It takes no notice of the views
of the particular individual, or of others like him. It requires everyone to exercise all
such precautions as a man of ordinary prudence would observe.
(ii) Special skill may be considered

9.034 Yet, the objective standard may consider an individual’s specialisation. A contractor
in Siu Chi Moon v Rainfield Design & Associates Ltd44 was found in breach of the
duty toward its subcontractor who was injured when climbing down a scaffolding,
due to its failing to provide safe access to the work, such as by way of a ladder, that
a reasonable contractor in such circumstances would have. The Hong Kong Court of
Final Appeal observed that, in effect, the only safety precaution it took was to enter
into the subcontract on terms which imposed the responsibility for safety measures on
the subcontractor and, while it might be that in an exceptional case subcontracting to a
highly qualified specialist might bring a party within the words “so far as is reasonably
41
(1856) 11 Ex 781. See Fung Mei Fan v Tung Wah Group of Hospitals [2007] HKEC 867. See also A Prosser &
Son Ltd v Levy [1955] 1 WLR 1224.
42
Certain matters will be taken into account by the court. In Morris v West Hartlepool Steam, Navigation Co Ltd
[1956] AC 522, Lord Reid said:
“It is the duty of an employer, in considering whether some precaution should be taken against a foreseeable
risk, to weigh, on the one hand, the magnitude of the risk, the likelihood of an accident happening and the
possible seriousness of the consequences if an accident does happen, and, on the other hand, the difficulty and
expenses and any other disadvantage of taking the precaution.”
43
[1943] AC 448. See Hart v Lancashire & Yorkshire Railway Co (1869) 21 LT 261 and Roe v Ministry of Health
[1954] 2 QB 66. In Wong Wai Ming v Hospital Authority [2000] 3 HKLRD 612, applying Glasgow Corporation
v Muir, it was held that whilst the likelihood of harm could not be viewed with hindsight, the court would review
whether measures could have been practicably carried out in the first place.
44
[2000] 2 HKLRD 226. See Wan Tsz Nok v Hung Fai Electrical Engineering Ltd [2008] HKEC 1939 and Tsui
Kwan Fai v Goldfield N&W Construction Co Ltd [2007] HKEC 1578. Contrast with Chung Ping Wai v Pedder
Logistics Godown Ltd [2009] HKEC 1790 in relation to a claim under occupiers’ liability.

NEGLIGENCE 215
practical” in the regulation, the evidence in the present case did not go anywhere near
such a position.45
(iii) Bolam test

Indeed, for professional people, such as an engineer or lawyer, who exercise some 9.035
special skill or competence, it is expected that such professional persons should show
a fair, reasonable and competent degree of skill and judgment in their professions. The
test has been laid down in Bolam v Friern Barnet Hospital Management Committee,46
which shows that a doctor is not guilty of negligence if he has acted in accordance
with a practice accepted as proper by a responsible body of medical men skilled in
that particular form of treatment; nor is he negligent merely because there is a body of
opinion which would adopt a different technique.
The Bolam test47 applies to engineers, architects or the like, as it applies to other 9.036
professionals, in so far as the importance of following accepted professional practice
is concerned.48 Therefore, failure to act in accordance with such practice is in itself
evidence of negligence, albeit it may not amount to conclusive evidence in the
circumstances. The effect of non-compliance with such codes of practice has been
reviewed in detail in the New Zealand case of Bevan Investments Ltd v Blackhall
and Struthers (No 2),49 where it was held that, unless it could be demonstrated that
it still conformed to accepted practice by rational analysis, a design which departed
substantially from the codes of practice was prima facie a faulty design.
(iv) Res ipsa loquitur rule

To assist determination of negligence in certain cases, the law has also derived for 9.037
use the rule of res ipsa loquitur. The classic case in this regard is Scott v London and
St Katherine Docks Co,50 where Erie CJ said:
“… where the thing shewn to be under the management of the defendant or his
servants, and the accident is such as in the ordinary course of things does not
happen if those who have the management use proper care, it affords reasonable
evidence, in the absence of explanation by the defendants, that the accident arose
from want of care.”
45
Ross v Associated Portland Cement Manufacturers Ltd [1964] 1 WLR 768.
46
[1957] 1 WLR 582. See Lee Chun Mui v Securicor Gurkha Services Ltd [2008] HKEC 336 and JD Williams &
Co Ltd v Michael Hyde & Associates Ltd [2001] BLR 99.
47
In other jurisdictions, development is ongoing for the review of the Bolam test for professionals. For instance, in
Australia, there has been a principle-based review of the law of negligence covering this aspect. See the “Review
of the Law of Negligence Final Report: September 2002” by the Commonwealth of Australia, pp 37 – 58 and
also Rogers v Whitaker (1992) 175 CLR 479. The main criticism of the Bolam test is that it gives too much
weight to opinions that may be extreme and held by only a very few experts, or by practitioners whose views are
unrepresentative of those of the larger body of practitioners. However, the case of Bolitho (Deceased) v City and
Hackney Health Authority [1998] AC 232 must now be seen as qualifying Bolam.
48
See Jenkins v Betham (1855) 15 CB 168; Allied Trust Bank v Edward Symmons & Partners (1994) 22 EG 116;
and Crane Heath Securities v York Montague (1994) 21 EG 124. See also Watts v Morrow [1991] 1 WLR 1421.
49
[1973] 2 NZLR 45. See Costain Ltd v Charles Haswell & Partners Ltd (2009) 128 ConLR 154 and Bovis Lend
Lease Ltd (formerly Bovis Construction Ltd) v RD Fire Protection Ltd (2003) 89 ConLR 169.
50
(1865) 3 H & C 596.

216 TORT
9.038 The nature and application of res ipsa loquitur has also been considered by the Hong
Kong Court of Final Appeal in Sanfield Building Contractors Ltd v Li Kai Cheong,51
which involved a sub-sub-subcontractor who was injured when he fell down a light well
while climbing a 3.8 metre high movable scaffold that toppled over. Scaffolds of that
sort did not normally topple over and there was no explanation as to why it happened.
The cause was probably some undetected defect but no acceptable explanation was
forthcoming. It was held that res ipsa loquitur, as a mode of inferential reasoning,
which applied to events of unknown cause, was in operation on these facts to support
a finding of negligence on the part of the contractor. The immediate cause of the event
such as the toppling of the scaffold here was not material. The cause of event would
be regarded as unknown as long as the cause on which the issue of liability actually
turned was unknown. An event of unknown cause was one that normally would not
happen without negligence on the part of the defendant in control of the object or
activity that injured the plaintiff or damaged its property. In such case, the court would
infer negligence on the defendant’s part unless there was an acceptable explanation
consistent with its having taken reasonable care over the matter. In essence, an event
which in the ordinary course of things is more likely than not to have been caused by
negligence is by itself evidence of negligence.
9.039 In Yu Yu Kai v Chan Chi Keung,52 a case concerning medical negligence, it was
observed that res ipsa loquitur is “… no more than a convenient Latin phrase used to
describe the proof of facts which are sufficient to support an inference that a defendant
was negligent and therefore to establish a prima facie case against him…” and one
is concerned with a rule regarding the proper approach to the evidence, whereby,
in cases where the plaintiff is unable to say exactly how the injury was caused but,
consonant with duty of care, one may expect the defendant to know, one asks whether
the evidence has raised a prima facie case against the defendant and if it has, whether
51
(2003) 6 HKCFAR 207. See also Yu Yu Kai v Chan Chi Keung (2009) 12 HKCFAR 705 and Poon Kwok Wing
Ernest v Airport Authority [2010] 3 HKLRD 354. In the Sanfield judgment, Bokhary PJ said:
“2. The expression res ipsa loquitur (the thing speaks for itself) features prominently in the judgments of the
courts below in this case. It is an expression that some lawyers (prominent among them Hobhouse LJ (as
he then was) in Ratcliffe v Plymouth and Torbay Health Authority [1998] PIQR P170) prefer to avoid. But
some lawyers still find it convenient. For my own part, I think that using it is convenient sometimes. The
important thing to remember - and make clear - is that the expression does not denote a doctrine but merely
‘a mode of inferential reasoning’. The words which I have put within quotation marks are those used by
Gleeson CJ and McHugh J in their joint judgment in a recent decision of the High Court of Australia,
Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 at p. 141.
3. This mode of inferential reasoning applies only to accidents of unknown cause. But it matters not that the
immediate cause of an accident (eg brake failure or a burst tyre) is known. As long as the cause on which
the issue of liability actually turns (eg why the brakes failed or the tyre burst) is unknown, the accident is
regarded as one of unknown cause. The res ipsa loquitur mode of inferential reasoning comes into play
where an accident of unknown cause is one that would not normally happen without negligence on the part
of the defendant in control of the object or activity which injured the plaintiff or damaged his property. In
such a situation the court is able to infer negligence on the defendant’s part unless he offers an acceptable
explanation consistent with his having taken reasonable care. The ‘essence’ of this was identified by Lord
Radcliffe in Barkway v South Wales Transport Co Ltd [1950] 1 All ER 392 at p. 403G. It is, his Lordship
said, that ‘an event which in the ordinary course of things is more likely than not to have been caused by
negligence is by itself evidence of negligence’.
4. None of this is to be analysed as putting an onus on the defendant to disprove negligence …”
52
(2009) 12 HKCFAR 705.

NEGLIGENCE 217
the defendant has, at the end of the day, dispelled that prima facie case by providing a
plausible explanation for the plaintiff’s injury which is consistent with the absence of
negligence on the defendant’s part. Thus, in Chok Yick Interior Design & Engineering
Co Ltd v Lau Chi Lun,53 the court refused to apply the res ipsa loquitur rule to find
defective workmanship or lack of reasonable care against the subcontractor who
carried out tiling works and painting of waterproofing materials by the contractor.54
(d) Damage
(i) Determination of damage
Damage is an essential element to ground a cause of action in negligence. Such 9.040
damage has to satisfy the requirements that it was caused by the breach of duty in
issue in a manner recognised by the law as not being too remote. Strictly speaking, the
question of causation, ie whether the damage was caused by the breach, is a question
of fact. As to the question of remoteness, ie whether the damage was too remote to
be recoverable, is one of law. Yet, in practice, it may not be too easy to draw a distinct
line between them in some cases. In Thomsen v Johnson Burglar Alarms Co Ltd,55 a
security company was engaged to repair the alarm system of a user but the company
omitted to tell the user that the system was not working properly. The alarm system was
left disconnected and inoperative for months until the property was burgled. Though
the damage was actually inflicted by a third party, the court adopted a test for causation
by asking what the property owner would have done if informed of the disconnection.
The court was of the view that the property owner would have telephoned the company
immediately and instructed that a full repair be carried out and would never have the
property unprotected and found that had the system been functioning properly, the loss
could have been avoided. Accordingly, causation was established and the damage was
not too remote in the circumstances of this case.
(ii) Causation
Causation is a matter of common sense and is generally based on inference or 9.041
induction from the uniformity of sequence between two events, in deciding that
there is a causal connection between them. Lord Hoffmann has, on more than one
occasion, discouraged a mechanical approach to the issue of causation, as he noted in
Environment Agency (formerly National Rivers Authority v Empress Kahn Co Ltd:56
“The first point to emphasise is that common sense answers to questions of

causation will differ according to the purpose for which the question is asked.
53
[2010] HKEC 967. See also Yau Hing Machinery Ltd v Kin Shing Construction Co Ltd [2008] HKEC 1421 and
Chan Ching Yuk v Otis Elevator Co (HK) Ltd [2007] HKEC 1664.
54
In the judgment, Lam J remarked that:
“If the Plaintiff had all along been trying to establish a case of defective workmanship by relying on the res
ipsa rule or inference, the onus was on the Plaintiff to put forward proper evidence of the primary facts basing
on which the inference can be drawn. It is plainly not sufficient for the Plaintiff to rely simply upon the facts
that the tiling works were done solely by the Defendant and there was water leakage from the walls.”
55
[2001] 3 HKLRD 571. See also Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602.
56
[1999] 2 AC 22. See Barings Plc (In Liquidation) v Coopers & Lybrand (No 7) [2003] PNLR 34. Contrast
Express Ltd (t/a Express Dairies Distribution) v Environment Agency [2004] 1 WLR 579.

218 TORT
Questions of causation often arise for the purpose of attributing responsibility to

someone, for example, so as to blame him for something that has happened or to
make him guilty of an offence or liable in damages. In such cases, the answer will
depend upon the rule by which the responsibility is being attributed.”
(iii) ‘But for’ test

9.042 A number of tests with different descriptive labels have been proposed for answering
the question of causation in fact. The most generally accepted test is the ‘but for’ test.
An event will be a cause if the result would not have happened but for that certain
event. In applying the test, the court is not concerned with what did happen but with
what would have happened if there had been no breach of duty by the defendant. In
determining whether the defendant’s breach caused the plaintiff ’s injury, it is helpful
to ask whether the plaintiff would have suffered that injury but for the defendant’s
breach. With it, it is assumed that the defendant did commit a breach and that the
plaintiff did suffer an injury. By the ‘but for’ test, this actual state of affairs is being
compared with a hypothetical or counterfactual state of affairs – what would have
happened if the defendant had not committed the breach. The ‘but for’ test is not
a conclusive test of causation. It is often described as a negative test, serving the
purpose of screening out and eliminating factors from further consideration, which
made no difference to the outcome. Where the ‘but for’ test is satisfied, causation may
still not be recognised at law.
(iv) More than one cause

9.043 Further, there will be difficulties in applying the ‘but-for’ test, for example, where
an event has two causes. In such situations, the case of McGhee v NCB57 shows that
the court may adopt a robust and pragmatic approach by holding both authors of the
two causes responsible for the whole loss, leaving the apportionment and contribution
issues to be resolved between themselves. In another case of Plant Construction
Plc v Clive Adams Associates (No 3),58 which concerned a roof that collapsed due
to inadequate temporary support, it was held that it was enough to show that the
breach on the part of the supervisor had caused the damage, either on its own or
in conjunction with other causes and what needed to be shown was that, but for the
combined existence of the causes, there would have been no damage.
(v) Quantification of damage

9.044 In addition, it also seems that the extent of damage to which a defendant is liable
may be limited to its share of that damage. In the case of Holtby v Brigham & Cowan
57
[1973] 1 WLR 1. The burden is on the plaintiff to show causation. See Cheng Loon Yin v Secretary for Justice
[2006] 1 HKLRD 871 and Sienkiewicz v Greif (UK) Ltd [2010] 2 WLR 951. See also Tam Shiu Wan v Shun Shing
Construction & Engineering Co Ltd [2008] HKEC 859, where it was noted that the court was looking at an
irrefragable chain of causation and, when considering causation the court was not only entitled, but was bound,
to use common sense, to approach the question in the same way as would a juror.
58
[2000] BLR 205. See Aurum Investments Ltd v Avonforce Ltd (In Liquidation) (2000) 78 ConLR 115, in relation
to a breach of a duty to warn.

NEGLIGENCE 219
(Hull) Ltd,59 a marine fitter who had been exposed to asbestos dust throughout his
work history with different employers, and who contracted asbestosis as a result,
claimed damages from one of them, with whom he had 12-years’ service. The Court
of Appeal in England and Wales held that the onus of proving causation was on the
fitter, who would succeed if he could prove that the defendant’s conduct had materially
contributed to his disease.
The fact that precise quantification is impossible should not be material. What justice 9.045
does demand is that the court should make the best estimate it can, in light of the
evidence, making the fullest allowance for the uncertainties known to be involved
in any apportionment. Appointment of liability for contributory negligence is
provided for in s 21 of the Law Amendment and Reform (Consolidation) Ordinance
(Cap 23).60
Obviously, the starting point for any enquiry into the quantification of damages is the 9.046
principle that the court should as far as possible endeavour to restore the plaintiff to
the position in which it would have found itself but for the defendant’s wrongful act.
Justice looks to the interests of both parties, not to those of the plaintiff alone and,
hence, the defendant as well as the plaintiff is entitled to a just result.
Also, in Lamb v Camden London Borough Council,61 damage may be found to be too 9.047
remote to be held recoverable. In that case, further damage done by invading squatters
to a house, which had been left unoccupied due to severe water damage caused by
local council work nearby having broken a water main, was held to be too remote.
Thus, a defendant is not liable in damages in respect of losses of a kind that fall outside
the scope of its duty of care.
(e) Economic loss

(i) Liability for economic loss
Liability for negligently caused economic loss may be the most controversial area of 9.048
the law of torts.62 The common law duty owed by builders and professionals such as
architects and engineers under the “neighbour” principle is a duty not to create latent
sources of physical danger to the person or property of third persons whom they ought
reasonably to foresee as likely to be affected thereby. If the latent defect causes actual
physical damage to the structure of the building itself, rather than other property,
59
[2000] 3 All ER 421. See also cases such as Environment Agency v Ellis [2009] PIQR P5 and Allen v British Rail
Engineering Ltd (BREL) [2001] PIQR Q10.
60
See Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 and Liao Kuo Chun v Win Capital (HK) Ltd
[2010] 4 HKLRD 257. See also Civil Liability (Contribution) Ordinance (Cap 377). See further Cheng Wai Li v
Far East Aluminium Works Co Ltd [2009] 1 HKLRD 161 and Cheung Kai Chi v Chun Wo Contractors Ltd [2008]
1 HKLRD 102.
61
[1981] QB 625. See Yuen Tat-Cheong v Urban Council [1987] HKLR 723 and Tai Hing Cotton Mill Ltd. v. Liu
Chong Hing Bank [1986] AC 80.
62
In Spartan Steel & Alloy Ltd v Martin & Co (Contractors) Ltd [1973] 1 QB 27, Lord Denning MR said: “At
bottom I think the question of recovering economic loss is one of policy. Whenever the courts draw a line to mark
out the bounds of duty, they do it as a matter of policy so as to limit the responsibility of the defendant. Whenever
the courts set bounds to the damages recoverable-saying that they are, or are not, too remote-they do it as a
matter of policy so as to limit the liability of the defendant.”

220 TORT
the defendant is still liable. There is yet a distinction between physical damage and
economic loss.
9.049 Economic loss can be defined as financial loss unconnected with and not flowing from
damage to a plaintiff’s person or property. There are certain established categories
when liability has been found and the most developed one is negligent misstatement.
Other categories include negligent performance of a service and negligent supply of
goods or services.
(ii) Recovery of economic loss is restrained

9.050 In other cases, recovery of pure economic loss is restrained. In Cattle v Stockton
Waterworks Co,63 for instance, a third party was not allowed to recover damages for
economic loss resulting from the injury to the person or property of an individual
with whom the third party had a contractual relationship.64 In SCM (United Kingdom)
Ltd v WJ Whittall & Son Ltd,65 where in a case of damage to an electric cable caused
by a contractor, it was held that economic loss without damage to person or property
arising from a negligent act is not recoverable as damages except where such loss is
the immediate consequence of the negligence. In that case, a factory owner claimed
that a contractor had negligently damaged the electricity cable so causing a power
failure in its factory and damage to materials and machines and consequent loss of
production. Likewise, in Spartan Steel & Alloys Ltd v Martin & Co (Contractors)
Ltd,66 a contractor, by negligently cutting an electricity cable, caused an interruption
in the power supply to a factory. As was foreseeable, the factory lost the value of the
metal in the course of processing, the profit which would have been made on that metal
and the profit which would have been made on further lots of metal which would have
been processed in the hours until the electricity supply was restored. It was held that
the factory was not entitled to recover the loss of profit from the further lots of metal
63
(1875) LR 10 QB 453. See Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27; Esso
Petroleum Co Ltd v Hall Russell & Co Ltd (The Esso Bernicia) [1989] AC 643; and Yuen Kun-Yeu v Attorney
General [1986] HKLR 783. See also Colour Quest Ltd v Total Downstream UK Plc [2010] 3 All ER 793.
64
Blackburn J gave the judgment saying:
“In the present case the objection is technical and against the merits, and we should be glad to avoid giving
it effect. But if we did so, we should establish an authority for saying that, in such a case as that of Fletcher v
Rylands LR 1 Ex 265; LR 3 HL 330 the defendant would be liable, not only to an action by the owner of the
drowned mine, and by such of his workmen as had their tools or clothes destroyed, but also to an action by
every workman and person employed in the mine, who in consequence of its stoppage made less wages than he
would otherwise have done. And many similar cases to which this would apply might be suggested. It may be
said that it is just that all such persons should have compensation for such a loss, and that, if the law does not
give them redress, it is imperfect. Perhaps it may be so. But, as was pointed out by Coleridge J, in Lumley v Gye
2 E & B, at p. 22 ; LJ (QB) at p. 479, Courts of justice should not ‘allow themselves, in the pursuit of perfectly
complete remedies for all wrongful acts, to transgress the bounds, which our law, in a wise consciousness as
I conceive of its limited powers, has imposed on itself, of redressing only the proximate and direct consequences
of wrongful acts’. In this we quite agree. No authority in favour of the plaintiff’s right to sue was cited, and, as
far as our knowledge goes, there was none that could have been cited.”
65
[1971] 1 QB 337. See Cynat Products Ltd v Landbuild (Investment & Property) Ltd [1984] 3 All ER 513 and
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27. See also Yuen Kun-Yeu v Attorney
General [1986] HKLR 783 and BPI Resources Ltd v Merrill Lynch Canada Inc (1987) 36 BLR 105.
66
[1973] QB 27. This decision was doubted in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520 and distinguished
in Greater Nottingham Cooperative Society v Cementation Piling & Foundations Ltd (1988) 41 BLR 43. See also
Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH [2009] PNLR 5.

NEGLIGENCE 221
due to the negligent interruption of the electricity supply since such loss was pure
economic loss.
The justification for this general rule against recoverability in tort of pure economic 9.051
loss, as explained in Candlewood Navigation Corporation v Mitsui OSK Lines Ltd,67
is that it provides “some limit or control mechanism … imposed upon the liability of
a wrongdoer towards those who have suffered economic damage in consequence of
his negligence”.
(iii) Hedley Byrne principle

Fewer difficulties arise when the particular act or omission falls within certain 9.052
established categories. In relation to negligent misstatement, the well-known case is
Hedley Byrne & Co Ltd v Heller & Partners Ltd68 which extended negligence to cover
cases of pure economic loss not resulting from physical damage. In the House of Lords
judgement, Lord Morris noted that:
“… if someone possessed of a special skill undertakes, quite irrespective of

contract, to apply that skill for the assistance of another person who relies upon
such skill, a duty of care will arise. Furthermore if, in a sphere in which a person
is so placed that others could reasonably rely on his judgment or his skill or
upon his ability to make careful inquiry, a person takes it on himself to give
information or advice to, or allows his information or advice to be passed on to,
another person who, as he knows or should know, will place reliance upon it, then
a duty of care will arise.”
Lord Oliver in Murphy v Brentwood District Council 69 said that, subsequent to Hedley 9.053
Byrne & Co Ltd v Heller & Partners Ltd,70 the essential question was whether the
relationship between the parties was of sufficient proximity to impose on one party a
duty to take care to avoid or prevent the loss sustained.71 While proximity is the test,
it has not been held up as a scientific formula by the judges who have defined it. In
67
[1986] AC 1. See Yuen Kun-Yeu v Attorney General [1986] HKLR 783. See also Galliford Try Infrastructure Ltd
(formerly Morrison Construction Ltd) v Mott MacDonald Ltd (2008) 120 ConLR and Colour Quest Ltd v Total
Downstream UK Plc (2010) 129 ConLR 104.
68
[1964] AC 465. A more recent review of the principles derived from this case by the Hong Kong Court of Appeal
can be found in Yue Xiu Finance Co Ltd v Agnew [1996] 2 HKC 122. See also James McNaughton v Hicks
Anderson & Co [1991] 2 QB 113 and Caparo Industries plc v Dickman [1990] 2 AC 605. The assumption of
responsibility test appears to be the dominant test for determining the existence of a duty of care in the context
of negligent misstatement causing economic loss. See Henderson v Merret Syndicates Ltd [1995] 2 AC 145;
Williams v National Life Health Foods Ltd [1998] 1 WLR 830; and Smith v Bush [1990] 1 AC 831.
69
[1991] 1 AC 398. See Linklaters Business Services (formerly Hackwood Services Co) v Sir Robert McAlpine Ltd
(2010) 130 ConLR 111 and Calvert v William Hill Credit Ltd [2009] Ch 330. See also Shun Kai Finance Co Ltd
v Japan Leasing (Hong Kong) Ltd [2008] HKEC 1637.
70
[1964] AC 465.
71
Hedley Byrne, as well as requiring a special relationship of sufficient proximity to exist between the parties, also
requires that the plaintiff must also have relied on the statement made by the defendant. This is illustrated in JEB
Fasteners v Marks, Bloom and Co [1983] 1 All ER 583, where the Court of Appeal in England held that reliance
in this regard could possess a narrow meaning of ‘induced’ or ‘wholly dependent on’, or a wider meaning of
‘being encouraged or supported by’ and that it was the narrow meaning that was to be applied as the basis of duty.

222 TORT
Williams v Natural Life Health Foods Ltd,72 the Hedley Byrne principle was extended
as the rationalisation or technique adopted by the law to provide a remedy for the
recovery of damages in respect of economic loss caused by the negligent performance
of services. In that case, the issue was whether the director also incurred personal
liability, where the company was responsible as principal. The subsequent case of
Merrett v Babb73 shows that, to determine whether a defendant owed a duty of care to
a plaintiff, it would be helpful to ask whether the defendant was to be taken to have
assumed responsibility to the plaintiff to guard against the loss for which damages
were claimed. This question or an assumption of personal responsibility should be
determined objectively. In that case, an employed surveyor of a firm engaged in the
valuation of property for mortgage was found liable in his personal capacity to the
purchaser for the negligent valuation and the resultant loss. The surveyor had signed
the mortgage valuation report in his personal capacity and was the person who was
competent to value and not disqualified from doing so. The Court of Appeal in England
and Wales found that he had thereby assumed personal responsibility for it in the
knowledge that his report would be relied on.
9.054 Thus, even in the absence of a contract, a duty of care arose where a party relied on
another party to provide information, advice or services in circumstances where it was
reasonable to rely on that party, and that party took it upon himself to provide such
information, advice or services, when he knew or ought to have known that the party
was relying on him. In Yiu Chown Leung & Others v Chow Wai Lam,74 the Hong Kong
Court of Final Appeal held that it was not necessary to show that a party has knowingly
or deliberately assumed such responsibility since the test was an objective one and
the question to ask was whether it could reasonably be said that that party had by his
conduct or otherwise accepted responsibility.
(iv) Economic loss arising from defective buildings

9.055 In relation to economic loss arising from defective buildings, in Sunface International
Ltd v Meco Engineering Ltd,75 which is a case concerning a claim between the house
owner and the electrical work nominated subcontractor, it was held that the costs
of remedying an imminently dangerous or defective article or building were not
recoverable as damages in negligence when no injury had been caused to any person
and no damage had been caused to property other than the defective building itself.
This case followed the approach in D&F Estates Ltd v Church Commissioners for
England.76 The facts in D&F Estates Ltd were that plaster on ceilings and a wall of a
flat became loose and some of it fell down. The defective plaster was stripped off and
72
[1998] 1 WLR 830. See Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 and Yiu Chown Leung &
Others v Chow Wai Lam (2005) 8 HKCFAR 592.
73
[2001] QB 1174. See Yazhou Travel Investment Co Ltd v Bateson [2004] 1 HKLRD 969. See also Parkinson
Engineering Services Plc (In Liquidation) v Swan [2010] PNLR 17; Rice v Secretary of State for Trade and
Industry [2007] PIQR P23; and Sandhar v Department of Transport, Environment and the Regions [2004] 1 WLR
1632.
74
(2005) 8 HKCFAR 592.
75
[1990] 2 HKLR 193.
76
[1989] AC 177. See also Tam Kam Fai v Michael J Design Ltd [2006] HKEC 1450; Bole v Huntsbuild Ltd (2009)
124 ConLR 1; and Farraj v King’s Healthcare NHS Trust [2010] 1 WLR 2139.

NEGLIGENCE 223
replaced. The tenant of the flat brought an action based on negligence against, inter
alia, the contractor who had appointed a subcontractor to do the plaster work, claiming
the cost of the remedial work and the cost of cleaning carpets and other possessions
dirtied by the falling plaster. It was held by the House of Lords that the loss sustained
by the tenant in stripping and replacing the plasterwork in the flat was purely economic
loss, which was not recoverable in tort.
As to the case of Junior Books Ltd v Veitchi Co Ltd,77 where a duty of care was found 9.056
owed in tort by a specialist flooring subcontractor towards a factory owner for the
replacement costs of the cracked surface of the floor, the House of Lords treated that
as a decision unique to the particular facts of the case only where a special relationship
existed between the parties.
Yet, there can still be instances where a special relationship as in Junior Books Ltd 9.057
v Veitchi Co Ltd is found. An example is Mitsubishi Corporation v Wong Tung &
Partners,78 where the subcontractor alleged that the architect had been negligent in the
certification of payments. Taking into account the cognisance of the normal practice in
the construction industry, the court accepted that a degree of proximity could exist to
ground the finding of a special relationship that led to a duty of care.
It should be noted that there is unsurprisingly no uniform view on this matter in other 9.058
jurisdictions.
In the United Kingdom, after Murphy v Brentwood District Council,79 a plaintiff who 9.059
acquired a defective property, whether posing an imminent danger or not, would be
treated as having incurred a pure economic loss, in the amount of the diminution in
the value of the property and, unless there is special proximity along the Hedley Byrne
principle, the plaintiff is without a remedy in tort. In Murphy, the local authority that
approved foundations that turned out to be of inappropriate design, resulting in cracks
in the walls and subsidence of the structure, was not liable for the economic loss.
(v) Hong Kong law in relation to defective buildings

In Hong Kong, the law of latent building defects is unique in the sense that there 9.060
is no counterpart legislation along the line of the Defective Premises Act 1972 in
United Kingdom. The position of Hong Kong has been reviewed by the Court of
Final Appeal in Bank of East Asia Ltd v Tsien Wui Marble Factory Ltd.80 Although
the central issue of the case was the time limitation imposed on the bank in bringing
77
[1983] 1 AC 520. See Sunface International Ltd v Meco Engineering Ltd [1990] 2 HKLR 193. See also Galliford
Try Infrastructure Ltd (formerly Morrison Construction Ltd) v Mott MacDonald Ltd (2008) 120 ConLR 1; John
F Hunt Demolition Ltd v ASME Engineering Ltd [2009] 1 All ER 180; and Realstone Ltd v J&E Shepherd [2008]
PNLR 21.
78
[1988] HKLY 776.
79
[1991] 1 AC 398. See also Linklaters Business Services (formerly Hackwood Services Co) v Sir Robert McAlpine
Ltd (2010) 130 ConLR 111; ANM Group Ltd v Gilcomston North Ltd [2008] BLR 481; Hart Investments Ltd
v Fidler (t/a Terence Fidler Partnership) [2007] BLR 526; Pearson Education Ltd v Charter Partnership Ltd.
[2007] BLR 324; and Oxford Architects Partnership v Cheltenham Ladies College [2007] BLR 293.
80
[2000] 1 HKLRD 268. See Tong Chun Keung v Lau Kwong & Hung [2009] HKEC 973 and Shun Kai Finance
Co Ltd v Japan Leasing (Hong Kong) Ltd [2008] HKEC 1637. See also Kensland Realty Ltd v Tai Tang & Chong
(2008) 11 HKCFAR 237.

224 TORT
the action, consideration of the duty of care and the time when damage had resulted
from the defective cladding were still necessary elements of the decision. Proceedings
brought against the architect and the specialist subcontractor in contract were time-
barred. Under the limitation legislation in Hong Kong, by s 31(1) of the Limitation
Ordinance (Cap 347), time only runs against a plaintiff when the plaintiff acquires
the knowledge necessary to bring an action for damages for negligence. The building
was completed in 1983. Physical damage in a real and substantial sense first occurred
in 1985. In 1989, a survey of the cladding was conducted indicating that major work
needed to be carried out to rectify the defect. The defect was of course latent and it
was not addressed until 1993, when the defects had become progressively worse and
a number of panels showed signs of cracking. Proceedings were commenced against
the subcontractor and the architect respectively in 1994 and 1996. To the issue of
when damage was done by the negligent design of the cladding, ie when the course of
action accrued, the court at first instance said that the cause of action accrued when the
damage was reasonably discoverable in 1993. In the Court of Appeal, it was held that
the damage was purely economic loss and the course of action accrued either when
the building was completed or when the bank acquired and paid for the building, in or
around 1983. In both cases, the claims were time-barred. The Court of Final Appeal,
by a majority of three to two, agreed that the claims were time-barred. Although the
Court of Appeal did not rule expressly on the duty of care owed by the specialist
subcontractor to the bank, strong hints were provided in the judgement to the effect
that such a duty was so owed. Indeed, it seems that the Court of Final Appeal also
adopted Murphy v Brentwood District Council as the starting point for consideration
of duty of care in negligence.
(vi) Reworking of Hedley Byrne principle

9.061 The reworking of the Hedley Byrne principle into a doctrine based on assumption of
responsibility in Henderson v Merrett Syndicates Limited 81 is a significant change of
direction. This approach is not saying that there is as a matter of principle no liability
for the building owner’s economic loss caused by negligent acts. Instead, all turns on
whether the duty is consistent with the contractual structure, as a matter of fact. Lord
Goff in Henderson said that a duty along the Hedley Byrne principle will not normally
apply, because the contractual framework will generally exclude the necessary
assumption of responsibility. In his words:
“Let me take the analogy of the common case of an ordinary building contract,
under which main contractors contract with the building owner for the
construction of the relevant building, and the main contractor subcontracts with
subcontractors or suppliers (often nominated by the building owner) for the
performance of work or the supply of materials in accordance with standards
and subject to terms established in the subcontract … [I]f the subcontracted work
or materials do not in the result conform to the required standard, it will not
81
[1995] 2 AC 145. See Titan Steel Wheels Ltd v Royal Bank of Scotland Plc [2010] 2 Lloyd’s Rep 92 and Galliford
Try Infrastructure Ltd (formerly Morrison Construction Ltd) v Mott MacDonald Ltd (2008) 120 ConLR 1. See
also Tong Chun Keung v Lau Kwong & Hung [2009] HKEC 973.

NEGLIGENCE 225
ordinarily be open to the building owner to sue the subcontractor or supplier

direct under the Hedley Byrne principle, claiming damages from him on the
basis that he has been negligent in relation to the performance of his functions.
For there is generally no assumption of responsibility by the subcontractor or
supplier direct to the building owner, the parties having so structured their
relationship that it is inconsistent with any such assumption of responsibility … It
is true that, in this connection, some difficulty has been created by the decision of
your Lordships’ House in Junior Books Limited v Veitchi Limited. In my opinion,
however, it is unnecessary for your Lordships to reconsider that decision for the
purposes of the present appeal.”
As illustrated in Linfield Ltd v Taoho Design Architects Ltd,82 pure economic loss 9.062
may be recoverable if there exists a special relationship between the parties. This case
concerns claims in negligence by a plaintiff against the registered structured engineer
as regards the construction of a limestone cladding system of six houses under a
luxury development.
(f ) Contributory negligence
(i) Court determines the just and equitable amount
Where the damage to a party is caused partly by negligence of its own, then that party 9.063
could recover nothing at common law. This rule produced hardship and was modified
by the so-called rule of last opportunity that enabled the recovery of damages if the
defendant had the last opportunity to avoid the wrong, notwithstanding negligence
on the part of the plaintiff. The present position is governed by legislation, though it
is still open for the court to conclude that the sole or effective cause of the damage is
attributed to the wrong of one party.
Section 21 (1) of the Law Amendment And Reform (Consolidation) Ordinance 9.064
(Cap 23)83 provides that where any person suffers damage as the result partly of his
own fault and partly of the fault of any other person or persons, a claim in respect
of that damage shall not be defeated by reason of the fault of the person suffering
the damage, but the damages recoverable in respect thereof shall be reduced to such
extent as the court thinks just and equitable having regard to the claimant’s share in the
responsibility for the damage.
In Davies v Swan Motor Co (Swansea) Ltd (Swansea Corp & James),84 Lord Denning 9.065
had said:
“While causation is the decisive factor in determining whether there should be a

reduced amount payable to the plaintiff, nevertheless the amount of the reduction
does not depend solely on the degree of causation. The amount of reduction is
82
[2004] HKEC 1135.
83
See, for illustration, Cheung Kai Chi v Chun Wo Contractors Ltd [2005] HKEC 2174 and Hondon Development
Ltd v Powerise Investments Ltd & Centaline Property Agency Ltd (Third Parties) [2005] 3 HKLRD 605.
84
[1949] 2 KB 291. See Chisman v Electromation (Export) Ltd (1969) 113 SJ 246 and Jones v Livox Quarries Ltd
(1952) 96 SJ 344. See also Brian Warwicker Partnership Plc v HOK International Ltd (2005) 103 ConLR 112.

226 TORT
such an amount as may be found by the court to be ‘just and equitable’, having
regard to the claimant’s share in the responsibility for the damage. This involves
a consideration, not only of the causative potency of a particular factor, but also
of its blameworthiness.”
9.066 In Rainfield Design & Associates Ltd v Siu Chi Moon,85 the Hong Kong Court of Final
Appeal held that where an employer had used all due diligence to fulfil its statutory
duties, it might avoid civil liability where it was shown that the accident causing the
injury was solely due to the breach of those duties by the workman himself. In Hsu
Li Yun v Incorporated Owners of Yuen Fat Building,86 an electrician/plumber, who
had designed and installed a plumbing system inside the pump room of a building,
when he worked for a water company, subsequently set up his own company and
contracted with the incorporated owners of the building, to maintain the system. In
1995, the electrician/plumber was called out to make emergency repairs to the pump
room. However, the design of the plumbing system was negligent and the tank had a
fibreglass cover on the top of which was installed a water level control switch which
operated the water pumps. When the electrician/plumber was standing on the cover to
access the switch box, the fibre glass cover collapsed and submerged into the water
tank together with the water level control switch and its connecting wires. The water
became charged with electricity and the electrician/plumber died from electrocution.
He was found to be responsible for 75 per cent contributory negligence for his defective
design and for knowingly failing to take reasonable care for his own safety.
9.067 However, as highlighted in General Cleaning Contractors Ltd v Christmas,87 Lord

Denning LJ said:
“You cannot blame the man for not taking every precaution which prudence
would suggest. It is only too easy to be wise after the event. He was doing the
work in the way which his employers expected him to do it and, if they had taken
proper safeguards, the accident would not have happened.”
(ii) Defendant’s liability under contract

9.068 The issue of contributory negligence on the part of the defendant may also arise in
a contractual context. The defendant’s liability in contract can be the same as her or
his liability in the tort of negligence independently of the existence of any contract.
In Sahib Foods Ltd (In Liquidation) v Paskin Kyriakides Sands (A Firm),88 while
architects had a duty to exercise reasonable skill and care in the design and construction
of buildings so as to guard against the effects of fire, it was held that a failure to
85
[2000] 2 HKLRD 226. The Hong Kong Court of Appeal held that the plaintiff was 50 per cent to blame for his
own breach in failing to take care for his own safety. See Tsui Kwan Faiv Goldfield N&W Construction Co Ltd
[2007] HKEC 1578 and Chung Ping Wai v Pedder Logistics Godown Ltd [2009] HKEC 1790.
86
[2000] 1 HKLRD 900. See Wong Yuk Foon v Nice Property Management Ltd [2007] HKEC 1987 and Kwan Chu
Kwong v Cheng Shui Hung & Yin Tse Ping (Third Party) [2005] HKEC 1235.
87
[1953] AC 180. See Lam Po Wai v I Cable Communications Ltd [2010] HKEC 1313 and Mehmood Khalid v
Million Harvest Wharves & Logistics Ltd [2008] HKEC 970.
88
(2004) 93 ConLR 1. See Siemens Building Technologies FE Ltd v Supershield Ltd (2009) 124 ConLR 158.

NEGLIGENCE 227
fully discharge that duty did not mean that the architects were wholly responsible for
damage caused by the spread of a fire that had been started as a result of negligence
on the part of the occupier of the building. Such concurrent liability in tort may arise
out of a variety of circumstances. The most unusual one may be that in Barclays Bank
v Fairclough Building Limited (No 2).89 There, the bank engaged the contractor to
carry out maintenance and repairs to its warehouse. The builder subcontracted the
cleaning of roofs to its subcontractor who in turn sub-subcontracted it to another
sub-subcontractor. As a result of pressurised water from a power hose used by the
sub-subcontractor for the purpose, cement bonding in asbestos disintegrated leaving
behind a slurry of asbestos, which was a very serious health hazard even after drying.
The contractor was found liable for the bank’s damage in separate litigation. The
subcontractor settled with the contractor and sought to recover the amount involved
from the sub-subcontractor. In that litigation, the sub-subcontractor argued that he
owed the subcontractor a concurrent duty of care in contract and tort. The motive
behind the argument, which was most unusual for a defendant, was that a plea of
contributory negligence would not be available if liability was purely in contract. The
Court of Appeal in England and Wales agreed that there was such liability in tort and
appointed 50 per cent of the blame to the subcontractor. Indeed, in the main proceedings
of that case in Barclays Bank v Fairclough Building Limited (No 1),90 between the bank
and the contractor, the bank brought an action to recover damages for breaches by
the defendant of two of the main obligations contained in a standard form building
contract, both of which required strict performance and which did not depend on a mere
failure to take reasonable care. The Court of Appeal in England and Wales reversed
the decision at first instance, holding that the contractor had breached not a general
duty of care but a specific contractual term and that issues of contributory negligence
were therefore irrelevant. The court was of the view that the obligations undertaken
by the contractor as a skilled contractor under the terms of the contract required strict
performance and did not impose on the bank any duty to prevent breaches from being
committed by the contractor. The specific condition in issue provided that “materials
and workmanship shall be the best of their respective kinds and the work shall be
executed and finished in an expeditious efficient and workmanlike manner”. Thus, on
a claim for damages founded on a breach by a defendant of a strict contractual liability
arising independently of any negligence on its part, the contract would be construed as
excluding the operation of the principle of contributory negligence.
(iii) Concurrent delay

In the context of construction contracts, the rationale advanced for this approach seems 9.069
to find support in that it does no more than reflect the allocation of risk agreed upon by
the parties when they entered into their contract. It seems also that the same rationale can
be applied to concurrent delay, a situation that often appears in construction contracts
89
(1995) 44 ConLR 35. In the judgment, Beldam LJ said:
“A skilled contractor undertaking maintenance work to a building assumes a responsibility which invites
reliance no less than the financial or other professional adviser does in undertaking his work. The nature of the
responsibility is the same although it will differ in extent.”
See Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax Plc) (2008) 120 ConLR 201.
90
[1995] QB 214. See Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax Plc) (2008) 120 ConLR 201.

228 TORT
and which concerns the grant of extension of time for completion and consequential
compensation. The expression ‘concurrent delay’ is understood differently in different
sectors but commonly is used in this regard in relation to delays or disruption to the
progress of the works caused by two or more competing contributing causes, each of
which may have different financial or time remedies under the construction contract.
An example of this is when there is delay in the issue of drawings from the employer
for the works at a time when the weather is adverse. Depending on the wording of the
contract, the contractor may be entitled to compensation in time, compensation in time
and costs or no compensation at all for individual events. Various approaches to handle
such situations, for instance, the first-in-line approach, the dominant cause approach
or the apportionment approach, have been put forward but there does not seem to be
a uniformly adopted one. In Henry Boot Construction (UK) Ltd v Malmaison Hotel
(Manchester) Ltd,91 the court did not disapprove the approach adopted by the parties
when Dyson J said:
“... it is agreed that if there are two concurrent causes of delay, one of which is a
relevant event, and the other is not, then the contractor is entitled to an extension
of time for the period of delay caused by the relevant event notwithstanding the
concurrent effect of the other event. Thus, to take a simple example, if no work is
possible on a site for a week not only because of exceptionally inclement weather
(a relevant event), but also because the contractor has a shortage of labour (not
a relevant event), and if the failure to work during that week is likely to delay
the works beyond the completion date by one week, then if he considers it fair
and reasonable to do so, the architect is required to grant an extension of time
of one week. He cannot refuse to do so on the grounds that the delay would have
occurred in any event by reason of the shortage of labour.”
3. OCCUPIERS’ LIABILITY
(a) Governing legislation
9.070 In Hong Kong, injuries suffered as a result of the dangerous state of another’s premises
by persons who entered the premises are governed by the common law principles of
negligence and the statutory duty in the Occupiers Liability Ordinance (Cap 314).
(b) Statutory duty of care
9.071 According to s3 of the Occupiers Liability Ordinance (Cap 314), an occupier of

premises owes the same duty, the ‘common duty of care’, to all his visitors. The
common duty of care is a duty to take such care in all reasonable circumstances to see
that visitors will be reasonably safe in using the premises for the purposes for which
they are invited or permitted by the occupier to be there.
91
(1999) 70 ConLR 32. See Steria Ltd v Sigma Wireless Communications Ltd [2008] BLR 79. See also City Inn Ltd
v Shepherd Construction Ltd [2008] BLR 269, which was approved on appeal.

OCCUPIERS’ LIABILITY 229
The common duty of care is owed toward lawful visitors who are using the premises 9.072
for the purposes for which they are invited or permitted to be there. If visitors exceed
the scope of such invitation or permission, they become trespassers and are owed a
lesser duty under common law. As said in The Carlgarth,92 “[w]hen you invite a person
into your house to use the staircase, you do not invite him to slide down the banisters”.
In determining whether the occupier of premises has discharged the common duty 9.073
of care to a visitor, regard is to be had to all the circumstances. The circumstances
relevant for the present purpose include the degree of care, and of want of care, which
would ordinarily be looked for in such a visitor. For example, in proper cases an
occupier may expect that a person, in the exercise of his calling, will appreciate and
guard against any special risks ordinarily incident to it, so far as the occupier leaves
the person free to do so.
For instance, an occupier must be prepared for children to be less careful than adults. 9.074
This is in line with the position at common law in relation to children trespassers. In
Phipps v Rochester Corporation,93 a girl aged seven and a boy aged five while out
picking blackberries walked across a large open space of grassland – part of a building
site on which a housing estate was being developed by the defendants. The boy fell into
a trench that had been dug for the purpose of laying a sewer and broke his leg. It was
accepted that children were in the habit of playing on this land but the plaintiff was too
young to go unaccompanied. The court considered that if he had been accompanied
by a responsible person, the danger of the trench would have been apparent to that
person. In such circumstances, the judge said, even if the danger were not apparent,
it would still be sufficient that warning was given which was comprehensible to a
reasonable adult.94 For non-visitors in Hong Kong, the position can be illustrated in
Perry Jonathan Brink (an infant) suing by his next friend Dirk Marinus Brink (No 1)
v The New PG Farm (A Firm).95 In that case, the defendant kept a market garden with
an ancillary small zoo, which included a bear. The infant plaintiff, then a boy aged
21 months, was injured by a bear while on a visit in the care of an adult. The infant was
a trespasser in the area in which he suffered injury. The court held that the defendant’s
only duty owed to a trespasser is not to set a trap with deliberate intent to injure him,
and dismissed the claim.
The decision of the Hong Kong Court of Appeal in Mak Woon King & Another v Wong 9.075
Chiu96 shows that the standard of such care depends on the facts, and due regard must
be given to the actual conditions under which people work in a factory or mine – to
the long hours and fatigue, to the slackening of attention which naturally comes from
constant repetition of the same operation, to the noise and confusion in which the
92
[1927] P 93. See Tomlinson v Congleton Borough Council [2004] 1 AC 46.
93
[1955] 1 QB 450. See Fu Cheung Chun Tom v MTR Corp Ltd [2009] HKEC 370.
94
In the judgment of Devlin J, it was said:
“… the responsibility for the safety of little children must rest primarily on the parents; it is their duty to see
that such children are not allowed to wander about by themselves, or at least to satisfy themselves that the
places to which they do allow their children to go unaccompanied are safe for them to go to. It would not be
socially desirable if parents were, as a matter of course, able to shift the burden of looking after their children
from their own shoulders to those of persons who happen to have accessible bits of land …”
95
[1965] HKLR 1001.
96
[2000] 2 HKLRD 295. See Leung Po Chun v Yat Lee Booth – Construction Co Ltd [2008] HKEC 948.

230 TORT
people work, to their preoccupation in what they are actually doing at the cost perhaps
of some inattention to their own safety.
9.076 The common duty of care exists, except in so far as the occupier is free to and does
extend, restrict, modify or exclude her or his duty to any visitor or visitors by agreement
or otherwise. Indeed, the context of such a duty can be changed by agreement. There
are however restraints imposed by legislation, namely the Control of Exemption
Clauses Ordinance (Cap 71) and the Unconscionable Contracts Ordinance (Cap 458),
as regards the extent to which such changes or modification are allowed.
(c) Occupier
9.077 ‘Occupier’ is not defined in the Occupiers Liability Ordinance (Cap 314).97 A useful
explanation of its meaning was given by Lord Denning in Wheat v Lacon98 where,
in relation to the counterpart legislation of Occupier’s Liability Act 1957 in the
United Kingdom, the word ‘occupier’, as in other common law cases, is simply
a convenient word to denote a person who had a sufficient degree of control over
premises to put her or him under a duty of care towards those who came lawfully on
to the premises.
9.078 Therefore, wherever a person has a sufficient degree of control over premises, he or
she ought to realise that any failure on her or his part to use care may result in injury
to a person coming lawfully there. He or she is an occupier and the person coming
lawfully there is her or his visitor; and the occupier is under a duty to the visitor to use
reasonable care.
9.079 In order to be an occupier, it is not necessary for a person to have entire control
over the premises. The person need not have exclusive occupation. Suffice it that the
person has some degree of control, and the person may share the control with others.
Two or more may be occupiers, and whenever this happens, each is under a duty to
use care towards persons coming lawfully on to the premises, dependent on each
occupiers degree of control. If each fails in this duty, each is liable to a visitor who
is injured in consequence of this failure, but each may have a claim to contribution
from the other.
9.080 In Chu Wo Heung v Hui Lai Wa,99 the manager appointed by the owners of the premises,
pursuant to the terms of a deed of mutual covenant, was held to be liable as an occupier
for the overhanging awning, attached to the common part of a building, that fell on a
passerby. In Yeung Kam Fuk v Len Shing Construction Co Ltd,100 a worker of the sub-
subcontractor was injured at work when a platform on which he was working collapsed
and he fell approximately 10 feet. The court found that the main contractor exercised
control of everything on the site all the time and it was in sufficient occupational
97
See Wan Tsz Nok v Hung Fai Electrical Engineering Ltd [2008] HKEC 1939.
98
[1966] AC 552.
99
[2002] 3 HKLRD 209. See Leung Tsang Hung v Incorporated Owners of Kwok Wing House (2007) 10 HKCFAR
480.
100
[1986] HKC 160. See Chung Ping Wai v Pedder Logistics Godown Ltd [2009] HKEC 1790 and Wan Tsz Nok v
Hung Fai Electrical Engineering Ltd [2008] HKEC 1939.

control of the site to put it in control of the platform. The court held that the main
contractor was liable as occupier.
(d) Independent contractors
As stipulated in s 3(4) of the Occupiers Liability Ordinance (Cap 314), where 9.081
damage is caused to a visitor by a danger due to the faulty execution of any work
of construction, maintenance or repair by an independent contractor employed by
the occupier, the occupier is not to be treated as answerable for the danger if in all
the circumstances the occupier had acted reasonably in entrusting the work to an
independent contractor and had taken such steps as the occupier reasonably ought in
order to satisfy herself or himself that the contractor was competent and that the work
had been properly done.
Also, an occupier is entitled to expect that a person, in the exercise of her or his calling, 9.082
will appreciate and guard against any special risks ordinarily incident to it, so far as the
occupier leaves her or him free to do so. However, this is yet to be examined in relation
to factors such as the knowledge and expertise of the independent contractor.
In Mak Kwai-Yin v USA Fur Processing Ltd,101 a worker sent by his employer to work 9.083
at a fur-processing factory owned by others was injured in a fire which suddenly
flared up while he was using oxyacetylene equipment in a fur drying room of the
factory. The evidence showed that the fire was caused by the ignition of particles
of fur either in the air or on the floor, which may have been impregnated with some
flammable liquid from the washing area. The court was of the view that whereas it
could be the case that the factory occupier relied upon the skill and knowledge of
the worker’s employer in relation to the alteration and repair of the tumblers as an
independent contractor, the worker’s employer was not an expert in the processes
carried out on the premises nor was he an expert on the likely impact between the
works he was required to carry out and the processes carried out at the same time at
the factory. Thus, the court held that there was upon the factory occupier a positive
duty to call to the attention of the worker’s employer any unusual risks in existence at
the premises at the relevant time.
In relation to a construction contractor occupier, the court should be satisfied that it 9.084
has acted reasonably in entrusting work to an independent contractor, used reasonable
care in selecting the contractor, taken reasonable steps (if any were possible) to
supervise the carrying out of the work and used reasonable care to check (if possible)
that the work had been done properly, provided that this was within the reasonable
competence of the experienced contractor. Working on a platform at a building site is
not regarded as a case concerning special risks that absolve the main contractor from
being liable as an occupier in Yeung Kam Fuk v Len Shing Construction Co Ltd;102 in
Wong Sau Chun v Ho Kam Chiu;103 the owner of a flat was held liable for failing to
ensure that the decorator engaged to replace a kitchen window, had taken adequate
101
[1994] 2 HKLR 120.
102
[1986] HKC 160.
103
[2000] 2 HKLRD E12.

232 TORT
protection to those at risk when a pane of glass killed a passerby walking in a common
area outside the building.
(e) Warning
9.085 Where damage is caused to a visitor by a danger of which he or she had been adequately
warned by the occupier, the occupier may be absolved from liability. Yet, the warning
is not to be so treated, unless in all the circumstances it was enough to enable the
visitor to be reasonably safe. This is provided for by s 3(4) of the Occupiers Liability
Ordinance (Cap 314).
9.086 A warning of danger in many cases will be sufficient to enable a visitor to be
reasonably safe and will discharge the occupier from liability. However, the warning
may not be sufficient and, in such cases, the occupier remains liable. In Hau Kit Ho
v Starway International Development Ltd,104 the plaintiff was injured after falling
on an unusually wet and slippery toilet floor when it was being cleaned by the
defendant’s worker. There were two small warning signs. The court held that there
should have been a special warning given or the toilet should have been cordoned
off until the floor was dry. Therefore, failing such a duty, the court held in favour of
the plaintiff.
9.087 In the context of construction projects, warnings about safe operation on site are
almost everywhere. Yet, the sufficiency of warnings has to be examined in the context
of the overall safety management system installed on site and particular reference
needs to be made to the degree of risks of the danger and the special skills of those
on site.
9.088 At common law, where a person consents to accept a risk when he or she is aware of the
full circumstances and knowledge of such a risk, the defendant otherwise liable has a
defence of consent or volenti non fit injuria. This reflects the voluntary assumption of
risks and acts as a complete defence. By s 3(5) of the Occupiers Liability Ordinance
(Cap 314), the common duty of care does not impose on an occupier any obligation
to a visitor in respect of risks willingly accepted as his or hers by the visitor. The
question whether a risk was so accepted is to be decided on the same principles as
in other cases where one person owes a duty of care to another. The effect of this
provision is to afford a likewise defence as consent by visitors. Its operation is yet to
be subject to the operation of the Control of Exemption Clauses Ordinance (Cap 71)
and the Unconscionable Contracts Ordinance (Cap 458). For dealings involving
consumers, it is provided under the Control of Exemption Clauses Ordinance (Cap 71)
that a person cannot, by reference to any contract term or to a notice given to persons
generally or to particular persons, exclude or restrict her or his liability for death or
personal injury resulting from negligence and, in the case of other loss or damage,
a person cannot so exclude or restrict her or his liability for negligence except in so
far as the term or notice satisfies the requirement of reasonableness. On top of this,
104
[2003] 3 HKLRD J20. See Chan Chi Shing v Chan Shu Kuen [2009] 2 HKLRD 259 and Sin Fu Yau v Cheung
Kwok Leung [2007] 3 HKLRD I8.

where a contract is found to be unconscionable, the court may refuse to enforce it or

any part of it.
(f) Trespassers
For trespassers, occupiers still owe a duty of care to them. In British Railways Board 9.089
v Herrington,105 the effect of the decision of the House of Lords was that it became
possible for a plaintiff, even though he was a trespasser, to recover in negligence.
The precise nature of the duty owed to a trespasser gave rise to controversy and the
Occupiers’ Liability Act 1984 in the United Kingdom was made to address the liability
of an occupier to a trespasser.
There is no corresponding Hong Kong legislation. The law applicable in Hong Kong 9.090
is that set out in British Railways Board v Herrington. In that case, a child was injured
when he stepped onto an electrified railway line, having got through the broken part
of a fence. The railway line was open to the public. The fences on each side were in
poor condition and children had been seen on the line. A particular part of the fence
had clearly been used as a route to cross the railway. The House of Lords held that the
defendant was in breach of the duty owed to the child as a trespasser.106
As illustrated in Wong Wing Ho v Hong Kong Housing Authority,107 a decision of the 9.091
Hong Kong Court of Appeal, on the one hand, the occupier is entitled to put in the
scales every kind of disadvantage to her or him if he or she takes or refrains from
action for the benefit of trespassers; on the other hand, he or she must consider the
degree of likelihood of trespassers coming and the degree of hidden or unexpected
danger to which they may be exposed if they come. In doing so, more weight should be
given to these factors if the potential trespassers are children because generally mere
warning is of little value to protect children.
The question whether an occupier is liable in respect of an accident to a trespasser on 9.092
his land would depend on whether a conscientious humane person with knowledge,
skill and resources could reasonably have been expected, before the accident, to have
done or refrained from doing something which would have avoided it. Yet, occupiers
owe no duty to make their land fit for trespassers to trespass in but there is a duty
which, while not amounting to the duty of care which an occupier owes to a visitor,
would be a duty to take such steps as common sense or common humanity would
dictate. If the presence of the trespasser is known to or reasonably to be anticipated by
the occupier, then the occupier has a duty to the trespasser, but it is a lower and less
105
[1972] AC 877. See Tomlinson v Congleton Borough Council [2004] 1 AC 46. See also Addie & Sons (Collieries)
Ltd v Dumbreck [1929] AC 358.
106
In the judgment of Lord Diplock, it was highlighted:
“The duty does not arise until the occupier has actual knowledge either of the presence of the trespasser upon
his land or facts which make it likely that the trespasser will come on to his land; and has also actual knowledge
of facts as to the condition of his land or of activities carried out upon it which are likely to cause personal
injury to a trespasser who is unaware of the danger.”
107
[2008] HKEC 13. In this case, a child of 12 fell when he climbed up a fence in a basketball court to retrieve the
ball.

234 TORT
onerous duty than the one which the occupier owes to a lawful visitor. Very broadly
stated, it is a duty to treat the trespasser with ordinary humanity.
4. NUISANCE AND RYLAND V FLETCHER

(a) Types of nuisance
9.093 Nuisance is a branch of the law of torts that is most closely concerned with the
environment and the use of land. According to its nature of sources, nuisance can be
divided into public nuisance,108 which is a crime, statutory nuisance, which is defined
by legislation, and private nuisance, which is a tort at common law.
(b) Interference with enjoyment of land
9.094 For private nuisance, it can be defined as an unlawful interference with the use or
enjoyment of another person’s land. The harm sufficient for a private nuisance may
be in the form of an interference with the beneficial use of the land or in the form
of actual damage to the land. It may be both as well. In Hui Yeun Fong v Mok Mo
Yin,109 the flat owner engaged an independent contractor to undertake renovation
work which involved the drilling and demolition of two partition walls, removal of
the flooring and tiles in the bathroom, repositioning the kitchen and replacement of
the plumbing and pipes. Such renovation work was disruptive and generated excessive
noise and vibrations and speeded up the spalling and breaking off of the concrete
and caused other damage. The flat owner below claimed that the work generated
excessive vibration and noise, causing cracks in the walls and ceiling of her flat,
further damage to her main door and frame and power failure. The court held that
whether a person could be said to be a wrongdoer if the nuisance was created by the
person’s independent contractor depended on whether the person could reasonably
have foreseen that the work he or she had instructed the contractor to do was likely to
result in a nuisance and found in favour of the flat owner below. In K & B Household
Co Ltd v Incorporated Owners of Nos 151 – 153 Sai Yee Street,110 a household goods
store operator succeeded in claiming nuisance against the incorporated owners of
the building when flooding occurred with foul water from pipes maintained by the
incorporated owners.
9.095 In general, it is only the occupier of land that can claim against the occupier of
the adjoining land where the nuisance exists. The person who creates the nuisance
may also be liable in addition to that occupier. In Secretary for Justice v Kin Ching
Besser Co Ltd,111 a claim in nuisance in respect of damage caused by a landslide
was upheld.
108
See, for example, Liao Kuo Chun v Win Capital (HK) Ltd [2010] 4 HKLRD 257, which involved a collapse of an
unauthorised canopy from a building.
109
[2003] 2 HKLRD F30.
110
[2010] HKEC 833. See also Lo Yuk Chu v. Hang Yik Properties Management Ltd [1996] 4 HKC 278.
111
[2009] HKEC 131.

NUISANCE AND RYLAND V FLETCHER 235
The forms of interference are innumerable and include those by way of noise, smells 9.096
and pollution of air or water.112 Where interference is with personal comfort, it is not
necessary that any injury to health should be shown, in order to establish nuisance. For
instance, in the Australian case of Haddon v Lynch,113 the early morning church bell on
Sunday was held to be a nuisance to the occupiers of a dwelling situated only 100 feet
from a church in the Melbourne suburb, as it disturbed their sleep.
(c) Competing rights of neighbours
The central issue of the law of nuisance is the question of reasonableness of the 9.097
defendant’s conduct according to the ordinary usages of people living in a particular
society. It involves the balance of the competing rights of neighbours.114 It is a process
of compromises, and neighbours are expected to exercise give and take. Obviously,
deliberate acts motivated by a desire to annoy neighbours can become an actionable
nuisance. Legal intervention is warranted only when an excessive use of property
causes inconvenience beyond what other occupiers in the vicinity can be expected
to bear, having regard to the prevailing standard of comfort of the time and place.
Reasonableness in this context is a two-sided affair. There is no precise formula for
deciding reasonableness in this sense and factors such as the time and place of the act,
the seriousness of harm, the manner of committing the act, the purpose of committing
the act and the frequency or duration of the act all come into the picture.
(d) Right to support of land
The tort of nuisance has also been utilised to underpin a right to support of land. 9.098
The basis of such a right has been examined in Leakey v National Trust for Places of
Historic Interest or Natural Beauty.115 In that case, the plaintiff ’s houses were built
at the foot of a large mound on the defendants’ land. Due to natural weathering and
the condition of the soil, the defendants knew that the instability of their land was a
threat to the plaintiff ’s properties. However, the defendants did not do anything and
argued that they had no responsibility to the plaintiff, as it was the natural condition
of the soil. The plaintiff commenced an action in nuisance for an abatement of the
nuisance and damages. It was held that there was a general duty upon occupiers in
relation to hazards occurring on their land, whether natural or manmade and the
scope of the duty was such as “… to do which is reasonable in all circumstances,
and no more than what, if anything is reasonable, to prevent or minimise the known
risk of damage or injury to one’s neighbour or to his property”. The standard of
the duty was subjective and regard had to be given to the expenditure of money
involved, the landowner’s means, physical effort required to avert the danger and
112
See, for example, Lam Eguchi Mayumi v Fast Well Enterprise (HK) Ltd [2010] HKEC 485, Wong Kang Kwong
v Tung Shu Kwan [2009] HKEC 1277 and Tse Chit Sang v Ho Mei Ling [2009] HKEC 991.
113
[1911] VLR 230.
114
See, for example, Incorporated Owners of Cliffview Mansions v Sherav (HK) Ltd [2009] HKEC 1433.
115
[1980] QB 485. This case was followed in Leung Tsang Hung v Incorporated Owners of Kwok Wing House
(2007) 10 HKCFAR 480. See also Birmingham Development Co Ltd v Tyler [2008] BLR 445 and Marcic v
Thames Water Utilities Ltd [2004] 2 AC 42.

236 TORT
the landowner’s age and relevant physical condition. In Holbeck Hall Hotel Ltd and
Another v Scarborough Borough Council,116 the plaintiff ’s hotel was situated at the
top of a cliff that was inherently unstable and subject to unpredictable local slips.
A massive landslip occurred at the defendant’s land at the under cliff between the
hotel and the sea, leading to the loss of support of the hotel grounds and the resultant
demolition of the hotel. The Court of Appeal in England and Wales remarked that
the scope of the duty depended not only upon the defendant’s knowledge of the
hazard, the ease and expense of abatement and his ability to abate it, but also upon
the extent to which the damage which in fact eventuated was foreseen, and whether
it was fair, just and reasonable in the circumstances to impose a duty. The defendant
was not aware of the magnitude of the danger that in fact occurred. It was held that
the scope of the defendant’s duty had therefore been confined to an obligation to take
care to avoid damage to the plaintiff ’s land, which it ought to have foreseen without
further geological investigation and, accordingly, the defendant was not liable to the
plaintiff.
(e) Duty to reduce nuisance
9.099 With advances in modern engineering techniques, an owner both can and should, and
in practice almost invariably does, take precautions against damage to his neighbours’
buildings caused by subsidence arising from excavations on adjoining land. In the
context of the construction operations, landowners, who employ a contractor to erect
a temporary retaining wall before excavation work begins between two plots of land
so as to hold up the soil on the adjoining land, may be liable in nuisance if the
landowner comes to be aware of defects in the wall but fails to remedy it immediately
or to order the contractor to stop the works to ascertain what needs to be done.
In carrying out operations that are normal and usual in the construction industry,
contractors are still required to exercise reasonable care and skill. Their duty is to
take proper precautions to see that the nuisance is reduced to a minimum and this
is a question of common sense and degree. In Andreae v Selfridge,117 a demolition
contractor was liable for the nuisance created as a result of its failure to minimise
noise and dust near the hotel.
(f ) Rylands v Fletcher
9.100 In Rylands v Fletcher,118 the defendants constructed a reservoir on their land for their
mill. Through the negligence of the contractor or engineer, it was not discovered that
there was a disused and filled-up shaft of an old coalmine leading to an adjoining
mine of the plaintiff. When the reservoir was filled, water escaped down the shaft to
the plaintiff’s mine, flooding it and causing damage. There was no negligence on the
part of the defendants but the court held that they were liable. In the judgement of the
House of Lords, Blackburn J said:
116
[2000] QB 836. See Transco Plc v Stockport Metropolitan Borough Council [2004] 2 AC 1.
117
[1938] Ch 1. See Hiscox Syndicates Ltd v Pinnacle Ltd [2004] BLR 393.
118
(1868) LR 3 HL 330.

NUISANCE AND RYLAND V FLETCHER 237
“We think that the true rule of law is that the person who for his own purposes
brings on his lands and collects and keeps there anything likely to do mischief
if it escapes, must keep it at his peril, and if he does not do so is prima
facie answerable for all the damage which is the natural consequence of its
escape.”
Thus, the rule of Rylands v Fletcher is one of strict liability and the occupier of land, 9.101
who brings and keeps upon it anything likely to do damage if it escapes, is bound
at his peril to prevent its escape and is liable for all the direct consequences of its
escape, even if he has not been guilty of negligence.119 In Chan Ying Wah v Bachy
Soletanche Group Ltd,120 seawater escaped from the defendant’s land causing damage
to plaintiff ’s crops and it was held that the collection or storage of seawater on the
site was an unnatural use and that the defendant was liable for allowing the seawater
to escape.
(g) Non-natural use of premises
There is a wide range of things that has been found to be likely to do mischief when 9.102
brought upon land. In Lee Hing Warehouse Ltd v Siu Chi Keung Coman (t/a Yick Fung
Dyeing & Bleaching Factory),121 storing a large volume of water in a tank constituted
a non-natural use of the premises used for dyeing and bleaching. Yet, it is not every
use to which land is put that brings into play that principle. It must be some special
use, bringing with it increased danger to others and must not merely be the ordinary
use of the land or such a use as is proper for the general benefit of the community.
In Mason v Levy Auto Parts of England Ltd,122 MacKenna J employed three criteria
to resolve the question of what was non-natural use. They were: the quantities of
combustible material which the defendants brought onto their land; the way in which
they stored them; and the character of the neighbourhood. These criteria have been
applied in Wayfoong Credit Ltd v Tsui Siu-Man t/a Wilson Plastics Manufactory,123
where the spread of a fire to neighbouring premises was intensified by the defendant’s
accumulation of highly combustible materials in a non-residential area. The Hong
Kong Court of Appeal took into account the nature of the locality and held that there
was no non-natural use of the premises.
In Chan Ying Wah v Bachy Soletanche Group Ltd,124 seawater escaped from the 9.103
defendant’s land causing damage to the plaintiff’s crops, and it was held that the
collection or storage of seawater on the site was an unnatural use and that the defendant
was liable for allowing the seawater to escape.
119
See, however, Cambridge Water Co Ltd v Eastern Counties Leather Plc [1994] 2 AC 264, restricting the
application of the rule. See also Hui Yeun Fong v Mok Mo Yin [2003] 2 HKLRD F30.
120
[2005] 2 HKLRD 176.
121
[1994] HKLY 482.
122
[1967] 2 QB 530.
123
[1984] HKLR 259.
124
[2005] 2 HKLRD 176.

238 TORT
(h) Liability cannot be delegated
9.104 In relation to contractors, it should be noted that liability under the principle in Rylands
v Fletcher cannot be delegated.125 Thus, in cases involving the escape of substances,
such as explosives, which have been brought onto the land and which are likely to
do damage if they escape, the landowner is not excused from liability even if it has
engaged an independent contractor to perform the work.
5. TRESPASS TO LAND
(a) Definition of trespass
9.105 Trespass to land may be committed by entering upon the land of the plaintiff, remaining
upon such land or placing or projecting an object upon the land, without lawful
justifications. Trespass to land is a tort that is actionable without proof of damage. It is
actionable by the person who is in possession of the land.
(b) Termination of contract leading to trespass
9.106 In the context of the construction process, a contractor may be faced with a trespass
to land situation when its contract is terminated. An employer grants a licence to a
contractor under the construction contract to enter its land and do work. In theory, that
licence can only be terminated in accordance with the contract. Yet, in practice, the
immediate remedy available to the contractor in a case of invalid termination of the
construction contract is quite limited.
9.107 An illustration of this is in Hounslow London Borough Counci v Twickenham Garden

Developments Ltd.126 In that case, by serving the requisite notice, the employer
terminated the employment of the contractor that was engaged in a building project
under the RIBA form of contract. The contractor denied the validity of the termination
and continued with work on the site. Having unsuccessfully attempted to eject the
contractor from the site, the employer issued a writ claiming an injunction and damages
for trespass to land. In the interlocutory proceedings for an injunction, the court held
that, on the facts, the employer had not shown that the contract had been validly
terminated with the degree of certainty making it right to grant such a mandatory
injunction. It was remarked that the court would not grant equitable remedies in order
to procure or aid a breach of the licence.
125
See Tsang Hing Cheung v Chan Po Ling [2002] HKEC 1421.
126
[1971] Ch 233. See Vipac Engineers & Scientists Ltd v Mark Karpovich [1990] 1 HKLR 725. See also West
Faulkner Associates v Newham London Borough Council (1994) 71 BLR 1 and Amec Civil Engineering Ltd v
Secretary of State for Transport [2005] BLR 227. See, however, Mayfield Holdings v Moana Reef [1973] 1 NZLR
309 and Tara Civil Engineering v Moorfield Developments Ltd (1989) 46 BLR 72.

TRESPASS TO LAND 239
However, subsequent cases have gone a separate path. In Chermar Productions 9.108
Proprietary Limited v Prestest Proprietary Limited 127 it was held that since the
contractor’s licence has been revoked, whether rightly or wrongly, the builder has
become a trespasser. Similar rationale is also adopted in Hong Kong. In Paul Y-CREC
Engineering Co Ltd v Ajax Pong Construction Ltd,128 an interlocutory injunction was
granted restraining the subcontractor from entering or remaining on a site where the
validity of the termination of the subcontract was in dispute, upon consideration of the
balance of convenience in the circumstances, such as the liquidated damages, loss of
goodwill and reputation for delayed completion and the adequacy of compensation by
way of damages.
127
(1992) 8 ConLJ 44. See also Cowell v Rosehill Racecourse Company Limited (1937) 56 CLR 605 and Graham
H Roberts Proprietary Limited v Maurbeth Investments Proprietary Limited [1974] 1 NSWLR 93.
128
[2000] HKCFI 1294; (unrep, HCA No 5324 of 2000).

1. BREACH OF STATUTORY DUTIES
(a) Civil and criminal liability
Generally speaking, breach of statutory duties can carry with it various liabilities. 10.001
Depending on the relevant provisions of the legislation, there can be civil liability in
tort for a breach of statutory duties. On the other hand, the breach of statutory duties
may itself be visited with criminal liability if an offence is created. Hence, in some
cases, there can be both civil and criminal liability that flows from a breach of the
imposed statutory duties.1
In construction and industrial settings, an illustration of the recurring issues that can 10.002
arise when there is a breach of safety legislation is the case of Tsang Yuen Nam v
Hung Yun Metalware Co Ltd.2 A metalwork technician sustained injuries after being
crushed by metal sheets. The metal sheets were being stored in racks against the walls
and the technician, together with his supervisor, were trying to retrieve from storage a
sheet that was 8 to 10 sheets in. More than 20 sheets fell forward away from the wall
onto the technician and the supervisor, who had to be rescued by the fire brigade. The
employer subsequently pleaded guilty to two offences of failure to comply with the
provisions of s 6A(2)(a) and s 6A(2)(b) of the Factories and Industrial Undertakings
Ordinance (Cap 59), concerning the provisions of a safe system of work and safety in
handling material. In the civil action brought by the technician against the employer
for compensation for personal injuries due to negligence and breach of statutory
duties, the employer unsuccessfully argued that the guilty pleas were merely pleas of
convenience.
(b) Intention of legislation to create duty under tort
A civil claim founded on a breach of statutory duties is one based on common law. It 10.003
is a cause of action independent of any other form of tortious action.3 Yet, not every
breach of statutory duties can support a common law claim as a tort.4 The question to
ask in each case is whether it is the intention of the legislation to create such a duty
and, as explained in Lochgelly Iron & Coal Co v M’Mullan,5 no action for damages will
lie if the intention to be inferred is that some other remedy, civil or criminal, should
1
See Attorney General of Hong Kong v Gammon (HK) Ltd [1983] HKLR 93 and HKSAR v Shun Tak Properties
Ltd [2009] 3 HKLRD 299.
2
[2003] 1 HKLRD C13.
3
Monk v Warbey [1935] 1 KB 75 and Warder v Cooper [1970] Ch 495. The actions can overlap and the same
injury may give rise to both or other types of liability. See, for example, Li Man Yuen v Li Chung (t/a VF
Electric Manufacturing Co) [1991] 2 HKC 230 and Sanfield Building Contractors Ltd v Li Kai Cheong (2003)
6 HKCFAR 207.
4
See Powell v Phillips [1972] 3 All ER 864, where it was held that, in relation to a breach of the Highway Code,
a breach created no presumption of negligence calling for an explanation, still less a presumption of negligence
making a real contribution to causing an accident or injury; it was merely one of the circumstances on which one
party was entitled to rely in establishing the negligence of the other.
5
[1934] AC 1. See East Suffolk Rivers Catchment Board v Kent [1941] AC 74. See also Yeung Kam Fuk v Len
Shing Construction Co Ltd [1986] HKC 160 and Lam Yau v Shun Shing Construction and Engineering Co Ltd
[1992] HKLY 423.

be the only remedy available. A working formula sometimes adopted in an attempt to

answer this question is to ask whether the duty is owed primarily to the community or
state and only incidentally to the individual, or vice versa. This, sometimes, is put in the
form of a distinction between the public at large and a class of individuals. In practice,
the court will make reference to decided cases regarding breach of the same legislative
provisions to see whether a claim based on statutory duties can be established.
10.004 In finding out the intention of the legislature, the court takes into account factors such
as the context and object of the legislation, the nature and precision of the relevant
provisions and the kind of damages suffered with reference to those to be guarded
against.6 This, however, involves a broad interpretation. Thus, if the object of a
statutory regulation is to prevent workers on a roof from falling to the ground, it is
immaterial that the injured worker fell through a hole on the roof rather than through
fragile roofing materials, as illustrated in Donaghey v Boulton & Paul Ltd,7 which
concerned a breach of the statutory duty to provide and use crawling boards where
work was being done on roofs covered with fragile materials through which a person
was liable to fall.
(c) Contractor liability in relation to subcontractor breach
10.005 Also, the mere fact that the works have been subcontracted out does not, in itself,
absolve a contractor from liability, whether civil or otherwise. In Rainfield Design
& Associates Ltd v Siu Chi Moon,8 the contractor for the design, installation and
subsequent dismantling of decorative lights was without the expertise or proper
equipment for the job and subcontracted the work out to the plaintiff subcontractor.
During the dismantling of the lights, cross pieces at three feet intervals were used,
instead of a ladder, for access to the scaffold platform. The plaintiff subcontractor
fell to the ground 15 feet below when climbing down the scaffolding and sustained
injuries, becoming a quadriplegic. There was a breach of reg 38A of the Construction
Sites (Safety) Regulations (Cap 59) in relation to the reasonable provision of sufficient
safe access. The contractor had relied on the expertise of the subcontractor; the
subcontractor documents provided that the subcontractor should ensure the provision
6
See Solomons v R Gertzenstein Ltd [1954] 2 QB 243 and Phillips v Britannia Hygienic Laundry Co Ltd [1923]
2 KB 832.
7
[1968] AC 1.
8
(2000) 3 HKCFAR 134, where Bokhary PJ said:
“15. I say at once that the mere fact of Mr Siu having been an independent contractor rather than an employee
makes no difference. It is true that usually the person injured or killed would have been the employee of
the person owing the statutory duty. But I can see no reason why it makes any difference merely because the
person injured or killed was an independent contractor rather than an employee. Neither in terms of corrective
justice nor in terms of distributive justice does there appear to be any reason in situations of this kind for
distinguishing between employees and independent contractors. There is no authority, principle or policy
consideration calling for any such distinction. Physical safety is plainly the paramount element of the law’s
policy in this sphere. The only concern is whether the person injured or killed as a result of non-compliance
with a statutory duty was within the class of persons which such statutory duty was imposed to protect. As a
person working on a construction site, Mr Siu was clearly within the class of persons which the statutory duty
here in question was imposed to protect.”
See Chung Ping Wai v Pedder Logistics Godown Ltd [2009] HKEC 1790 and Wan Tsz Nok v Hung Fai Electrical

BREACH OF STATUTORY DUTIES 245
of safe equipment and use of safety measures when carrying out works on the site.
One issue that arose before the Hong Kong Court of Final Appeal was whether the
contractor was liable for injuries caused to an independent contractor, even if there
was a breach of the contractor’s statutory duty under these circumstances. It was
observed that the contractor had not used due diligence nor taken all steps as far as
were reasonably practicable to ensure site safety and, although it might in exceptional
cases be possible to gain protection from civil liability by subcontracting to a highly
qualified specialist, this was not such a case. Further, it was held that very clear words
in the subcontract were needed to exclude civil liability for breach of statutory duty.
(d) Strict liability offences
As regards criminal liability, many statutory offences are strict liability offences in that 10.006
their commission does not depend on the state of mind of the offender. Once the acts
of breach are committed, it matters not whether all reasonable steps have been taken or
whether there is no knowledge of such breach. For example, in Gammon (Hong Kong)
Ltd v Attorney General of Hong Kong,9 a contractor and its project manager and site
agent were charged with an offence under s 40 of the Buildings Ordinance (Cap 123)
in respect of a temporary lateral support system erected with a substantial deviation
from that as approved by the Building Authority. The legislation provides that it is an
offence on the part of the contractor if it “… diverges or deviates in any material way
from any work shown in a plan approved” and on the part of any person who “carries
out or ... permits ... such works to be carried out, in such manner”. The Privy Council
held that proof of knowledge was not required and the offences were of strict liability.
In the Hong Kong Court of Appeal judgement in HKSAR v Paul Y – ITC Construction 10.007
Ltd,10 the test for deciding whether a statutory offence was of strict liability was
again considered. The offences in issue related to contravention of the Noise Control
Ordinance (Cap 400) in causing mechanical equipment to be used and construction work
to be carried out without a construction noise permit. It was held that in determining
whether an offence was one that carried strict liability, the approach to follow was that
there was a presumption of law that the mental element of a crime was required before
a person could be held guilty of a criminal offence; this presumption was particularly
strong where the offence was truly criminal in character. This presumption applied
to statutory offences, and could be displaced only if this was clearly, or by necessary
implication, the effect of the legislation; but this presumption could only be displaced
where the legislation was concerned with an issue of social concern, which included
public safety. Further, even where the legislation was concerned with such an issue,
the presumption of a criminal state of mind stood unless it could also be shown that the
creation of strict liability would be effective to promote the object of the legislation by
encouraging greater vigilance to prevent the commission of the prohibited act. Taking
into account all these factors, it was held that the concerned offences were of strict
liability.
9
[1985] 1 AC 1. See also HKSAR v Ho Hon Chung Danel [2004] 3 HKC 304 and So Wai Lun v HKSAR (2006) 9
HKCFAR 530.
10
[1998] 2 HKLRD 35.

(e) Offences requiring mens rea
10.008 It should also be noted that, depending on the wording of the legislation creating the
offence, the offence may require a criminal state of mind, or mens rea, by way of
intention, negligence or recklessness, or of knowledge or notice. Further, if a statutory
defence is provided for in the legislation, such as the defence of reasonable but
mistaken belief, where the defendant is in the position to prove on the balance of
probabilities that it believed for good and sufficient reason, though erroneously, that
there had been compliance with the relevant legislation, as in the case of HKSAR v
Paul Y – ITC Construction Ltd,11 the burden of proving that such a defence should
apply falls on the defendant. Therefore, it is for the defendant to establish its innocence
in such circumstances.
10.009 More recently, in Hin Lin Yee v HKSAR,12 the Hong Kong Court of Final Appeal
provided further guidance for deciding whether a statutory offence was with absolute
liability. Chan PJ remarked:
“The crucial question in the present case is whether the presumption of mens
rea is displaced and if so, whether this common law defence is excluded
expressly or by necessary implication by the language and subject matter of
the statute …
The language of the statute which must be examined includes not only
the wording of the offence but also any defence which may be provided in
the statute itself. The subject matter of the statute that must be taken into
account refers to the social context in which the offence was created and this
includes: the purpose of the statute: whether the statute is concerned with an
issue of social concern or public health and safety; the nature of the offence:
whether it is truly criminal or merely regulatory and whether the penalty to
be imposed for contravention is substantial or not; and whether the creation
of absolute liability will be effective in promoting the objects of the statute
by encouraging greater vigilance to prevent the commission of the prohibited
act. Depending on the circumstances of each case, some of these matters no
doubt carry more weight than others in deciding whether the presumption of
mens rea is displaced and if so, whether it is open to the accused to rely on the
common law defence …
It is thus clear that these questions are ultimately to be resolved by a construction

of the relevant provisions. There is no support in the authorities for a rule of
law which requires the displacement of the presumption of mens rea simply on
the ground that it is a piece of safety legislation. Where the declared object of
the statute is the protection of public health and safety, the court would no doubt
be much more ready to come to that conclusion.”
11
[1998] 2 HKLRD 35.
12
[2010] 2 HKLRD 826.

BUILDING CONTROL 247
(f) Liability in joint ventures
Joint ventures are often used as a vehicle in the construction industry and they are, on 10.010
occasion, set up for a particular project. A joint venture is a highly flexible concept and
the nature of a particular joint venture will depend to a very large extent on its own
facts and on the resources and wishes of the parties. Joint ventures may well have a
limited life. A joint venture may be defined for present purposes as any arrangement
whereby two or more parties cooperate in order to run a business or to achieve a
commercial objective. This cooperation may take various forms, and may involve the
running of a business on a long-term basis or the realisation of a particular project. The
business may be entirely new or it may be an existing business, which it is believed
will benefit from the introduction of a further participant. In relation to a charge of
statutory offence, it would seem to be legal nonsense to convict a joint venture. Yet,
in such a situation, it is of course possible that individual members of the body can
be prosecuted under their own names in respect of their own acts or omissions as
members, as remarked in Jiang Enzhu v Lau Wai Hing Emily.13
2. BUILDING CONTROL
(a) Buildings Ordinance and Building Authority
(i) Buildings Ordinance (Cap 123)
Private buildings and private building works in Hong Kong come within the domain 10.011
of the Buildings Ordinance (Cap 123). It ensures that minimum safety and health
standards are maintained in the design, construction, use and safety maintenance of
buildings.
(ii) Scope of the Building Authority
The Building Authority is established with a vision to make the built environment 10.012
safe and healthy for our community. To achieve this, it sees its mission as setting and
enforcing safety, health and environmental standards for private buildings. Through
registration systems under the Buildings Ordinance (Cap 123), the Building Authority
regulates the standards applicable to key personnel in building construction works;
these are authorised persons who may be architects, engineers or surveyors, registered
structural engineers or registered general building or specialist contractors. Any person
who intends to carry out building works, whether or not resulting in a new building, is
required to employ these key personnel who make a submission on the person’s behalf
to the Building Authority for approval, and such building work is to be executed by a
registered contractor.
13
[2000] 1 HKLRD 121. It was remarked that “… to convict an unincorporated association would be a legal
nonsense”. See HKSAR v Hyundai-CCECC Joint Venture [2005] HKEC 1974.

10.013 Matters involving the structural and fire safety of existing private buildings and
their associated features also come under the jurisdiction of the Building Authority.
Statutory orders may be served on owners to rectify unsafe or undesirable situations
such as dilapidation, drainage nuisance, dangerous slopes or earth-retaining structures,
unauthorised building works, fire hazards and other nuisances. Such orders may also
require owners to assess the required remedial measures.
(iii) Growing complexity of building regulation

10.014 In this present age of scientific discovery and advancing knowledge, building
regulations are no longer simple. The theme of building regulation has a long history.
The earliest known example of building regulations is contained in the Code of
Hammurabi14 (King of Babylon), dating from about 2000 BC, which provides:
“If a builder builds a house for a man and does not make its construction firm,
and the house which he has built collapses and causes the death of the owner of
the house, the builder shall be put to death”.15
10.015 Site utilisation is regulated in respect of open space and heights and volumes of
buildings with an approach to limitation based on the width of the adjoining street
and the volume of the building. The structural complexity of modern building has
necessitated special requirements, specifications of building materials, loads and
stresses and structural requirements, all of which are considerably detailed. Finally, in
addition to the purely physical requirements there must be administrative regulations
regarding plans and notices, registration of architects and contractors, fees, offences
and penalties, encroachments and projections, etc.
10.016 In launching the present statutory framework, it has been remarked that the task of
compiling building regulations is thus a most onerous and lengthy one requiring wide
knowledge of the science and art of building and structure, and an understanding of
public safety and individual responsibility towards the general public.
(b) Building works control
(i) Definition of building works

10.017 A wide range of ‘building’ is under statutory control of the Buildings Ordinance
(Cap 123). Under s 2 thereof a building also includes bridges, wharfs, jetties, caverns
or underground spaces or other structures as the Building Authority declares to be
a building. Likewise, building works include any kind of building construction,
site formation works, foundation works, repairs, demolitions, alterations, additions,
drainage works and every other kind of building operation. Apart from building works,
street works are also subject to the same statutory control. Here, street works mean
any work for the construction, formation or laying out of any private street or access
14
Legal principles have been tabulated since the time of the code of Hammurabi, the sixth king of the first dynasty
of Babylonia, who in around 1750 BC issued a code in 282 sections.
15
Likewise, pursuant to the code, where a house collapsed on the son of its owner, the builder’s son, and not the
builder, was put to death.

road and these include the reconstruction, alternation, repair, surfacing, channelling,
drainage or lighting of them.
Detailed provisions are provided by way of regulations to govern matters on structural 10.018
materials, fire safety, site preparation and investigation, design parameters, methods
of construction, safety at work, lighting and ventilation, sanitary fitments, plumbing,
drainage works, latrines, energy efficiency, refuse handling, layout, plot ratio, stairways,
ramps and guards, etc.
(ii) Process of approval for building works

Before the commencement of any building works or street works, the approval and 10.019
consent of the Building Authority is required. The role and responsibility of the
Building Authority under the Buildings Ordinance (Cap 123) and its subsidiary
legislation are certainly not limited to approval of plans for the construction of new
buildings, or to new buildings only. Nor is the Building Authority only concerned
with structural building works, as opposed to non-structural ones. After all, the
Building Authority’s power and responsibility cover both new buildings and existing
buildings, and in particular dangerous buildings. An application must be submitted
to the Building Authority in a specified form and, in most cases, is required to be
accompanied by a supervision plan lodged by an authorised person. On receipt of the
submission, the Building Authority may refuse to approve or consent to the plans or
commencement of the building works or street works on various grounds, as detailed
in s 16 of the Buildings Ordinance (Cap 123).16 In approving the plans or consenting
to the commencement of works, the Building Authority is empowered to impose
conditions as detailed in s 17 of the Buildings Ordinance (Cap 123).
By s 15(1) of the Buildings Ordinance (Cap 123), an application made to the Building 10.020
Authority to approve plans or to consent to the commencement of building works
or street works shall be deemed to have been approved or consented to, if there
is no notification of refusal of the same given from the Building Authority within
the designated period. For plans, the designated period is 60 days or 30 days from
application, depending on whether the plans are previously submitted or extensively
revised; for commencement of work, the designated period is 28 days from such
application. In Head Step Ltd v Building Authority,17 it was held by the Hong Kong
Court of Appeal that the law to be applied was that applicable at the date when
the Building Authority considered the submission, within the time limits allowed.
Also, it was observed that a refusal, unless expressly stated otherwise, was not a
conditional or qualified refusal and the Buildings Ordinance (Cap 123) contained no
words providing for a piecemeal approval or refusal as such. In Wong Kwok Gee v
16
The exercise of the power under the Buildings Ordinance (Cap 123) is subject to judicial review. See Fortune Key
Ltd v Appeal Tribunal (Buildings) [2010] HKEC 698, where it was remarked that, by s 14(1) of the Buildings
Ordinance (Cap 123), the Building Authority could only invoke the power under s 16(1)(i) of the Buildings
Ordinance (Cap 123) to seek particulars of information that was necessary for the task of considering the
approval. See also Re Yat Ming Construction & Engineering Ltd [2006] HKEC 261; Emperor Hotel (HK)
Ltd v Building Authority [2008] HKEC 1068; and Building Authority v Appeal Tribunal (Buildings) & Asean
Enterprises Ltd (Third Party) [2007] HKEC 468.
17
(1995) HKLY 116.

The Building Authority,18 it was held that the same principle applied even if the law
had been changed since the date on which the plans were submitted to the Building
Authority for approval.
10.021 As in Singway Ltd v The Attorney General,19 the Building Authority could be entitled
to refuse to approve building plans on the grounds that the proposed building works
would contravene an approved or draft outline zoning plan under the Town Planning
Ordinance (Cap 131). A likewise decision regarding plot ratio in a draft outline zoning
plan was reached in The Attorney General v CC Tse (Estate) Ltd.20
(iii) Unauthorised building works

10.022 In the event of unauthorised building works, the case HKSAR v Choy Bing Wing21
illustrates that it is the person who asserts that approval from the Building Authority
has been obtained who must prove it on the balance of probabilities. In that case,
a registered structural engineer was responsible for supervising building works at
certain premises. Despite his application to the Building Authority to approve the
building plans having been rejected on three occasions, the engineer proceeded with
the works. Proceedings were brought against him for contraventions of ss 14(1), 40(1)
and (5) of the Buildings Ordinance (Cap 123). The engineer maintained that the day
before the latest refusal, an employee of the Building Authority had given him oral
approval and, later that day, had stamped the building plans with an approval stamp.
No such approved plans were produced, however. The concerned employee of the
Building Authority had retired and moved abroad at the time of the trial. The engineer
was convicted of permitting the carrying out of building works without obtaining
written consent from the Building Authority. In the appeal, it was held that, as reg 30
of the Building (Administration) Regulations (Cap 123A) provided for service of
written approval by the Building Authority and the stamping, signing and dating of the
approval on the plans, no valid approval could be given orally.
10.023 In Building Authority v Appeal Tribunal (Buildings),22 it was held that reg 41(1) of the
Building (Planning) Regulations (Cap 123F) which concerned the means of escape
from a building, the regulation applied to building works carried out or to be carried
out in existing buildings just as it applies to those to be carried out in new buildings.
(iv) Power to order cessation of works

10.024 In the event of works being carried out in contravention of these statutory control
provisions or in material deviation from the approved plans, the Building Authority is
conferred with powers under s 23 of the Buildings Ordinance (Cap 123) to direct that such
works shall cease until the order is withdrawn. Such powers to order the cessation of works
can also be exercised where there is a likely danger of causing collapse of adjoining land
or where there are dangerous conditions within the site. Also, under s 24 of the Buildings
18
[1995] HKLY 117.
19
[1974] HKLR 275.
20
[1982] HKLR 7.
21
[1997] HKLY 307. See also Tsui Koon Tin v The Building Authority [2006] HKEC 907.
22
[2010] HKEC 372.

Ordinance (Cap 123), the Building Authority is also conferred with powers to direct that
works erected or being erected in contravention of the statutory control be demolished or
altered in order to put an end to such contraventions. In HKSAR v Joy Express Ltd,23 the
Building Authority issued an order in respect of metal structures attached to the external
wall of a building, which first obtained the approval of the Building Authority. The
Building Authority directed demolition and reinstatement of the same within 60 days.
The defendant did not comply with the order and was prosecuted before a magistrate
who convicted the defendant for failure to comply with the order without reasonable
excuse, contrary to s 40(1B)(b) of the Buildings Ordinance (Cap 123). On appeal, it was
contended by the defendant that the structures in question were not building works but
merely advertisement signs and, hence, only to be dealt with under s 105 of the Public
Health and Municipal Services Ordinance (Cap 132), which concerns dangerous hoarding,
scaffolding or other structures erected solely for the purpose of exhibiting advertisements.
Each of the structures in question was a metal-cantilevered structure built over a rather
busy street; was several storeys high; and supported an advertising sign of corresponding
size. Each of these structures was of a dead weight estimated at about 3 tons and the wind
load of each was estimated to be about 19 tons. Each appeared to be connected to the parent
building using drilled-anchors, with uncertain and dubious structural stability. The danger
was categorised as imminent according to the manual on which the Building Authority
used for control and enforcement matters. Drawing reference from the Building Tribunal
appeal case of Good Think Consultants Ltd v Attorney General,24 which concerned a
structure that had been welded together and bolted to a concrete canopy, from which was
supported an air-conditioning plant approximately 3.2 metres long, 2.4 metres high and
2.0 metres deep, the court was of the view that whether a particular structure fell within
the definition of building works was a matter of circumstances and degree. In this case, it
was held that the attached structures were building works, having regard to the nature and
size of the thing attached, the way that it was attached and the effect or potential effect to
the building of having the thing attached to it. The conviction was upheld.
(v) Occupation permits

By s 21 of the Buildings Ordinance (Cap 123), no new building shall be occupied in 10.025
any way except by not more than two caretakers, unless the Building Authority has
issued an occupation permit or a temporary occupation permit that remains valid.
Unlike an occupation permit, a temporary occupation permit can be issued in respect
of the whole or any part of a new building that is completed. Considerations to be
taken into account are set out in s 21(6) thereof.
(vi) Wilful concealment of substandard works
In cases where there is wilful concealment from the Building Authority in relation 10.026
to substandard works, the matter may fall into the ambit of the common law offence
of conspiracy to defraud. This is illustrated in Secretary for Justice v Li Che Hing &
23
[2003] HKEC 352. See HKSAR v Joy Express Ltd [2005] HKEC 554. See also Sky Wide Development Ltd v
Building Authority [2009] HKEC 329 in relation to whether building orders issued were contrary to published
enforcement policy.
24
[1996] 4 HKC 782.

Others,25 a case that concerns dishonest construction of bored piles for the foundation
works of the project at one of the Tung Chung station development projects. The
defendants were the project manager, the site agent and the site engineer, who falsely
represented that the bored piles were constructed in accordance with the approved
site plans and this caused and permitted the Building Authority to consent to the
commencement of the pile cap construction. In an appeal against the sentence
before the Hong Kong Court of Appeal, it was held that a starting point of 10 years’
imprisonment would not be excessive for any party mainly responsible for deciding
to enter a scheme and who, for financial gain, deliberately failed to comply with the
necessary requirements and ordered subordinates to go along with the deception.
(c) Building maintenance
10.027 The call for building maintenance is growing in Hong Kong. Building neglect has been
a long-standing problem26 in a highly developed and densely populated city like Hong
Kong with a stock of aging buildings. The cost of building neglect is huge at both
the societal and individual levels. Under the existing Buildings Ordinance (Cap 123),
it is only when a building becomes dangerous or is liable to become dangerous or
there is defect or dilapidation in a building that the Building Authority may order
the owner to carry out repair and rectification works.27 To tackle these, the HKSAR
Government is proposing the Mandatory Building Inspection Scheme and Mandatory
Window Inspection Scheme28 supported by legislation29 and corresponding measures.
(i) Normal duties of owners

10.028 Under the common law, landlords or building owners have certain normal duties to
maintain their properties, including the maintenance and repair of the structures and
finishes of the building as well as the facilities in the building. Another source of duties
is the deed of mutual covenant, which is a legal document binding building owners and
setting out the rights, interests and obligations of the owners, occupiers, tenants and
property management agents in respect of the control, administration, maintenance
and management of private properties, common parts and facilities of buildings.
10.029 Other legislation includes the Fire Services Ordinance (Cap 95), governing the
installation of fire fighting equipment in buildings, and the maintenance of them; the
Waterworks Ordinance (Cap 102), governing the water supply work for consumption
purposes and for fire services installations in buildings; the Water Pollution Control
Ordinance (Cap 358), governing the achievement and maintenance of water quality; the
Electricity Ordinance (Cap 406), governing the electrical installations in buildings and
25
[2000] 4 HKC 43. See also HKSAR v Tai Yuen Ming [2001] 2 HKLRD 229.
26
Building defects include structural deterioration, concrete spalling, defective drainage and defects in building
fire safety provisions, posing safety hazard not only to the building occupants but also to other building users and
pedestrians nearby.
27
The Building Ordinance (Cap 123) does not empower the Building Authority to require the owner to carry out
periodic inspections and conduct necessary preventive repair works for the regular maintenance of the building.
28
Lack of proper maintenance and improper use of windows have also resulted in incidents of window components
falling from a height, posing a serious threat to public safety.
29
The Buildings (Amendment) Bill 2010 has been introduced.

the requirements on periodic inspection and certification; the Gas Safety Ordinance
(Cap 51), governing the gas installations and use inside buildings; the Lifts and
Escalators (Safety) Ordinance (Cap 327), governing the design, construction, testing
and maintenance of lifts and escalators; the Public Health and Municipal Services
Ordinance (Cap 132), governing public hygiene and municipal services, including
public sewers, public drains, litter or waste, etc; and the Fire Safety (Commercial
Premises) Ordinance (Cap 502), providing better protection from the risk of fire for
occupiers and users of certain kinds of commercial premises and covering the statutory
requirements of certain kinds of old commercial premises to improve and upgrade
the fire fighting equipment and installations. There is also the Building Management
Ordinance (Cap 344) which aims at facilitating the incorporation of owners of flats in
buildings or groups of buildings, providing for the management of buildings or groups
of buildings and for matters incidental thereto or connected therewith. The Occupiers
Liability Ordinance (Chapter 314) governs the obligations of occupiers of properties.
(ii) Orders to rectify unsafe situations

Under the Buildings Ordinance (Cap 123), statutory orders may be served on owners 10.030
to rectify unsafe or undesirable situations such as dilapidation, drainage nuisance,
dangerous slopes or earth-retaining structures, unauthorised building works, fire
hazards and other nuisances. These powers are exercised by the Building Authority. In
addition, when making such orders, the Building Authority may also require owners
to carry out an investigation in order to assess the required remedial measures. Once
an order is issued, the concerned owners or owners’ corporation may then be liable to
prosecution if they fail to comply with the order. Furthermore, such an order will be
registered against the title of the property in the Land Registry and will come to the
attention of potential property buyers before completing transactions.
The commonly encountered orders concerning maintenance of buildings under the 10.031
Buildings Ordinance (Cap 123) are of various types. First, there is the removal order
for unauthorised building works. This is provided for under s 24 of the Buildings
Ordinance and is served upon the registered owners of a property where unauthorised
building works are located. Usually the owners are required to comply with the order
within 60 days. Second, there can be an order for investigation under s 26A of the
Buildings Ordinance, which requires detailed investigation by an authorised person
to identify and report on the extent and the nature of the dilapidation or defects when
earlier signs of them are shown. Third, the Building Authority may issue a repair order
under s 26 of the Buildings Ordinance requiring the carrying out, possibly under the
supervision of an authorised person, of repair works to buildings with serious defects
likely to cause risk of injury or damage, usually within a six-month period. Fourth,
an order for investigation and repair may be made under s 27A of the Buildings
Ordinance in respect of dangerous hillsides or under s 27C of the Buildings Ordinance
regarding water pipes, drains or sewers laid in slopes. Such orders may require the
owners to carry out investigations and submit remedial proposals for approval via an
authorised person and to carry out the remedial works in a specified period of time.
Also, there is an order for investigating and repairing the drainage installations or
drainage system under s 28 of the Buildings Ordinance, where there are defective or
inadequate drainage installations or a drainage system that causes nuisance. There is

also closure orders under s 27 of the Buildings Ordinance, which is can be illustrated
by Building Authority v Cyber Trade Trading Ltd.30
(iii) Compliance with orders

31
10.032 In Liem Hung v HKSAR, , the registered owners of a three-storey house in the New
Territories with a retaining wall just beyond the perimeter of the property, appealed
against the conviction for failing to comply with the last order from the Building
Authority under s 27A of the Buildings Ordinance (Cap 123) to investigate, analyse
and report on the wall and to submit remedial proposals. Under s 40(1B)(b) of the
Buildings Ordinance (Cap 123), any person who without reasonable excuse, fails to
comply with an order served on her or him is to be guilty of an offence. The owners
employed an authorised person who made a visual inspection of the wall and claimed
that the wall was safe. The Hong Kong Court of Appeal did not accept that the owners,
in these circumstances, had taken all the reasonable steps to comply with the order.
10.033 In complying with such orders, it should be noted that, as held in Ho King-Kwan v
Attorney General,32 no legitimate expectation is generally created, for example, by a
letter from the Building Authority confirming compliance with a notice requiring the
removal of an illegal structure that no further enforcement measures would be taken
by the Authority in respect of the same structure.
10.034 In 1999, the Buildings Department launched large scale unauthorised building works
clearance operations called ‘Blitz’ mainly aiming at the clearing up of these works on
external walls of buildings. Since 2000, the Buildings Department has also launched
a coordinated maintenance-of-buildings scheme in various districts, coordinating
other relevant departments in surveying target buildings and determining the scope
and nature of improvement works required so as to ensure efficiency and cost-
effectiveness to owners. Such departments include the Home Affairs Department, the
Fire Services Department, the Electrical and Mechanical Services Department, Food
and Environmental Hygiene Department and the Water Supplies Department.
3. ENVIRONMENTAL PROTECTION
(a) Governing legislation
10.035 The Environmental Department was established in 1986 as an institution to administer

environmental policies and regulations and to enforce the law. There are now seven
key pieces of legislation governing protection of the environment in Hong Kong:
Air Pollution Control Ordinance (Cap 311), Waste Disposal Ordinance (Cap 354),
Water Pollution Control Ordinance (Cap 358), Noise Control Ordinance (Cap 400),
Dumping at Sea Ordinance (Cap 466) and the Environmental Impact Assessment
Ordinance (Cap 499).
30
[2009] HKEC 841.
31
[2000] HKEC 115.
32
[1986] HKLR 1148.

ENVIRONMENTAL PROTECTION 255
(b) Air pollution
(i) Scope of Air Pollution Control Ordinance (Cap 311)

The Air Pollution Control Ordinance (Cap 311) controls pollution from stationary 10.036
sources such as industry, commercial operations and construction work. It establishes
air control zones that are monitored by the Government and sets up a licensing system.
Operations that belong to one of the stipulated processes, such as those involving
the open burning of construction wastes, are under the control of licenses issued by
the Environmental Protection Department. The Air Pollution Control Ordinance also
regulates mobile sources by requiring petrol retailers to take all reasonable steps to
stock and sell unleaded petrol.
Under the statutory scheme, the air control authority is empowered to issue abatement 10.037
notices to anyone causing air pollution from a process or machinery and can direct
the reduction or discontinuation of such emissions. The sanction is prosecution
for the statutory offence. A person may appeal to the Air Pollution Control Appeal
Boards set up under s 31 of the Air Pollution Control Ordinance (Cap 311) if the
person is aggrieved by such a decision, requirement or specification in relation to
the abatement notice.
(ii) Application of section 9

Under s 9 of the Air Pollution Control Ordinance (Cap 311), technical memoranda 10.038
set out principles, procedures, guidelines, standards and limits for (a) the prediction,
measurement, assessment or determination of air pollution caused, or contributed
to, by the operation of a polluting process (Technical Memorandum for Specifying
Air Quality Objectives for Hong Kong); (b) the issue of air pollution abatement
notices for such pollution; and the determination of whether or not an air pollution
abatement notice is being complied with (Technical Memorandum to Issue Air
Pollution Abatement Notice to Control Air Pollution from Stationary Processes).
Detailed criteria and scientific methods are set out in these statutory standards and
guidelines. For instance, different standards and approaches are set out, in relation
to the issue of abatement notices to control air pollution, for the determination of
whether air pollution is: a nuisance; prejudicial to health using health protection
concentration levels; or prejudicial to health other than according to health
protection concentration levels. As the name suggests, the purpose of the health
protection concentration levels are for protecting health and outlining the acceptable
level of concentration of individual chemical compounds (listed out in the table
annexed to the memorandum). Also, when determining whether the emission of any
air pollutant from a stationary source has caused or contributed to the existence or
imminence of a nuisance; regard should be given to a list of factors including deposit
of dust, grit or particles of any kind; objectionable odour; staining, corrosion, or
damage of any building, plant, equipment or materials; irritation of eye, noise, skin
or any sensory discomfort; disturbance of normal activities by the colour or opacity
of the emission; effect on public safety; and other effects that are unreasonable for
members of the public to suffer.

10.039 The case of Asia Dyeing Co Ltd and Others v The Authority (Appointed Under The Air
Pollution Control Ordinance, Cap 311)33 illustrated that the statutory procedures for
issuing notices have to be strictly followed. In that case, a notice given to the owners
of chimneys and plant under s 9 of the Air Pollution Control Ordinance (Cap 311) was
held invalid as failing to state clearly in the notification whether the nuisance currently
existed or was imminent.
10.040 On the other hand, as held in Clean Air Foundation Ltd & Another v Government of
HKSAR,34 the Government policies on air pollution were not amenable to review.
10.041 Contravention of the Air Pollution Control Ordinance (Cap 311) can result in criminal
liability.35 Such offences under the Air Pollution Control Ordinance may be ones of
strict liability; though a defence of due diligence may be provided.
(iii) Pollutants controlled by statute

10.042 The pollutants under statutory control are wide ranging. In Teng Fuh Co Ltd v Air
Pollution Control Appeal Board and Another,36 an importer of dried shark fins stored
large quantities of shark fins at its premises, open to the street. Following an inspection
by the Environmental Protection Department, an air pollution abatement notice was
issued under s 10 of the Air Pollution Control Ordinance (Cap 311) on the basis that
air pollution was being imminently caused or contributed to by a polluting process.
The notice was subsequently upheld by the Air Pollution Control Appeal Board. The
importer applied for judicial review and argued on its appeal that the definition for a
polluting process under s 2 of the Air Pollution Control Ordinance required there to be
some activity by the importer – mere passive storing was not enough, and that such air
pollution was in any case not imminent. The Hong Kong Court of Appeal dismissed
the appeal and held that on a true construction, passive storing could amount to a
polluting process and that air pollution was imminent if it could reasonably have been
anticipated on the basis of existing facts that the mischief was foreseeable. The court
observed in this case that the odour was imminent in that the odour would increase
when the quantity of sharks fins stored increased; when the number of customers at
the premises increased, resulting in the doors to the premises being open for longer
periods and more of the odour escaping; and at the onset of warmer weather.
(c) Noise control
(i) Scope of the Noise Control Ordinance (Cap 400)

10.043 Many instances of pollution are related to noise. Noise pollution is controlled by
the Noise Control Ordinance (Cap 400) and its scope covers both neighbourhood
noise and noise from construction, industrial and commercial activities. In relation
to industrial and commercial noise, specified statutory limits and a system of noise
33
[1990] 1 HKLR 263. See also Asia Dyeing Co Ltd And Others v The Authority (Appointed Under The Air
Pollution Control Ordinance, Cap 311) [1990] 1 HKLR 263.
34
[2007] HKEC 1356.
35
HKSAR v Li Li Mua (2001) 4 HKCFAR 123.
36
[2001] 3 HKLRD 304.

abatement notice similar to that for air pollution is in place. So far as construction
noise is concerned, noisy work is restricted to weekdays and normal hours of work,
unless there is a granting of a noise permit covering the same. Certain equipment,
such as hand-held percussive breakers or air compressors, needs to comply with noise
emission standards and be issued with a noise emission label from the Environmental
Protection Department. For percussive pile-driving operations, these are only allowed
on weekdays in limited hours and need to have approval by way of a noise permit.
There are statutory standards and guidelines issued to govern noise pollution, which 10.044
set out detailed criteria and scientific methods for assessing compliance with the
statutory requirements. These include the Technical Memorandum for the Assessment
of Noise from Places other than Domestic Premises, Public Places or Construction
Sites; Technical Memorandum on Noise from Construction Work in Designated Areas;
the Technical Memorandum on Noise from Construction Work other than Percussive
Piling; and Technical Memorandum on Noise from Percussive Piling.
(ii) Noise abatement notices

The power to issue a noise abatement notice is derived from s 13 of the Noise Control 10.045
Ordinance (Cap 400). In Step In Ltd v Noise Control Appeal Board and Another,37 a
bar was operating in a building that was located in an area where there were a number
of pubs and restaurants. Following complaints by residents of the building, the noise
control authority issued a noise abatement notice requiring the bar to ensure that the
noise from the bar was not audible between 11 pm and 7 am. The bar’s appeal to the
Noise Control Appeal Board was dismissed and it applied for judicial review of that
decision. One argument was whether the imposed limit of “not audible” was beyond
statutory powers because it was not prescribed under the Noise Control Ordinance
(Cap 400) or by the technical memorandum issued thereunder. It was held that
there could be a limit or standard of noise specified, requiring the person served to
ensure that noise emanating from his premises did not exceed the limit or standard so
specified and that the section conferred a wide discretion with regard to such limit or
standard and did not oblige the authority to set a decibel standard or even adopt a limit
that was based on an objective assessment. On appeal, the Hong Kong Court of Appeal
overruled this approach and held that such a notice was not properly issued.38 In Noise
Control Authority & Another v Step In Ltd,39 the Hong Kong Court of Final Appeal
overturned the decision of the Hong Kong Court of Appeal. It was held that it was not
beyond the Noise Control Authority’s power to impose a requirement prescribing a
limit not expressed in decibels since s 10(1) of the Noise Control Ordinance provided
for the issuing of technical memoranda setting out “guidelines” as well as “standards
and limits” and the technical memoranda directed the Authority to follow its directions
“generally”.40 Hence, the technical memoranda limits are not mandatory in all
37
[2003] 3 HKLRD J25.
38
See Step In Ltd v Noise Control Appeal Board [2004] HKEC 662. See also Step In Ltd v Noise Control Appeal
Board [2003] 3 HKLRD J25.
39
(2005) 8 HKCFAR 113.
40
Here, the Hong Kong Court of Final Appeal held that the requirement was entirely certain, reasonable and clearly
within the power conferred by s 13(2)(a) of the Noise Control Ordinance (Cap 400).

circumstances and there is nothing in the Noise Control Ordinance which confines the
Noise Control Authority’s powers to specifying a limit or standard only prescribed by
the Noise Control Ordinance or the technical memoranda.
10.046 Indeed, the Hong Kong Court of Appeal observed that the legislation did not mandate
it to be guided by the memorandum when specifying the limit or standard in the notice
as illustrated in the case of Secretary for Justice v Tak Yue Restaurant Ltd.41 Also, as
in HKSAR v Poly Gain Enterprises Ltd,42 once the requirement had been complied
with, the notice was discharged and would not have any further legal effect. Thus, if
excessive noise levels are found to emanate from the premises after such discharge, a
fresh notice must be served.
10.047 In the case of HKSAR v Paul Y – ITC Construction Ltd,43 the contractor was charged
with causing equipment to be used in respect of which a construction noise permit
was not in force. The offence was contrary to ss 6(1)(a) and (5) of the Noise Control
Ordinance (Cap 400). The Hong Kong Court of Appeal observed that it would have
been a defence for the contractor to prove that it believed for good and sufficient reason,
though erroneously, that there had been compliance with the statutory requirements.
This case was considered in HKSAR v Hop Shing Loong Lighting Ltd,44 where it was
remarked that the mere fact of engaging a subcontractor to do the work could not allow
the contractor to escape liability and to allow a due diligence defence here would be
absurd.
(iii) Other controls on noise pollution

10.048 Issues of noise pollution control may also arise in a quite different setting. In Secan
Limited v Attorney General of Hong Kong,45 a developer entered into an agreement
with the Government to carry out substantial redevelopment at Ap Lei Chau, part of it
for residential blocks called South Horizons alongside a road leading towards proposed
industrial areas. Under a condition of the agreement, the developer was to implement
such ameliorative measures as deemed necessary by the Director of Environmental
Protection. After various discussions between the developer and the Environmental
Protection Department, the Director insisted that the developer build a noise barrier;
otherwise permission to assign the flats would be refused. In finding that the power
had been validly exercised, the Hong Kong Court of Appeal held that the Director
of Environmental Protection was empowered to require ameliorative measures to be
implemented, though the Director was bound to act in good faith, exercise judgment
and not act capriciously.
10.049 Like other environmental legislation, contravention of the Noise Control Ordinance
(Cap 400) can bring criminal liability.46
41
[1998] 1 HKC 236.
42
[1999] HKLRD 403 (Yrbk).
43
[1998] 2 HKLRD 35.
44
[1998] HKEC 852.
45
[1995] 2 HKLR 523.
46
HKSAR v Woo Carrie [2005] HKEC 12.

(d) Water pollution
(i) Applicable legislation

There are various pieces of legislation governing water pollution in Hong Kong waters, 10.050
such as the Dumping at Sea Ordinance (Cap 466)47 and the Buildings Ordinance
(Cap 123). The principal legislation governing water pollution in Hong Kong is the
Water Pollution Control Ordinance (Cap 358), which prohibits the discharge of
poisonous or noxious matter into Hong Kong waters. Indeed, all discharges, other than
domestic sewage to a foul sewer or unpolluted water to a storm drain, are controlled
by an effluent discharge system. Such a licence under the system will stipulate the
permitted physical, chemical and microbial quality of the effluent; such details of the
effluent standards are set out in the statutory standards and guidelines. The key standard
is the Technical Memorandum Standards for Effluents Discharged into Drainage and
Sewerage Systems, Inland and Coastal Waters (Cap 358AK), issued under s 21 of the
Water Pollution Control Ordinance. The standards apply to effluents discharged under
licences under ss 15, 16 and 20 of the Water Pollution Control Ordinance. The Director of
Environmental Protection is to consult this memorandum when fixing the conditions that
will be included in a licence and it is expressly stated that the Director of Environmental
Protection will not normally impose conditions that are more stringent than those in the
memorandum, unless with good reason. Standards imposed will require the effluent to
be cleaner than the water that the user takes and the memorandum sets standards for
effluents that differ in different areas and between surface waters and sewers.
(ii) Obligations of licensee

The legislative framework makes it clear that there is an obligation on the licensee 10.051
involved to ensure that the provisions of the licence are not breached. The breach of a
licence condition creates an offence of strict liability, for example, in terms of reg 17B
of the Water Pollution Control (General) Regulations (Cap 358D). In HKSAR v Sunley
Engineering & Construction Co Ltd,48 a foundation works contractor on a construction
site, with a licence pursuant to s 20 of the Water Pollution Control Ordinance
(Cap 358) relating to discharge from the site, was convicted of discharging a substandard
effluent from the site, in breach of the licence conditions. This was contrary to reg
17B(1) of the Water Pollution Control (General) Regulations, which provided that
“a person who contravenes any of the provisions of a licence under the Ordinance
commits an offence”. On the appeal against conviction, at issue was whether on a true
construction, the offence was one of strict liability, with the contractor arguing that
it could not be held liable simply because it held the licence since there was no direct
evidence that such discharge was caused by it and not the main contractor. The court
considered that the offence was not one that could be regarded as truly criminal in
47
See R v Fanta Construction Co Ltd [1996] HKLY 450. See also Town Planning Board v Society For Protection
of The Harbour Ltd (2004) 7 HKCFAR 114.
48
[2001] HKLRD 322 (Yrbk). See also HKSAR v Kwan On Construction Ltd [2009] HKEC 978, which involved
a breach of the condition of a licence by discharging effluent containing suspended solids in excess of that
permitted by the licence. It may be noted that effluent coming out from a construction site into another’s property
may also result in tortuous liability. In Chan Ying Wah v Bachy Soletanche Group Ltd [2005] 2 HKLRD 176, a
rainwater gutter flowed into a pit used for irrigation and caused damaged to crops.

character and it was clearly or by necessary implication the effect of the statute that the
presumption of mens rea could be displaced. The court also observed that the licensing
provisions existed to deal with an issue of social concern, to prevent contractors who
were carrying out development or construction work from uncontrolled discharging of
effluent containing solids that might damage the drainage system; affect the water table;
or pollute streams, rivers and harbours. It was also remarked that, if the prosecution
was required to establish precisely who had caused the discharge, that would place an
impossible burden on them and render nugatory the purpose for which the licence was
issued. As such, the court held that the offence was one of strict liability.
10.052 The conditions of a licence may provide a defence but it may not be easy for one to be
invoked in the usual settings of construction operations. The case of HKSAR v Vibro
(HK) Ltd49 concerns such a condition, the wording of which was that:
“Bypass of treatment facilities shall be prohibited unless it is unavoidable to

prevent loss of life, personal injury or severe property damage or no feasible
alternative exists and the licensee shall inform the authority thereof in writing
and prove to the authority”.
10.053 The contractor for bored piles was convicted after trial for contravention of the general
regulations attached to the Water Pollution Control Ordinance (Cap 358). When a
70-metre bored pile, with 20 metres of ‘super mud’ poured in as temporary support,
was being concreted, a generator broke down. The effect of the breakdown was that
the liquid being pumped up could not be fed through the purifier before the liquid
was reused or discharged. No replacement generator was available from the site and
timing was critical. If the concreting remained suspended for about three hours, the
pile would be declared void. The contractor decided to start up the pouring without
the use of this generator and to discharge the polluted liquid into the public drainage
system. At trial, the contractor’s witness gave considerable evidence about how much
a pile costs and about how much money would be lost if a pile had to be rebuilt
having been declared void. He also gave evidence about possible hypothetical dangers
to persons and property if the piling operation was stopped with only some of the
concrete in place. He, for example, recounted incidents where it had been necessary
for professional divers to be sent into flooded half built bore holes and the inherent
danger in such an exercise. On appeal, the court upheld the finding that the contractor
was in breach of the said licence without any justifiable grounds or good cause.
(e) Solid waste control
(i) Applicable legislation

10.054 Solid waste disposal is regulated under the Waste Disposal Ordinance (Cap 354),50
which prohibits the dumping of waste in public places or on private property without
the consent of the landowner or occupier.
49
[2001] HKEC 1155.
50
See, for illustration, Lam Yuk-Fong v Attorney General [1987] HKLR 263; Hong Kong Racing Pigeon Association
Limited v Attorney General [1994] 2 HKLR 309; HKSAR v Sze Kwan [1999] HKEC 679.

There is also the Waste Disposal (Chemical Waste) (General) Regulation (Cap 354C), 10.055
which controls the production and disposal of chemical waste and the Waste Disposal
(Livestock Waste) Regulations controlling pollution by livestock waste.
Various statutory standards and guidelines are made under the Waste Disposal 10.056
Ordinance (Cap 354). These include the Code of Practice on Livestock Waste
Management; the Code of Practice on the Handling, Transportation and Disposal of
Asbestos Waste; the Code of Practice on the Handling, Transportation and Disposal
of Polychlorinated Biphenyl (PCB) Waste; and the Code of Practice on the Packaging,
Labelling and Storage of Chemical Wastes.
Regulating waste other than from the obvious sources may be wider than the scope 10.057
for which the Waste Disposal Ordinance (Cap 354) was originally intended. In Hong
Kong Racing Pigeon Association Ltd v Attorney General,51 members of the plaintiff
were visited by officers of the Environmental Protection Department and warned that
they should not keep more than 10 pigeons or they would be prosecuted. The plaintiff
sought from the court a declaration that all racing pigeons kept by its members were
not pigeons for the purposes of the Waste Disposal Ordinance. This was refused by the
Hong Kong Court of Appeal; though it was also observed that the primary mischief
addressed was the pollution caused by livestock, particularly, pig waste.
(f) Environmental Impact Assessment
(i) Purpose of legislation

The purpose of the Environmental Impact Assessment Ordinance (Cap 499) is to 10.058
provide for the assessment of environmental impacts of certain projects and proposals.
The carrying out of a designated project, which means a project that causes adverse
environmental impact, is prohibited without an environmental permit. The major steps
for an environmental impact procedure are laid down in the Environmental Impact
Assessment Ordinance (Cap 499).
(ii) Procedure for obtaining environmental permit

In brief, it is required that an application for an environmental permit to construct or 10.059
operate a designated project be made to the Director of the Environmental Protection
Department. A project profile, showing information about the project, how and when
it is implemented, and its broad environmental implications, needs to be submitted.
Then, upon issue to the applicant of a study brief, an environmental impact assessment
needs to be conducted and its results are to be reported in an environmental impact
assessment report in accordance with the requirements of the study brief and the
Technical Memorandum on Environmental Impact Assessment Process applicable to
the study brief. Matters covered include details of mitigation measures, avoidance
of detrimental impacts to the environment and measures for residual impact from
construction. If the submitted report fulfils the statutory requirements, the applicant
may be asked to advertise the project profile for public inspection or to make a
51
[1995] HKLY 1182.

presentation of the report to the Advisory Council on the Environment, which is the
government’s principal advisory body on matters relating to pollution control and
sustainability of the environment.
10.060 The Advisory Council on the Environment is consulted on a wide range of issues relating
to new legislative proposals and the implementation of existing pollution control and
conservation measures. This is an independent advisory committee comprised of
23 members and is a sort of guardian, peculiar to Hong Kong of environmental impact.
10.061 The criteria for approving the report include concerns on attainment and maintenance
of environmental quality; impact caused or likely to be caused to the health or well
being of people, flora, fauna or the ecosystems; the relevant requirements in the
technical memorandum; and comments from the public and the Advisory Council
on the Environment. Once the report is approved, the environmental permit may be
granted, which is the last step in the environmental impact assessment process.52
(iii) Addressing public interest

10.062 As noted in Kowloon Canton Railway Corporation v Director of Environmental
Protection,53 the Environmental Impact Assessment Ordinance (Cap 499) gives the
environmental impact assessment process a legal structure, which, in itself, is not a
process that sits comfortably within a detailed legal framework. Much of its success
depends therefore upon the manner in which it is implemented within the outline
structure provided, assisted by the technical memorandum. The consequence is that
all involved are learning how best the various steps required can be implemented.
There are two main and equally important matters that involve public interest. The
first is the public interest in the protection of the environment upon which the quality
of life in Hong Kong will increasingly depend. The second is the public interest
in ensuring that major designated projects are brought to fruition in a timely and
efficient manner. The time constraints put upon the steps in the process and for the
decisions show that the Environmental Impact Assessment Ordinance aims to satisfy
both interests.
52
As summarised in Shiu Wing Steel Ltd v Director of Environmental Protection (2006) 9 HKCFAR 478, the
process leading to the issuing of an environmental permit is, first, under s 5 of the Environmental Impact
Assessment Ordinance (Cap 499), to submit a project profile which complies with the Technical Memorandum
on Environmental Impact Assessment Process issued by the Secretary for Environment, Transport and Works and
to apply for an environmental impact assessment study brief. The Technical Memorandum sets out the principles,
procedures and requirements for, inter alia, the technical content of a project profile and for deciding whether
an EIA report complies with the study brief. Once a study brief is issued by the Director, under s 6(1), the
second step is to prepare an EIA report in accordance with the requirements of the study brief and Technical
Memorandum. Thirdly, s 6(3) of the Environmental Impact Assessment Ordinance requires the Director of
Environmental Protection to decide within 60 days if the EIA report meets those requirements. If so, it is to be
made available for public inspection, and the Director must advise if a submission to the Advisory Council on
the Environment is required. Fourth, under s 8(3) of the Environmental Impact Assessment Ordinance, within 30
days of the public inspection, the Director is to approve, conditionally approve or reject the EIA report. Finally, if
approved, under s 10 of the Environmental Impact Assessment Ordinance, the applicant can apply for the permit
in order to proceed with the project, which the Director of Environmental Protection can issue subject to any
conditions the Director thinks fit.
53
(unrep, Environmental Impact Assessment Appeal Board No 2 of 2000).

An environmental impact assessment report shall comprise a document or series of 10.063

documents providing a detailed assessment in quantitative terms, wherever possible,
and in qualitative terms of the likely environmental impact and environmental benefits
of the project.
(iv) The granting or refusal of permit

The Environmental Impact Assessment Ordinance (Cap 499) provides a wide 10.064
discretion to grant or refuse an environmental permit and the detailed requirements
in the technical memorandum are relevant considerations in the exercise of such a
wide discretion. The board rationale is to conserve habitats of ecological importance,
to avoid adverse impacts to the maximum extent practicable, or if unavoidable, to
minimise or compensate for such impacts. To achieve this, conditions may be imposed
in granting the permit.
Similar to other counterpart legislation on environmental protection, an appeal 10.065
procedure to the Appeal Board is allowed and a person aggrieved by any decision in
this regard may appeal within time, ie 30 days of the notice of such decision.
The technical memorandum includes guidelines for mitigation measures, maintenance 10.066
plans, environmental monitoring and audit requirements, the technical content of the
project profile, the technical content of the study brief and the environmental impact
assessment report, the decision on whether the designated project is environmentally
acceptable, the decision on whether the environmental impact assessment report meets
the requirements of the study brief and the issue of the environmental permit. The study
brief and the technical memorandum are key documents. The technical memorandum
is the framework of criteria from which a study brief is created; the study brief is
the template of objectives and obligations against which the environmental impact
assessment report is prepared.
Shiu Wing Steel Ltd v Director Of Environmental Protection & Airport Authority of 10.067
Hong Kong concerned a new permanent air fuel farm needed by the Hong Kong
Airport Authority. One of the issues in the judicial review was whether the Director of
Environmental Protection acted lawfully or reasonably in approving an environmental
impact assessment report and allowing the project proponent, ie the Hong Kong
Airport Authority, not to carry out a quantitative risk assessment on instantaneous
release of 100 per cent of a fuel tank’s contents. The court at first instance54 considered
that it would be unduly literal, mechanistic and not in accordance with the objectives
and purposes of the legislation to construe it to mean that all possible scenarios were
required to be taken into account by para 4.4.4 of the Technical Memorandum on
Environmental Impact Assessment Process. The judicial review application was then
dismissed. The case went all the way to the Hong Kong Court of Final Appeal,55
in allowing the application for judicial review of the quashing of the Director of
Environmental Protection’s decisions regarding the permanent air fuel farm proposed
by the Hong Kong Airport Authority, it held that s 6(1) of the Environmental Impact
54
[2004] 1 HKC 581.
55
(2006) 9 HKCFAR 478.

Assessment Ordinance (Cap 499) mandated what the Technical Memorandum and
the study brief in fact required. Therefore, there could be only one meaning of those
requirements and it was for the court to determine this meaning. Given the Technical
Memorandum and the study brief were technical instruments, they were to be
construed, as they would be understood by an expert risk assessor.56
4. SITE SAFETY
(a) Relevant legislation
10.068 Construction activities are notoriously dangerous. Legislation exists, which operates
over and above, and in complement to the common law duties, providing a framework
for the regulation of health and safety at work. The legislation imposes duties on both
the employers and the employees.
10.069 So far as construction sites are concerned, the key piece of legislation is the
Factories and Industrial Undertakings Ordinance (Cap 59). It applies to industrial
undertakings, ie factories, construction sites, catering establishments, cargo and
container handling undertakings, repair workshops and other industrial workplaces.
This piece of legislation imposes general duties on proprietors and employees,
and requires the person having the management and control of a factory or other
industrial establishment to notify the Commissioner for Labour of the particulars
of their operations or construction works. This legislation also prescribes detailed
safety and health standards on various aspects of hazardous work activities,
plants and machinery, processes and substances. A whole series of subsidiary
legislation also exists by way of regulations, such as the Construction Sites (Safety)
Regulations (Cap 59I), which are most closely connected with site safety, and the
recently introduced Factories and Industrial Undertakings (Safety Management)
Regulations (Cap 59AF), which is undertakes to better align the legislation with
current safety management practice.
(b) Duty to reasonably ensure health and safety
10.070 By s 6A(1) of the Factories and Industrial Undertakings Ordinance (Cap 59),57 there
is imposed upon every proprietor, or contractor on a site, a duty to ensure so far
as is reasonably practicable, the health and safety at work of all persons employed
by him. Such a duty is given an extended scope by s 6A(2) of the Factories and
Industrial Undertakings Ordinance to cover the system and arrangement for works;
the information, instruction, training or supervision provided; the maintenance of
access and egress; and the provision and maintenance of the working environment.
56
R v Director of Passenger Rail Franchising, Ex p Save Our Railways [1996] CLC 589; R v Financial Ombudsman
Service Ltd, Ex p Norwich & Peterborough Building Society [2002] EWHC 2379; R v Ministry of Defence, Ex p
Walker [2000] 1 WLR 806; Belize Alliance of Conservation Non-Governmental Organisations v Department of
the Environment [2004] Env LR 38.
57
See, for illustration, HKSAR v Shun Tak Properties Ltd [2009] 3 HKLRD 299 and Imtiaz Perviz v Senibo
Development Ltd [2008] 4 HKLRD G5.

SITE SAFETY 265
The standard in issue is one of reasonable practicability but this has to be interpreted
sensibly with reference to individual activity on site. It is obvious that a safe and
proper system or environment of work cannot exist without a cooperative workforce.
Section 6B of the Factories and Industrial Undertaking Ordinance likewise imposes a
duty on the part of the employees to be careful of the health and safety of co-workers.
Contraventions of these sections constitute the commission of offences with the
criminal sanction of a fine and imprisonment.
Apart from these, there is also the Occupational Safety and Health Ordinance 10.071
(Cap 509) which aims at regulating safety and health at work for all economic activities
(both industrial and non-industrial establishments). The scope has been expanded
to cover offices, commercial premises, educational institutions, hospitals, clinics,
laboratories and other workplaces. This legislation also imposes a general duty of care
on employers, occupiers of premises and employees, and sets down basic requirements
in accident prevention, fire prevention, working environment, workplace hygiene, first
aid, manual handling operation and use of display screen equipment. Under s 6(1)
of the Occupational Safety and Health Ordinance, every employer must, so far as
reasonably practicable, ensure the safety and health at work of all the its employees.
Similar to the framework under the Factories and Industrial Undertaking Ordinance
(Cap 59), it lists out some but not all instances in which the statutory duty is breached.
Contraventions of this section likewise constitute the commission of offences with the
criminal sanction of a fine and imprisonment.
(c) Legislation in operation: examples
The operation in practice of these legislative instruments is illustrated by some recent 10.072
cases. For example, s 2(1) of the Factories and Industrial Undertakings Ordinance
(Cap 59) provided that a proprietor, in relation to any industrial undertaking,
includes the person for the time being having the management or control of the
business carried on in such industrial undertaking and includes also the occupier
of any industrial undertaking. In Chow Cheung Ching v Right Base Construction
& Engineering Co Ltd,58 in relation to the liability for the breach of statutory
duty as a proprietor under reg 10(4) of the Factories and Industrial Undertakings
(Woodworking Machinery) Regulations (Cap 59G), the main contractor argued
unsuccessfully that it was not a “proprietor” for the purpose of the Regulations,
in that the term “occupier of any industrial undertaking” was not a second limb
of the definition, but merely referred to the person for the time being having the
management or control of the business carried on in the undertaking and who was
also in actual occupation. The plaintiff, in that case, was a worker of a subcontractor
who suffered injury when using an electric circular saw, which was fixed on a
bench placed on uneven ground surrounded by debris, with the saw blade not being
guarded. It was held that the definition was inclusive rather than exhaustive and any
interpretation should be liberal and purposive rather than restrictive.
58
[2002] 2 HKLRD 738.

10.073 In Attorney General v Shun Shing Construction And Engineering Co Ltd,59 it was
held by the Hong Kong Court of Appeal that where reg 37(1) of the Construction
Sites (Safety) Regulations (Cap 59I) required the contractor to ensure compliance,
the word “ensure” means “make sure” and, hence, if the prohibited act occurred, there
had necessarily been a failure to ensure that it did not occur. Thus, it seems that the
duty imposed on the contractor is quite a heavy one. Also, in HKSAR v Paul Y – ITC
General Contractors Ltd,60 it was held that, in relation to an uncovered hole, there was
a breach of duty by the contractor under the Construction Sites (Safety) Regulations
for failing to take adequate precautions to prevent a person on site from falling from
a height of two or more metres, though the last inspection of the hole took place just
two days before the commencement of the work.
10.074 Also, in relation to the Occupational Safety and Health Ordinance (Cap 509), it was
held in Wong Wing Chow v Lee Wing Hang and Another61 that there was no breach of
the statutory duty when a construction worker fell because he descended the ladder in
an inappropriate manner with his back to it, when the proper method was to descend
with his body facing it and hands reaching forward and upward to hold the sides of it.
(d) Other safety legislation
10.075 There is other legislation governing safety matters. The Builders’ Lifts and Tower
Working Platforms (Safety) Ordinance (Cap 470) applies to owners or lessees of
builder’s lifts and tower working platforms and regulates the design, construction,
installation, maintenance, testing, examination and use of such work equipment.
The Boilers and Pressure Vessels Ordinance (Cap 56) applies to establishments
using boilers and pressure vessels including thermal oil heaters, steam receivers,
steam containers, air receivers and pressurised cement tanks mounted on trucks
and trailers. It regulates the standards and operation of these boilers and pressure
vessels, requiring them to be registered with the Labour Department and to be
examined before being put into use, and periodically thereafter by an appointed
examiner.
5. IMMIGRATION OFFENCES
(a) Responsibility of employer to check employees’
legal status
10.076 The law requires an employer to take all practical steps to ensure that the job seeker is
lawfully employable. If the job seeker is not holding a Hong Kong permanent identity
card, the law requires an employer to inspect the job seeker’s valid travel document.
59
[1986] HKLR 311.
60
(unrep, HCMA No 347 of 2003).
61
[2003] 3 HKLRD L10. See also Leung Kin Fai v IDS Logistics (Hong Kong)Ltd [2010] 3 HKLRD 267, where it
was held that whether a workplace was safe under the Occupational Safety and Health Ordinance (Cap 509) was
to be decided purely as a question of fact and it was wrong to imply a requirement of foreseeability.

IMMIGRATION OFFENCES 267
Under s 17I of the Immigration Ordinance (Cap 115) any person who is the employer 10.077
of an employee who is not lawfully employable commits an offence and is liable to a
fine of HK$350,000 and to imprisonment for three years. It is a defence in proceedings
for the employer charged to prove that all practicable steps were taken to determine
whether the employee in respect of whom the offence is alleged to have been committed
was lawfully employable and that it was reasonable to conclude that the employee was
lawfully employable.
In Attorney General v Wong Chung-Lee,62 an independent contractor to a garment 10.078
manufacturing factory was unable to secure workers to complete the packaging of
goods in time to avoid the loss of export quotas. He employed 21 visitors who arrived
on two-way permits and were prohibited from taking up any form of employment.
This was discovered upon a police raid. The defendant pleaded guilty to 21 charges of
employing a person not lawfully employable, contrary to s 17I(1) of the Immigration
Ordinance. The Hong Kong Court of Appeal held that the starting point for sentence was
15 months’ imprisonment after trial where one employee was involved, where there
were no circumstances of exploitation and where it was established that the offender
was aware that he was employing an unlawful immigrant or had acted recklessly in so
doing and that this starting point should be increased in cases of multiple employment
and where there was any element of exploitation.
It is obvious that there are serious legal consequences to employing illegal workers. 10.079
In Hong Kong, many construction contracts also spell out expressly that no illegal
workers are to be employed by the contractor or subcontractor. A deterrence system,
reflected in the tender and performance assessment process for contractors engaged or
intended to be engaged in public works, is also in place.
As remarked by the Hong Kong Court of Appeal in HKSAR v Ho Mei Wa:63 10.080
“This factual situation is, we perceive, a common one encountered by the courts.
For our part, we accept that this sentence is appropriate on this factual scenario.
However, we wish to make clear the following points in relation to this sentence
and the facts to which it applies:
(a) It is an immediate custodial sentence, and not a suspended one.

(b) The sentence is applicable to a first time offender.
(c) The relevant employment should be one in relation to the employer’s
commercial or business interests, for example, employment in a
restaurant or shop or construction site. We say nothing about the
applicability of this sentencing guideline to domestic situations nor
have we heard any arguments on this aspect.
(d) The reference to employment on a casual basis means a short term,
temporary and one-off employment. By short term we have in mind
days, not weeks and certainly not months.
62
[1996] 2 HKCLR 159.
63
[2004] 3 HKLRD 270.

(e) As to knowledge, given that all employers of workers in Hong Kong

should by now realize the need to see identification documents before
a person is hired as an employee (such as those types of documentation
referred to in section 17G(2) of the IO), short of deception, it is perhaps
difficult to see how an employer who is found guilty or pleads guilty
to the offence will be able to say that he did not have the requisite
knowledge or was not reckless.”
10.081 Thus, as recently illustrated in HKSAR v Lo Man Wing,64 an immediate sentence of

imprisonment is normally expected for the employer of illegal workers.
64
[2005] 3 HKLRD I5. It was noted that it was incumbent upon every employer in Hong Kong that they must view
the identification documents of a person hired as an employee.

PART II
LAWS IN THE CONTEXT OF
CONSTRUCTION CONTRACTS

1. THE PROCUREMENT PROCESS
(a) Avoidance of dispute
Many potential disputes and claims can be avoided if sufficient planning and 11.001
precaution is put into the pre-contract process. With the complexities and technical
nature involved in construction projects, such disputes and claims may already be
locked in once the contract is entered into if the procurement process has not been
prudently carried out. It is then left only as a matter of when and how such disputes
surface as the construction work goes along.
(b) Tender or negotiation approach
There are two basic approaches to the conclusion of a construction contract. Under 11.002
the first approach, the employer invites tenders, or bids, from contractors to construct
the works and the contract is concluded on the basis of the tender selected by the
employer through formal tender procedures; under the second approach, the employer
negotiates the contract with the selected contractor, without going through formal
tender procedures. Particularly for some government agencies or public entities, the
employer may not have complete freedom of choice with respect to the approach to be
used in concluding the contract in that procurement laws and regulations in place will
often impose limitations.
Negotiation of construction contracts with one or more potential contractors may avoid 11.003
the need to adopt the formalities of the tender procedures. This negotiation approach
may be used when the tender approach is not mandatory, particularly in the private
sectors or works for domestic subcontractors. This approach may also be appropriate
where the works in issue are of a special nature and can only be carried out by limited
number of contractors.
(c) Open versus limited tender system
As for tendering, it can either take place through an open or a limited tendering system. 11.004
For an open tendering system, all interested contractors are invited to submit tenders
for the works, thereby promoting more competition among the tenderers. This system
may also be the more formal, time consuming and costly type of procedure that leads to
the conclusion of construction contracts. In the limited tendering system, only certain
contractors are invited to submit tenders for the works. This provides some competition
among the tenderers, though to a lesser degree than that in an open tendering system.
(d) Rationale for the tendering process
The rationale for tendering is that it replaces negotiation with competition. This 11.005
competitive process is heavily weighted in favour of the employer and requires
investment by each tenderer. The main aim of the system, however, is destroyed if the
employer is at liberty to circumscribe the rules regulating the conduct of the tender
process by accepting an invalid bid.

(e) Pre-qualification
11.006 Whether in open or limited tendering system, tenders may further be restricted to those
that have been qualified by the employer pursuant to its pre-qualification procedures.
The purpose of pre-qualification is to eliminate at the outset those potential contractors
that would not be suitable. This seeks to narrow down the number of tenders that
need to be considered, but maintains the standard of the tenders by managing who
may submit a tender. In order to be pre-qualified, a contractor may be required to
fulfil the capacity requirements for the performance of the contract. These capacity
requirements are usually assessed by considering the contractor’s experience and past
record of performance; its ability to supply the necessary technology; equipment,
materials and services; its financial status and existing contracts in hand; and its
capacity to meet the employer’s other requirements, such as those in relation to safety
or employment of legal labour.
11.007 In some government agencies, the pre-qualification process is effected by way of a list
system, whereby contractors assessed to be qualified to submit a tender for a particular
type or scale of works are managed by including them on various lists. Tenders are
then invited from those contractors who validly remain on the concerned list or lists,
normally by the tender closing date.
(f) Stages in the tendering
11.008 In tendering, the normal stages involved apart from pre-qualification are the
preparation of the tender, an invitation to tender, submission of the tenders,
opening of the tenders, assessment of the tenders and acceptance of a tender.
The tender documents to be provided to prospective tenderers may consist of the
following: instructions to tenderers, the form of tender, conditions of contracts,
technical specifications and drawings. The purpose of the instructions to tenderers
is to provide guidance for the preparation of tenders and to convey information
on matters relating to the evaluation of tenders. The form of tender may call for
the offer of the tenderer to construct the works, as expressed in the tender, and to
conform to the conditions of contract, technical specifications and drawings and
may also require the consent of the tenderer to be bound by the instructions to
tenderers. Also, the form of tender may require the tenderer to set out in detail
all matters in respect of its offer, such as the programme of the works or the price
fluctuation factors. The conditions of contract set out the general contractual
terms adopted by the employer and are usually expressed by a combination of
standard conditions of contract and the special conditions of contract. As to the
detailed requirements of the works, these are commonly communicated by way of
specifications and drawings.
(g) Evaluation of the tenders
11.009 After tenders are received, they are subject to evaluation by the employer. The purpose
of such evaluation is to compare the submitted tenders in order to identify the one that

LEGAL ASPECTS OF PUBLIC PROCUREMENT 275
most closely complies with the employer’s requirements. For projects in the public
sector, there may be mandatory rules or laws applicable that govern the criteria for
evaluating tenders. In evaluating tenders, the tender price need not necessarily be
the most important criterion in choosing among the tenderers and the employer may
need to seek clarification from a tenderer during the evaluation period. The employer
may also hold discussions with the most acceptable tenderer in order to consider any
deviations in the tender from the employer’s design or specifications, or alternatives
in the tender.
(h) Combining tendering and negotiation
In practice, an approach combining tendering and negotiations may instead be 11.010

adopted. Such a practice is more common in the conclusion of subcontracts or
contracts for non-public works. This, for example, is effected, after receiving tenders
submitted from invited contractors, by negotiating with some or all of the acceptable
tenderers. However, special care must be taken in any post-tender negotiations,
particularly where public entities are concerned. Any such discussions with tenderers,
in particular on prices, may distort competition and should be held only for the
purpose of clarifying or supplementing the content of their tenders or requirements
of the contracting entities.
(i) Acceptance of a tender
Acceptance of a tender is commonly effected by a letter from the employer. This letter 11.011
may be termed a letter of intent or simply a letter of acceptance. This normally forms
the basis of the legal relationship between the employer and the contractor, until the
formal execution of the contract. However, the exact legal effects created by this letter
can differ substantially depending upon its wording and as such, have to be examined
in light of all the circumstances in each case.
2. LEGAL ASPECTS OF PUBLIC PROCUREMENT

(a) Principles of government procurement
Procurement of construction works and services by the Hong Kong SAR Government 11.012
and other public agencies represents an important share of the total public spending
and, thus, has a significant role in domestic economies.
Government procurement in Hong Kong is based on the following principles: public 11.013
accountability, value for money, transparency and open and fair competition. In
Hong Kong, most Government procurement of goods and services is handled by
the Government Supplies Department, which is the central procurement agency.
The Government procurement process is governed by the Stores and Procurement
Regulations issued by the Financial Secretary under the Public Finance Ordinance

(Cap 2).1 These Regulations are supplemented by Financial Circulars issued by the
Secretary for Financial Services and the Treasury from time to time. The Stores
and Procurement Regulations cover all stores purchased or acquired on behalf of
the Government, excluding land and buildings, as well as services performed
by contractors for and on behalf of the Government, including construction and
engineering works. As to construction services, they are mainly procured by the
individual works departments, under the general supervision of the Development
Bureau. Contracts are awarded by various tender boards (for example, the Public
Works Tender Board is responsible for works and related contracts below HK$30
million; tenders exceeding that limit are submitted to the Central Tender Board).
Construction services are also procured directly through other public entities such as
the Housing Authority. Unsuccessful tenderers can ask for the reasons their tenders
were rejected. Further, any tenderer who feels aggrieved may lodge a complaint
directly with the procuring entities or to the relevant tender board, the Independent
Commission Against Corruption, or even the Office of the Ombudsman, who is
empowered to investigate a complaint concerning the procedures adopted in invitation
of tenders, in determining the qualifications of the persons who submitted tenders and
the selection of the successful tenderer.
11.014 Moreover, an application for judicial review in accordance with the Rules of the High
Court can also be made to challenge any such decisions. Obviously, unsuccessful
tenderers may also seek to obtain the grant of relief from the court against public
entities under private law, for example for breach of statutory duty or breach of
contract, including declaratory or injunctive relief. In the Australian case of Streamline
Travel Service Pty Ltd v Sydney City Council,2 on the basis of breach of the local
tendering ordinances and contractual obligations resulting from the tendering process,
the unsuccessful tenderers challenged the validity of the council’s decision to accept
the offer of a tenderer who had been short-listed for further negotiations with the
council after the close of tenders and successfully obtained an injunction, albeit that
under the circumstances of this case no tendering contract was found by the court.3
11.015 Challenges to decisions on public procurement may be effected by way of an injunction
against the continuation of a procurement exercise4 or a declaration.5
1
Though Hong Kong is not a sovereign state, it enjoys a high degree of autonomy. Under Art 106 of the Basic
Law, the Hong Kong SAR shall have independent finances. In respect of financial matters, the Hong Kong SAR
is its own sovereign. Article 110 of the Basic Law provides that the monetary and financial systems of the Hong
Kong SAR shall be prescribed by law. Accordingly, the Public Finance Ordinance (Cap 2) provides the statutory
framework for the control and management of the public finances of the Hong Kong SAR. Pursuant to Pt III of
the Public Finance Ordinance, the Financial Secretary has made certain administrative regulations, including the
Stores and Procurement Regulations, which cover all stores purchased or acquired on behalf of the Government
of the Hong Kong SAR, as well as services performed by contractors for and on behalf of the Government of
the Hong Kong SAR, including construction and engineering works. See Secretary for Justice v Penta-Ocean
2
(1981) 46 LGRA 168.
3
See Hunter Brothers v Brisbane City Council [1984] 1 Qd R 328 but contrast Maxwell Contracting v Gold Coast
City Council [1983] 2 Qd R 533.
4
See B2Net Ltd v HM Treasury (2010) 128 ConLR 53 and Morrison Facilities Services Ltd v Norwich City
Council [2010] EWHC 487 (Ch).
5
See European Commission v Ireland (C-456/08) [2010] PTSR 1403.

(b) Judicial review
In the context of challenge under public law, judicial review provides the means by 11.016
which judicial control of administrative action is exercised. It is the process by which
the Court exercises its supervisory jurisdiction over the proceedings and decisions of
government entities or statutory bodies, who are vested with quasi-judicial functions
or who carry out public acts or duties. Yet, judicial review is concerned with reviewing
the decision-making process itself, rather than the merits of the decision in respect of
which the application for judicial review is made. There are detailed conditions and
procedures with which an application for judicial review has to comply for it to be
validly made. The substantive grounds for intervention are fluid and overlap, yet the
most favoured classifications of grounds for intervention are: illegality, irrationality
and procedural impropriety.
For instance, in R v Portsmouth City Council, Ex parte Coles,6 the lowest ranked 11.017
tenderers successfully challenged through a judicial review the council’s decision to
award contracts for building repair and maintenance works, which were contrary to
the requirements in the Public Works Contracts Regulations 1991 made under the
European Communities Act 1972; in R v Enfield London Borough Council Ex parte
TF Unwin (Roydon) Ltd,7 it was held that, in removing a contractor from the approved
list, the council was obliged to give reasons for such a decision. The situation may be
the same even the decision on the award of the contract came from the high authority
of the Government. In CO Williams Construction Ltd v Blackman,8 the contract was
awarded to a rival tenderer by the Barbados cabinet on the recommendation of the
Minister of Transport. On application of a tenderer who put in a lower bid, the court
held that continuation of the proceedings was justified. In Harmon CFEM Facades
(UK) Ltd v Corporate Officer of the House of Commons,9 it was held that damages
for the cost of the tender and any margin could be recovered for a tender stated
to be assessed based on ‘value for money’, rather than ‘lowest price’ or ‘the most
economically advantageous’ as required by public procurement law.
(c) WTO Agreement on Government Procurement
From the international perspective, the World Trade Organisation (WTO) Agreement 11.018
on Government Procurement is an international treaty to which Hong Kong is a party.
It was first negotiated during the WTO Tokyo Round negotiations in 1980 and entered
into force on 1 January 1981. Its objective is to allow international competition
over the business of government procurement as much as possible. Its design is to
enhance transparency of the laws, regulations, procedures and practices in government
procurement and to safeguard against domestic protection or foreign discrimination.
6
(1996) 59 ConLR 114 and R v Tower Hamlets LBC Ex p Luck (t/a G Luck Arboricultural and Horticultural
Services) (1999) 15 ConLJ 235.
7
(1989) 46 BLR 1. See R v Derbyshire County Council Ex p Noble [1990] ICR 808.
8
[1995] 1 WLR 102.
9
(1999) 67 ConLR 1.

11.019 The present agreement took effect on 1 January 1996 and was reached in the WTO
Uruguay Round negotiations in 1994. Its coverage extends to services (including
construction services), procurement at a sub-central level and procurement by public
utilities. The cornerstone of it is non-discrimination and it calls for “no less favourable”
treatment of products, services and suppliers of any party to the agreement than that
given to domestic products, services and suppliers. Furthermore, each party is required
to ensure that its entities do not treat a locally established supplier less favourably than
another locally established supplier on the basis of degree of foreign affiliation or
ownership and do not discriminate against a locally established supplier on the basis
of country of production of the good or service being supplied.
11.020 In the WTO Agreement on Government Procurement, Art X deals with the selection
procedures and provides that:
“[t]o ensure optimum effective international competition under selective

tendering procedures, entities shall, for each intended procurement, invite tenders
from the maximum number of domestic suppliers and suppliers of other Parties,
consistent with the efficient operation of the procurement system”.
11.021 Article XX sets out the requirement to install proper challenge procedures and requires
that:
“[c]hallenges shall be heard by a court or by an impartial and independent review

body with no interest in the outcome of the procurement and the members of
which are secure from external influence during the term of appointment”.
11.022 Hong Kong acceded to the WTO Agreement on Government Procurement on 20 May
1997, which took effect for Hong Kong on 19 June 1997. However, its provisions
are still not part of the domestic legislation in Hong Kong. To what extent decisions
over tenders concerning such public procurement are impacted by the Agreement on
Government Procurement is highlighted in the case of Ngo Kee Construction Co Ltd v
Hong Kong Housing Authority.10
11.023 This case concerns an unprecedented short piling scandal in Hong Kong. In this case,
the piled foundations for two public housing blocks had serious defects and these
were discovered by the Housing Authority in 1999. Such defects led to the complete
demolition of the blocks, upon recommendation of the consultants appointed by the
Authority to investigate the matter. The Authority also set up a panel, as recommended
by the consultants, to investigate the matter and the panel reported, inter alia, that no
further contracts should be awarded to the parties responsible for the problem or to
members of the same corporate group, or any other contracting companies with the
same directors in common with the group. The piled foundation was performed by a
member of a group of companies that specialised in civil engineering projects. The
applicant was a member of the same group of companies but specialised in building
works and was one of the approved contractors on various lists maintained by the
10
[2001] 1 HKC 493.

Authority. In 2000, the Authority announced that the applicant was suspended from
tendering for all the Authority’s projects for 24 months and that such a suspension
would be lifted subject to review and approval after that period. The applicant sought
judicial review of the decision to suspend it from tendering and relied on, inter alia,
the WTO Agreement on Government Procurement.
In dismissing the application and rejecting the argument that the decision was 11.024
amendable by judicial review, Cheung J found that the decision to suspend an approved
contractor from tendering for contracts was a commercial decision but he also went
on to consider the impact of the WTO Agreement on Government Procurement. In his
judgement, he noted that a treaty was not part of the domestic law until and unless it was
incorporated into the law by legislation and individuals could not derive rights from
a treaty but accepted that the ratification of a treaty was an adequate foundation for a
legitimate expectation, in the absence of contrary statutory or executive indications,
that administrative decision-makers would act in conformity with the international
treaty. However, in the present case, Cheung J found that the applicant was not assisted
by it at all as to whether the decision to suspend was a public decision.
In E Bon Building Materials Co Ltd v Hong Kong Housing Authority,11 a supplier, 11.025
who was removed from the Authority’s supply of building material list, applied for
judicial review. Applying Matteograssi SpA v Airport Authority, the court dismissed
the application.
(d) Doctrine of legitimate expectation
Thus, it seems that the door is open for the WTO Agreement on Government 11.026
Procurement to be invoked in a proper case concerning public decision by way of
the doctrine of legitimate expectation in judicial review. In Ng Siu Tung and Others v
Director of Immigration,12 it was affirmed that the doctrine of legitimate expectation
formed part of the administrative law of Hong Kong and that, under this doctrine, where
official conduct has generated a legitimate expectation of a substantive benefit, an
administrative decision based on government policy which frustrated the expectation
may be reviewed on wider grounds, in particular substantive unfairness and abuse of
process. In the Court of Final Appeal judgment, it was held that this doctrine had four
components: first, a legitimate expectation arose from a promise or representation,
the expectation being that the promise or representation would be honoured, ought
to be properly taken into account in the decision-making process, so long as to do
so was within the power of the decision-maker; second, unless there were reasons
recognised by law for not giving effect to legitimate expectations, then effect should be
given to them; third, even if the decision involved the making of a political choice by
reference to policy considerations, the decision-maker had to make the choice in the
light of the legitimate expectation of the parties; fourth, if the decision-maker failed
to comply with the third element, the decision would be vitiated by reason of failure
11
[2004] HKEC 1251.
12
(2002) 5 HKCFAR 1. See also Shiu Wing Steel Ltd v Director Of Environmental Protection (2006)
9 HKCFAR 478.

to take account of a relevant consideration, which constituted an abuse of power.13

To be legitimate, an expectation must be reasonable in light of the official conduct
which was said to have given rise to the expectation. This depended on the conduct of
the relevant public authority and what it had committed itself to, as well as what the
applicants factually expected and what they were entitled to expect.
11.027 The doctrine has been applied in relation to other aspects such as town planning,14
building control15 and government lease enforcement.16
(e) Public versus private decision
11.028 Regarding the aspect of whether a decision is a public or private one, as held by the
Privy Council in Hang Wah Chong Investment Co Ltd v Attorney General,17 the true
test is whether the making of the decision in question amounts to the performance of a
function within the public domain. This has been applied more recently in Hong Kong
and China Gas Co Ltd v Director of Lands,18 where it was held that the decision not to
extend a lease by the Director of Lands, who also took account of a host of competing
public interests, was made in the exercise of his public functions.
11.029 As highlighted in Anderson Asphalt Ltd v Secretary for Justice,19 it may be said that
the Government exists for the benefit of the public, and all discretions and powers of
the Government should be and are expected to be exercised in the public interest and
for public benefit.20 Yet this does not invalidate the distinction between a Government
official performing a public function and the same official performing in his official
capacity an essentially private, purely commercial one, in a role that is no different
in substance from that of an ordinary citizen. Speaking generally, the law is such that
only in the former case, but not in the latter, is the official’s decision reviewable under
public law. The same is true with the decisions of public authorities and statutory
bodies. Thus, in Matteograssi SpA v Airport Authority21 and Ngo Kee Construction
Co Ltd v Hong Kong Housing Authority,22 the courts recognised that what were being
challenged were in reality commercial decisions made by the statutory authorities
concerned, which were no different from commercial ones made by private citizens,
and, in the absence of fraud, corruption, bad faith or breach of law, were not amenable
to judicial review. The facts of these cases can be contrasted with those in Wong Yui Hin
v Hong Kong Arts Development Council,23 where the court held that the Hong Kong
Arts Development Council’s decisions made in an open competition for a sponsored
13
See R v London Borough Council of Newham, Ex p Bibi and Al-Nashed [2001] EWCA Civ 607.
14
See United Grand Ltd v Town Planning Board [2006] HKEC 1971.
15
See King Glare Ltd v Secretary for Justice [2008] HKEC 1976.
16
See Cheung Shing Scrap Metals Recycling Ltd v Director of Lands [2009] HKEC 813.
17
[1981] HKLR 336.
18
[1997] 3 HKC 520.
19
[2010] 5 HKLRD 490. See also Lee Chau Mou v Secretary for Environment Transport and Works [2007] HKEC
1028 and Rank Profit Industries Ltd v Director of Lands [2007] 2 HKC 168.
20
See Rank Profit Industries Ltd v Director of Lands [2007] 2 HKC 168 and Ying Ho Co Ltd v Secretary for Justice
(2004) 7 HKCFAR 333.
21
[1998] 2 HKLRD 213.
22
[2001] 1 HKC 493.
23
[2004] HKEC 1102.

curatorship of an exhibition representing Hong Kong in an international visual arts

exhibition were amenable to judicial review.24
(f) Review Body on Bid Challenges
It should be noted that the invitation to tender may express that it is covered by the 11.030
WTO Government Procurement Agreement, such that the Agreement’s provisions will
apply. Tenders by certain entities in Hong Kong that are covered by the Agreement are
specified in Appendix I of that Agreement, according to value of the tender, and include
those by all government bureaux and departments and some non-government public
bodies including the Housing Authority, the Hospital Authority, the Airport Authority,
the Mass Transit Railway Corporation Limited and the Kowloon-Canton Railway
Corporation. Indeed, a Review Body on Bid Challenges25 has been set up by the Hong
Kong SAR Government to deal with challenges made against alleged breaches of the
WTO Government Procurement Agreement in respect of such tenders and the relevant
procedures for handling bid challenges are set out in the Rules of Operation of the
Review Body, which stipulate a definite time limit for such challenges to be brought.
Such challenges are decided by a three-member panel appointed for the individual
case, which is empowered to recommend corrective measures or compensation that
will be limited to the cost of tender preparation or protest.
In China Harbour Engineering Co Ltd v Secretary for Justice,26 it was highlighted 11.031
that as per Blackpool & Fylde Aero Club v Blackpool Borough Council,27 a tender
inviting authority is bound to consider all valid tenders properly. There was a clause in
this case stating that the failure to comply with a pricing condition “may” invalidate
the tender. The second highest overall scoring tenderer was recommended by the
consultant, as the highest overall scoring tenderer did not comply with the pricing
condition. The Central Tender Board considered the recommendations and decided
24
The court was of the view that the Council was not performing a purely commercial function, or functions that
were merely incidental or ancillary to its main or substantive statutory functions, but it was making decisions
that went to the main or substantive statutory functions of the Council, namely, the promotion and support of the
broad development of the arts by means of grants and participation in international arts events.
25
The Review Body on Bid Challenges was established in Hong Kong on 30 December 1998. For a detailed
introduction to this review body, see Gao H, “The Bid Challenge Procedures under the WTO Government
Procurement Agreement: A Critical Study of the Hong Kong Experience” (2007) 16 PPLR 211.
26
[2007] HKEC 2232.
27
[1990] 1 WLR 1195. In the judgment, Bingham LJ said:
“The invitation to tender may itself, in a complex case, although again not here, involve time and expense
to prepare, but the invitor does not commit himself to proceed with the project, whatever it is; he need not
accept the highest tender; he need not accept any tender; he need not give reasons to justify his acceptance or
rejection of any tender received. The risk to which the tenderer is exposed does not end with the risk that his
tender may not be the highest or, as the case may be, lowest. But where, as here, tenders are solicited from
selected parties all of them known to the invitor, and where a local authority's invitation prescribes a clear,
orderly and familiar procedure – draft contract conditions available for inspection and plainly not open to
negotiation, a prescribed common form of tender, the supply of envelopes designed to preserve the absolute
anonymity of tenderers and clearly to identify the tender in question, and an absolute deadline – the invitee
is in my judgment protected at least to this extent: if he submits a conforming tender before the deadline he
is entitled, not as a matter of mere expectation but of contractual right, to be sure that his tender will after the
deadline be opened and considered in conjunction with all other conforming tenders or at least that his tender
will be considered if others are.”

instead to award the contract to the highest overall tenderer. At first instance, the judge
dismissed the plaintiff ’s claim and concluded that all bidders had been treated equally
and fairly; and that the highest overall scoring tenderer’s bid, whilst not compliant
with the conditions, had not been invalidated. The Hong Kong Court of Appeal upheld
the decision and noted that since “may” did not mean “must”, the discretion not to
invalidate the other tenders that did not comply with the pricing formula was allowed
to be exercised.
(g) Restricted tender arrangements
11.032 On the other side of the coin, contractors, particularly suppliers, sometimes enter into
agreements with others, restricting their prices or otherwise limiting their freedom to
tender. Agreement of these types may distort competition but the position in Hong
Kong is primarily governed by the common law.
11.033 As such, agreements between contractors limiting their rights to tender are commonly
treated as a restraint of trade, as illustrated in Thorsten Nordenfelt v Maxim Nordenfelt
Guns and Ammunition Co Ltd.28 They are generally invalid unless they are supported
by consideration and are reasonable such that they are enforced by the Court in the
interests of the parties and the public.29 As in North Western Salt Co v Electrolytic
Alkali Co,30 it was held that the parties were regarded as the best judges of what
was reasonable between themselves. In Rawlings v General Trading Co,31 a knock-
out agreement at an auction was held not illegal; in Metcalf v Bouck,32 an agreement
between two contractors that one should not tender was enforced by the court. There
are, however, contrasting views in other jurisdictions. See, for example, the South
African case of Negugebauer & Co Ltd v Hermann,33 Supreme Court of South
Appellate Division, 13 August 1923, where the question was broached as to the
requirements of good faith and the plaintiff was held to have conspired with others to
eliminate competition in reaching an agreement with others present at a public auction
for the sale of piping to sell them as much piping as they wanted at the rate paid by the
plaintiff, up to a maximum price.
28
[1894] AC 535. In the judgment, Lord Macnaghten said:
“It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable – reasonable,
that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the
public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed,
while at the same time it is in no way injurious to the public.”
See also Greig v Insole [1978] 1 WLR 302 and Pharmaceutical Society of Great Britain v Dickson [1970]
AC 403.
29
As explained in Hummingbird Music Ltd v Acconci [2010] 1 HKLRD 587, a contract was not regarded in law as
being in restraint of trade simply because it tied the parties during the continuation of the contract. The law had
always favoured free trade and the doctrine of restraint of trade as it applied to contracts was a corollary of that:
there was a distinction between contracts which were, in effect, in furtherance of trade and those which were in
restraint of trade.
30
[1914] AC 461. See Sit Kam Tai v Gammon Iron Gate Co Ltd [2010] HKEC 1207. See also Dawnay Day & Co
Ltd v de Braconier d'Alphen [1998] ICR 1068.
31
[1921] 1 KB 635. See Norris v United States [2008] 1 AC 920.
32
(1871) 25 LT 539.
33
1923 AD 564. See also Brisley v Drotsky [2002] ZASCA 35.

INVITATION TO TENDER AND TENDERING 283
In such cases where the employer’s interests are adversely affected by collusive 11.034
or restrictive tendering arrangements, unless there has been an agreement or
warranty from the tenderers against so doing, it seems that the employer is likely
to be without effective remedy at common law. An action based on conspiracy will
probably fail, if it is established that the predominant aim is to further or protect
one’s own interests.
Also, the issue of illegality may come into play. In Sit Kam Tai v Gammon Iron Gate Co 11.035
Ltd,34 the court held that the Hong Kong Housing Authority and the main contractors
were cheated into believing that the tendering system was working and that market
forces were at play by a cartel of suppliers of iron gates, and that the claim brought
pursuant to the agreement was to be disallowed on the grounds that the agreement was
illegal and contrary to public policy.
3. INVITATION TO TENDER AND TENDERING

(a) Invitation to treat
In general terms, unless the agreement is a mere agreement to contract or to negotiate, 11.036
which is not enforceable in law as illustrated in Courtney and Fairbairn Ltd v Tolaini,35
when the agreement reached between the contractor and the employer is merely for
the contractor to carry out works, the employer will still have to pay a reasonable
sum. Thus, to enable the employer to obtain a fixed or ascertainable price for works,
the employer will usually seek a quotation or tender from the contractor. The request
or invitation to the contractor to submit a tender or quotation is normally, in law, an
invitation to treat.
(b) No set formalities in construction contracts
A construction contract generally requires no set formalities. The contractor’s offer 11.037
to carry out the works is usually called the tender. This may result from negotiation
with or an invitation to tender from the employer. When the contract is formed
through negotiation, the general law of contract will apply. Thus, the rules governing
the offer and acceptance are in operation. It is therefore a matter of construction and
interpretation of the course of negotiations and the relevant documents to determine
whether, when and what agreement has been reached between the parties.
Indeed, many construction contracts, particularly those for works of smaller scale, 11.038
may be concluded informally with a selected contractor. In contracts for works of
larger scale, it is common and normal that competitive tendering is adopted and an
34
[2010] HKEC 1207.
35
(1974) 2 BLR 97. See Holloway v Chancery Mead Ltd (2007) 117 ConLR 30; WN Hillas & Co Ltd v Arcos
Ltd (1932) 43 Lloyd’s LR 359; Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297;
and Walford v Miles [1992] 1 AC 128, but contrast Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24
NSWLR 1. See also Hyundai Engineering & Construction Co Ltd v Vigour Ltd [2005] 3 HKLRD 723.

invitation to tender is extended to more than one contractor for the carrying out of the
works in order to obtain a firm offer from the contractor. A firm offer is one that is
capable of being accepted and converted into a binding contract.
11.039 An offer to carry out the works may come from the contractor in the form of an
estimate or a quotation, or in the form of a tender in a more established contractual
arrangement. In Croshaw v Pritchard and Renwick,36 it was held that an estimate
provided in response to an invitation to tender based on drawings and specifications
amounted to an offer which could be accepted by the plaintiff.
(c) Acceptance must be pertinent and unambiguous
11.040 Acceptance of the tender on the part of the employer must be pertinent to all essential
terms. A contract will not arise in circumstances of an “agreement to agree”. The
acceptance of the tender must also be definite and unambiguous in its terms if its
acceptance is to conclude an agreement enforceable by the law as a contract. In Peter
Lind & Co Ltd v Mersey Docks & Harbour Board,37 there was no concluded contract
where there were alternative tenders for the construction of a freight terminal, one on
a fixed-price basis and another one on a cost-plus basis, and the acceptance merely
referred to ‘your tender’ without specifying which one.
(d) Employer not obligated to accept any tender
11.041 Many tenders for construction works in Hong Kong contain an express exclusion of
the employer’s obligation to accept the lowest or any tender. This is strictly speaking
not necessary since, in general, there is no obligation in law to accept the lowest or
any tender. However, in competitive tendering, there may be obligation on the inviting
employer to consider any conforming tender submitted, failing which there could
be a breach of contract on the part of the employer. In Blackpool and Fylde Aero
Club v Blackpool BC,38 in relation to an invitation from an airport owner to tender
for a three-year concession from seven parties to operate pleasure flights from the
airport, the invitation to tender stated that tenders received after noon would not
be considered. The tenderer placed its tender in the designated letter box at 11 am
but the letter box was not cleared at 12 pm by the defendant’s staff. The tenderer’s
tender was regarded as late and was excluded from consideration. It was held that
the submission of a tender, in itself, created a binding contract to consider any tender
properly submitted, failing which was a breach of contract. In Williams Roffey Bros &
36
(1899) 16 TLR 45. See also Megalift Pty Ltd v Terminals Pty Ltd [2009] NSWSC 324.
37
[1972] 2 Lloyds Rep 234. See Mast Electrical Services v Kendall Cross Holdings Ltd [2007] EWHC 1296
(TCC).
38
[1990] 1 WLR 1995. See Profit Boat Development Ltd v Craft Projects (HK) Co Ltd [2007] HKEC 1615 and
Kenworth Engineering Ltd v Airport Authority [2002] 1 HKLRD 796. See also Dore v Leicestershire County
Council [2010] 25 EG 102 (CS); JB Leadbitter & Co Ltd v Devon County Council (2009) 24 ConLR 135; and
Latchin (t/a Dinkha Latchin Associates) v General Mediterranean Holdings SA [2003] EWCA Civ 1786.

Nicholls (Contractors) Ltd,39 it was remarked that an undertaking given by one party
to another in a continuing relationship in order to gain an advantage is not to be denied
contractual effect for want of consideration, notwithstanding that a gratuitous promise
remains unenforceable unless given in the form of a deed.
In the Canadian case of MJB Enterprises Ltd v Defence Construction (1951) Ltd et al,40 11.042
a disappointed tenderer with the next lowest bid challenged the award of a government
works contract by an agency in Alberta for breach of contract. That contract was
awarded to the tenderer whose tender came with a hand-written qualification to the
effect that the unit price was based on type 3 fill and, if type 2 fill was required, an extra
over-price would apply. Despite complaint from other tenderers that such qualification
invalidated the bid, the agency treated the price change as a mere clarification and not
a qualification and asserted that the privilege clause in the tender documents precluded
the obligation to accept the lowest valid tender, stipulating: “The lowest or any tender
shall not necessarily be accepted”. The Supreme Court of Canada dismissed the appeal
and held that, in the face of the privilege clause, the agency was merely obliged to
accept a valid tender, rather than the lowest valid tender. In this case, the price change
was found to be a qualification and, as such, rendered the accepted bid invalid for
acceptance. Therefore, on finding that there was a tendering contract with an implied
term that the agency would only accept a valid tender, the agency was in breach of the
tendering contract.
It should however be noted that whether a tendering contract arises depends on an 11.043
objective view of the parties’ intention, which is determined from the tender documents
and the surrounding circumstances. A tendering contract may, but not necessarily
must, arise from the invitation of tender and the submission of a valid bid.
Even where a tendering contract exists, in such situations, there may still be difficulties 11.044
in the proof of actual damages suffered by the tenderer. It seems from the case of
Harmon CFEM Facades (UK) Ltd v House of Commons Corporate Officer 41that,
39
[1990] 2 WLR 1153. In the judgment, Gladwell LJ said:
“Accordingly, following the view of the majority in Ward v Byham [1956] 1 W.L.R. 496 and of the whole
court in Williams v. Williams [1957] 1 W.L.R. 148 and that of the Privy Council in Pao On [1980] A.C. 614 the
present state of the law on this subject can be expressed in the following proposition: (i) if A has entered into a
contract with B to do work for, or to supply goods or services to, B in return for payment by B; and (ii) at some
stage before A has completely performed his obligations under the contract B has reason to doubt whether A
will, or will be able to, complete his side of the bargain; (iii) B thereupon promises A an additional payment in
return for A’s promise to perform his contractual obligations on time; and (iv) as a result of giving his promise,
B obtains in practice a benefit, or obviates a disbenefit; and (v) B’s promise is not given as a result of economic
duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B’s promise, so
that the promise will be legally binding.”
See also SKK (Hong Kong) Co Ltd v Hon Fung Engineering Ltd [2005] HKEC 114.
40
(1999) 15 ConLJ 455. See also Balfour Beatty Civil Engineering Ltd v Docklands Light Railway Ltd (1996) 78
BLR 42 and Regalian Properties Plc v London Docklands Development Corp (1994) 45 ConLR 37.
41
(1999) 67 ConLR 1. See Montpellier Estates Ltd v Leeds City Council [2010] EWHC 1543 (QB); Henry Bros
(Magherafelt) Ltd v Department of Education for Northern Ireland [2009] BLR 118; SIAC Construction Ltd v
Mayo County Council (C-19/00) [2002] All ER (EC) 272; and Glencot Development & Design Co Ltd v Ben
Barrett & Son (Contractors) Ltd (2001) 80 ConLR 14.

in special circumstances where there is a breach of an implied contract as discussed

above, the measure of damage can be the loss of profit or the costs incurred in tendering.
11.045 Obviously, a tenderer is always at risk of having its tender rejected, either on its merits
or due to some other disqualifying factor personal to the tenderer. In Fairclough
Building v Borough Council of Port Talbot,42 the tender was rejected as a director of
the tenderer was the husband of the principal architect of the employer, the tenderer
was left with no cause of action where some consideration was indeed given to its
tender.
(e) Invitation to tender may be an ‘if’ contract
11.046 Yet, an express offer to accept the lowest tender can be binding and have the effect
of turning the invitation to tender into an offer. It may even be possible to classify an
invitation to tender as a unilateral or ‘if’ contract, being an offer that the offeror, ie the
person making the offer, may be free to revoke until the offeree, ie the person to whom
the offer is made, starts to perform its condition. As such, an invitation to tender may
be revoked at any time prior to the making of the unilateral or ‘if’ contract. This is
illustrated in Harvela Ltd v Royal Trust Co.43 In relation to a sealed competitive tender
for the acquisition of shares, it was held that, in the circumstances, the legal nature
of the invitation to bid was that of a unilateral “if ” contract and, when an offer was
received by the owner of the shares, imposed an obligation on the owner of the shares
to sell them to the one making the higher offer.
11.047 An invitation to tender must be in law an offer rather than a mere invitation to treat
before it can be converted by acceptance into a legally binding contract. In Gibson v
Manchester County Council,44 it was held that a statement that “… the corporation may
be prepared to sell the house to you at the purchase price of £2,725 …” was not an offer.
(f) Distinct from request to develop design
11.048 All of these should nevertheless be distinguished from the situation where the tenderer
is simply asked to develop design, whether solely or in competition with others, for
42
(1992) 62 BLR 86. See City Polytechnic of Hong Kong v Blue Cross (Asia-Pacific) Insurance Ltd [1995] 2 HKLR
103. See also J&A Developments Ltd v Edina Manufacturing Ltd [2006] NIQB 85 and Natural World Products
Ltd v ARC 21 [2007] NIQB 19.
43
[1986] 1 AC 207. In that case, telex messages had been dispatched by the vendors to two parties inviting offers
for the purchase of shares in a company. The invitation stipulated that the offers had to be made in a particular
manner by a stated time on a given date, when the vendors would accept the highest offer. The plaintiff submitted
an offer in a fixed sum, while the second defendant submitted an offer bidding a sum which could be ascertained
only by reference to a rival bid. It was held that the terms of the invitation were such that the vendors were not
entitled to accept the referential bid. In his analysis, Lord Diplock said that the telex was not a mere invitation
to negotiate for the sale of the shares, but that its legal nature was that of a unilateral or “if ” contract to which
the vendors and the recipients of the telex were the promisor and promisees, respectively. The recipients of the
telex did not assume any legal obligation to anyone to do or refrain from doing anything at the time when they
received the invitation, but the vendors assumed a legal obligation to the promisees which was conditional upon
the happening of an event which was specified in the invitation. See Wincheer Investments Ltd v Lobley Co Ltd
[1996] HKLY 252 and Lobley Co Ltd v Tsang Yuk Kiu [1997] HKLRD 863. See also Office of Fair Trading v
Abbey National Plc [2010] 1 AC 696.
44
[1979] 1 WLR 294. See Najeeb Bardissy v Joaquim D’souza [1999] HKEC 59.

the selection by the employer. In Landless v Wilson,45 an architect who accepted the
employer’s invitation to prepare plans for the erection of a building was entitled to
be paid a reasonable sum even if the prepared plans were not adopted for use. Thus,
it would be prudent to examine the matrix of the surrounding circumstances and
language used in order to determine the respective obligation.
(g) Tender for works as employer may order
In rare cases, usually in respect of supply of materials or, sometimes, in subcontracts 11.049
for maintenance or other works during an agreed period, the tender may fall into the
category of tender for works as the employer may order. In such cases, it is sometimes
not an easy question of construction as to whether the employer or purchaser is bound
by the initial general acceptance or whether the liabilities arise only when specific
orders for works or materials are made under the tender. In another sense, there
may only be an obligation to sell or supply materials or to carry out works as per
the stipulated quantities and specifications under the tender, but there is no likewise
obligation to buy materials or allow the carrying out of works at the stipulated or
any quantities. These situations in effect involve tenders for such work or materials
as employers may order. It should also be noted that, depending on the construction
of the tender, the tender may sometimes fall into the category of a standing offer to
the contractor to carry out work during the agreed period if and when the employer
chooses to give an order.
In Percival v London City Council Asylums,46 a contractor submitted a tender agreeing 11.050
to supply all or any of the goods in any quantity specified in the schedule, if and to the
extent such goods were ordered by the employer. The quantities in the schedule were
stated to be the estimated quantities that would probably be required for the periods
of the contract. The employer did not order the specified quantities in the schedule
and the contractor claimed that it was entitled to supply goods to the full amount so
specified. It was held that the employer was under no obligation to order any of the
goods but the contractor was bound to deliver the goods specified as and when it
obtained orders for them from the employer.
(h) Documentation involved in an invitation to tender
As to the documentation involved, for works of larger scales, it is common that the 11.051
invitation to tender is sent out via the professional advisers, such as architects or
engineers, of the employer. The document containing the invitation usually includes
the proposed conditions of contract, plans and a specification and often unpriced bills
of quantities which set out the works to be carried out leaving the price columns blank
for filling in. Normally, similar to the legal effect of an advertisement, an invitation to
tender is not an offer capable of being accepted and converted into a binding contract
for the carrying out of the works.
45
(1880) 8 R 289. See Chartered Brands Limited v Elmwood Design Limited [2009] ScotSC 11 and Site
Preparations Ltd v Secretary of State for Scotland 1975 SLT 41 (Notes).
46
(1918) 87 LJKB 677. See O’Kelly v Trusthouse Forte Plc [1984] QB 90.

11.052 The invitation to tender may also contain statements of fact about matters such as the
quantities, the site or the existing utilities or structures. If a contract is subsequently
concluded, these statements may have no legal effect at all; they may amount to
representations; they may take effect as collateral warranties; they may give rise
to a claim for negligent misstatement; or they may become terms of the concluded
contract. It is a question of fact and law in determining the nature of these statements.
(i) Costs of tendering
11.053 Though the costs of tendering can be considerable, there is no implication that the
tenderer will be paid for its works in this connection. The costs of tendering are
generally borne by the contractor. However, the contractor may be able to recover a
reasonable sum for work done, at the employer’s request, which falls outside the normal
ambit of work in tendering. In William Lacey (Hounslow) Ltd v Davis,47 the contractor
tendered for the reconstruction of the war-damaged premises of the employer, who
led the contractor to believe that it would receive the contract. With that belief, the
contractor prepared various further calculations, schedules and estimates that were
made use of by the employer in negotiation with the authorities. No contract was ever
placed with the contractor and the employer informed the contractor of its intention
to employ another contractor to do the works. In fact, the employer sold the premises.
It was held that the contractor was entitled to a reasonable sum for the work carried
out subsequent to the tender and that there was an implied promise to pay. Similarly,
in Marston Construction Co Ltd v Kigass Ltd,48 where there was express and implied
request by the employer to the contractor to respectively carry out design works and
preparatory works in general due to the tight schedule, the contractor was entitled to
be paid a reasonable sum though no contract was ever placed.
11.054 However, it seems that a distinction has to be made if such preparatory works are
carried out by the contractor for the purpose of enabling the contractor to obtain and
perform the intended contract at a time when there should be no legal obligation by
either party to the other. As illustrated in Regalian Properties v London Dockland
Development,49 the acceptance of an offer to buy a licence for residential development
of land, with the use of the words “subject to contract”, whereby the parties both
agreed that there should be no legal obligation by either party to the other unless and
until a formal contract had been entered into, did not confer any right to payment
for the professional fees incurred in connection with the design for the proposed
development. In such circumstances, the loss would lie where it falls.
11.055 In construction works involving specialist contractors, it is sometimes part of the
tendering process for them to carry out works of design. If no contract is entered into or
47
[1957] 2 All ER 712. See Profit Boat Development Ltd v Craft Projects (HK) Co Ltd [2007] HKEC 1615 and
Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. See also
MSM Consulting Ltd v Tanzania (2009) 123 ConLR 154 and Mowlem Plc v Phi Group Ltd [2004] BLR 421.
48
(1989) 46 BLR 109. See MSM Consulting Ltd v Tanzania (2009) 123 ConLR 154 and ERDC Group Ltd v Brunel
University [2006] BLR 255.
49
[1995] 1 WLR 212. See Adegbulu v Mayor & Burgesses of London Borough of Southwark [2003] 2 P&CR
DG20.

ACCEPTANCE OF TENDER 289
there is no otherwise agreement, such design costs, as part of the costs of tendering, are
not recoverable. This, it seems, is the situation unless the employer does make use of such
design or induce the contractor to perform work outside the normal ambit in tendering.
3. ACCEPTANCE OF TENDER
(a) Unconditional acceptance
An unconditional acceptance of the tender creates a binding contract between the 11.056
employer and the contractor. If new terms are suggested by the acceptance, it cannot
be a valid acceptance and may amount to a fresh or counter-offer. In such cases, there
needs to be acceptance of the counter-offer made to the tenderer before a contract
is concluded. An unconditional acceptance is effective when communicated to the
tenderer. If it is reasonable to accept the offer by post, telex or fax, such an acceptance
is effective when it is posted or sent. When acceptance is by post, subject to otherwise
agreement, special rules apply and acceptance remains and becomes effective as soon
as it is posted, even if it does not eventually reach the offeror.50 In Holwell Securities
Ltd v Hughes,51 in respect of an option to purchase land exercisable by “notice in
writing”, it was held that actual communication of the acceptance was necessary
notwithstanding that the parties contemplated that the post might be used.
(b) Counter-offers
It often occurs in construction contracts, particularly those involving subcontractors 11.057

and contractors, that a tender is followed by a series of counter-offers and negotiations
where each party successively seeks to insert or modify the terms of the contract.
This may sometimes be done by using standard terms or with printed forms. In this
so-called battle of forms, the other party may be taken to have agreed to the terms of
the party who fires the “last shot”, by its conduct in proceeding to perform the contract
without objection. In Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England)
Ltd,52 where the seller of machine tools completed and returned the acknowledgement
slip, stating to be on the buyer’s terms and conditions, it was held as amounting to
acceptance of the buyer’s counter-offer.
(c) Acceptance by conduct
Acceptance can also be by conduct, known to the offeror, showing an intention to 11.058
accept the terms of the offer. Where, without objection, a contractor commences work
50
This is often referred to as the postal acceptance rule, which is an established part of the law of contract. It is yet
an exception to the general rule that the acceptance of a contractual offer has no effect until it is communicated to
the offeror. See Carmarthen Developments Limited v Samuel James Penningto [2008] CSOH 139 and Macdonald
Estates Plc v Regenesis (2005) Dunfermline Ltd 2007 SLT 791.
51
[1974] 1 WLR 155. See Toy State Industrial Limited v Lam Wing Investment Company Limited [1989] HKEC 93.
52
[1979] 1 All ER 965. See Oka Electronics Ltd v Manohar Chugh (t/a Electric & Electronics Industries) [1991]
HKLY 154. See also AE Yates Trenchless Solutions Ltd v Black & Veatch Ltd (2004) 98 ConLR 44.

or an employer allows work to be commenced, after receipt of an offer or counter-offer

for carrying out certain work upon stated terms, it would be taken to have accepted
and be bound by the terms stipulated in that offer. In A Davis & Co (Shopfitters) Ltd
v William Old Ltd,53 the nominated subcontractor, who started works after receipt of
the main contractor’s order without protest or objection, was held to have accepted
the main contractor’s new term introducing a “pay when paid” clause in the order,
notwithstanding that there was no similar term in the tender of the subcontractor to the
employer, which had been accepted by the architect.
(d) Subject to contract
11.059 Where the parties have agreed on the terms of the contract but acceptance is made
subject to a condition that a formal document should be executed, it is a question
of fact whether such a condition is a condition precedent that prevents a concluded
contract from arising. If the purported acceptance is expressed to be “subject to
contract”, or some other words are used which show that further negotiations or events
are contemplated, there is no concluded contract. As noted in Cohen v Nessdale,54
the words “subject to contract” have acquired a definite ascertained legal meaning
and, once introduced, can only cease to apply if the parties expressly or by necessary
implication so agree. There may only be a concluded contract in special circumstances,
where the parties have agreed upon all the terms and merely agree that these shall later
be embodied in a formal document. In Lewis v Brass,55 a statement providing that
“unless and until a formal agreement is prepared and executed this tender, together
with your written acceptance thereof, shall constitute a binding contract between us”
was held to be a statement that a formal contract is being prepared and, as such, did
not prevent a concluded contract from arising.
11.060 In Hong Kong Housing Authority v Hung Pui,56 the defendant’s offer to pay a reviewed
rent for taking on a tenancy agreement for the plaintiff’s restaurant was accepted by
the plaintiff with a letter headed “subject to contract”. The letter of acceptance also
referred to future arrangement for formalities between the parties. In deciding that
the parties had come to an agreement as to the reviewed rent, Godney J remarked
that the words “subject to contract” were not to be lightly ignored but that the court
was entitled to ignore them where it was satisfied on the evidence that they had no
meaning. In this case, there were indeed no formalities to be arranged except, perhaps,
the payment of an increased deposit. It was held that the court was entitled to ignore
them where the parties by their words or conduct have unequivocally demonstrated
that they have agreed. The words may be treated as expunged from the instrument
which contains them.
53
(1967) 67 LGR 395. See Butler Machine Tool Co v Ex-Cell-O Corp (England) Ltd [1979] 1 WLR 401.
54
[1987] 2 All ER 97. In Tang Wai Man v Fotosky Investment Ltd [2006] HKEC 2358, it was noted that, once a
“subject to contract” qualification was introduced into negotiations, it would only cease to apply if the parties
expressly or by necessary implication agree that it should be expunged. See Pakwell Investment Ltd v CRC
Department Store Ltd [2002] HKEC 112. See also Jirehouse Capital v Beller [2009] EWHC 2538 (Ch).
55
(1877) 3 QBD 667. See Behnke v Bede Shipping Co Ltd [1927] 1 KB 649 and Winn v Bull (1877 – 78) LR 7
Ch D 29.
56
[1987] 3 HKC 495. See Pang Nap Pui v Secretary of Justice [2006] HKEC 1454.

ACCEPTANCE OF TENDER 291
In Yeu Shing Construction Co Ltd v Pioneer Concrete (HK) Ltd,57 in respect of a 11.061
quotation for the supply of concrete with the notation “subject to tender awarded”,
the concrete supplier claimed for damages for repudiation of the contract by the
contractor who withdrew from the arrangement. It was held that the quotation did
create a bilateral contract that contemplated a succession of requests for and deliveries
of the concrete. In such circumstances, the doctrine of estoppel cannot come in to
assist in producing legal obligations unless there is created or encouraged a belief
or expectation that the other party will not withdraw from the agreement reached,
which has been relied on. In Attorney General v Humphreys Estate (Queen’s Gardens)
Ltd,58 where the parties had agreed the terms in principle in respect of certain property
transactions, the Privy Council noted that it was not easy to persuade the Court that
the parties had, by subsequent agreement, converted the document, which contained
agreed terms of negotiations but was expressed to be “subject to contract”, into a
contract.
Yet, as highlighted in World Food Fair Ltd v Hong Kong Island Development Ltd,59 11.062
whether the parties intended to enter into a concluded contract was a matter to be
looked at objectively. In this case, it was held in relation to a disputed tenancy that
the payment of a deposit and the giving of access for fitting out works were generally
equivocal acts since such acts were, on the one hand, consistent with the existence of a
concluded agreement, but did not prove its existence; and, on the other hand, were also
acts being done in anticipation of a legally binding agreement. The Hong Kong Court
of Final Appeal was of the view that it was not uncommon for parties in the course of
negotiations which were still incomplete or subject to contract to pay deposits or to
allow builders access to the premises.
(e) Agreement on essential terms
Generally, there is no binding contract unless the parties are agreed on all essential 11.063
terms. In Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd,60 it was held that
there was no enforceable contract because there was no agreement about the price
or any method of ascertaining it. Likewise, there is no concluded contract yet when
the parties stipulate that certain matters are still left for agreement to be made. As
in Mitsui Babcock Energy Ltd v John Brown Engineering Ltd,61 there is, however,
no reason in principle why two parties should not enter into a binding agreement, if
that was their intention, which is to be objectively determined, even though they have
agreed that some proposed terms should be the subject of further discussion and later
agreement.
57
[1987] 2 HKC 187. See also Mui Foon v Land Development Corp [1999] HKLRD 150 (Yrbk).
58
[1987] HKLR 427.
59
(2006) 9 HKCFAR 735. See Champion Ray Ltd v Incorporated Owners of Workingberg Commercial Building
[2006] HKEC 1254.
60
(1975) 2 BLR 97. See World Food Fair Ltd v Hong Kong Island Development Ltd (2006) 9 HKCFAR 735 and
Hyundai Engineering & Construction Co Ltd v Vigour Ltd [2005] 3 HKLRD 723. See also R & D Construction
Group Ltd v Hallam Land Management [2009] CSOH 128.
61
(1996) 51 ConLR 129. See Unruh v Seeberger [2007] 2 HKC 609. See also Tesco v Costain Construction Ltd
[2003] EWHC 1487 (TCC).

11.064 When the contractor commences works in circumstances without a concluded contract
but there was later agreement on the terms, such terms so agreed may have retrospective
effect in relation to works already carried out. In Trollope & Colls Ltd v Atomic Power
Constructions Ltd,62 the contractor began work at the request of the employer and on
the basis of a letter of intent. Thereafter, the form of the general conditions was agreed
between the parties. Disputes then arose as to whether the provisions as to variations
governed the rights of the parties for work done prior to the agreement. It was held
that, as a matter of course, the concluded contract applied not only to the parties’
future obligations but also to what had been done by them in the past – since the date
of the tender – in anticipation of the making of the contract.
(f) Quantum meruit
11.065 When the contractor commences works in circumstances where there is no concluded
contract at all, it is possible that the contractor may be entitled to be paid on a quantum
meruit basis. In The Hong Kong Electric Co Ltd v Cheung Leung Kee (t/a Leung
Kee Construction Co),63 the contractor, when carrying out excavation works, was
informed the electricity cables on the site were damaged and had to be repaired and
diverted. In a letter from the electric company, it seemed to indicate that it was putting
the responsibility on the developer but there was no specific mention as to whose
responsibility the cost of such repairs and diversion would be. If the repairs and
diversion were not carried out, the site would be hazardous. Eventually, the contractor
took up the responsibility of paying for such repair work and claimed from the electric
company the costs for the diversion work. It was held that as the electric company had
permitted the work to be done without objection, the contractor could maintain that the
work was done at its request, such that the contractor could recover its remuneration
on quantum meruit basis. In such cases, the unit rates or basis of remuneration that
would have been included in the contract had it been concluded will be taken into
consideration in determining the reasonable payment, as in Peter Lind & Co Ltd v
Mersey Docks & Habour Board.64
11.066 From time to time building projects proceed without the parties ever getting round to
executing a formal contract. It then becomes necessary to analyse the correspondence,
minutes of meetings and so forth, in order to ascertain whether a contract was ever
concluded. Where performance has been rendered, the court will lean in favour of
finding a contract if it is possible to do so properly.65 If both parties have proceeded
on the assumption that there is in existence a concluded contract governing their
relationship, they may be estopped from subsequently denying its existence.
62
[1962] 3 All ER 1035. See Grand Subject Investment Limited v Mable Road Company Limited [1993] HKEC 27.
See also Haden Young Ltd v Laing O’Rourke Midlands Ltd [2008] EWHC 1016 (TCC) and Northern & Shell Plc
v John Laing Construction Ltd (2003) 90 ConLR 26.
63
[1978] HKLR 287.
64
[1972] 2 Lloyd’s Rep 234. In Mast Electrical Services v Kendall Cross Holdings Ltd [2007] EWHC 1296 (TCC),
it was held that documents which had passed between a subcontractor and the main contractor did not amount to
a construction contract under s 107 of the Housing Grants, Construction and Regeneration Act 1996, as they had
failed to set out, record or evidence all the material terms of the subcontract.
65
See Claymore Services Limited v Nautilus Properties Limited [2007] EWHC 805 (TCC).

WITHDRAWAL OF TENDER 293
(g) Qualified tenders
Qualified tenders refer to those tenders submitted with qualifications or conditions. It 11.067
is usual for the invitation to tender to expressly reserve a right to reject tenders that
are qualified or subject to conditions of any kind. Unless put forward as an alternative
to a separate unqualified tender, there is no tender capable of being accepted by the
employer.
Public entities may be bound by their policy or rules, which preclude the consideration 11.068
of a qualified tender or the acceptance of a qualified tender, at least unless all tenderers
are allowed to modify their tenders to incorporate the same terms or conditions.
In MJB Enterprises Ltd v Defence Construction (1951) Ltd et al,66 a hand-written
qualification, to the effect that the unit price was based on type 3 fill and, if type 2 fill
was required, an extra over-price would apply, was found to be a qualification, rather
than a mere clarification. With the breach of the tendering contract, damages measured
by the loss of profits were awarded to the tenderer with the next lowest bid.
If a qualification is made to a tender, it is important that it is incorporated in the 11.069
contract in clear terms. In Davis Contractors Ltd v Fareham UDC,67 a letter attached
to the tender for the building of 78 houses, stating that it was subject to adequate
supplies of labour being available as and when required, was held not incorporated in
the contract.
4. WITHDRAWAL OF TENDER
(a) Designated period of validity
In general, a tender, being an offer, may be withdrawn by notice to the employer at 11.070
any time before acceptance. However, it is normal to include in the invitation to tender
a requirement that the tender shall remain valid for a designated period of time, as
illustrated in City Polytechnic of Hong Kong v Blue Cross (Asia-Pacific) Insurance
Ltd.68 In that case, the plaintiff invited tenders from several insurance companies to
cover its employees’ medical and life insurance. The tender was required to remain
valid for acceptance within three months after the deadline for submission. The
defendant was invited and did submit a tender before the deadline. Yet, a week after
the deadline and prior to the acceptance by the plaintiff, the defendant gave notice to
withdraw the tender with immediate effect. The plaintiff refused to recognise such a
withdrawal and sent to the defendant a letter of acceptance within the three-month
period. Upon reiteration of the withdrawal by the defendant, the plaintiff entered into
66
[1999] 1 SCR 619. See Balfour Beatty Civil Engineering Ltd v Docklands Light Railway Ltd (1996) 78 BLR 42
and Regalian Properties Plc v London Docklands Development Corp [1995] 1 WLR 212.
67
[1956] AC 696. See Fu Kai Wa v Luk Ngai Ling [2006] HKEC 1505 and Wong Lai-Ying v Chinachem Investment
Co Ltd [1980] HKLR 1. See also Gold Group Properties Ltd v BDW Trading Ltd (formerly Barratt Homes Ltd)
[2010] BLR 235.
68
[1994] 3 HKC 423. See Kenworth Engineering Ltd v Airport Authority [2002] 1 HKLRD 796 and Chong Cheng
Lin Courtney v Cathay Pacific Airways Ltd [2011] 1 HKLRD 10.

a contract with another insurance company at a higher premium and claimed from the
defendant the difference. It was accepted that, in general, an invitation to tender was
no more than an offer to receive bids and any invitee was entitled to withdraw its offer
to tender at any time before acceptance since there was no consideration moving from
the invitor who was the promisee. Yet, in the present case, the format of the invitation
document suggested that a legal obligation was implied on the plaintiff to consider
all conforming tenders and this, in turn, amounted to valid consideration to make all
tenders irrevocable within the period for consideration. Thus, it was held that, in the
circumstances of the case, an implied contract could come into existence binding the
tenderers until the expiry of the period specified by the tender’s terms for keeping the
tenders open for acceptance.
11.071 Such a requirement for the tender to remain valid for acceptance may arise expressly
or impliedly. A tender without a specified timeframe for acceptance will lapse if it
is not accepted within a reasonable time. What is a reasonable time is a question
of fact but, as in Metropolitan Asylums Board of Managers v Kingham & Sons,69 it
seems that reasonable time may not extend after the time, at which the contract is to
commence.
11.072 Also, if consideration has been given to keep the tender open or the contractor, in
special circumstances, is estopped from acting inconsistently with the validity of the
tender, the tender may however not be revoked. In any case, no such revocation is
effective unless and until it has been communicated to the contractor.
(b) Termination of offer
11.073 Apart from lapse of offer and revocation, the tender, being an offer, may also be
terminated by way of rejection, counter-offer, and death. A rejection takes place when
communicated to the offeror and operates to prevent the offer from being accepted
thereafter. Likewise, a counter-offer operates as a rejection, thereby preventing the
offer from being accepted thereafter. In Butler Machine Tools v Ex-Cell-O Corp,70 a
purported acceptance that materially altered the terms operated in law as a counter-
offer. As to death, if an individual who makes an offer dies, the offer cannot be accepted
after he is dead.
(c) Mistake in tender
11.074 If the contractor makes a unilateral mistake in its tender price, or there are individual
errors in pricing or otherwise, it is still bound by such errors unless the employer
is aware of the errors and realises that it is not intentional, prior to acceptance. On
the other hand, an employer who discovers an error in the contractor’s tender cannot
accept the tender and create a binding contract where that error is as to the terms of
the offer.
69
(1890) 6 TLR 217. See Port Jackson Stevedoring Pty v Salmond & Spraggon (Australia) Pty (The New York Star)
[1981] 1 WLR 138.
70
[1979] 1 WLR 401. See Oka Electronics Ltd v Manohar Chugh (t/a Electric & Electronics Industries) [1991]
HKLY 154. See also AE Yates Trenchless Solutions Ltd v Black & Veatch Ltd (2004) 98 ConLR 44.

LETTER OF INTENT 295
5. LETTER OF INTENT
(a) Effect of letter of intent
A letter of intent is a letter communicating an intention to enter into a binding contract 11.075
in the future. In the Hong Kong construction industry, construction works are normally
commenced in advance of the formal execution or signing of the contract. Thus, letters
of intent are commonly engaged in the Hong Kong construction industry and they take
a variety of forms. It is a question of facts of each case whether a letter of intent gives
rise to any and, if so, what liability.
In Turriff Construction Ltd v Regalia Knitting Mills Ltd,71 the employer invited the 11.076
contractor to tender for the design and construction of a new factory at Corby. It was
held that the letter of intent, sent out by the employer following the request by the
contractor at a meeting to cover it for the work it was then undertaking, was regarded by
the contractor as an acceptance of its tender and created an ancillary contract covering
the interim detailed design costs, where works could not begin on site and the whole
project was eventually abandoned. The letter of intent was in the following form:
“As agreed at our meeting of 2 June 1969 it is [our] intention to award a contract
to [you] to build a factory including production, stores, offices, and canteen
facilities to be built in four continuous phases …
All this is to be subject to obtaining agreement on the land, and leases with the
Corby Development Corporation, full building and by-law consent, and the site
investigation being undertaken by [other contractors].
The whole to be subject to agreement on an acceptable contract.”
In British Steel Corporation v Cleveland Bridge & Engineering Co Ltd,72 the letter of 11.077
intent involved in the construction of a bank in Saudi Arabia stated:
“We are pleased to advise you that it is [our] intention to enter into a subcontract
with your company, for the supply and delivery of the steel castings which form
the roof nodes on this project … we request that you proceed immediately with
the works, pending the preparation and issuing to you of the official form of
subcontract.”
It was held that no contract had come into existence between the parties on the basis of 11.078
the letter of intent and the contractor was entitled only to be paid on a quantum meruit
basis. In the judgement of Goff J, it is noted that:
71
(1971) 9 BLR 20. See AC Controls Ltd v BBC (2002) 89 ConLR 52 and Project Consultancy Group v Trustees of
the Gray Trust [1999] BLR 377.
72
7 HKCFAR 79; Comtech Engineering & Consultant Co Ltd v Thorn Security (Hong Kong) Ltd [2003] HKEC
528; and Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering & Construction Ltd
[2003] 1 HKLRD 653.

“As a matter of analysis the contract (if any) which may come into existence
following a letter of intent may take one of two forms – either there may be
an ordinary executory contract, under which each party assumes reciprocal
obligations to the other; or there may be what is sometimes called an ‘if’ contract,
ie a contract under which A requests B to carry out a certain performance and
promises B that, if he does so, he will receive a certain performance in return,
usually remuneration for his performance. The latter transaction is really no
more than a standing offer which, if acted upon before it lapses or is lawfully
withdrawn, will result in a binding contract.”
11.079 Indeed, the effect of a letter of intent depends on the objective meaning of the words
used. There are various possibilities. It may have no binding effect at all; it may take
effect as an executory ancillary contract, entitling the contractor to costs consequently
incurred if the intended contract does not come into existence; it may take effect and
operate as an offer such that if the contractor undertakes the proposed action, it will be
paid a reasonable sum or a stated sum.
(b) Interpretation of obligations
11.080 In cases involving a letter of intent sent from the employer to a nominated subcontractor,
it is important to examine the whole factual matrix, including the commercial
considerations, in interpreting the true nature of the obligations involved.
11.081 In Stent Foundations Ltd v Carillion Construction (Contracts) Ltd (formerly Tarmac
Construction (Contracts) Ltd,73 the subcontractor carried out preparatory work pursuant
to the strength of a letter of intent which indicated that it was required to enter into a
subcontract with the management contractor. No formal subcontract was ever entered
into, and it had been said at progress meetings by the management contractor that it
could not enter into a subcontract with the subcontractor until the main contract had
been signed. It was held that the work by the subcontractor was done under a subcontract
with the management contractor which came into being as soon as the management
contractor concluded the main contract, taking into consideration the conduct of the
parties at the time.
11.082 In Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd,74 the triable issue
involved in a summary judgement application75 was whether there was in fact a
73
(1999) 78 ConLR 188. See Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd [2003] HKEC 210. See
also Bryen & Langley Ltd v Boston [2005] BLR 508; Westminster Building Co Ltd v Beckingham [2004] BLR 16;
and Harvey Shopfitters Ltd v ADI Ltd [2004] 2 All ER 982.
74
[2003] 1 HKC 438. See Lenz-Kran Karl Lenz GmbH & Co v Houston Machinery Co Ltd [2008] HKEC 2005;
Surf Wide Investments Ltd v Lam Kit Yuk Noel [2010] HKEC 164; and Fine Elite Group Ltd v Cheng Wai Tao
[2010] HKEC 630.
75
In such application, the court has to determine two questions: first, whether what the defendant says is believable
as opposed to whether its version of events is to be believed; and secondly, if it is, whether what the defendant
says amounts to an arguable defence in law. In determining the first question, the court should not embark on
a mini trial of the action on affidavit evidence. The burden of proof is not a heavy one. It is not the function of
the court at this stage to assess if a defence will succeed at trial. Insofar as the second question is concerned,
summary judgment will not be granted if there are arguable defences or serious disputes of law.

PRICE 297
subcontract between the nominated subcontractor and the main contractor. In a letter
of intent, the agent of the employer informed the subcontractor that its tender for lift
installation works at a commercial development was accepted by the employer. It
was provided under clause 9 of the letter of intent that the subcontractor would be a
nominated subcontractor to a main contractor to be confirmed later. The subcontractor
was required to take out a performance bond under clause 12 of the letter of intent. It
was also provided at clause 14 that until a formal agreement was prepared and executed
between the plaintiff and the main contractor, the letter of intent constituted a binding
contract between the subcontractor and the employer. No formal subcontract was
concluded between the subcontractor and the main contractor. Relying on clause 14,
the subcontractor sued the employer for payment for completed lift installation works
at the development. The employer asserted that there was a binding subcontract
between the subcontractor and the main contractor such that its obligations under
clause 14 fell away. The employer also argued that the subcontractor was estopped
from denying that a binding contract existed. In giving the employer unconditional
leave to defend, Ma J held that the impact of clause 14 of the letter of intent upon
the employer’s position was a matter that should go to trial. It was remarked that
the common intent of the letter was arguably to commit the subcontractor to the lift
installation works even before the appointment of a main contractor and, commercially,
there was desirability of separate contractual relationships between the employer
and the main contractor and between the main contractor and the subcontractor. In
the judgement, he noted that the true meaning of clause 14 should be taken in the
context of other provisions contained in the letter, particularly clauses 9 and 12 and
general commercial considerations. He also noted that it is important when construing
contracts to look at the whole of the terms and at what is commonly referred to as the
factual matrix. Therefore, it was arguable that clause 14 merely required the existence
of a binding subcontract before the employer’s liability fell away.
(c) Condition precedent
With proper wordings, the terms in a letter of intent may become a condition precedent 11.083
to recovery of compensation. This is what happened in CJ Sims Ltd v Shaftesbury
Plc Ltd,76 where it was held that the statement in the letter of intent required that the
contractor had no right to payment until it had presented a claim substantiated “in full
to the reasonable satisfaction of the employer’s quantity surveyor” in the “unlikely
event of the contract not proceeding”.
6. PRICE
(a) Fixing the price
The price of a construction contract, whether by way of a lump sum or instalments, 11.084
may normally be fixed by the contract in one of two common ways. It may be fixed
76
(1991) 25 ConLR.

at a specified sum, in which case the claim for the amount payable is a liquidated
demand, to which summary judgement may apply after the work was executed, in the
absence of contrary provisions in the contract; or it may be fixed at an ascertainable
sum, usually when the exact extent of the work at the time of the contract is still not
certain, where the contract provides that the price is to be ascertained by measuring
the work done against items in the bills of quantities. The claim here is also for a
liquidated demand if the measurement of the work is purely of an administrative
nature and has been certified. This also covers the situations where adjustment to the
price for changes to the work is provided for with reference to bills of quantities or
schedules of rates in a contract for a lump sum or specified sum. In such a case, the
contractor may also likewise apply for summary judgement when the measurement
has been certified.
(b) Implied term of reasonable rates
11.085 Where a contract has been concluded and there is no agreement reached as to the
price, there may be an implied term that the rates for the work would be reasonable
rates. This right to recover payment rests on an implied promise of the employer that
it will pay for the goods supplied or services rendered at its request, as illustrated in
Astilleros Canarios SA v Cape Hatteras Shipping Co Inc.77 In Peter Lind & Co Ltd
v Constable Hart & Co Ltd,78 where the purchase order provided: “Price fixed until
3 June 1975 – £434,732 29p less 5 per cent discount”, it was held that there was
implied a term that works to be carried out after 3 June 1975 would be at reasonable
rates. A rate at which part of the work done has been paid for without objection from
the contractor can itself be a reasonable rate.
(c) Pricing schemes
11.086 The common schemes for pricing construction contracts in Hong Kong differ
considerably among the broad categories of contractual arrangements in nature and
complexity. The traditional contract forms include that of the fixed price or lump sum
contracts, which are normally used in building works, and that of remeasurement
contracts, which are normally used in civil engineering works. There are also some
non-traditional new forms of contracts such as the design-build or turnkey contracts
and management contracts.
11.087 Pricing depends on the type of contractual arrangement used; the documents available
to the tenderers, which impact on the formulation of the contract price and normally
include drawings in sufficient details; specifications covering the permanent work
and any stipulations as to the working methods of the contractor that may affect the
quality and other performance of the work; and the conditions of contract which seek
to regulate the entire contractual position of the parties.
77
[1982] 1 Lloyd’s Rep 518. See Ying Ho Co Ltd v Secretary for Justice (2004) 7 HKCFAR 333.
78
(1978) 9 BLR 1.

PRICE 299
(d) Lump sum/fixed price contracts
“Fixed price” or “lump sum” contracts are contracts with a fixed price or prices quoted 11.088
for the carrying out and completion of the work as described in the drawings and
specifications. In the absence of express provisions to the contrary, all indispensably or
continently necessary expenditures required in order to complete the described work
will be included in both the contractor’s tender price and in his obligation to complete.
For contracts of this kind no variations to the works, remeasurement of the work or
recalculation of the price are intended. Thus, they are classically referred to as “fixed
price” or “lump sum” contracts.
An example in Hong Kong is the Agreement and Schedule of Conditions of Building 11.089
Contract (Standard Form of Building Contract) for use in Hong Kong, Private
Edition (With Quantities), Second Edition 1976 (May 1979 Revision) issued by The
Hong Kong Institute of Architects. As the name suggests, there is another version that
is described as “Without Quantities”.
Where bills of quantities have not been produced and it is the parties’ agreement that 11.090
only the specifications and schedule of rates are used in lieu of the bills of quantities,
the “Without Quantities” version will be adopted for use. Indeed, the “Without
Quantities” version generally differs from the “With Quantities” version in three
principal aspects. First, there is a provision for the functions of the quantity surveyor
to be exercised by other designated persons; second, the specifications are used to
take up the function of the bills of quantities; third, there is provision for the main
contractor to give the architect a schedule of rates immediately after the contract has
been entered into.
(e) ‘Without quantities’
It is obvious that there are substantial risks imposed on the tenderer under this 11.091
arrangement, whether with or without the use of the bills of quantities. For example,
the risk of any errors in taking off the quantities from the drawings is borne by the
tenderer. Also, the tenderer is also responsible for the potential costs incurred due to
any uncertainties or unforeseen difficulties. The costs of tendering will also have to
cover the costs for producing the quantities. The practical effect is that the contingency
and other allowances are inserted into the tender price by the tenderer.
The advantages to the employer, however, include the saving of costs in working out 11.092
the quantities and shifting the risks to the contractor. This is of particular benefit for
projects of a minor nature or minimal anticipated variations.
(f) ‘With quantities’
For lump sum contracts based on bills of quantities, the lump sum is built up from the 11.093
total items in the bills of quantities and the contractor is required to carry out work
accordingly. In preparing the bills of quantities, standard methods of measurement are
usually engaged and a fully comprehensive design is required as the basis. Thus, the
risk of uncertainty should in theory be lower.

11.094 The quantities and unit rates of the measured items in the bills of quantities serve as
the basis for assessing the costs of variations and interim payments. The drawings
and specifications are the essential documents for assessing the price and completion
obligations of the contractor. It should be noted that it is always a question of
interpretation whether undescribed work is or is not covered by the contractor’s pricing
and completion obligations.
11.095 Usually included at the beginning of the bills of quantities, a preliminary bill has
a preamble setting out the preliminary items of responsibility for any necessary
individual pricing. These preliminary items listed out include the general obligations
of the contractor and the services that it has to provide for carrying out the works,
including, for instance, supervision, care of the works, provision of facilities, safety
measures, etc. The breakdown of the individual items in the bills of quantities is
expected to be realistic and comprehensive and is usually set out in accordance with
the standard methods of measurement.
(g) Remeasurement contracts
11.096 In remeasurement contracts, the tender price is usually based on the stated quantities
in the bills of quantities, though the actual contract sum at the end of the day is
ascertained by using the measured or as-built quantities and the inserted unit rates.
The contract sum is grossed up from the priced bills of quantities in association with
an incorporated standard method of measurement.
11.097 The stated quantities in the bills of quantities are approximate or estimated quantities
only. The contractor is required to carry out the works, which are then measured
and priced at the unit rates in the bills of quantities. This contractual arrangement
provides flexibility for those works, for which by their nature exact quantities cannot
be determined. Such situations occur frequently in relation to civil engineering works,
such as geo-technical works or excavation works.
11.098 Thus, the stated quantities in the bills of quantities are subject to final measurement
during the progress of the works when they are completed. The unit rates in the bills
of quantities are also used as the basis for the valuation of variations. Thus, unlike
“lump sum” contracts, the risk of increase in the as-built quantities from the estimated
quantities lies on the employer.
11.099 There is also another form of measurement contract that is based on schedules of
rates or schedules of prices, instead of the bills of quantities. These may be termed as
schedules of rates contracts and are adopted when the exact ambit of works cannot be
determined at the time of tendering.
(h) Non-traditional contract forms
11.100 There is a growing trend of moving away from traditional contract forms to
using non-traditional forms of contacts, particularly in large-scale infrastructure
projects.

PRICE 301
(i) ‘Turnkey’ or ‘design-build’ contracts

The principle of these contracts is that the contractor offers a package deal service, 11.101
which includes designing, building and, perhaps, even fitting out the project. The
vital distinguishing feature of these contracts is in the provision of the design by the
contractor, which is relied on by the employer. Thus, the employer does not employ
its own professional advisers to produce the design that it requires. Rather, through
negotiation or specifications during tendering, the employer makes known to the
tendering contractor the requirements for it to produce the design. The design output
may take the form of drawings, specifications and sometimes schedules of rates to
cater for variations.
In these contracts, the obligation on the contractor as regards the design is not merely 11.102
to use reasonable care but is more extensive in ensuring that the finished work is
reasonably fit for purpose.
The distinction between them can be illustrated in the case of Greaves v Baynham 11.103
Meikle,79 where the contractor undertook to build a factory complex using a package
deal. The warehouse was built using a newly introduced method of composite
construction. The contractor engaged the consultant engineers to design the
warehouse, making known to them that it was to be used for storing and moving oil
drums. The warehouse was built according to the consultant engineers’ design, which
was in accordance with the British Standards, but within a few months the floor began
to crack. The contractor claimed for damages and indemnity from the consultant
engineers. It was held that, though the consultant engineers were not in breach of
the duty to exercise ordinary skill of competent engineers, they were in breach of the
implied warranty on the special facts that they would design a building with a floor fit
for the purpose for which they knew it was required.
(ii) ‘Management’ contracts

These are another type of novel, non-traditional forms of contract. They take a variety 11.104
of forms but the general features are for the main or managing contractors to perform
their usual functions with remuneration in the form of a fee. The role of the main
contractor is sometimes equated to that of a project manager. The actual work is carried
out by works contractors (subcontractors under a traditional agreement), which enter
into contracts with the employer or managing contractor. The managing contractor
may also engage design professionals directly for carrying out the necessary design
for the works.
(i) Adjustments to price
Adjustment to the contract price may be brought on various grounds, such as changes 11.105
to quantities or to the works, missing items, adjustment to unit rates as provided in the
contract or through the mechanism of a price fluctuation clause.
79
[1975] 1 WLR 1095. See A Pub (HK) Co Ltd v Tang Yuk Lun [2008] HKEC 1929.

11.106 Fluctuation clauses in construction contracts are normally inserted to compensate for
the rise and fall of labour, materials and plant costs, during the period of construction.
Their effect is to adjust the final contract sum upwards or downwards to take into
account increases or decreases in the costs of the contractor, with reference to
economic indices or legislative factors. For example, in the Hong Kong Government
standard clauses, the index figures used are compiled by the Census and Statistics
Department.
(j) Index-based price adjustment
11.107 The adjustment to be made is usually index-based, with a stipulated formula. The
standard forms of contract in Hong Kong usually permit the tendering contractor to
stipulate the percentages of its total contract price that it requires to be governed by the
various constituent indices for the different categories of labour or materials.
11.108 As noted in Blaenau Gwent Borough Council v Lock (Contractors’ Equipment) Ltd,80
which concerns a contract using the ICE Conditions of Contract (5th edn) standard
form, the purpose of the fluctuations clause is to protect the contractors from the
possibility of the costs of performing their contractual obligations rising during the
currency of the contract. As such, any limitation that will result in any increase in
costs envisaged by the fluctuation clause not being fully reflected on the rates quoted
by the contractors needs to be plainly expressed. Also, the contractor is at liberty to
plan and perform its works as desired during the contract period and, as illustrated
in Greater London Council v Cleveland Bridge & Engineering Co Ltd,81 as long as
the works are finished within time, the contractor cannot be blamed for increased
prices resulting from the operation of the fluctuation clause even if there is delay to its
original programme.
11.109 An illustration of the way in which the indices may affect the adjustment for fluctuation
is given in Lee Po Hung t/a Lee Po Decoration and Whitewashing Works v Leighton
Contractors (Asia) Ltd.82 In that case, in relation to a labour-only subcontract, there
was no express provision for the payment of fluctuation claims but the subcontractor
had over the months been paid sums which were said to be for fluctuations. Before the
Court of Appeal, the issue in dispute was whether, as the subcontract was a labour-only
contract, the sole index relevant to the issue of calculation of fluctuation matters was
that relating to labour. Looking at the context in which the relevant clause was found,
it was held that the less illogical and anomalous result of interpretation was that the
true intention of the parties was to apply the fluctuation adjustment with reference to
the relevant labour index only.
11.110 It should be noted that most of the fluctuation clauses in use are drafted with more
consideration given to ease of calculation and convenience in administration than
80
(1994) 71 BLR 94. See Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850.
81
(1984) 8 ConLR 30. See Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 4 HKLRD 447 and Tridant
Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656. See also Multiplex Constructions
(UK) Ltd v Cleveland Bridge UK Ltd (2006) 107 ConLR 1; Sindall Ltd v Solland (2001) 80 ConLR 152 and
Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd (1999) 66 ConLR 119.
82
[1996] 4 HKC 406.

PRICE 303
accuracy in estimating the effects of particular cost increases. Therefore, there may be
situations where the resulting compensation is indeed far from realistic. These are yet
considered acceptable, particularly where the tendering contractor may make requisite
allowance in pricing the tender. Indeed, in Hong Kong, there is a practice in the private
sector to not include a fluctuation clause in the contracts. However, the employer will
rarely save overall costs, as the tendering contractor does include an allowance in the
tendered price, which may be much greater than the actual cost of eventual increases.
Also, in times of economic downturn, to balance the effect of the possible decreases
in labour or material costs, the tendering contractor may likewise make allowances for
this when submitting the tender.
(k) Adjusting price by provisional sum of prime cost
Another mechanism for adjusting the contract price is by way of provisional sum of 11.111
prime cost. These are round sum prices inserted against the bills of quantities on behalf
of the employer before they go out to the contractor for tender. Almost invariably, they
are used with the intention, in effect, of substituting actual cost for the stipulated sum
or price. In this context, prime cost usually means all of the contractor’s direct costs,
such as labour, plant, materials and subcontractors. In practice, prime cost is used for
work or services to be carried out by nominated subcontractors or utilities undertakers,
or for materials or goods supplied by nominated suppliers. The cost resulting from the
nomination is substituted in the final account for the prime cost sum in the contract.
The intention is therefore that the contractor should only charge the employer the
actual cost to itself. A provisional sum is inserted for dealing with works that are
provisional in character at the time of contract. This is for the purpose of covering
some expenditure of an unknown amount at the time of entering into the contract and
may be for extras, or works that cannot be exactly estimated, or for a subcontract yet
to be placed after the main contract is entered into. Usually, the item is defined but the
original contract sum is adjusted according to the actual expenditure.
Disputes sometimes arise when there are substantial actual changes to the inserted 11.112
prime cost sum or provisional sum and the contractor claims compensation for extra
overheads, supervision and profit. In the decision of the Canadian case of Cana
Construction Co Ltd v The Queen,83 the estimate for the supply and installation of
a mail handling plant in a contract for the construction of a new postal terminal in
Edmonton was C$1,150,000 but the actual costs of a subcontract turned out to be
C$2,078,543.66. The contractor asked for a sum of C$2,171,398.03 with a 10 per cent
mark-up for overheads and profit. The Supreme Court of Canada found that the
contractor was entitled to receive a sum calculated at 10 per cent of the balance between
the actual subcontract costs and the original estimate as reasonable remuneration for
overheads, supervision and profit.
83
(1973) 21 BLR 15.

1. INSURANCE AND SURETY BONDS
Insurance is used by the employer and the contractor to protect the construction project 12.001
from physical property damage, and to protect itself from liability due to project
loss or risk. Generally, the policy is not intended to provide coverage for intentional
actions of the insured. An insurance policy is not intended to cover the business risk or
contractual risk in the execution of the construction works, but a surety may be liable
if the contractor defaults in due performing the contract.
The concept of insurance derived from the mercantile adventure of transporting goods 12.002
across the sea. Thus, the vast majority of common law principles regarding insurance
can be found in the Marine Insurance Ordinance (Cap 329) in Hong Kong. Non-marine
insurance appeared first as life and fire insurance. Each insurance policy stipulates that
a sum of money will be paid by the insurer on the happening of a specified event.
That sum of money can be in the nature of an indemnity (eg fire insurance) or a non-
indemnity (eg life insurance). Insurance coverage may be subject to periodic renewal,
and there may be excepted risks that are not covered by the insurance policy. In this
regard, the wording of the insurance policy is obviously of prime importance. In
Wayne Tank v Employers Liability, where a factory was destroyed by fire caused by hot
wax that escaped from a pipe, the supplier of the pipe was held bound by an exclusion
clause excluding coverage for damage caused by the nature or condition of any goods
sold or supplied.
Construction contracts usually contain provisions as to who is to provide insurance 12.003
against certain risks. In each case, it is necessary to analyse the wording of the contract
carefully to see whether it operates to produce the intended result. See Dorset County
Council v Southern Felt Roofing Ltd,1 where the issue concerned where the risk of fire
caused by the contractor’s negligence was placed. In practice, it is commonly provided
that the works are done at the contractor’s risk until practical completion, and the
contractor therefore needs to insure against the possibility of the works being damaged
by causes which are not its fault,2 other than the excepted risks. The policy is often
taken out in the joint names of the contractor and the employer, in the terms stated
in the contract. Such an insurance policy may also be extended or added on to cover
the risks in relation to subcontractors or the labour force in relation to third-party
liability. In this context, contractors sometimes maintain a continuing policy covering
a variety of matters, often called ‘Contractors’ All-risks Policy’.3 In relation to design
and advice, there may also be a professional indemnity policy taken out to cover the
risks of faulty design or advice.4
1
(1989) 29 ConLR 61.
2
See, eg an earlier illustration in AE Farr Ltd v The Admiralty [1953] 2 All ER 512, where a contractor to construct
a destroyer jetty at a naval base that was damaged by a destroyer owned by the employer when it collided into it
before completion was held responsible to bear the repair costs of the jetty as the contract provided that the works
‘stand at the risk and be in the sole charge of the contractor’ and that ‘the contractor shall be responsible for …
any loss and damage thereto arising from any cause’.
3
See Petrofinan (UK) Ltd v Magnaload Ltd [1983] 3 All ER 35 for an illustration of the operation of such
‘all-risks’ policy.
4
Wimpey Construction v Poole [1984] 2 Lloyds Rep 499.

308 PERFORMANCE BOND, GUARANTEES AND COLLATERAL WARRANTIES
12.004 A surety bond, on the other hand, is a type of contractual guarantee of the due
performance of the contract by the contractor given by a surety to the employer. A
premium is required to be paid from the contractor to the surety for the service. A
surety is usually a bank or insurance company. In other words, the function of the
surety is to provide assurance that the party interested in the completion of the contract
will be protected by a sum up to the amount of the surety bond when there is no due
performance of the contract by the contractor.
12.005 Generally speaking, the surety may require some form of collateral or indemnity
agreement or counter-guarantee from the contractor in order to recover the amount
paid. Collateral may be in the form of cash or promissory note, like a personal
cheque. An indemnity agreement requires the contractor to provide a written
undertaking to pay back the surety for any amounts paid to the employer. A counter-
guarantee is given by a third party for the contractor’s obligation to reimburse the
surety.
12.006 In brief, surety bonds are undertakings given at the request of a client by the surety
(usually an insurance company or a bank) to pay the beneficiary a sum of money (up
to a stated limit) in certain events, usually the failure by the client to discharge its
contractual obligations to its customer, the beneficiary.5 There are few kinds of bonds
used in construction. In the construction industry the type of bonds normally required
are advance payment bonds, performance bonds, maintenance bonds and retention
bonds. A premium is paid by the client to the surety as the surety’s fee for bearing the
risk implicit in issuing the surety bond. In Hong Kong, some are more common than
others in the construction industry.
2. BID BONDS
12.007 Basically, a bond is a legal instrument that sets up a tripartite legal relationship
among, in the case of a bid bond, the employer (as the obligee), the contractor (as
the principal or assured) and the bond corporation (as the surety). A bid bond (or
tender bond) is usually utilised to require contractors to provide a bid guarantee
when bidding on a project. This is for the benefit of the employer. In particular,
the employer may want some recourse if the lowest bidder fails to enter into the
contract. This is partly as a security to offset the possible damage, which may
include the price difference between the bid and the next low bid, in case that
happens. In return for providing the bid bond, the surety will ask for a premium and
an indemnity from the contractor.
5
Markel International Insurance Co Ltd v Surety Guarantee Consultants Ltd [2008] All ER (D) 10 (Jun). It was
observed that:
“The UK surety market is relatively small and specialised. The premium income accruing to insurance
companies from the writing of surety bonds is unlikely to exceed £100m. per annum. Clearing banks also
provide surety bonds. Their income from such business is thought to be about three times that of the insurance
companies.”

PAYMENT BONDS 309
As an illustration, in the US case of State Highway Commission v State Construction 12.008

Co,6, 7 State Construction and its surety, Continental Casualty Company, submitted
a bid bond to the State of Oregon’s highway commissioner to ensure that if State
Construction was awarded the contract by the highway commission, it would enter into
a formal contract with the state. The highway commission thereafter made a change in
the plans and specifications that State Construction had relied upon when it submitted
the bid. Before the bid was accepted or rejected, State Construction wanted to cancel
its bid, as it realised it had made a mistake. The highway commissioner wanted to
recover the bond stating that State Construction refused to execute the contract. The
court held that State Construction was entitled to cancel the bid because the highway
commissioner had not suffered any damage because of the mistake.
3. PAYMENT BONDS
A payment bond8 is a guarantee by the surety that it will pay the contractor’s bill for 12.009
labour and materials incurred during the project. Labour and materials are defined as
whatever is necessary to be used in the performance of the contract.
In the Hong Kong construction industry, there are two types of bonds commonly in 12.010
use to indemnify or guarantee the due performance of the contractor. The right of the
employer to recover from the bondsman depends on the construction of the bond.9
The first type of bond is the conditional or default bond, the right to call of which is
expressed to be conditional upon a particular event or set of events and commonly
upon the satisfactory performance of the contractor. In such a case, the employer has
to establish damages occasioned by the breach of the conditions and, if it succeeds, it
recovers the amount of the damages proved.10
In Kono Insurance Ltd v Tins’ Industrial Co Ltd [1987], the plaintiff developer entered 12.011
into a building contract with a contractor and a performance bond was given jointly
and severally by the contractor and the surety defendant. The contractors were given
conflicting instructions and the works were carried out incorrectly. The works were
later executed by other contractors at a much higher price. The appeal was made
6
(1995) 280 P 2d 370. See also ABB Asea Brown Boveri Ltd v Hiscox Dedicated Corporate Member Ltd [2007]
All ER (D) 259 and Cargill International SA, Geneva Branch Cargill (HK) Ltd v Bangladesh Sugar & Food
Industries Corporation [1997] All ER (D) 80.
7
(1995) 280 P 2d 370.
8
Payment bonds or advance payment bonds are also used in other industries, such as shipbuilding or insurance.
See Rainy Sky SA and others v Kookmin Bank [2010] 1 All ER (Comm) 823 and Trade Indemnity plc and others
v Försäkringsaktiebølaget Njord (in liq) [1995] 1 All ER 796.
9
See Workington Harbour and Dock Board v Trade Indemnity Co Ltd [1938] 2 All ER 101.
10
See American Home Assurance Co v King Pacific International Holdings Ltd [2001] 3 HKC 673 and Kono
Insurance Ltd v Tins’ Industrial Co Ltd [1987] 3 HKC 71 where the wording of the bond was:
“Now the condition of the above written bond is such that if the contractor shall duly perform and observe all
the terms, provisions, conditions and stipulations of the said contract on the contractor’s part to be performed
and observed according to the true purport intent and meaning thereof, or if on default by the contractor the
surety shall satisfy and discharge the damages sustained by the employer thereby up to the amount to the above
written bond then this obligation should be null and void, but otherwise shall be and remain in full force and
effect.”

310 PERFORMANCE BOND, GUARANTEES AND COLLATERAL WARRANTIES
and attention was drawn to distinguishing whether the bond was a single bond or a
conditional bond.
12.012 In Dragages et Travaux Publics (HK) Ltd v Citystate Insurance Ltd,11 the appellant/
defendant issued a performance bond in favour of the respondent/plaintiff to guarantee
the due performance by a subcontractor of its obligation under the subcontract
in an airport project. It was a term of the bond that it would be paid on default by
the subcontractor and upon a demand in writing made by the plaintiff. After the
subcontractor went into liquidation, the plaintiff sued on the bond and obtained
summary judgment against the defendant. On appeal, the defendant argued that the
wording in the bond was the same as a conditional bond in another case. Allowing the
appeal, the judge stated that, whether a bond was an on-demand bond would depend
upon the construction of the instrument in question and, as on-demand bonds were
potentially ‘oppressive’ documents, the wordings of these bonds must be drafted in
clear and unambiguous terms. Therefore, it should be noted that it is important to draft
the bonds very clearly, indicating whether it is a conditional or on-demand bond, in
order to avoid any disputes.
12.013 Proof of damages and not mere assertion of damages is required before liability under
a conditional or default bond arises.
12.014 In Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co
Ltd,12 it is stated that:
“Bonds in similar forms have existed for more than 150 years and have been
treated by the parties thereto and by the courts as guarantees. Indeed the current
standard ICE Conditions of Contract contain a specimen term identical to
those in the [sub-contractor’s] bond. In the first place the bond itself contains
indications that is was intended to be a guarantee. The appellants are described
as ‘the surety’. There is a provision to the effect that no alteration in the terms
of the subcontract should release the surety from liability. In the absence of such
provision a surety would normally be released from his obligation by any sequent
material alternation to the contractual provisions agreed between the contractor
and subcontractor.”
12.015 In the case of an on-demand bond,13 all that is required to activate it is a demand by
the beneficiary of the bond stated to be on the basis of the event specified in the bond.
12.016 The ordinary conditions to be complied with are that the employer makes a written
demand on the bondsman in question and that the employer may be obliged to give
11
[2001] 1 HKC 196.
12
[1995] 3 WLR 204.
13
An example can, in appropriate cases, be in the following wording:
“If the contractor shall be in default in respect of any of his obligations under the contract the bondsman shall
upon demand made by the employer in writing and without proof of the said default or conditions satisfy and
discharge the amount identified in the demand by any damages, losses, charges, costs or expenses sustained by
the employer by reason of the default up to the amount of the bonded sum.”

SUMMARY 311
written notice to the contractor of its intention to call the bond some days before
actually calling it, detailing the breaches of contract relied upon and the likely losses.
Save in case of fraud, the beneficiary is entitled to make a call for the full amount of 12.017
the bond even if the breach of contract has caused it no loss.14 The bond is not intended
to represent an estimate of the amount of damages to which it might be entitled under
such a breach. It is a guarantee of due performance. As such, the effect of the bond is
akin to that of a confirmed letter of credits.
There may yet be a question of accountability in relation to the calling of an on- 12.018
demand bond.15
In Prema Birkdale Horticulture (Macau) Ltd v Venetian Orient Ltd,16 the issue of an 12.019
on-demand bond surfaced in a different setting. The contractor sought interim relief
pending the completion of arbitration in Macau under the recent provisions of s 21M
of the High Court Ordinance (Cap 4) and s 2GC1(a) of the Arbitration Ordinance
(Cap 341). One of the issues before the court was whether the bond in issue was an
on-demand bond. Referring to Trafalgar House Construction (Regions) Ltd v General
Surety & Guarantee Co Ltd17 and Kono Insurance Ltd v Tins’ Industrial Co Ltd,18 the
court held that the bond was a classic on-demand bond which did not require proof of
breach and operated in effect as a promissory note payable on demand and on similar
footing to a letter of credit.
4. DEMAND OR CONDITIONAL BONDS
It is thus of vital importance to distinguish whether a bond is a on-demand bond or a 12.020

conditional bond; disputes may remain unresolved if this is not done. It follows that
the wording used when drafting the bond is important.
5. SUMMARY
To conclude, insurance is used by the employer to protect the construction project 12.021
from physical property damage and to protect itself from liability due to project losses
or risks. A bond, on the other hand, is a financial security for the performance of
the contract or contractual obligations given by a surety on behalf of the contractor
to the employer. There are a few types of bonds used in construction, mainly bid or
tender bonds, payment bonds and performance bonds. The two types of performance
bonds are conditional bonds and on-demand bonds, and it is important to distinguish
between these when drafting the bond, in order to avoid dispute.
14
See Cargill International SA v Bangladesh Sugar and Food Industries Corp [1996] 4 ALL ER 563.
15
See Australasian Conference Association Ltd v Mainline Construction Pty Ltd (In Liquidation) (1978) 141
CLR 335.
16
[2009] 5 HKC 485.
17
[1996] 1 AC 199.
18
[1987] 3 HKC 71.

1. TYPES OF LIABILITY
Insurance policies1 in building contracts are mainly liability insurance and material 13.001
damage insurance. Liability insurance covers the insured’s legal liability to third
parties, which can be employees or the public. Employees’ compensation policy covers
the liability of an employer to its employees for bodily injury or death arising out of
and in the course of their employment. Public liability policies provide for indemnity
claims by the public, other than employees, and property damage claims. For example,
clauses 18, 19 and 20 are the clauses in the Agreement & Schedule for Conditions of
Building Contract2 concerning indemnity and insurance.
2. CLAUSE 18 – EMPLOYER’S INDEMNITY CLAUSE

REGARDING INJURY TO PERSONS AND PROPERTY
(a) Clause 18(1)
Under this clause, 13.002
“[t]he Main Contractor shall be liable for and shall indemnify the Employer
against, any expense, liability, loss, claim or proceedings whatsoever arising
under any statute or at common law in respect of personal injury to or the death
of any person whomsoever arising out of or in the course of or caused by the
carrying out of the works, unless due to any act or neglect of the Employer or of
any person for whom the Employer is responsible.”
The main contractor is conferred with a wide liability in this regard. For injuries 13.003
covered by this clause, the employer can seek indemnity from the main contractor,
whether by separate legal proceedings or by joining it as a third party when the
employer is being sued.3
The words ‘any person whomsoever’ include not only the main contractor’s employees, 13.004
its subcontractors or the workmen, but also the employer itself, its servants and agents
and any third party (who may be only a passer-by), ie anyone who comes into contact
with the works.4 It may also include any trespasser if the main contractor or employer
is aware of the trespasser’s presence and recklessly disregards it.5
1
In Kanson Crane Service Co Ltd v Bank Of China Group Insurance Co Ltd [2003] HKEC 1139, it was remarked
that:
“An insurance contract is a contract for indemnity. It is a commercial transaction and an insurer is entitled to
offer such indemnity solely on the basis of the terms and conditions set out in the policy.”
2
This is the 1986 edition, then published by the Hong Kong Institute of Architects, the Royal Institution of
Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong.
3
See, for illustration, Viatech Engineering Ltd v Ming An Insurance Co (HK) Ltd [2008] HKEC 1706 and Lee Yam
Loi v Leung Yiu Chi [2009] HKEC 1823.
4
See, for illustration, Wong Chun Kuen v Wong Tin Lam & Others & Sun Yu Chau Engineering Co Ltd (Third
Party) & Aprils (Fourth Party) [2006] HKEC 400.
5
See Occupiers Liability Ordinance (Cap 314) and British Railways Board v Herrington [1972] AC 877.

316 INSURANCE AND INDEMNITY
(b) Clause 18(2)
13.005 This clause states that the main contractor assumes liability and indemnifies the
employer against liability only where the injury or damage is due to any negligence,
omission or default on the main contractor’s part or its servants or agents or on the part
of any subcontractor or its servants or agents.
13.006 It seems that the wording “... unless due to any act or neglect of the Employer” in
clause 18(1) and “[e]xcept for such loss or damage as is at the risk of the Employer …
the Main Contractor shall be liable for, and shall indemnify the Employer against …”
in clause 18(2) are not significantly different. Clause 18(1) focuses on personal injury
or death whereas clause 18(2) concerns personal injury or damage to property. Both
specify that the main contractor is the one who is liable for and shall indemnify the
employer in case of liability unless it is proved that the loss is caused by the employer’s
negligence, and not the main contractor’s. The main purpose of both clause 18(1) and
(2) is to minimise the possibilities of disputes over liability for personal injuries, by
placing wider responsibility on the main contractor.6
3. NEGLIGENCE
13.007 Proving negligence of the employer or of the main contractor is a critical part of
many disputes. It determines whether the former or the latter party shall be liable for
an injury or loss, and the extent of any such liability. Duty of care is a vital part of
insurance since one of the many major purposes of an insurance policy is to insure
against liability in negligence. Negligence exists only if a breach of duty of care has
occurred. Therefore, we have to define which party owes a duty of care in any dispute
of liability.
13.008 In Attorney General v Gammon (Hong Kong) Ltd and Another,7 Gammon (Hong
Kong) Ltd failed to ensure that all reasonable steps were taken to prevent persons from
having access to the place when the appliance was in use, which caused the death of a
workman, Mr Wong Kwai-Shun, after injuries.
13.009 In R v Wellform Construction Co Ltd,8 the internal staircases and electrical work were
not completed when the deceased was working between the eighth and ninth floors,
although bricks were stacked on each floor for safety purposes. It was necessary for
the deceased to extend his head into the stairwell beyond the staircase railing to give
instruction. His death was caused by a brick falling onto his head from an upper
floor. The defendant contractor was convicted and fined. The contractor appealed and
proved that he had given reasonable care to the safety of his workmen; and the fine
was returned.
6
See Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957, which concerns
a similar provision under the JCT (1963 edn) standard form of contract.
7
[1983] HKLR 93.
8
[1983] 1 HKC 530.

CLAUSE 19 – INSURANCE AGAINST INJURY TO PERSONS AND PROPERTY 317
Tse Hoi Cheung v Hip Hing Construction Co Ltd and Others9 is a case of contributory 13.010
negligence. There were three defendants and two of them were found to be negligent.
The plaintiff, a plumber, was injured in an accident at work when he fell 20 metres
down an air-conditioning duct. The first defendant was the principal contractor; the
second defendant was the plumbing subcontractor and the plaintiff’s employer. The
third defendant was the air-conditioning subcontractor. The claim against the third
defendant was dismissed, as it had no duty of care to warn against the danger of the
duct. The second defendant had breached the duty of care to the plaintiff and also
breached the contractual obligation that an employer should take care of the safety of
the employee. The principal contractor was also in breach of duty of care. Thus, both
the first and second defendants were found liable for the plaintiff’s injury and had to
contribute to the compensation.
An indemnity clause may take on different forms, particularly in subcontract settings. 13.011
In Richful Engineering Ltd v Pine Year Development Ltd,10 a settlement agreement was
reached in relation to railway maintenance works subcontracted to the plaintiff. The
settlement agreement in Chinese provided:
“Should [the plaintiff] fail to carry out the repair work in accordance with this
agreement, [the plaintiff] shall indemnify [the defendant] for all losses and
damages incidental to and occasioned by such failure, [the defendant] shall at
the same time be released from the obligation to make payment to [the plaintiff]
pursuant to this agreement.”
The court held that this clause only operated to release the contractor temporarily from 13.012
making payment until the repair work done by the subcontractor was concluded to the
employer’s satisfaction.11
4. CLAUSE 19 – INSURANCE AGAINST

INJURY TO PERSONS AND PROPERTY
Under this clause, the main contractor shall maintain and shall cause any subcontractor 13.013
to maintain insurance policies which are necessary to cover the liability of the main
contractor or, as the case may be, of such subcontractor, in respect of personal injuries
or deaths arising out of or in the course of or caused by the carrying out of the works.
9
[1995] HKLY 532.
10
[2009] HKEC 483.
11
The court remarked:
“27. At first blush, this clause might be construed to mean that if the Plaintiff fails to carry out repairs, then
the Defendant is released completely from making any further payments. 28. On reflection however, I am
convinced this is not the correct construction to reflect the presumed common intention of the parties and to
give it business efficacy. The clause immediately goes on to provide an indemnity for the Defendant in the
event of the Plaintiff’s failure. If the remaining defects could be rectified quickly for a small sum, albeit by
someone other than the Plaintiff, can the parties really have intended that the Plaintiff would thereby forfeit the
balance for all time?”

To determine whether an injury is caused by an accident arising out of or in the course

of employment is sometimes difficult.
13.014 In R v Yorkshire Sheeting & Insulation Limited,12 the deceased was a self-employed
roof sheet-layer. The appellant, Yorkshire Sheeting & Insulation Services Limited was
a subcontractor of Totty Building Services; Yorkshire specialised in roofing work.
Both Totty and Yorkshire were charged for not ensuring the safety of persons not in
their direct employment, by exposing the sheet-layers engaged to carry out the work
to the risk of falling through the roof. The injury occurred because there was not
adequate netting to ensure safety and also not adequate roof lighting. It was argued
that all responsible persons of the contractor and subcontractor companies had taken
care and showed concerns about the site condition. However, it was concluded that no
steps had been taken to ensure safety. It was wrong to assess the risk as low with regard
to the possibility of falling. There should not have been any access permitted until the
roof area was completely safely netted and all roof lights in place. No work whatsoever
should have been done in such areas. Therefore, both defendants were fined. This case
shows that there is no rigid standard to determine the degree of reasonable care that
has to be taken in different situations, and it differs from one situation to another. In
addition, this case shows the liability of the contractor and subcontractor for parties
who are in the course of employment. The victim was a self-employed roof sheet-
layer but he was in an employment relationship with Yorkshire Sheeting, who was the
subcontractor.
13.015 The main contractor is normally required to effect, or to cause any subcontractor to
effect, insurance policies necessary to cover its liability for personal injury or death.
The scope of responsibilities upon the main contractor (or the subcontractor as the
case may be) is a matter regulated by agreement between the parties.13 Indeed, in
relation to subcontracts, it is not unusual in the construction industry in Hong Kong
for the main contractor to take out a ‘third party insurance’ or public liability policy
for all its subcontractors.14
13.016 In Attorney General v Chan Ka Kui,15 however, there was a question whether the
contractor or the subcontractor was responsible for an injury. The respondent contractor
was charged with failing to ensure that every dangerous part of machinery was
securely fenced, resulting in an injury. The victim was employed by the respondent’s
subcontractor. The case was defended on the basis that the defendant should have
been the subcontractor instead of the contractor, as he was in charge of the machinery
that caused the injury, whereas the contractor was only in charge of the site. It was
concluded in the appeal that the main contractor and the subcontractor were both liable,
as the subcontractor had the responsibility to ensure safety in using the machinery and
the contractor was responsible for safety on the site.
12
[2003] EWCA Crim 458, CA (Crim Div).
13
In Lee Yam Loi v Leung Yiu Chi [2009] HKEC 1823, the subcontractor alleged that, in breach of an oral agreement,
the main contractor failed to take out adequate liability insurance coverage to protect it against claims by third
parties for injuries suffered during the construction of the projects. This was rejected by the court.
14
See Lee Yam Loi v Leung Yiu Chi [2009] HKEC 1823.
15
[1984] HKC 569. See also HKSAR v Chun Wo Building Construction Ltd [2001] HKEC 553.

CLAUSE 20 – INSURANCE OF WORKS AGAINST ACCIDENTS OF FIRE 319
Argument arose in Leung Siu Mui v Tai Ping Insurance Co Ltd16 as to whether an 13.017
insurer’s public liability insurance extended to cover the subcontractor’s employee.
The judge stated that by virtue of the Employees’ Compensation Ordinance (Cap 282)
at s 24(1), a principal contractor was liable to pay compensation to an employee of its
subcontractor as if that employee was employed by the principal contractor.
In Poon Hau Kei v Hsin Cheong Construction Co Ltd Taylor Woodrow International Ltd 13.018
Joint Venture,17 the appellant suffered from an injury in the course of his employment
as a scaffolder. His immediate employer was Ho Shui Keung who had been engaged
by General Engineering. General Engineering had in turn been engaged by HCTW
to carry out fire service installation work and the scaffolding had been required for
the purposes of that work. The plaintiff originally commenced proceedings against
Mr Ho but then found that Mr Ho was not insured. The question followed was
which party should be the liable party. The Employees’ Compensation Ordinance
(Cap 282) provides protection to employees in case their immediate employer should
be untraceable or insolvent and uninsured. The Ordinance provides that a principal
contractor may take out a single insurance policy for the benefit of the employees of
all his subcontractors.
(a) Clause 19(2)
This clause states that the main contractor is required to insure on behalf of the 13.019
employer, with certain exceptions, against liability for damage to third party property
caused by collapse subsidence, vibration, weakening or removal of support or the
lowering of ground water arising in connection with the contract. In Chan Fei Lung
v Mansion Products Ltd & Others,18 the plaintiff and first defendant were owners of
adjacent detached houses. The first defendant’s architect was the second defendant,
and the third defendant was the main building contractor. Building works on the first
defendant’s premises caused the boundary wall to collapse with severe damage to parts
of the plaintiff’s property. The plaintiff was entitled to claim for nuisance, and he had
enjoyed a high degree of comfort in his home prior to the defendants’ negligent acts.
The plaintiff was awarded the amount claimed for carrying out remedial works to a
standard commensurate with the standard of his property.
5. CLAUSE 20 – INSURANCE OF
WORKS AGAINST ACCIDENTS OF FIRE,
LIGHTNING, EXPLOSION, ETC
This clause is applicable to the erection of a new building and to the alterations of, 13.020
or extensions to, an existing building. Whether a structure is an alteration or building
work may be a critical fact to determine the liability of different parties. In Good
16
[2001] HKEC 1269. See also B + B Construction Ltd v Sun Alliance and London Insurance plc [2000] 2
HKC 295.
17
[2000] HKEC 230.
18
[1990] 1 HKC 504.

Think Consultants Ltd v Attorney General & Another,19 the plaintiff applied to the
Urban Services Department to install a mechanical ventilation system which involved
a structure supporting an air conditioning plant mounted under the canopy of the
restaurant. In 1992, the Building Authority issued an order for the removal of the
structure supporting the air-conditioning plant. It said the plan submitted for approval
did not show the ventilation system and insisted on its removal, as it was considered
dangerous to the public. The plaintiff argued that it was an alteration but not a new
building work. The court held that “the structure was an addition to the building and
therefore came within building works.”
13.021 Disclosure of material fact is vital in building insurance as in other kinds of insurance
policies. The insured has the duty to disclose to the insurer all material facts within its
knowledge and to provide details of the interest to be protected prior to the conclusion
of the contract and throughout the contractual relationship.
13.022 In relying on the insurance, the stipulated procedures, such as timely notification, need
to be followed.20
6. SUMMARY OF CLAUSES 18 TO 20
13.023 In general, clause 18 states the main contractor’s liability to persons and property
except where the loss or injury is due to the negligence of the employer. It is essential
for us to determine whether there is any negligence in any accident and which party
does and does not owe a duty of care in order to conclude which party shall be liable.
The clause also points out clearly that personal injury or death refers to any person
whomsoever, whose injuries or death has arisen from or in the course of or caused by
the carrying out of the works.
13.024 Clause 19 emphasises the importance of properly maintaining an insurance policy
and that the main contractor shall be responsible for ensuring that this is the case.
Clause 20 deals with the insurance of works against accidents of fire, lightning,
explosion, etc, where applicable.
19
[1996] 4 HKC 782.
20
See, however, The New India Assurance Company Limited v Dewi Estates (unrep, HCA No 5078 of 2007), where
the plaintiff submitted, inter alia, that there was late notification by one of the insured under an employment
insurance policy covering the main contractor for plumbing works at the defendant’s premises. Finding that
the policy is composite in nature, the court held against the insurance company plaintiff who was seeking an
indemnity for the sums paid out. See also Fong Wing Shing Construction Co Ltd v Allianz Insurance (Hong Kong)
Ltd [2003] 3 HKC 561 in relation to ‘all risk insurance policy’.

1. OVERVIEW
(a) Types of certificates
Under an agreement between an employer and a contractor, the contractor shall 14.001
undertake to carry out and complete the works to the satisfaction of the architect,
by the contract completion date, while the most fundamental duty of the employer is
to make payment in accordance with the terms of the contract. Money must be paid
promptly and fully unless there are specific reasons for withholding it.
To ensure the proper completion of the contract and the protection of the interests of 14.002
the employer and the contractor, the standard forms of contract, such as the HKIA
Standard Form of Contract, give power to the architect to issue certificates in certain
respects. Most contractors link the word ‘certificate’ with money. In practice, a wide
range of certificates may be issued with a wide range of names and intended purposes
and effects. By function, they may be classified into three types. First, payment
certificates are issued periodically during the course of the work to certify quantities
of work carried out and payments due to the contractor, and a final certificate is ratified
to signify both the quantities and qualities of work completed at the end. Contracts
provide a mechanism for determining issues, such as how applications for certificates
are to be made, what is to be included in certificates, how certificates are to be adjusted
or corrected, final dates for payment, the grounds upon which certificates may or may
not be withheld and the legal effect of certificates. In addition to confirming that a
sum of money is due to the contractor, certificates may be needed to confirm that
a certain event has occurred or has not occurred. The purpose of the second type
of certificate is to record some event for the purposes of the contract. Examples of
this type of certificate include non-completion certificates that trigger the liability
of the contractor to pay liquidated damages. Written notices of extensions of time
granted by the architect, although they may not always be so called, have the effect
of a certificate. The third type of certificates include practical completion certificates
and certificates of rectifying defects, which signify the satisfaction of the work by
the certifier. An important issue concerning certification in building and engineering
contracts is whether a certificate is legally and finally binding upon the parties as to
what it certifies.
(b) Function of a certificate
The function of a certificate is usually to record factual events only.1 But this also 14.003
involves the certifier forming a judgment or giving an opinion, for example, as to
1
In Attorney General v Costain International Ltd [1983] 2 HKC 110, in relation to the words ‘certificate’ and
‘order’ under the ICE conditions of contract, the court held that a certificate was a document which spoke to
the truth of some existing fact or an existing state of affairs while an order directed the doing of some act in the
future.

324 CERTIFICATES
the value of work performed2 or whether the standard of workmanship has been
achieved.3
(c) Definition of certificate
14.004 The working definition of certificate has been given in Token Construction Co Ltd
v Charlton Estates Ltd4 as “the expression in a definite form of the exercise of the
judgment, opinion of skill of the engineer, architect or surveyor in relation to some
matter provided for by the terms of the contract”. The case further provides that the
validity of a certificate is determined by the result of the certifying process; it must
be served, clear and unambiguous.5 This case was applied in London and Regional
(St George's Court) Ltd v Ministry of Defence6 in relation to the contract for the
refurbishment of an office building, where it was held that, in considering whether a
particular document was a certificate, regard was to be had to whether the document
relied upon was the physical expression of a certifying process in the light of form,
substance and intent, and the surrounding circumstances.
2. APPROVAL AND CERTIFICATES
(a) Legal effect
14.005 For a certificate to be validly executed, it must comply with any requirements expressed
in the contract.7 The general form of a building contract does not require a certificate
2
As illustrated in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850, certificates
may sometimes not merely be evidence of the engineer's opinion but are a condition precedent to the contractor’s
entitlement to an interim payment or final payment.
3
See Kaye v Hosier and Dickinson [1972] 1 WLR 146. Also, as noted in Chitty on Contracts (30th edn) Vol 2
para 37-104:
“There is no definition of the term, but a certificate is usually taken to embody a decision requiring the exercise
of professional skill and judgment on issues which will often require subjective assessments.”
4
(1973) 1 BLR 48. In this case, it was held that the architect’s letter, enclosing an interim certificate and stating
that the difference between the contract completion date plus an agreed extension of the allowed and the agreed
practical completion dates was 24 weeks, did not constitute the grant of extension of time within the meaning
of the contract. See Attorney General v Costain International Ltd [1983] 2 HKC 110; Nin Hing Electronic
Engineering Ltd v Aoki Corp [1987] 3 HKC 516; Pyrok Industries Ltd v Chee Tat Engineering Co Ltd [1988] 2
HKLR 472; and Kiu May Construction Co Ltd v Wai Cheung Co Ltd [1983] 2 HKC 403.
5
It was remarked by Roskill LJ:
“The court should not be astute to criticise documents issued by an architect merely because he may not use the
precise language which a lawyer might have selected in order to express a like determination, but whilst this
amount of latitude is permissible, it cannot extend to the court’s treating as due compliance with contractual
requirements documents which, however liberally interpreted, do not plainly show that they were intended to
comply with, and fairly understood, do comply with those contractual requirements.”
6
(2008) 152(14) SJLB 28. See also BR Cantrell v Wright & Fuller Ltd [2003] BLR 412, where the court, after
taking into account its nature or effect to assess whether it was clear and unambiguous in form, substance or intent,
held that the certificate in issue was not in substance capable of being the final certificate, nor was it clearly and
unambiguously the final certificate in a JCT 1980 standard form. In that case, the judge held that the documentation,
on which reliance had been placed to explain the certificate, was not part of the certification process.
7
BR Cantrell v Wright & Fuller Ltd [2003] BLR 412.

APPROVAL AND CERTIFICATES 325
to be given in any particular form,8 but the assumption is clear that it is to be issued
in writing.9 Practice certificates are often issued on standard forms, published by the
institutions that publish the standard form contracts, and are designed specifically to
be used with those contracts.
Since a certificate is a statement made by an employer or its architect or engineer, 14.006
another important legal effect of a certificate is that it can be used as evidence if a
dispute arises. The question is to what extent it can be relied upon as evidence.10 The
status of a certificate as evidence of a matter to which it relates will depend upon what
is stated in the certificate, as well as its context. Some standard forms of contract, such
as the HKIA and JCT, contain clauses that define the status of certificates as evidence.
As discussed later, it is normal to make a distinction between an interim certificate and
a final certificate as regards their conclusiveness. Interim certificates are not normally
considered to be conclusive evidence of any matter stated in them so that they will
not prejudice the rights of either of the parties against the other.11 The final certificate
certifies the total amount payable to the contractor under the contract and it is normally
issued upon completion of the work, once the defects liability period has expired and
remedial work, if any, has been done.12 The effect of this as evidence will depend upon
the precise contract terms. If a clause in the contract states that the final certificate is to
be conclusive evidence of a matter, then the final certificate will readily be considered
final, and as far as that matter is concerned, cannot be raised between the parties.
(b) Interim payment certificate
(i) Principle of interim payment

Construction contracts often extend over long periods of time and involve the use of 14.007
considerable resources in land and materials and, if they are not completed, the financial
and other consequences can be very serious. The total expenditure of each contract
forms a large proportion of the annual turnover of a contractor. Interim payment is a
8
As observed in Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10 (which has been overruled by the UK House
of Lords on other grounds in Reinwood Ltd v L Brown & Sons Ltd [2008] 1 WLR 696), no particular form was
required for the grant of an extension of time in writing.
9
See, however, earlier cases such as Coker v Young (1860) 2 F & F 98; Roberts v Watkins (1863) 14 CBNS 592;
and Oates v Bromell (1704) 1 Salk 75.
10
A certificate is binding only between the parties. See Lewis v Hoare (1881) 44 LT 66.
11
As remarked in Clark Contracts Ltd v Burrell Collection Co (Construction Management) Ltd 2002 SLT (Sh Ct) 103:
“The interim certificate is not conclusive evidence that the works in respect of which the pursuers seek payment
were in accordance with the contract (see clause 30.10). That however does not preclude the sum brought out
in an interim certificate being a sum due under the contract.”
In Rupert Morgan Building Services (LLC) Ltd v Jervis [2004] 1 WLR 1867, it was remarked:
“If [the employer] has overpaid on an interim certificate the matter can be put right in subsequent certificates.
Otherwise he can raise the matter by way of adjudication [under the Housing Grants, Construction and
Regeneration Act 1996] or if necessary arbitration or legal proceedings.”
12
See, for illustration, P & M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146, where it was held in relation to
a RIBA form (1963 edn) that the final certificate was conclusive evidence that the work had been properly carried
out in any proceedings arising out of the contract whether commenced after the date of the final certificate or
previously begun. See also Oxford University Fixed Assets Ltd v Architects Design Partnership [1999] CLC 631.

326 CERTIFICATES
common provision in most standard forms of building and civil engineering contracts.
Its principle is to provide sufficient money to allow the contractor to carry out the
works and reduce the need to borrow money to fund the construction of the project.
However, it is also a common area of dispute between employers, contractors and
subcontractors.
14.008 Generally,13 payment on interim certificates may be calculated either by stage
payments made at agreed stages of completion, or by measurement of work done at
agreed intervals throughout the contract. The amount of money due in each instalment
is recorded by the architect in an interim certificate. The issue of such an interim
certificate depends on the occurrence of some other event on which a contractual
liability to make payment depends.14
(ii) Clause 30 of the HKIA form

14.009 For illustration, clause 30 of the HKIA Form deals with all certificates that regulate
payments under the contract. Clause 30(1) sets out the procedures for the issue of
interim certificates by the architect both before and after practical completion. The
interval between interim certificates is one month unless otherwise stated in the
appendix. Regular interim certificates and payments will generally cease at practical
completion because there will be no further work to certify. The clause also obliges
the employer to pay within the period of honouring certificates named in the appendix,
14 days from presentation unless otherwise stated.
14.010 The issue of such a certificate by the architect imposes upon the employer a strict
obligation to make payment. Failure to do so is a breach of contract. If the employer
does not undertake the obligation to pay within the stipulated period, there is a ground
for the main contractor to determine the contract in accordance with clause 26(1) of
the HKIA Form after giving notice.
14.011 The conditions of contract are often drafted in such a way that interim certificates
are a condition precedent for payment to be made. Campbell & Smith Construction
Co v Boyle15 illustrates that it may be raised as an issue by the employer in its
defence of failure to pay according to an architect’s interim certificate that there is
a breach of contract by the contractor at the time that payment became due under
the certificate.
13
Where there is a conflict by the inclusion of two different interim payment mechanisms contained in the
employer’s requirements and the standard form of contract, the standard form may take precedence pursuant to
the standard provision providing for a hierarchy of contractual documents. See Fenice Investments Inc v Jerram
Falkus Construction Ltd (2009) 128 ConLR 124.
14
See the Scottish cases of SL Timber Systems Ltd v Carillion Construction Ltd [2001] BLR 516 and Clark
Contracts Ltd v Burrell Collection Co (Construction Management) Ltd 2002 SLT (Sh Ct) 103. Such a certificate
is usually a condition precedent to the right to claim payment. In The Tharsis Sulphur and Copper Company v
M’Elroy & Sons (1877 – 78) LR 3 App Cas 1040, it was held that an interim certificate was not a written order
from the engineer in a contract calling for a written order from the engineer before any alterations or additions
were allowed.
15
1996 SCLR 335. Even if a certificate by the architect is required under the contract, the employer’s failure to put
in place an architect for that purpose has disentitled the former to rely on any such condition precedent by reason
of the well-established ‘prevention principle’. See Kensland Realty Ltd v Whale View Investment Ltd (2001)
4 HKCFAR 381; Frederick Leyland & Co Ltd v Panamena Europea Navigacion (1947) 80 Ll L Rep 205. See also
Alpha Appliances Ltd v Get Luck Development Ltd [2006] HKEC 945.

Clause 30(2) of the HKIA Form sets out what may be included in the amount stated 14.012
as due in an interim certificate. The usual provision is for the contractor to be paid the
estimated value of the work properly executed and such materials or goods assembled
or stored for inclusion in the works less a retention which the employer holds as
security for completion of the works.
(iii) Effect of an interim certificate in law

The case Vickers v Lynn & Jones,16 decided by the Crown Court (Leeds), indicates 14.013
the position of an interim certificate in law. The plaintiff Vickers had contracted to
carry out the building works under the standard RIBA form. He asked for an interim
payment for the work he had done. The architect issued an interim certificate but the
employer refused to pay the amount certified on the ground that it was an incorrect
valuation of the work done. The court decided that in the absence of the clearest
express provision, the interim certificate did not prevent the employer challenging
it at common law, either because the employer had a counter-claim or he had a debt
to set-off against the sum due to the contractor. The employer therefore was able to
continue with the court action challenging the interim certificate. Thus, an interim
certificate under clause 30(1) of the standard RIBA form was not conclusive to the
effect that the valuation of the work which it stated had been correctly computed.
Thus, interim certificates are not meant to be conclusive and final.17 In the absence of a
clear expression to the contrary, usually certification of the quality and value of works
for the purpose of making monthly payments is meant to be provisional and represents
only an approximation.18
(iv) Error in certificate

A question arises as to whether interim arbitration will be available when a certificate 14.014
contains an error. Lubenham Fidelities v South Pembrokeshire District Council19
suggests that under-valuation of work alone does not justify a contractor leaving the
site, and that the contractor should request the issue of another certificate or arbitration.
In that case, JCT 80 was adopted for the contract. An architect had wrongly deducted
liquidated damages from an interim certificate. The error was patent but the employer
refused to pay the difference and the contractor terminated his employment on the
grounds of non-payment. The court treated the certificate as effective even though
demonstrably wrong. The judgment of the court stated that:
16
[1981] CLY 188. Applying the decision of the House of Lords in Gilbert Ash (Northern) Ltd v Modern
Engineering (Bristol) Ltd [1974] AC 689, the court held that, in the absence of the clearest express provision, an
interim certificate did not prevent an employer from raising any matter which could at common law be raised as a
set-off or counter-claim in proceedings based upon that certificate. See also W&JR Watson Ltd v Lothian Health
Board 1985 SC 352.
17
Wide Project Construction (HK) Ltd v Incorporated Owners of Yen Dack Building [2005] HKEC 1997.
18
Wong Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521.
19
(1986) 33 BLR 4. Thus, upon the true construction of the relevant terms of the contract, it was held that where
in a building contract it was agreed that the employer's architect would issue Interim Certificates stating the
amount due to the contractor from the employer and that the contractor would be entitled to a payment therefore
within a specified period, the employer was bound to pay the amount stated in the certificate even though the
amount was wrong and the certificate contained patent or latent errors. See Henry Boot Construction Ltd v
Alstom Combined Cycles Ltd [2005] 1 WLR 3850 and See also Pilecon (Hong Kong) Limited v Mightyton
Limited [1993] 2 HKLR 435.

328 CERTIFICATES
“Whatever the cause of the under-valuation, the proper remedy available to the
contractor is, in our opinion, to request the architect to make the appropriate
adjustment in another certificate, or if he declines to do so, to take the dispute
to arbitration under clause 35. In default of arbitration or a new certificate the
conditions themselves give the contractor no right to sue for the higher sum. In
other words we think that under this form of contract the issue of a certificate is
always a condition precedent to the right of the contractor to be paid.”
14.015 In that case, the employer had not repudiated its obligations. Conversely, it was the
contractor who had repudiated the contract. A failure to pay an amount certified for
payment by the employer can be express grounds for termination of the contract by
the contractor. However, the contractor will not be entitled to terminate the contract
simply because he disagrees with the amount certified or in fact, there is an error
in the certificate. Where a certificate for payment has been issued, the obligation of
the employer is to pay the sum stated. If the contractor believes that this amount is
incorrectly stated, then the proper solution is to have the errors remedied by adjustments
in subsequent certificates.
(v) Conclusiveness of a certificate

14.016 Though interim certificates are an important contractual mechanism, there is nothing in
the present form of contract to make them conclusive. Generally,20 the figure certified
will be an approximate estimate21 and is rarely binding upon the employer or contractor
unless the contract clearly makes it so. It is only intended to provisionally determine,
with some precision, the rights and duties of the parties at any given moment. Interim
certificates say nothing about the quality of materials or workmanship, nor does it
indicate satisfaction with the work by the architect at any moment. Hence, it does
not have significant effect on a claim by the employer against the contractor for poor
work. Anything included in an interim certificate may be subject to revision by a later
certificate.
14.017 A certificate may be conclusive as to what it purports to certify. To date, many
construction contracts draw a firm distinction between interim certificates and final
certificates, with finality being given to the latter. Clause 30(8) provides that only a
final certificate shall of itself be conclusive evidence that any works, materials and
goods to which it relates are in accordance with the contract.22
20
Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850; Pilecon (Hong Kong) Limited
v Mightyton Limited [1993] 2 HKLR 435; and Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd
[1974] AC 689.
21
Once an interim certificate is issued it must be paid save only for the permitted deductions. See Dawnays Ltd v
FG Minter Ltd and Trollope and Colls Ltd [1971] 1 WLR 1205.
22
See P&M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146 and East Ham Corporation Appellants v
Bernard Sunley & Sons Ltd [1966] AC 406. In relation to final certificates, as illustrated in Inverdale Construction
Ltd (In Liquidation) v Meikleriggs Housing Society Ltd 1977 SC 181, a clause providing for the conclusiveness
of the final certificate may not be applicable in case of termination of the work before completion in cases such
as insolvency.

(c) Non-completion certificate
(i) Late completion by contractor

Once the contractor has taken possession of the site he or she must regularly and 14.018
diligently proceed with the execution of the works and complete on or before the date
for completion.
If the contractor is late in completing the works, the employer will be entitled to 14.019
recover liquidated damages at the rate specified in the appendix in accordance with
the contract. Such damages do not have to be proven but the sum must be a genuine
pre-estimate of the likely loss to the employer.
(ii) Deduction of liquidated damages

Where the contract provides for payment of money following the issue of a certificate, 14.020
issue of the certificate is a condition precedent to payment.23 Similarly, a prerequisite
triggering the liability of the contractor to pay liquidated damages is the issue of a
non-completion certificate by the architect in accordance with clause 22 of the HKIA
Form which deals with damages for non-completion. The certificate states that the
contractor has failed to complete the works by the original or extended date for
completion.
The principle is extended to cases where a certificate of non-completion is followed by 14.021
the grant of an extension of time. In Bell (A) & Son (Paddington) Ltd v CBF Residential
Care & Housing Association,24 a further certificate of non-completion is a condition
precedent to the deduction of liquidated damages by the employer.
Upon the issue of a certificate of non-completion, payment for liquidated damages is 14.022
calculated by multiplying the period between the date that the architect specifies in the
certificate as the date on which the building ought to have been completed and the date
of issue of the certificate of practical completion, by the rate of liquidated damages as
specified in the appendix.
23
W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501. See also Pyrok Industries Ltd v Chee
Tat Engineering Co Ltd [1988] 2 HKLR 472; JF Finnegan Ltd v Community Housing Association Ltd (1993) 65
BLR 103; Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715. The court has no power to issue a
certificate for non-completion in lieu or waive the requirement for one. See Brightside Kilpatrick Engineering
Services v Mitchell Construction (1973) Ltd [1975] 2 Lloyd’s Rep 493; Hsin Chong Construction Co Ltd v Hong
Kong and Kowloon Wharf and Godown Co Ltd [1986] HKLR 987; Savage Brothers Ltd v Shillington (Heating
and Plumbing) Ltd (1989) 5 ConstLJ 295.
24
(1989] 46 BLR 102. In this case, the court held that, in relation to a contract in the JCT 1980 standard form,
clause 24 strictly construed in accordance with its plain and ordinary meaning demanded the issue of a certificate
when the contractor had not completed by the completion date and, when the new completion date was fixed,
if the contractor had not completed by it, a certificate to that effect had to be issued and, thus, it was irrelevant
whether a certificate had been issued in relation to an earlier, now superseded, completion date. See, however,
the UK House of Lords judgment in Reinwood Ltd v L Brown & Sons Ltd [2008] 1 WLR 696 where it was held
that such a cancellation of a certificate of non-completion by a grant of an extension of time for completion had
not, on the true construction of the contract, in particular the provisions pursuant to which the payment had been
made, been retrospective in effect.

330 CERTIFICATES
(d) Practical completion certificate
(i) Practical completion determined by the architect

14.023 Under the contract, the main contractor is obliged to complete the works according
to the contract bills and/or contract drawings,25 while the employer shall pay the main
contractor the amount stated in the interim certificates issued by the architect. This
procedure will carry on until the practical completion certificate is issued under, for
example, clause 15(1) of the HKIA Form whenever the architect is of the opinion that
practical completion of the works has been achieved. Generally speaking, the usual
contractual and legal effects of a practical completion certificate are that all or part of
the retention money, or money held until a milestone has been reached, may become
due for release; liability for damage and the burden to identify and prove deficiencies
in the works for the purposes of recovery of damages due to breaches of the contract
passes on to the employer. Obligation on the contractor’s part to pay further liquidated
damages or the entitlement to claim loss and expenses for delay ceases; and the defects
liability period commences.26
14.024 The HKIA Form does not contain a clear definition27 concerning the precise stage at
which practical completion of the works has been reached – this will be subject to
the discretion and judgment of the architect.28 The architect will issue a certificate of
practical completion when the architect thinks that practical completion of the works
has been achieved. A contractor who deems that the practical completion certificate is
being unreasonably withheld should inform the architect in writing, giving the date on
which he or she considers practical completion has been achieved. Once the certificate
is issued, the main contractor is no longer obliged to accept new instructions from the
architect to undertake extra work.
(ii) Events following issue of a certificate

14.025 There are various consequences following the issue of the certificate. Most importantly,
the liability of the contractor for liquidated damages ceases and one half of the retention
money is released. It also confers the end of the contractor’s liability for insurance and
frost damage and the contractor’s licence to be on the site.
14.026 At the same time, the defects liability period begins to run. The length of the period
should be stated in the appendix, and if none stated, it is six months from the date
named in the certificate of practical completion of the works. Within this period the
25
By the doctrine of entire contract, even without express terms, construction contracts are subject to an implied
obligation to carry out and complete the works in accordance to the contract. See Ibmac v Marshall (Homes)
(1968) 208 EG 851, applying Sumpter v Hedges [1898] 1 QB 673.
26
In TFW Printers Ltd v Interserve Project Services Ltd [2006] BLR 299, as regards a JCT Form of agreement, the
liability to insure against the works after practical completion fell on the employer once possession was restored
to the employer.
27
See Mariner International Hotels Ltd v Atlas Ltd [2007] 1 HKLRD 413, where the Hong Kong Court of Final
Appeal held that ‘practical completion’ meant, as used in building contracts in Hong Kong, a state of affairs in
which the works had been completed free from patent defects other than ones to be ignored as trifling and this
was distinct from the concept of substantial performance. Contrast Big Island Contracting (HK) Ltd v Skink Ltd
[1990] 1 HKC 69, which was overruled.
28
Certification or assessment of the value of works in a building contract is a very complex exercise.

contractor is responsible for the making good of defects, shrinkage or other faults,
like plastering cracks resulting from materials or workmanship not to the contract
standard (scope of works are discussed later in the section “Certificate of Making
Good Defects”). The remaining retention money will be released either at the end
of the defects liability period or upon the issue of the certificate of completion of
rectifying the defects, whichever is later.
(iii) Working definition of practical completion

The certificate of practical completion identifies the date that the works are, in fact, 14.027
practically completed. Practical completion does not necessarily mean substantially
or nearly complete.29 A working definition might be that there are no defects apparent
and the employer will not be seriously inconvenienced when using the building as
intended, while outstanding items are being finished.
In Westminster Corp v J Jarvis & Sons,30 one judge held that practical completion 14.028
means the work is complete for the purpose of allowing the employer to take possession
and using the works as intended. In this case, the council contracted with Jarvis for
the construction of a multi-storey car park under the RIBA Form. Jarvis then made a
subcontract with Peter Lind & Co Ltd for the piling work. Lind completed the piling
work within the subcontract period and left the site. While Jarvis was proceeding with
other work on the site one of its excavating machines nudged a pile and it broke off.
Lind returned to the site and put right the defective piles. This remedial work led to
a delay in the completion of the whole contract work, and thus the main contractors
became liable to pay liquidated damages. Jarvis sought relief from paying liquidated
damages by seeking an extension of time on the ground that there had been a delay by
the subcontractors in the completion of the piling work.
The House of Lords decided that there had been no delay on the part of the 14.029
subcontractors since they had completed the work within the subcontract period,
enabling the main contractor to take over the work. Moreover, the work had been
completed to the reasonable satisfaction of the architect and main contractor.
Based on the decision of the House of Lords, it is possible to say that practical 14.030
completion does not necessarily mean everything must be perfect. There may still
be some defects that are of an obviously minor nature but capable of being put right
with little difficulty, or there may be more serious latent defects. Acceptance by the
architect seems to be recognition of practical completion.
29
With the widespread use of standard forms of contract, many of the authorities related to the doctrine of substantial
performance arose from cases involving contracts that provided for the concept of “practical completion” or
“substantial completion”. Yet, the authorities dealing with the existence and content of the doctrine of substantial
performance can only be considered of general application. See also Westminster Corp v J Jarvis & Sons Ltd &
Another [1970] 1 WLR 637; P&M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146; HW Nevill (Sunblest)
Ltd v William Press & Son Ltd (1981) 20 BLR 78; Emson Eastern Ltd v EME Developments Ltd (1991) 55 BLR
114; Hoenig v Isaacs [1952] 2 All ER 176; and Bolton v Mahadeva [1972] 1 WLR 1009.
30
[1970] 1 All ER 943. See Mariner International Hotels Ltd v Atlas Ltd [2007] 1 HKLRD 413 and contrast Big
Island Contracting (HK) Ltd v Skink Ltd [1990] 1 HKC 69 (overruled). See also Artlane Design Consultants Ltd
v Chan Wen Mee May [2009] HKEC 1142, where Burrell J noted that the issue of completion must be viewed in
context.

332 CERTIFICATES
(iv) Employer possession prior to practical completion

14.031 Occasionally, the employer requests to take possession of the building some time
before the architect has certified practical completion. This often happens if an
employer is anxious to get into a building. The contractor may accept the request from
the employer and expect the architect to issue a certificate of practical completion.
Even if both parties agree, the architect will not be free to issue the certificate. In fact,
the certificate is the formal expression of the architect’s opinion. Contracts require the
architect to issue the certificate only when the contractor has satisfied certain criteria
and contractual requirements. If the architects issue certificates that do not represent
their opinion, they will be guilty of professional misconduct and there can be serious
legal consequences for them. Occupation by the employer is not the same as practical
completion. In BFI Groups of Companies Ltd v DCB Integrated Systems Ltd,31 it
appeared that the employer may still have been able to recover or deduct liquidated
damages after taking possession of the building in the absence of a certificate of
practical completion.32
(e) Final certificate
(i) Function of the final certificate

14.032 To take effect, the contractual conditions of the final certificate have to be strictly
construed.33 Depending on the standard form adopted for the contract, a final
certificate fulfils either or both of two functions. It includes the contract sum adjusted
as necessary in accordance with the conditions of the contract, the amounts previously
certified and the balance expressed either as a sum due to the employer or a sum due
to the contractor. This balance must be settled within 14 days after the main contractor
has presented the final certificate to the employer. In addition, it may be used to certify
approval of the works that have been entirely completed to the satisfaction of the
employer in accordance with the terms of the contract. The final certificate issued
under the HKIA Form serves both functions. For every single case, the effect of a final
certificate depends on the wordings of the particular contract used. In the absence of
a clear expression to the contrary, usually certification of the quality and value of the
works for the purpose of making monthly payments is meant to be provisional and
represents only an approximation.34
(ii) Time limits for issue

14.033 Clause 30(6) of the HKIA Form provides that the final certificate must be issued
as soon as is practicable but before the expiration of three months from the end
of the defects liability period stated in the appendix; from completion of making
good the defects under clause 15 of the HKIA Form; or from receipt by the architect
of the documents for the settlement of the final account, whichever is latest.
31
(1987) CILL 348.
32
See, however, W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501.
33
Cantrell v Wright & Fuller Ltd [2003] BLR 412.
34
Wong Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521.

(iii) Legal effect of the final certificate

The effect of the final certificate is inextricably linked with the commencement of the 14.034
arbitration proceedings. Clause 30(7) of the HKIA Form provides that unless a written
request to concur in the appointment of an arbitrator is given under clause 35 of the
HKIA Form by either party before the final certificate has been issued or by the main
contractor within 14 days after such issue, the final certificate shall be conclusive
evidence in any proceedings arising from the contract that:
• quality or standard of the materials, goods or workmanship are to the

reasonable satisfaction of the architect;
• the contract terms requiring adjustment of the contract sum have been
properly made;
• all extensions of time granted are fair and appropriate;
• all matters concerning reimbursement of loss and/or expense under clause 26
have been settled; and
• all the claims have been properly accounted for.
(iv) Contractor’s obligation to supply documents

Subject to clause 30(5) of the HKIA Form, the contractor has a duty to provide the 14.035
architect with all the documents that are reasonably required for the final adjustment
of the contract sum. The contractor must send them either before, or within a
reasonable time after, practical completion of the works. Although the architect
is entitled to request the kinds of documents he or she requires and / or particular
documents to facilitate her or his assessment, the requests made shall be reasonable
in the circumstances.
Panamena Europa Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd 35 14.036
is an example of such a situation. It concerns a shipbuilding contract. The surveyor
Dr Telfer was required to certify whether the work had been satisfactorily performed.
However, he insisted on receiving additional information before certifying the works,
namely “such information as to labour, materials, dock and crainage charges as to
enable a rapid and accurate appreciation to be made of the position”. The contractor
did not supply the information and thus the certificate was not issued. The contractor
sought to recover payment without a certificate. Lord Thankerton said at 433 – 436:
“There is no dispute that this information was required by Dr Telfer because of

the view held by him that his function of certification was not confined to passing
actual quality of the work done but that he was also entitled to consider the
manner in which the work had been carried out, and, in particular, whether there
had been reasonable economy in time, labour and materials. Dr Telfer declined to
35
[1947] AC 428. In Birse Construction Ltd v McCormick (UK) Ltd [2004] All ER (D) 371 (Dec), while there may
be an obligation on the employer’s agent, by necessary implication into the contract, to fairly and properly assess,
estimate or agree the claimant’s entitlement under the contract, inactivity on the part of the contractor may result
in the claim being time-barred.

334 CERTIFICATES
proceed with the matter unless he was provided with the information to which on
his erroneous view of the contract, he held himself entitled … This means that an
illegitimate condition precedent to any consideration of granting of a certificate
was insisted on by Dr Telfer and the appellants [ship owners]. It is almost
unnecessary to cite authority to establish that such conduct on the appellant’s
part absolved the respondents [contractors] from the necessity of obtaining such
a certificate, and that the respondents are entitled to recover the amount claimed
in the action.”
(v) Conclusiveness of the final certificate

14.037 Clause 30(8) of the HKIA Form provides that no certificate, other than the final
certificate, shall of itself be conclusive evidence that any works, materials or goods to
which it relates are in accordance with the contract.36 Hence, the issue of an interim
certificate does not give evidence that all the works certified have been properly
executed in accordance with the contract. Similarly, the issue of a certificate of
practical completion does not prevent the architect from requiring the contractor to
make good work not in accordance with the contract.
14.038 Most contracts contain conclusive evidence clauses37 that make exceptions for fraud,
and for matters referred to arbitration within a certain period. Exception is also made
if there have been any accidental inclusions or exclusions of items, or any arithmetical
errors in any computation of the contract sums. If the matter is not concerned with the
conclusiveness of the final certificate, the parties have the normal limitation periods of
either 6 or 12 years in which to bring an action, depending on whether the contract is
respectively under hand or a deed.
14.039 For each contract, the finality will only attach to those matters specifically mentioned
in the conclusive evidence clause while other issues will not necessarily be final. The
courts will uphold the agreement between the parties as to the effect of a certificate.
In this respect, employers should examine such clauses under close scrutiny before
agreeing to them and it is important that the clause should be written so as to be fair
and reasonable.
14.040 Under the JCT Form, the House of Lords have held that the courts are bound by a
final certificate, which is conclusive evidence that the work has been properly carried
36
This may be enforced via a declaration from the court. See Mr Tracy Bennett v FMK Construction Limited (2005)
101 ConLR 92.
37
As observed in Cantrell v Wright & Fuller Limited [2003] BLR 412:
“The intention of such clauses is to provide the means of finally putting at rest the contractor’s contractual
obligations. They are also intended to bring to an end disputes arising out of the contract, particularly those
concerned with valuation, with the quality of the contractor’s performance where that is in part dependent on
the supervising professional’s satisfaction and with any delay in carrying out the works. However, by shutting
out relevant evidence in disputes arising out of the contract, a final certificate often has a draconian effect on
the rights of at least one of the parties to the contract. Thus, final certificate contractual conditions and the
final certificate itself must be strictly construed so as to ensure that the final certificate document conforms in
all respects to the contractual requirements relating to both its form and to the circumstances when it may be
issued.”

out. In P & M Kaye v Hosier & Dickinson,38 the final certificate was held to have the
effect of preventing the employer from continuing to contend that the work had been
executed defectively.39 Lord Pearson said:
“The architect’s function is not primarily or essentially an arbitral function. The works
have to be carried out to his satisfaction, and accordingly he must give or withhold his
expression of satisfaction. He may notify defects and require them to be made good.
He has to issue certificates and instructions may resolve some controversial points,
and he has to act fairly, but he is not primarily and characteristically adjudicating
on disputes. If in a contract such as this the parties agree that the architect’s final
certificate shall be conclusive evidence of certain matters, I do not think that there
is any invasion of the court’s jurisdiction or any affront to its dignity. The court’s
function in a civil case is to adjudicate between the parties, and if they have agreed
that a certain certificate shall be conclusive evidence the court can admit the evidence
and treat it as conclusive.”
(vi) Employer not entitled to dispute quality:

relevant case law
The following cases are listed to demonstrate that the courts are of the view that the 14.041
employer is not entitled to dispute the quality of the work after the issue of a final
certificate under clause 30(7) of the 1963 JCT standard form of contract.
In Crown Estate Commissioners v John Mowlem & Co Ltd,40 the JCT 80 Form was 14.042
adopted for the project. Clause 30.9 construes that unless proceedings in respect of any
defects are commenced within 28 days of the issue of the final certificate, the employer
will lose all rights to complain about them. The decision has been followed in Oxford
University Fixed Assets Ltd v Architects Design Partnership,41 where an architect,
having been sued by the client, sought to hold the contractor partly responsible under
the Civil Liability (Contribution) Act 1978. The claim failed since the contractor was
not held to be liable to the client by virtue of the conclusiveness of the final certificate.
In P & M Kaye Ltd v Hosier & Dickinson Ltd,42 the House of Lords considered the 14.043
conclusiveness of the final certificate issued under clause 30(7) of the RIBA standard
form of contract. Before the issue of a final certificate, the contractor had commenced
court proceedings to claim payment under two interim certificates. After the issue of
the final certificate, the contractor commenced a separate action to claim payment
under the final certificate. The employer, in turn, counter-claimed loss of profits
resulting from the contractor’s defective work. The House of Lords held that the final
38
[1972] 1 WLR 146. See also Wharf Properties Ltd & Another v Eric Cumine Associates (1986) 29 BLR 106. On
the other side of the coin, as noted in AMN Group Ltd v Gilcomston North Ltd 2008 SLT 835, as a general rule,
defaults by contractors attract no legal liability until at least the date of practical completion of the works, and
more plausibly until the date on which a final certificate is issued.
39
See also Panamena Europea Navigacion v Leyland [1947] AC 428 and Perini Corporation v Commonwealth of
Australia [1969] 2 NSWR 350.
40
(1994) 40 ConLR 36.
41
(1999) 64 ConLR 12.
42
[1972] 1 WLR 146.

336 CERTIFICATES
certificate was conclusive evidence that the works had in all respects been completed
in accordance with the contract, and it became binding on both the employer and
contractor once it was issued.
14.044 In H Fairweather Ltd v Asden Securities Ltd (1979) 12 BLR 76, the architect issued a
final certificate and subsequently a non-completion certificate under clause 22 of the
1963 JCT standard form of contract to trigger the deduction of liquidated damages
from the certificate. The court considered the fact that no notice concerning the
appointment of an arbitrator had been given in accordance with clause 30(7), so the
final certificate was conclusive evidence. Furthermore, the works had been completed
by the time prescribed by clause 21(1), and so precluded the employer from deducting
liquidated damages under clause 22.
14.045 The decision in the Kaye case was followed and it was held that the final certificate was
conclusive evidence that the works had been completed in all respects in accordance
with the terms of the contract. The court held that once the architect issues a final
certificate, the contractor will be functus officio (ie task performed) and the architect
is precluded from subsequently issuing a valid non-completion certificate under
clause 22.
14.046 The effect and conclusiveness of a final certificate established in the Kaye case has
been limited by the decision in H W Neville (Sunblest) Ltd v William Press & Son
Ltd,43 concerning the issue of a final certificate under the 1963 JCT Contract. Under
different circumstances, Judge Neway in the Neville case expressed a different view
from that of Lord Diplock in the Kaye case. It was held that the final certificate was
not conclusive as to consequential losses suffered by the employer in compensating
the later contractor and loss and expense in respect of the delay caused by defects
discovered by the architect and rectified by the contractor during the period between
practical completion and the date of the final certificate. Judge Neway took the view
that the final certificate and clause 30(7) dealt primarily with the state of the works
at the time of the issue of the certificate and the employer was not precluded from
recovering consequential losses due to the contractor’s earlier breaches of contract as a
result of the defective work. On the other hand, the validity of the final certificate may
be subject to dispute.44
14.047 In Cantrell v Wright & Fuller Limited,45 it was held that a ‘final certificate’ under the
JCT 1980 Form which was issued outside the time limits provided by the contract was
not a final certificate under the contract in the required form, substance or intent.
14.048 In Wong Chuk Kin v Millennium Engineering Ltd,46 it was held that certification for
interim payment applications did not have a final and conclusive effect, and the mere
43
(1981) 20 BLR 78.
44
Emson Contractors Ltd v Protea Estates Ltd (1987) 39 BLR 126.
45
[2003] BLR 412. See also Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850.
46
[2007] HKEC 1521. It was remarked :
“In AG v Wang Chong Construction Co Ltd [1991] 2 HKC 30 (CA), the Court of Appeal held that if the parties
intended the completion certificate to be final and conclusive such that the employer would be left without any
remedy even for latent defect of a very serious nature, the certificate has to be set out in the contract in the
clearest possible term before the Court would come to such an onerous conclusion.”

fact of expiry of the defect liability period did not absolve the contractor of liability
for the defects.
In Wide Project Construction (HK) Ltd v Incorporated Owners of Yen Dack Building,47 14.049
it was held that an interim certificate certifying the works as 100 per cent completed
was not a final certificate issued under the contract.
(vii) Maintenance certificate

Under the Government General Conditions of Contract for Building Works there is no 14.050
final certificate, but there is a maintenance certificate.
Clause 80(3) provides that: 14.051
“The issue of any certificate including the maintenance certificate shall not be
taken as relieving either the Contractor or the Employer from any liability the
one towards the other arising out of or in any connection with the performance of
their respective obligations under the Contract.”
Subject to the above provision, the maintenance certificate issued under the Government 14.052
form is not conclusive evidence on the quality of the work completed.48
(f) Certificate of making good defects
(i) Defects liability period

Clause 15(2) – (5) of the HKIA Form deals with the defects liability period. Reference 14.053
is also made to the period stipulated in the appendix, which is usually filled in by
the architect, and if not otherwise stated, is six months from the day named in the
certificate of practical completion of the works. Its intent is to allow a specific period
of time for defects to appear and to be listed by the architect, and it gives the contractor
the opportunity to remedy them.
The defects liability period starts from the date that practical completion is achieved. 14.054
Under the scope of clause 15(2), the contractor is required to make good any “defects,
shrinkage, or other faults”, which might seem to be all encompassing. In fact, the
phrase ‘other faults’ is to be interpreted ejusdem generis. This is to say that they must
be faults that are similar to defects or shrinkages. The clause also construes that the
defects so concerned must relate to workmanship or materials not in accordance with
the contract, or damage caused by frost occurring before practical completion. It does
not cover defects due to other reasons, such as poor standard of specification or the
47
[2005] HKEC 1997.
48
See Loundonhill Contracts Limited v John Mowlem Construction Limited (2001) 80 ConLR 1, for a different
form and effect of a maintenance certificate under the ICE Form of subcontract, which provides:
“The Contractor shall not be liable to the Sub-Contractor for any matter or thing arising out of or in connection
with this Sub-Contract or the execution of the Sub-Contract Works unless the Sub-Contractor has made a
written claim in respect thereof to the Contractor before the Engineer issues the Maintenance Certificate in
respect of the Main Works, or, where under the Main Contract the Main Works are to be completed by Sections
the Maintenance Certificates in respect of the last of such sections in which the Sub-Contract Works are
comprised.”

338 CERTIFICATES
occupancy of the employer. Damage due to frost occurring after practical completion
is the liability of the employer.
14.055 If a defect is found in an item that has been done in accordance with the contract, it is
not defective for the purposes of this clause. For instance, if the contractor procured and
fixed the timber that is of the moisture content specified by the architect and shrinkage
eventually took place solely because the central heating reduced the moisture content
below the specified level, the contractor would not be liable.
14.056 After the architect certifies that practical completion has been achieved, but before the
issue of a certificate of completion of righting the defects, the retention money that the
employer is entitled to hold is reduced by one half.
(ii) Schedule of defects

14.057 Clause 15(2) of the HKIA Form requires that the architect must deliver a schedule
of defects within 14 days from the expiry of the defects liability period. The main
contractor is required to make good defects within a reasonable time of receiving
the schedule. Much depends on the nature and circumstances of a particular defect
as to what may be considered a reasonable time. All work will normally be at the
main contractor’s expense. He is not entitled to issue any further instructions under the
defects liability clause after the issue of the schedule or after the end of the 14 days,
whichever is earlier.
(iii) Effect of the issue of the certificate

14.058 Subject to Clause 15(4) of the HKIA Form, the certificate of making good the defects
is issued when the architect is of the opinion that defects appearing within the defects
liability period have been duly made good. The issue of the certificate has two
important effects. First, it triggers the timetable for the issue of the final certificate
(clause 30(6) of the HKIA Form); and second, it signifies the end of the contractor’s
obligations to attend the site for the purpose of rectifying defects. Under clause 30(4)(c)
of the HKIA Form, the second half of the retention money will be released after the
issue of this certificate.
14.059 The word ‘defects’ seems to mean defects that are apparent during the defects liability
period. In any event, the contractor will be liable for any disconformity between the
works and the contract documents. The certificate of making good the defects only
means that the main contractor is no longer obliged to return and remedy defects, but
it does not end the main contractor’s liability for the cost of remedying them. Under
the Limitation Ordinance, the main contractor remains liable to the employer for
any breach in complying with the contract specifications. The period of the liability
of the main contractor is 6 years for ordinary contracts and 12 years for contracts
under seal.49
49
See, for illustration, Luk Ka Ming v YKK AP Hong Kong Ltd [2007] HKEC 1460, where the court took into
account the expiry of the defects liability period in evidence.

(g) The granting of an extension of time
(i) Reasons for delay

This appears in the form of a written notice for the purpose of recording an event 14.060
affecting the timely completion of the contract. Though it is not called a certificate,
an extension of time granted by the architect or engineer has the effect of a certificate.
If the contractor does not complete the works by the date for completion, the employer 14.061
is to be paid the liquidated damages as stated in the appendix. Clause 23 of the HKIA
Form gives the contractor the right to be granted an extension of time for the completion
of the contract, if the delay is due to certain specified events outside the control of
either party or the fault of the architect or employer.
(ii) Time limitations for granting an extension of time

The right to grant an extension of time is dependent on the contractor giving written 14.062
notice to the architect when it becomes apparent that the progress of the works is, or is
likely to be delayed. Clause 23 of the HKIA Form50 states that:
“upon it becoming reasonably apparent that the progress of the Works is delayed,
the Main Contractor shall forthwith give written notice of the cause of the delay
to the Architect, and if in the opinion of the Architect the completion of the Works
is likely to be or has been delayed beyond the Date for Completion stated in the
appendix to these Conditions or beyond any extended time previously fixed under
either this clause or clause 33(1)(c) of these Conditions …”
Although there is no stipulated time period stated in the contract, the main contractor 14.063
must be prompt in taking initial action by giving notice of delay and stating the cause
of delay.51 Otherwise, the architect may justifiably refuse to consider the extension
where notice is given long after the delay in question was apparent. The main
contractor should estimate the length of delay although the architect will make the
final decision.
The HKIA Form also does not place a time limit on the exercise of the architect’s 14.064
duty. If the architect is of the opinion that a relevant event falls within the events
contemplated by the extension of time clause and is likely to delay completion beyond
the completion date, he or she must give the contractor a fair and reasonable extension
of time through written notice and fix a new completion date as soon as he or she is
able to estimate the length of delay beyond the completion date. The contract period
will then be extended, thus releasing the contractor from the obligation to pay damages
based on the original date for completion.
In general, the architect should certainly make his decision before the contract 14.065
completion date is reached, but there may be instances when the delay is continuing.
50
W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501.
51
Birse Construction Ltd v McCormick (UK) Ltd [2004] All ER (D) 371 (Dec).

340 CERTIFICATES
In such a case, the architect may wait until the delay has ended before making an
extension.
14.066 The status of the certificate (or written notice) is said to be interim in nature and
the certifier will be entitled to exercise the function once only and will therefore be
functus officio thereafter. The contract permits no review other than by arbitration at
completion of the works.
3. FORM AND SUFFICIENCY OF CERTIFICATE

(a) Duties of the certifier
(i) Obligations of the certifier

14.067 In building contracts, the employer or his representative is under an obligation to
issue certificates at the various stages of the project.52 These may cover such issues as
interim and final payments, granting extensions of time and other matters. A common
provision of construction contracts authorises an independent third party to issue
certificates signifying particular events and embodying administrative decisions. For
a building project, the duty of issuing certificates is usually given to the architect or
engineer, either as a personal appointment or as a firm. Such person is referred to as
a certifier.
14.068 The certifier is obliged to issue certificates in a timely and accurate manner. For
instance, under clause 23 of the HKIA Form,53 the architect (certifier) shall, as soon
as he or she is able to estimate the length of the delay, make in writing an appropriate
extension of time for completion of the works upon receipt of an application from
the main contractor. Under clause 15(1) of the HKIA Form, the practical completion
certificate will be issued whenever the architect is of the opinion that practical
completion of the works has been achieved.54
14.069 In approaching the issue of whether a certificate is valid and binding, a few questions
may be asked, namely (1) the scope of the certifier’s authority, ie what the parties
had agreed should be decided; (2) whether the certifier’s determination fell within the
scope of that authority, ie what the certifier had in fact decided; and (3) if the certifier’s
52
See, for example, Jardine Engineering Corp Ltd v Shimizu Corp [1992] 2 HKC 271 and London Borough of
Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51. See also W Hing Construction Co Ltd v Boost Investments
Ltd [2009] 2 HKLRD 501.
53
Under clause 24 of the HKIA Form, in the event that the contractor invokes the provisions by making a written
application, the architect must form an opinion whether the contractor has suffered direct loss and/or expense
in the circumstances of the kind there set out. Such a written application must be made within a reasonable time
after a stated event, and the architect must then ascertain the amount of the loss or expense which is then added
to the contract sum. See London Borough of Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51.
54
For an illustration of the effect of a practical completion certificate on a subcontract, see Luk Ka Ming v YKK AP
Hong Kong Ltd [2007] HKEC 1460. For an early case on the meaning of practical completion, see Westminster
Corp v J Jarvis & Sons Ltd [1970] 1 All ER 943 and Big Island Contracting v Skink (1990) 52 BLR 110. Contrast
Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1.

FORM AND SUFFICIENCY OF CERTIFICATE 341
determination fell within the scope of his or her authority, whether, under the terms of
the parties’ agreement, that determination could nevertheless be challenged.55.
(ii) Interim certificates

Pursuant to clause 30(2)(A) of the HKIA Form, the amount stated as due in an interim 14.070
certificate, may in the discretion of the architect, include the value of any materials
or goods before delivery thereof to or adjacent to the works. Before certification of
interim and final payment takes place, many contract forms require the contractor to
submit an account and furnish the architect with evidence and reasonable proof at
times stated in the contract, setting out the amount of the gross valuation of the works.
The certifier will then consider this and issue a certificate stating the sum that is due
under the contract.56
Before an interim certificate is issued, the architect may ask the quantity surveyor to 14.071
prepare an interim valuation. After the architect has verified the interim valuation, he
or she will sign and issue the interim certificate by sending it to the main contractor.
However, the responsibility for the correctness of the sum on the certificate remains
with the architect.
(iii) Need for impartiality

In discharging her or his responsibilities, there is no obligation upon the certifier to 14.072
afford a full hearing or anything like it to the parties when he or she makes a decision
or issues an instruction or certificate. It is of paramount importance that the employer
and the contractor sign their contract on the understanding that in all such matters the
architect will act impartially between the employer and the contractor. The architect
shall not only exercise due care and skill but also reach such decisions fairly, keeping
a balance between the client and the contractor. This is distinct from the role of the
engineer or architect who is employed as the agent of the employer. The role of the
certifier can be illustrated in Sutcliffe v Thackrah,57 where Lord Reid said:
“The building owner and the contractor make their contract on the understanding
that in all such matters the architect will act in a fair and unbiased manner and it
must therefore be implicit in the owner’s contract with the architect that he shall
not only exercise due care and skill but also reach such decisions fairly, holding
the balance between his client and the contractor.’
55
For this, regard could be had not only to the determination itself, but also to any explanations or clarifications
of the reasoning given in subsequent correspondence. See Menolly Investments 3 Sarl v Cerep Sarl (2009) 125
ConLR 75.
56
For an example of whether a certificate was final or interim in nature, see Tong Pun Chung v Blessgain
Construction Engineering Ltd [2010] HKEC 825. For an example of disputes over the nature of payment
made to a contractor, see Sun Fook Kong (Civil) Ltd v Wellead Construction and Engineering Co Ltd [2004]
HKEC 1274.
57
[1974] AC 727. Thus, in issuing interim certificates, an architect does not, apart from specific agreement, act as
an arbitrator between the parties, and he or she is under a duty to act fairly in making her or his valuation and is
liable to an action in negligence at the suit of the building owner. A margin of error may still be acceptable. See
Secretary of State for Transport v Birse Farr (1993) 62 BLR 36.

342 CERTIFICATES
14.073 In assessing amounts to be certified, care however is to be taken to ensure that claims
for payment are reasonable and justified by the work done at the time, in quantity and
quality.58
(iv) Reasonable satisfaction

14.074 Thus, in certifying the work done, the quality or standard of materials and workmanship
must meet the reasonable satisfaction of the architect.59 The test of reasonable
satisfaction will be an objective one and the architect will be under an obligation to act
independently of the employer or contractor. If the approval or satisfaction mentioned
in the contract is that of a third party, including an architect or engineer in her or his
certifying capacity, an area of concern is the role of the certifier in relation to the legal
representation of the client in certifying satisfaction of the works. This matter was
examined in the Inner House in Robertson v Jarvie.60 In this case Mr John Robertson
(pursuer) contracted with Mr James Jarvie (defender) for the execution of carpentry,
joining, glazier and ironmongery works of a tenement of houses. Mr James Robertson
was the defender’s architect and also the inspector on the contract who made regular
visits to the work site. During the execution of the contract, all communications in
respect of the contract were made between the architect and the joiner. However, the
defender had many objections as the work was carried out by the pursuer and claimed
that the architect had no power to certify work that did not conform to the contract. The
Lord President made far-reaching remarks that:
“In the first place, upon the contract I think it is clear enough that the architect,
having been put forward by the proprietor as acting for him, is entitled to be the
judge of whether the work is executed in a satisfactory manner or not … and,
on the other hand, I think it follows equally upon the other side that, as to the
quality of work, if the defender allows his architect, as he naturally would, really
to represent him in this matter, and the medium of communication between him
and the tradesmen, and if the architect is satisfied with the work that is put in, the
defender cannot turn round and say: ‘I am going to have another opinion about
this, and I will get somebody else and put him in the witness-box to say that this
work has not been executed in a satisfactory manner’.”
14.075 In Minster Trust Ltd v Traps Tractors Ltd,61 the first defendant, Traps Tractors Ltd,
owned a number of tractors and scrapers, which were being reconditioned and ready
to be let out on hire. The plaintiffs, Minster Trust Ltd, agreed to purchase part of the
plants from the first defendant on the condition that “all machines are to be supplied
with the Hunt Engineering Certificate that they have been fully reconditioned to their
(ie Hunts’) satisfaction”. Hunts was in the business of inspecting new and second-hand
machines and issuing periodic progress reports and a final report to their customers.
58
See Victoria University of Manchester v Hugh Wilson (1984) 2 ConLR 43 and Rowlands v Collow [1992]
1 NZLR 178.
59
See Sutcliffe v Chippendale and Edmondson (1982) 18 BLR 149.
60
(1907) 15 SLT 703. See also Forrest v Scottish County Investment Co Ltd 1914 2 SLT 348.
61
[1954] 1 WLR 963. See also Merton LBC v Lowe (1982) 18 BLR 130 and Cantrell v Wright & Fuller Ltd [2003]
BLR 412.

The second defendant was Plant Sales and Exchange Ltd, which bought and sold
equipment, while the third defendant was the sole director of both companies. The
third defendant was aware of some defects in the plants but still requested Hunts to
indicate that ‘the machines have been satisfactorily overhauled on a fully-conditioned
basis”. Hunts sent the documents named “Inspector Reports”, not certificates, to Traps
Tractors Ltd and proved that the completed unit was accepted as reconditioned to the
required standard. Some time later, some of the machines required extensive repair.
The plaintiff sued the three defendants for breach of contract and breach of warranty.
It was held that the plaintiffs were entitled to damages for breach of contract: although
the documents tendered by Traps Tractors were not named certificates, they were
intended to embody a decision that was final and binding on the parties.
(b) Attacking the certifier
(i) Issues relating to conclusiveness

The issue of conclusiveness arises only in relation to final certificates. Clause 30(7) 14.076
of the HKIA Form states that the final certificate shall be conclusive evidence, in
any proceedings arising out of the contract and that the works have been properly
carried out and completed in accordance with the terms of this contract.62 It requires
an adjustment to be made to the contract sum except by reason of:
• fraud, dishonesty or fraudulent concealment relating to the works, or any part

thereof, or to any matter dealt with in the said certificate;
• any defect (including any omission) in the works, or any part thereof, which
reasonable inspection or examination at any reasonable time during the
carrying out of the works or before the issue of the said certificate would not
have disclosed; or
• any accidental inclusion or exclusion of any work, materials, goods or figures

in any computation or any arithmetical error in any computation.
(ii) Challenge in arbitration

Under construction contracts the actions and decisions of the certifier may be expressly 14.077
open to a challenge in arbitration. It is contended that the authorisation of an arbitrator
to ‘open up, review and revise’ the instructions and certificates issued by the architect
or engineer under the standard forms destroys the conclusiveness of the certificates. In
the HKIA Form, such power is given by clause 35(3) that:
“Subject to the provisions … in order to determine the rights of the parties and to
ascertain and award any sum which ought to have been the subject of or included
in any certificate and to open up, review and revise any certificate, opinion,
decision, requirement or notice …”
62
See also Norwest Holst Limited v Carfin Developments Limited [2009] BLR 167 and the earlier cases of Crestar
Ltd v Carr (1987) 37 BLR 113 and Minster Trust Ltd v Traps Tractors Ltd [1954] 1 WLR 963.

344 CERTIFICATES
14.078 This can be viewed as an important safeguard that the contractor has under the
contract. Instead of seeking to persuade the court that the certifier was disqualified,
the contractor may simply seek a second opinion from an arbitrator. In the event of
the withholding of certificates by the employer, some contracts permit arbitration to
proceed while the work is continuing. As given in clause 35(4) of the HKIA Form, the
award of such arbitrator shall be final and binding on the parties. If arbitration is going
to take place or is taking place when the final certificate is issued, the certificate will
be subject to the award of the arbitrator.
(iii) Court’s power to open up and review certificates

14.079 Another fundamental question is whether the court has been deprived of its ordinary
power to determine the rights and obligations of the parties and to provide them with
the usual remedies, by the power that the parties have given to their arbitrator to
open up, review and revise the certificates, opinions and decisions of the architect. In
Northern Regional Health Authority v Derek Crouch Construction Co Ltd63 at 667D,
Browne-Wilkinson LJ said:
“In no circumstances would the court have the power to revise such certificate
or opinion solely on the ground that the court would have reached a different
conclusion since so to do would be to interfere with the agreement of the parties.”
14.080 The decision of the Court of Appeal in Northern Regional Health Authority v Derek
Crouch Construction Co Ltd suggests that the court has no powers to open up or
review certificates given by the architect under a standard building contract. Such
powers were expressly given to arbitrators under the terms of the contract. This was the
case even where the certificates were not ordinary interim certificates, as commonly
used in building contracts, but certificates verifying records of expenditure for the
purpose of a cost plus contract. In Reed v Van de Vorm,64 it was also held that the court
could not open past certificates.
14.081 That decision was not overturned until recently when the House of Lords gave its
decision in Beaufort Development (NI) Ltd v Gilbert Ash NI Ltd65 that the courts do
have power to review architects’ certificates and can also deal effectively with similar
disputes in engineering contracts.
14.082 A requirement for any certificate is that it must be properly made in order to have
effect as provided in the contract. Referring to the summary judgment of Token
Construction v Charlton Estates,66 the validity of a certificate will be determined by
the result of its certifying process, it must be served and clear and unambiguous.67 The
63
[1984] QB 644. See W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501. See also
Atlantic Civil Proprietary Ltd v Water Administration Ministerial Corp (1997) 83 BLR 113.
64
(1985) 5 ConLR 111.
65
[1999] 1 AC 266. See W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501.
66
(1973) 1 BLR 48.
67
In Try Build Ltd v Blue Star Garages Ltd (1998) 66 ConLR 90, the meaning of ‘manifest error’ in a guarantee in
relation to a certified sum was held to mean an error which was plain and obvious on the face of the certificate or
which might be shown to be plain and obvious by looking at what it was supposed to represent.

following situations can lead to an ineffective and inconclusive certificate as no proper

certification has taken place.
(iv) Not within jurisdiction

If the certificate is issued in respect of matters that fall outside the certifier’s jurisdiction, 14.083
then the certificate will be ineffective. In practice, a certifier may seek assistance of
others to value the amount payable or assess the materials or workmanship of completed
work but he or she must certify personally. For instance, an interim valuation is usually
prepared by the quantity surveyor; the architect will sign and issue it in the form of
an interim certificate to the main contractor after it has been checked. Anglian Water
Authority v RDL Contracting68 illustrates that a certificate can be valid if it has been
signed by the person named as a certifier under the contract.
In that case the engineer was named to be the only person entitled to make a decision 14.084
under clause 66 of the conditions of contract. The validity of a document was attacked
by the contractor on the grounds that although it had been signed by the engineer, it
had in fact been drafted by an assistant. Judge Fox-Andrews said:
“In the commercial world many decisions are made by people such as [the
Engineer] who append their signature to letters drafted by others. It would
require compelling evidence to establish in such circumstances that the decision
was not that of the signatory.”
(v) Not properly made

The operation of the requirement that a certifier must act in accordance with any 14.085
requirement as to conditions precedent to that act.69
If the certificate is issued outside any time limits specified in the contract, then the 14.086
certificate will be ineffective. The argument had been raised in London Borough of
Merton v Lowe and Another 70 regarding the construction of an indoor swimming pool.
In the case, the construction provided for a suspended ceiling of Pyrok. Pyrok is a
proprietary product finally rendered into a ceiling. The plaintiff was the owner of the
swimming pool whilst the defendant was the architect appointed for this contract.
After completion, cracks were found in the ceilings of several rooms due to poor
workmanship and inappropriate mix of coatings on plastered ceilings by the ‘Pyrok’
contractor.
The contract provided that the issue of a final certificate would be conclusive evidence 14.087
of the contract in respect of workmanship unless it was challenged within a short time.
The defendants issued a final certificate despite realisation that there were still defects
in the roof. As a result of issuing the final certificate, the defendants negligently
caused the potential right of action of the plaintiff against the contractor to lapse. The
68
(1988) 43 BLR 98.
69
Crestar Ltd v Carr (1987) 37 BLR 113.
70
(1981) 18 BLR 130.

346 CERTIFICATES
plaintiff sued the architect for professional negligence. The architect defended that the
document the parties had taken to be the final certificate was defective and hence the
contractor could not rely upon it as a valid defence. The circumstance was whether
everyone involved realised that it was intended to be a final certificate. Lord Justice
Everleigh said:
“… this certificate was issued very much out of time. It should have been issued,
according to the terms of the contract, I think I am right in saying, within six
months of the end of the defects liability period. It matters not. It should have
been issued some years before it actually was.
But on the facts of the case what happened was this: the contractor called for
the certificate, the plaintiffs asked the architect not to issue it, there was still
some electrical work to be done, and it was not until May 1973 that the plaintiffs
agreed, on the advice of the architect, that the certificate could be issued. In the
correspondence between the Council and the architects relating to this matter
they speak of the issue of the final certificate; and in the covering letter enclosing
the certificate with which we are concerned the defendants say to the contractors:
‘We are enclosing the final certificate.’
I take the view that the plaintiffs, in an action brought by them against a main
contractor, could not have been heard to say that this document was not a final
certificate. It goes against all common sense. In my view it goes against the rules
of law, too. They would have been estopped from so contending, in my view. The
fact that the words ‘Final Certificate’ did not appear upon it seems to me to
wholly irrelevant in the present circumstances.”
14.088 In Cantrell v Wright & Fuller Limited,71 the claimant claimed about £75,000 for work
which it had carried out on the respondent’s nursing home under what they contended
was a valid final certificate issued under clause 30 of the JCT 1980 Form. This was
issued outside the period specified in the contract and was not a final certificate under
the contract.
14.089 In John Barker Construction Ltd v London Portman Hotel Ltd,72 the contractor
challenged the extension of time granted by the architect on the basis that it was not
considered fair and reasonable. The court agreed to it and it was held that there was an
obligation on the architect in a standard JCT contract to act fairly.
“I find quite unacceptable the suggestion that the parties can have intended that
a decision on a matter of such potential importance should be entrusted to a
third person, who was himself an agent of one party, without that person being
under any obligation to act fairly. It seems to me to go without saying that the
parties must have intended the decision-maker to be under such an obligation,
the imposition of which is necessary to give efficacy to the contract.”
71
[2003] BLR 412. See also Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850.
72
(1996) 83 BLR 31.

By the same token, it may be possible to extend this argument to the situation where an 14.090
employee of the main contractor apparently has authority to decide the subcontractor’s
entitlement. The decision can be challenged either in litigation or arbitration.
(vi) Disqualification of a certifier

Construction contracts generally provide that a certificate is a condition precedent73to 14.091
payment. To date, there is a substantial amount of case law concerning the recovery
of money in the absence of a certificate.74 In circumstances where the certifier has
acted improperly, for example, by colluding with the employer or other parties, the
certifier will be held to be disqualified and the certificates will be set aside. The
contractor will be entitled to recover payment, as in the case where no certification
has been given.
(vii) Impartiality
The certifier must issue a certificate in an honest and fair way. In Hickman v Roberts,75 14.092
the issue of certificates by the architect was made under the influence of the employer
and so his final certificate was set aside. In this case, the architect delayed issuing the
certificates and the contractor commenced an action to recover sums that were due.
The House of Lords realised that the architect did not rely on his opinion to act with
73
As to whether a term is a condition precedent, see Bremer Handelsgesellschaft Schaft v Vanden Avenne Izegem
[1978] 2 Lloyds Rep 109, where Lord Wilberforce noted:
“Whether this clause is a condition precedent or a contractual term of some other character must depend on (i)
the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii) general considerations
of law.”
74
See, for example, Alpha Appliances Ltd v Get Luck Development Ltd [2006] HKEC 945, where it was held that,
even if the certificate was required, the employer’s failure to put in place an architect for that purpose disentitled
the employer to rely on such condition precedent by reason of the well-established ‘prevention principle’ as per
Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 and Frederick Leyland & Co Ltd v
Panamena Europea Navigacion (1947) 80 Lloyd LR 205.
75
[1913] AC 229. See Hounslow London Borough Council v Twickenham Gardens Developments Ltd [1971] Ch
233, where Megarry J remarked:
“The real question for me, however, is whether the principles of natural justice apply to the architect’s notice
at all. Mr Neill’s sheet anchor was Hickman v Roberts [1913] AC 229. That was a case of an architect who
misapprehended his position. He allowed his judgment to be influenced by the billing owners and improperly
delayed issuing his certificates in accordance with their instructions. Throughout the speeches in the House of
Lords there are references to the arbitrator as a judge with a judicial position, a judicial attitude and so on. If an
architect abdicates his somewhat special and delicate position of independence and becomes an instrument of
the building owner, then I can well see that the building owner cannot rely upon the architect’s certificate. That,
however, does not carry the point that in all decisions that he makes, and in particular in issuing certificates,
anything that he does without observing the rules of natural justice is null and void. The question is whether
that ought to be the rule … I think the answer must be no … It seems to me that under a building contract, the
architect has to discharge a large number of functions both great and small which call for the exercise of his
skilled professional judgment. He must throughout retain his independence in exercising that judgment. But
provided he does this, I do not think that, unless the contract so provides, he need go further and observe the
rules of natural justice, giving due notice of all complaints and affording both parties a hearing. His position
as expert and the wide range of matters he has to decide point against any such requirement, and an attempt
to divide the trivial from the important with natural justice applying only to the latter would be of almost
insuperable difficulty. It is the position of independence and skill that affords the parties proper safeguards
and not the imposition of rules requiring something in the nature of a hearing. For the rules of natural justice
to apply, there must, in the phrase of Mr Harmon, be something in the nature of a judicial situation and this is
not the case.”
See also AMEC Civil Engineering Limited v The Secretary of State for Transport [2004] EWHC 2339.

348 CERTIFICATES
sufficient firmness to determine those questions affecting the issue of certificates and
the interim amounts thereof. Under these circumstances, the House of Lords held
that the employer was precluded from setting up a defence either that the certificate
was a condition precedent or that the certificate was conclusive as to the value of the
works.
14.093 Most construction contracts make provisions for a certifier to certify payments, grant
extensions of time, assess the quality of materials and workmanship, etc. It has been
established that a certifier can have two roles, one as a certifier and another one as
the agent of the employer. The impartial duty of architects in acting as certifiers has
raised the question of whether they can be successfully sued if they perform this role
negligently.
(viii) Immunity from liability

14.094 Judges and arbitrators have immunity from actions for negligence. The role of the
certifier has often been characterised as ‘quasi-judicial’ or ‘quasi-arbitral’. From this
proposition, it has been argued that the position architects, when acting as certifiers,
ought to be the same as judges and arbitrators and thus they should be immune from
liability for professional negligence in the performance of their work. In Chambers v
Goldthorpe,76 the Court of Appeal took the view that the architect held the position of
an arbitrator when issuing certificates and so he could not be sued for negligence in
exercising those functions.
14.095 The fact is that when architects act as agents of the employer in discharging obligations
imposed by the contract, claims for damages for breach of contract may be made
against them. The view in the Chambers case was overruled by the House of Lords in
Sutcliffe v Thackrah.77 In that case, Mr Sutcliffe decided to erect a house and discussed
the project with Mr Thackrah who was an appointed architect and quantity surveyor.
Tenders were invited for the construction of the house. David A Walbank (Builders)
Ltd submitted the lowest tender and was accepted as the main contractor.
14.096 Progress of work was slow and the architect made complaints to the builders. Interim
certificates were issued as the work proceeded, and they were paid by Mr Sutcliffe.
Certificates 9 and 10 were made in May 1964 and July 1964, respectively. Before the
builders had completed the work, the plaintiff turned them out of the site, and another
firm completed the works at a higher cost. Not long afterwards Walbank went into
liquidation.
14.097 It was then discovered that the work for which certificates 9 and 10 had been paid was
defective. Since Walbank was insolvent, there was no way to recover the overpayment
from them. Mr Sutcliffe brought an action against the defendants for over-certifying
the work. Following the decision in Chamber v Goldthrope in 1901, an architect would
not be held liable for negligence in issuing certificates. The House of Lords recognised
76
[1901] 1 KB 624. See Pacific Associates v Baxter [1990] 1 QB 993. See also Leon Engineering & Construction
Co Ltd v Ka Duk Investment Co Ltd [1989] 2 HKLR 537.
77
[1974] AC 727.

the well-established rule that both judges and arbitrators were not liable for negligence
when performing their duties.
The House of Lords were unwilling to accept the earlier decision of the Court of 14.098
Appeal that held that when architects act as certifiers they cease to owe a duty to their
clients to exercise care and skill. They therefore decided that architects, when acting
as certifiers, were not acting in some judicial capacity and so immune from liability to
their clients: architects are under a duty of care to their clients to act fairly in making
their valuations and are liable to actions in negligence at the suit of a building owner.
In these particular circumstances the architect had been negligent and was liable to
Mr Sutcliffe.
In Arenson v Arenson,78 it was held that an immunity from liability for negligence may 14.099
exist only if certain indicia are satisfied. These indicia are as follows: (a) there is a
dispute or a difference between the parties which has been formulated in some way or
another; (b) the dispute or difference has been remitted by the parties to the person to
resolve in such a manner that he or she is called upon to exercise a judicial function; (c)
where appropriate, the parties must have been provided with an opportunity to present
evidence and/or submissions in support of their respective claims in the dispute; and
(d) the parties have agreed to accept the decision.
Consequently, it may be suggested that architects, when certifying payments, 14.100
owe a duty of care to both the employer and the contractor. This view has been
confirmed in Michael Sallis & Co Ltd v ECA & FB Calil and Withain & Newman
& Associates.79 Yet, the duty to take reasonable care in certifying is owed to the
employer; no similar duty is owed to the contractor. This is confirmed by the
decision of the Court of Appeal in England in Pacific Associates Inc v Baxter and
this was followed in Hong Kong in Leon Engineering & Construction Co Ltd v Ka
Duk Investment Co Ltd.80
The architect will normally be the general agent of the employer. In Black v Corenlius,81 14.101
Lord Gifford stated that “I think that the architect is a general agent of the employer for
all purposes necessary for carrying out the works”, a view with which the remainder
of the Second Division concurred.
It is clear that the architect is not contractually linked with the contractor. Then the 14.102
question is whether an architect or an engineer will be held liable to a contractor in
negligence when acting as a certifier under a standard form construction contract.
It was always considered that this could be so but until 1987 there were no decisions 14.103
by the courts. Then in the case of Michael Sallis & Company Limited v Calil, it was
held that an architect could be liable.
78
[1977] AC 405 at 428.
79
(1988) CILL 396.
80
[1989] 2 HKLR 537. See also Metrowell Holdings Limited v Periwin Development Limited [2001] 3 HKLRD
182, where Leon Engineering & Construction Co Ltd v Ka Duk Investment Co Ltd was differentiated on the facts.
81
(1879) 6 R 581.

350 CERTIFICATES
14.104 However, a later decision of the Court of Appeal reached a contrary conclusion in
Pacific Associates Inc and Another v Baxter and Others.82 The facts of the case are
as follows: Pacific entered into a FIDIC Form of contract with the Ruler of Dubai for
dredging work. Halcrow was appointed as the engineer to administer the contract,
and RB Construction (RBC) were the subcontractors on the job. RBC alleged that it
had found unexpected ‘hard materials’, and repeatedly made claims. Halcrow rejected
these claims each time and the matter went to arbitration. Both RBC and Pacific then
started proceedings against Halcrow, alleging that there had been a continual failure
by Halcrow to certify, and that Halcrow had acted negligently in rejecting the claims
or alternatively, that it was in breach of its duty to act fairly and impartially in its
administration of the contract. The court held that the engineer was the agent of the
employer, and thus was under a duty to the employer to exercise reasonable skill and
care in the administration of the contract, and to act fairly between the employer and
the contractor. On the other hand, the decision of the court was not affected by the
disclaimer of liability regarding the engineer’s acts and obligations under the contract.
However, engineers are assumed not to have direct duty towards the contractors for
any economic loss arising from any breach of their duty.
82
[1990] 1 QB 993. In this case, the contract between the client and the contractor contained an arbitration clause
and a disclaimer of liability covering the engineer.

1. INTRODUCTION
(a) Payment overview
Payments of products are usually made either at the time of delivery or in the form of 15.001
instalments according to the agreement between the purchaser and the seller that the
amount is to be paid over a period of time on an equal basis. The method of payments
in the construction industry is quite unique.1 In this industry, interim payment is
a usual way to effect payment, where the amount will be varied according to the
amount of work executed by the contractor and certified by the architect at regular
intervals.
Different types of contractual agreements have different effects on payment. Before 15.002
exploring the issues in relation to payment in more detail, an overview of the types
of contractual agreements normally used in the industry is useful, as they differ
in the way in which variation is constituted and the final account is calculated and
concluded.
Cashflow is always the lifeblood of the construction industry.2 The legal landscape 15.003
in relation to the issues of payment in construction contracts has been substantially
modified by domestic legislation, and each jurisdiction needs to be approached
separately. In Hong Kong, no such or similar legislation is yet in place or in real
contemplation and, hence, common law principles still govern the impact and
consequences of non-payment.
2. TYPES OF CONTRACT
Typically, a construction can be a lump sum contract, a measurement contract or a cost 15.004
reimbursement contract3.
1
There are certain features inherent in the construction industry. Above all, construction activities are inherently
subject to a high level of risks and tender prices are installed with definite uncertainties due to technical and
financial assumptions in pricing.
2
Construction contracts traditionally provide for work to be paid for after the work has been done. Thus,
contractors are paid, if at all, in arrears and it is both common and necessary for contractors in the industry to
fund their work by way of overdrafts and trade credits. To cater for these, there have been some international
discussions and solutions to the highlighted problems, for example, Proposed Legislation to Address Payment
Problems in the Construction Industry (2002) by the New Zealand Ministry of Economic Development; the
New Zealand Law Commission Study Paper 3 Protecting Construction Contractors: An Advisory Report to the
Ministry of Commerce (1999); and the Northern Territory Department of Justice Discussion Paper Reform of
Law Concerning Payments due to Contractors (2002).
3
There are variations to these, depending on the agreement of the parties. See, for example, Headwin
Engineering Ltd v United Soundfair Engineering Co Ltd [2008] HKEC 591 and UDL Argos Engineering
& Heavy Industries Co Ltd v Yau Lee Construction Ltd [2008] HKEC 922. There are also other types of
contracts, such as design-build contracts. See Midland Expressway Ltd v Carillion Construction Ltd (No 1)
(2005) 106 ConLR 49.

354 MONEY
(b) Lump sum contract
15.005 A lump sum contract is a contract in which the contract sum is agreed in advance.4
Changes in quantity or quality of work will possibly be regarded as variations,
provided that such works are instructed by the architect or engineer under certain
provisions of the contract, which expressly empower him to order such works. In a
lump sum contract, completion of work is a prerequisite condition of effecting the full
payment of the whole of the agreed lump sum.5 It should be noted that the final cost
incurred and the cost estimated by the contractor at the tender stage may be different:
there is always a risk that tenderers have to take the responsibility for any additional
costs due to uncertainties. Hence, a lump sum contract carries a function to transfer
the risk of increased costs to the contractor who are contracted to complete the project
for the agreed fee. In practice, tenderers usually allow for the costs of risks, such as
uncertainties over the extent and nature of work, in their tender price.
15.006 For lump sum contracts, a fluctuation clause is commonly incorporated into the
contract to eliminate some of the risks associated with increased costs imposed on
the contractor whereby adjustments are allowed for fluctuations in costs of labour and
materials or a sum agreed upon the contract is fixed. Therefore, some risks of price
increase will be shifted back to the employer, instead of the contractor bearing all the
risks.
(c) Measurement contract
15.007 A measurement contract (or remeasurement contract) is a kind of contract in which

the amount of work is ascertained by measurement, and the contract sum is valued
in accordance with bills of approximate quantities or a schedule of prices in the
contract.6
15.008 For those contracts based on bills of approximate quantities, the contractor carries
out the works and the values are measured and priced against the unit rates as given
in bills of approximate quantities. This type of contract is usually adopted where
the employer cannot determine his requirements in advance or the works have to be
carried out urgently. Different from a lump sum contract, the approximate quantities
are subject to final measurement of the completed works. This gives a fair payment
for the contractor’s cost and provides a basis for the measurement of variations in the
4
See, for example, Tam Kai Hung v Winston Air-Conditioning & Engineering (Hong Kong) Co Ltd [2007] HKEC
1161 and Sunley Engineering & Construction Co Ltd v Ngo Kee Construction Co Ltd [2006] HKEC 2276. See
also Midland Expressway Ltd v Carillion Construction Ltd (No 1) (2007) 107 ConLR 235 and Emcor Drake &
Scull Ltd v Edinburgh Royal Joint Venture 2005 SLT 1233.
5
See, for example, Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689. See also
Cutter v Powell [1775 – 1802] All ER 159 but contrast H Dakin and Company Limited v Lee [1916] 1 KB 566
and Saphiatoon v Lim Siew Hu (1963) 29 MLJ 305.
6
See, for example, Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [1999] BLR 123 and Mitsui
Construction Co Ltd v Attorney General of Hong Kong (1986) 33 BLR 14. See also Chow Kee v Transway
Construction & Engineering Ltd [2006] HKEC 2314 and Kenon Engineering Ltd v Nippon Kokan Koji Kabushiki
Kaisha [2004] HKEC 542.

INTERIM PAYMENTS 355
course of the contract. The use of approximate quantities of bills allows overlapping
of design and construction in the construction period, which can shorten the overall
tender period and minimise the expense of preparing firm bills of quantities.
In measurement contracts based on schedules of prices, the works carried out by 15.009
the contractor are measured and priced at the rates in a schedule of prices. Without
knowing exactly how the project might be, the contractor has to execute the works
on the instructions of the employer or the employer’s representative. This type of
contract is usually used in situations where the employer cannot predetermine the
scope and/or quantities of the project at the time of entering into a contract with
the contractor. A great disadvantage of this kind of contract is that a schedule of
prices comprises components of work without quantities, which makes it difficult to
quote realistic prices, and results in great risk to both the employer and contractor.
An ad-hoc schedule is a specially prepared schedule in which only items relevant
to the job are stated. The more items it contains, the easier it is to value the work at
relevant rates.
(d) Cost reimbursement contract
Cost reimbursement contract is a contract in which the price is determined on the 15.010
basis of actual costs incurred by the contractor for the execution of the project, plus an
agreed lump sum amount, or subject to a formula covering the contractor’s profit and
overheads.7 This kind of contract is usually used when the work has to be carried out as
soon as possible. However, with this type of contract the employer has little idea about
the scope of work at the time of tendering.
3. INTERIM PAYMENTS
(a) Interim payment procedure
It is general practice for a great part of construction work to be carried out by a large 15.011
number of domestic subcontractors selected by the main contractor and/or nominated
subcontractors as directed by the client. The direct contractual relationships between
the employer and the main contractor and the main contractor and all subcontractors
further the gap between the employer and all subcontractors, causing payments from
the employer to go through many hands before reaching the parties that should be
receiving the payments.
As an illustration, clause 30 of the HKIA/RICS Standard Form of Contracts8 deals 15.012
with certificates and payments, providing contractual effects for various certificates
issued along different stages of a project and regulating payments under the contract.
7
Cost reimbursement contracts are relatively rare in Hong Kong.
8
This refers to the Agreement and Schedule of Conditions of Building Contracts for Use in Hong Kong (1976 edn).

356 MONEY
Pursuant to this clause, the values of work certified in interim certificates are regarded
as estimates of work done.
15.013 The consultant quantity surveyor does not have a contractual obligation to advise the
contractor on the amount that he should obtain, but must send a copy of his detailed
valuation to the architect recommending the value of the contractor’s work done. An
architect can seek assistance from the consultant quantity surveyor, for measurement
and valuation of work or other detailed matters, but the architect should issue the
actual certificate, ie the architect cannot delegate the entire duty of certification to
others. Only the persons authorised by the contract and named as certifiers can give
certificates.
15.014 Interim calculations serve the purpose of ascertaining the amount of work due under
an interim certificate, and shall be done whenever the architect considers it necessary.9
Interim certificates are issued periodically before practical completion, at an interval
as stated in the appendix, and if none stated, once a month. Once the stage of practical
completion is reached and a certificate of practical completion is issued by the
architect, the main contractor is no longer obliged to accept new instructions requiring
extra work, even on modified items. Before that, the architect is under an obligation to
issue interim certificates.
(b) Period for honouring certificates
15.015 Subject to the terms of the contract, as soon as the architect’s certificate is issued, a
debt is incurred by the employer which must be paid to the contractor within the period
for honouring certificates as stated in the appendix; and if none is stated, then the
period during which the contractor shall be able to present the certificate for payment
will be 14 days. The contractor can initiate proceedings against the employer under
clause 26 of the HKIA/RICS Standard Form of Contract, if the employer does not
honour the certificate within the stipulated time frame.
15.016 In L&M Special Construction Ltd v Johnny Ho & Partners Ltd,10 the defendant
failed to make payment to a nominated subcontractor of the sum due to it under
the payment certificate. It was stated in the contract that the defendant should
have caused the payment received from the employer to be made into a nominated
account with the bank, which is a joint account of the plaintiff and the defendant.
In spite of repeated requests and demands by the plaintiff, the defendant failed
to make the payment. The judge finally awarded the plaintiff the amount due
together with the interest. In addition to giving an idea about the legal function of
a payment certificate, this case demonstrates the “pay when paid” principle, which
9
See Rupert Morgan Building Services (LLC) Ltd v Jervis [2004] 1 WLR 1867, where it was held, albeit in relation
to the Housing Grants, Construction and Regeneration Act 1996, that once the architect had issued a certificate,
the builders were entitled to payment; that an interim certificate was not conclusive evidence that the works had
been done in accordance with the contract; and that the clients were not therefore precluded from subsequently
showing overpayment.
10
[1992] HKEC 41. See also Pilecon (Hong Kong) Limited v Mightyton Limited [1993] 2 HKLR 435, a case
decided with reference to the prior version of the Arbitration Ordinance (Cap 341).

will be discussed in depth in later in this chapter. After the contractor receives
payment from the employer, the contractor should make payment to the nominated
subcontractor accordingly.
(c) Materials and goods
Payment for materials and goods is often a matter of concern. Materials and goods 15.017
required for a construction project shall be ordered at appropriate times, with
consideration given to the times required for manufacturing and delivery and also
to the main construction programme and the short-term programmes, when they
are assembled on site. These materials or goods shall be stored away from the site,
until it is the right time for them to be delivered to the site. The value of off-site
goods and materials shall be included in the interim certificate, provided that the
conditions in clause 30 of the HKIA/RICS Standard Form of Contract have been
fulfilled. More specifically, subclause 30(2) sets out that an interim certificate may
include:
“the estimated value of the work properly executed and of the materials and
goods delivered to or adjacent to the Works for use thereon …”.
This clause sets out the conditions of payment for materials or goods. Once these 15.018
materials and goods are certified and paid for, they become the property of the
employer, though the main contractor remains responsible for loss or damage to
them.
Subclause 30(2)(A) deals with the “… value of any materials or goods before delivery 15.019
thereof to or adjacent to the Works …” and the details of the off-site goods and
materials with regard to payment. This is intended to cover the use of prefabricated
materials off site, and to enable the main contractor to be paid for them before their
delivery to the site.
(d) The entire contract
A lump sum contract is a contract to complete the whole work for a lump sum; detailed 15.020
clauses may be provided to state what amount, if any, a contractor is entitled to receive
if the work is not complete. An entire contract is one where the contractor’s right of
payment depends on entire performance. The contractor can recover nothing if he
stops work before the entire work is complete. However, the right to instalments may
arise under an express provision.11
11
At common law, when a contract with fixed price provides for the contractor to carry out works which are
sufficiently described, it will normally be implied that there is a parallel duty to complete the works. See Modern
Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689. In many construction contracts, the
contract also contains an express obligation to carry out and complete the works. See Modern Engineering
(Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689.

358 MONEY
15.021 Whether a construction contract is an entire one depends obviously on what was
agreed to be carried out.12 As to completion, it is not uncommon for the completion to
be expressed to be to the satisfaction of the engineer or the architect.13
(e) Consideration
15.022 It is essential, in some cases, to be able to determine if the employer can recover
money paid to the contractor. Where the contractor has received payment either in full
or in part but failed to complete the work, the employer can only recover that money
if there has been a total failure of consideration. However, if the employer received
any benefits derived from the performance of the contractor, there has not been a total
failure of consideration. Payment will not be recoverable in this regard even though it
was made in advance of performance. In such circumstances, the employer can claim
damages as an alternative. Therefore, attention should be paid to the consideration of
a contract, as it affects whether the contractor or subcontractor is entitled to payment
and whether the employer can recover payment in some circumstances.
15.023 In Williams v Roffey Bros & Nicholls (Contractors) Ltd,14 additional payment was
not honoured by the employer after substantial performance by the contractor, which
demonstrates the importance of defining consideration in a construction contract.
In this case, the plaintiff subcontractor entered into a contract for carpentry work
with the defendant contractor. Pursuant to the subcontract, the plaintiff would have
received interim payments in the amounts related to work completed, and accordingly
the plaintiff received payments for the work following the completion of carpentry
work on a few flats. However, the carpentry subcontractor then found that he was
in financial difficulties because the contract price was too low and he had failed to
12
For example, if the quoted price is a lump sum for the whole work, it is more likely to be found as an entire
contract; if the quoted price is merely in the form of a unit rate, it is open to argument whether the contract is an
entire one.
13
In the New Zealand Court of Appeal case of Stratford Borough Council v JH Ashman (NP) Ltd [1960] NZLR 503,
Cleary J made it clear that:
“It must in every case depend upon the interpretation of the contract as a whole whether, on the one hand, the
satisfaction of the architect is to be the overriding requirement as to the sufficiency of the work even if it does
not conform with the specification, or whether, on the other hand, conformity with the specification and the
satisfaction of the architect are cumulative requirements.”
In Major v Greenfield [1965] NZLR 1035, McCarthy J said:
“Some of the conflicts to be found in these and in other areas are frankly irreconcilable, and I am satisfied that
a way can be found through this jungle only if one keeps steadily in mind the principles of construction of
building contracts which were clearly stated in the judgment of this court delivered by Cleary J. comparatively
recently in Stratford Borough Council v. J. H. Ashman (N.P.) Ltd. [1960] N.Z.L.R. 503. That judgment
emphasises the necessity to decide primarily whether the contract is one where the satisfaction of the architect
is to be the overriding requirement as to the sufficiency and quality of the work done, or whether, on the other
hand, conformity with the specifications and the satisfaction of the architect are cumulative requirements. The
former interpretation is the one favoured in construing modern building contracts. As a result, even in the
absence of express provision that the architect’s certificates are to be conclusive, generally those certificates
are treated as such. The issue of a formal certificate may not be necessary, ‘for a certificate is only a mode of
expressing the satisfaction.’ Each case, however, depends finally on its own documents, and the difficulties in
this present case are in great part a product of the uncertainties presented by the documents.”
See also the South African case in Bruens v Smith [1951] 1 SA 67.
14
[1990] 1 All ER 512.

supervise his workmen properly. The defendant contractor, on the other hand, would
have been liable for the penalty clause in the main contract if the project were not
completed on time. He agreed to pay the plaintiff an extra amount at a rate per flat,
on completion, to ensure that the plaintiff continued with the work and completed it
on time. The plaintiff continued to work and completed a further few flats but then
stopped working on the remaining flats and claimed money at the new agreed rate. The
defendant denied payment as he claimed that the agreement to pay was unenforceable
since it was not supported by consideration.
The essence of this case and what the court held was that: 15.024
“Where one party to a contract agreed, in the absence of economic duress or

fraud, to make a payment to the other party to the contract over and above the
contract price in order to secure completion of the contract by the other party on
time and thereby obtained a benefit, such as the avoidance of a penalty payable
to a third party if the contract was not completed on time, the obtaining of that
benefit could amount to consideration for the payment of the additional sum.”
Therefore any agreement between a contractor and subcontractor or an employer and a 15.025
contractor to pay extra to ensure that the contractor or subcontractor completes the work
on time and to avoid a penalty caused by the delay of work would generally be a valid
and an enforceable contract, as the anticipated benefit is viewed as a consideration. The
extra payment would be treated as a variation to the original contract. The existence
of consideration is thus seen as a crucial element that influences the entitlement of
payment.
(f) Substantial completion
Another issue raised by this case was the defendant’s argument that the additional 15.026
payment was only payable on the condition that each flat was complete. The material
fact was that the subcontractor had substantially completed a few further flats. In
contract terms, substantial completion is less than completion. Substantial completion
means the building/facilities can be readily occupied/used by the employer, even
though part of it is defective and minor deficiencies are left for the contractor to
correct. Referring to the case, none of these extra flats had been completed by the
carpenter subcontractor and thus the defendant argued that no further payment was
due to him in this regard.
In regard to payment, substantial completion and completion have different 15.027
consequences. It is usual practice that half of the retention money will be released to
the contractor after substantial completion while the remaining monies will be paid
after completion of the works. Nevertheless, liquidated damages will not be effected
if substantial completion is before the original date for completion or the new date for
completion as approved by the architect.
The arguments in the case concluded that if entire performance were a condition 15.028
precedent that was expressly stated in the contract, the contractor would not be entitled
to payment in the situation of substantial performance. Otherwise, the employer must
pay and claim or deduct the costs of defects and omissions so involved.

360 MONEY
15.029 For measurement contracts, valuation of work takes place according to the costs or
prices as prescribed in a schedule of rates. If it is agreed in the contract that a whole
work is to be measured and paid for on completion, entire completion would then be a
condition precedent to payment. However, the rule of substantial completion normally
applies, and therefore, the works have to be valued and paid for even though they are
not fully complete.
(g) Non-completion
15.030 In the case of Williams v Roffey Bros, attention is drawn to the necessity of determining
whether there is substantial completion or non-completion in some circumstances.
Non-completion can occur in a number of ways, for instance, the employer precludes
completion of the work; the contractor is in breach of contract and fails to complete
the work; or the contract is frustrated. In a lump sum contract, the employer cannot
refuse to pay merely because there are a few defects and omissions in the work. As
long as there is substantial completion, the employer must pay the contract price to
the contractor with appropriate deductions for the costs of defects and omitted works.
However, disputes will probably arise if the employer is not satisfied with the work and
rejects the contractor’s work by saying that it constitutes non-completion.
15.031 Substantial performance and non-completion result in different payments. Substantial
performance involves completion of a specified work and entitles contractors to
payment with deductions for defective or omitted works. When entire completion
is a condition precedent to payment, the contractor cannot recover anything if he or
she failed to complete in every detail. Non-completion is a breach of contract, which
allows the employer to reject the entire work, refuse to pay and claim for damages.
If the failure to complete is due to impossibility of performance or frustration and
the employer has obtained a valuable benefit from the work done, the contractor can
recover from the employer such sum that the court considers reasonable. In practice,
it is not always easy to differentiate between substantial performance and non-
performance, but an attempt shall be made whenever necessary.
15.032 As mentioned previously, where entire performance is a condition precedent of
payment, substantial performance does not necessarily deprive the contractor of
recovering any payment. The case Hoenig v Isaacs15 addressed this issue further. First,
it considered whether in a lump sum contract substantial performance could possibly
allow the contractor to make a claim for payment: that is, whether entire completion is
a rigid condition precedent to payment. Secondly, it considered whether the principle
of quantum meruit should be applied to the case in question.
15.033 In this case the plaintiff was employed by the defendant to decorate and furnish a flat,
with a payment term of “net cash, as the work proceeds, and balance on completion”
in the contract. The defendant moved into the flat and used the furniture but refused
to pay the balance, complaining that the furniture was defective. The Court held
that although it was a lump sum contract with entire performance being a condition
15
[1952] 2 All ER 176.

precedent of payment, the substantial performance by the plaintiff would still allow
him to claim the balance with a deduction for the defective part.
Another noteworthy matter raised in the proceedings was that even if an entire 15.034
performance was a condition precedent to payment under the contract, the defendant
had taken benefit of the work by using the defective furniture; it implied that the
defendant had waived the condition and therefore, must pay the contract price subject
to appropriate deductions. The plaintiff could claim on a quantum meruit basis. The
underlying principle is similar to the distinction between a breach of conditions and a
breach of warranties. The former gives a right to reject the goods, whereas the latter
gives no right to reject the goods but the plaintiff can claim for damages. Applying
this principle to Hoenig v Isaacs, the contractor would not be deprived of all payment
simply because of some defects. However, if some terms in the contract state that
every tiny particular must be complete as agreed, this principle will not be applicable
and it would be decided in another way.
(h) Role of certifier
An architect has a dual identity. On the one hand architects act on a client’s instructions, 15.035
as an agent for site supervision, and on the other, they act on their own judgment and
use their professional skills to perform duties such as certification. Considering the
possibility of a conflict of interests, an architect has to apply her or his expertise
and act in an unbiased and fair manner in accordance with the terms of the contract.
In regards to payment, an architect’s duties generally include issuing change orders
and certificates of payment, providing proof of satisfaction of the works and, very
often, giving professional opinions which may influence the amount of payment due
to the contractor. Architects will be disqualified as certifiers and their certificates will
be void if they fail to act fairly, unless the contractor fully recognises the facts and
waives the breach. There are some situations that may lead to the disqualification of
the architect.
• If there is fraud or collusion with other parties, the architect will be dis-
qualified.
• If the architect fails to certify independently, or is unable to repel unworthy

suggestions by other parties, he or she may be disqualified even if there is no
fraud. An architect’s certificate shall be set aside if in the process of payment
preparation the architect lost her or his independence because of too much
influence from the employer.
• If there are personal interests involved, such as a promise to the employer to

keep the cost at a certain level, the architect will be disqualified. However,
if the interests of the architect are known to all parties, he or she may not be
disqualified. For instance, the architect may have given the estimated cost
to the employer before the work was carried out. Besides, the architect may
report to the employer on the contractor’s expenses and quality of work in
her or his independent view. In the absence of fraud, the architect would
not be disqualified, though it may greatly influence an estimation of the

362 MONEY
sum to be paid to the contractor. The architect can be a shareholder of the

employer’s company and will not be disqualified provided that the contractor
has knowledge about her or his interest.
15.036 In the event of the incapacity of the architect, the employer has, through either
implied or express terms, the authority to appoint a new certifier. It is also said to
be a duty of the employer to do so if the original one cannot provide a correct view
of the surveyor’s function. The appointed surveyor can act in the position of an
architect to certify the work done. If the employer fails to appoint a new architect,
he would be in breach of the contract and the contractor would be entitled to claim
for damages.
15.037 Payment can be recovered without a certificate when a certificate is not a condition
precedent to recovery, or if the employer waives his right to insist upon a certificate, or
if as a result of fraud, the architect is disqualified as a certifier, or there is an incapacity
of the certifier.
(i) Effecting a certificate
15.038 A construction contract may stipulate that in addition to payment certificates,

the issue of other certificates will be a condition precedent to halt the exercise of
certain rights, eg set-off from the employer. In the case of Pilecon (Hong Kong) Ltd v
Mightyton Ltd,16 the architect issued an interim certificate and a certificate of practical
completion to the plaintiff main contractor for the contract works, but the defendant
employer failed to pay the sum due as he claimed that there were disputes with the
plaintiff over the performance of the works and delay in completion. Pursuant to
the contract, if there was any delay in completion, the plaintiff was required to pay
the defendant liquidated and ascertained damages upon the issue of the certificate
of practical completion for the whole works. The inside story was that although the
architect had issued a certificate of practical completion certifying the works had been
practically completed at a certain date dated a back half a year before, there was still
at that time a substantial part of the works left to be done and various defects in the
works needed to be rectified.
15.039 A final certificate certifies the amount finally payable to the contractor. Likewise, the
issuance of the certificate needs to be approved by the architect, and it is binding
and conclusive. Although payment certificates are binding statements, they can be
challenged. It is worth noting that an architect is acting in a dual capacity, that is, as an
agent of the employer as well as a professional, and thus he or she is under a duty to act
fairly and in a professional manner. There may be some cases in which the certificates
issued by the architect can be challenged.
15.040 The requirements for effecting an architect’s certificate depend on the provisions of the
contract. Generally, a certificate will be effective if and only if it is issued and delivered.
The requirements dealing with completion of issuance and delivery are defined in
16
[1992] 2 HKC 346.

VARIATION AND VALUATION 363
the terms of a contract. Payment can only be effected after the requirements have
been met. Hence the expressions used in the contract shall clearly and unambiguously
define the specific requirements, and leave no doubt for disputes to arise.
If the contractor has been put to a loss by the employer’s breach of contract and the 15.041
architect gives a certificate for payment, the contractor’s claim for damages is not
conclusive. It is always true that the power of the architect in issuing a certificate cannot
extend to other matters that are under a new and independent contract. A certificate is
normally clear-cut. However, if the architect is only required to certify his satisfaction,
with no express requirement for a written certificate, an oral expression is sufficient. In
all cases, it depends on how the contract was written.
4. VARIATION AND VALUATION

(a) Overview
Changes are frequently made during the construction process and most construction 15.042
agreements contain provisions for variation of works. There is a wide array of reasons
for changes, for instance, enhancement of quality requested by the employer; additional
work due to unpredictable site conditions; errors in original designs; discovery of
lower cost designs; or changes demanded by statutory undertakers to fulfil relevant
regulations or ordinances in force. The financial burdens of these changes are generally
borne by the party who causes the changes.
It is understood that no design is perfect and errors may not be discovered until work is 15.043
being carried out on site. Contractors generally have the right to recover the costs due
to design changes and abortive works, and a contingency budget is often made by the
employer to cover the costs of these unexpected events. In some situations, designers
may have failed to anticipate the official interpretation of the design. If such incident
is not deemed to have been reasonably foreseen by the designer, then the designer shall
not be liable for negligence. Though the employer is entitled to recover the cost from
the designer due to her or his negligence (if so proved), the employer usually does
not proceed with cost recovery provided that the total cost of changes falls within the
contingency budget.
Contractors frequently carry out the works for which they are entitled to payment in 15.044
excess of the original contract sum. There are some conditions that must be fulfilled in
order for the contractor to recover payment for extra works.
• Contractors must prove that the extra work is not included in the work for
which the contract sum is payable.
• There is either an expressed or implied promise to pay for the work.
• The agent who ordered the work was authorised to do so.
• Any condition precedent to payment imposed by the contract has been duly
fulfilled.

364 MONEY
(b) Extra works
15.045 Most building contracts are entire contracts. Known as the doctrine of entirety, this
means that there is no obligation of the contractor to carry out variations and thus
for the employer to pay for such variations. However, this doctrine of entirety was
modified by the introduction of a variations clause. A variation is defined in Clause
11(2) of the HK Standard Form as:
“the alteration or modification of the design, quality or quantity of the Works

as shown upon the Contract Drawings and described by or referred to in the
Contract Bills, and includes the addition, omission or substitution of any work,
the alteration of the kind or standard of any of the materials or good to be used
in the Works, and the removal from the site of any work, materials or goods
executed or brought thereon by the Main Contractor for the purpose of the
Works other than work, materials or goods which are not in accordance with
this Contract.”
15.046 The contractor is entitled to be paid a reasonable sum for work outside the contract on
the basis of an implied contract, where there is a contract for a specified work. Extra
work is defined as work which is not expressly or impliedly included in the work for
which the lump sum is payable. The contractor may not have thought at the time of
entering the contract that such work would be necessary for the completion of the
contract. It is important to identify whether or not any particular item of work is within
the responsibility of the contractor in the contract. If the work is found to be outside the
scope of the original contract, the contractor is generally entitled to be paid at the contract
rate for extra work if applicable, or such rate will be governed by the conditions of the
contract with respect to price, or else, it will not be governed by any of these conditions.
In addition, it is essential to determine what work is impliedly included in that item of
extra work.
15.047 It is worth mentioning the term ‘bill of quantities contract’ when extra work is discussed.
It describes a contract where a bill of quantities forms part of the contract and describes
the work to be carried out, for which a lump sum is payable. The contractor may carry
out the work in excess of that as stated in the bills of quantities in order to complete
the contract. However, such excess work is not an extra work in a bill of quantities
contract. The employer does not know beforehand the exact quantities of work that
are necessary to complete the project. It should be noted that the quantities stated
in the bills of quantities do not only serve tendering purposes but also form part of
the contract. There are usually implied obligations that contractors are required to
complete the work even if the actual quantities are far in excess of that as stated in the
bills of quantities. Given the existence of such implied obligations, the performance of
the contractor in the execution of additional quantities will not be treated as extra work.
The greater the detail in the bills of quantities and other contract documents in defining
obligations for which the amount is payable, the less implied terms there will be.
15.048 It is normally implied that the contractor shall complete unanticipated work in
compliance with building regulations, as for any other works in the contract. All
variations shall be included as part of the final account, and the main contractor shall

be presented with a copy of the priced bills of variation before the issue of the final
certificate.
(c) Express or implied promise
To ensure smooth running of the project, verbal instructions are always given by 15.049
the architect in the course of the contract. Nevertheless, they should be recorded
in writing. Instructions should be clear and precise and revised drawings should be
issued if variation is to take place.
Disputes sometimes arise when documentation of change orders were not properly 15.050
made, and often contractors are required to perform the works under pressure from the
employer, with the promise that documentation will follow, which then in fact does
not. In reality, the employer or architect sometimes orders the extra work to proceed
without a change order, with cost and schedule issues to be resolved later. There are
many cases where contractors were denied the right to compensation after performing
the work ordered by the employer or architect, based on the grounds that the contractor
had responsibility for her or his performance and admission of the said work, ie the
contractor believes that the work is an extra one while the employer leads her or him to
perform it as part of her or his responsibility. If the contractor refuses to perform the
extra work and finally realises that it is in fact part of her or his work, the contractor
may have breached the contract and may be sued for damages. Thus, contractors run
the risk of compensation being denied by the employer after performing the unwritten
orders of extra work and the risk of being sued for breach of contract if they refuse to
perform the unexpected extra work.
Actually, any extra work carried out by a contractor does not necessarily entitle him to 15.051
receive any extra payment. The contractor must produce a written agreement to prove
that the work claimed for is an extra, unless the extra work is outside the contract and
agreed under a separate contract, whether expressed or implied. On the other hand,
without requesting the use of better quality of materials or the carrying out of more
work by the employer, contractors who undertake a specified work for an agreed price
is not entitled to claim extra payment if they used superior materials and performed
more work themselves.
It is also important to note that permission by the employer to do work different 15.052
from that specified in the contract does not constitute a request for such work by the
employer. Therefore, it is wise for contractors to clarify extra payment issues before
extra work is carried out, in order not to increase their own costs. The contractor may
refuse to carry out certain works that are not within the scope of the original contract
unless the employer promises to pay for it as an extra work.
(d) Authority
It is necessary to know who has the authority to vary the terms of the contract. The 15.053
architects, as agents of the employer, have no implied power to make variations to
the terms of a contract, nor can they make variations to the contract works such as
ordering extra works. The contractor will normally be able to claim a reasonable price
for the works outside the contract if the employer knows that the work is ordered. If the

366 MONEY
contractor has carried out extra work under the authority of the architect, that architect
must be proved to have such authority, and the work done must be within her or his
authority to order.
15.054 The employer may have the power to order part of the work to be omitted and then
adjust the contract price. However, it does not extend to ordering variations. This
means that the employer does not have the right to omit part of the work from the
contract and substitute it with similar work. Besides, a variation can simply be the
removal or limitation of an option provided to the contractor by the contract.
(e) Condition precedent
15.055 In order to avoid disputes, contracts sometimes state that any extra work must be
ordered in written form. As the contractor must produce a written agreement to prove
that the work claimed for is an extra, written orders signed by the architect should be
produced for these works to be paid. This is to prevent unauthorised or extravagant
claims for extra works. It should be given before the extras are carried out and should
be in clear definite form, drawings or other documents are not considered written
orders. No assumption should exist and only clear wordings in written form can
serve this purpose. The contractor may not be able to recover a reasonable sum under
the contract or on a fresh contract, if there is not a written order or any effective
documents that are conditions precedent to payment. Exception is where there is an
implied promise to pay.
15.056 The implied promise to pay means there is a waiver of the condition. There must be
conduct that leads the other party to reasonably believe that the conditions precedent
were not insisted on. In such cases, the contractor may be able to recover a reasonable
sum even if there is no written order of the extra works. The waiver can be in the form
of an oral waiver or written waiver. It is obvious that the court will try to enforce the
provision requiring a written order for extra work. However, when there is no such
written order, the court will make a judgment that is as fair as possible. If the employer
or contractor was aware of the changes and the changes were deemed necessary, the
judge may ignore the written order provision. Moreover, if the employer directs the
contractor to perform the extra work, the court may treat it as a valid verbal contract,
despite the fact that the written contract specifically requires written change orders.
Once the work requested by the employer is executed by the contractor, the verbal
contract will be regarded as executed and the employer has to reimburse the contractor
for the extra costs. By conduct, if the parties do not indicate a waiver of the provision
requiring written orders for changes and extra works, the court may not award the extra
claims that are not ordered in writing.
(f ) Agreeing on the rates
15.057 The employer and the contractor shall, as far as possible, agree to the terms for
assessing the prices of any changes. This is to avoid the situation that while the
contractor claims an huge, unexpected amount after the work has been completed,
the employer argues that it would not have approved the work if it knew in advance
that such a high cost was involved. In light of this, a fixed price for any change shall

be agreed on for the purpose of providing cost certainty to the employer, who must
rely on such information to decide whether the change should be proceeded with or
removed.
It is essential for all variations to be assessed before the orders are given, which 15.058
requires the attendance of the consultant quantity surveyor and the architect at all
relevant meetings, to look ahead and make early decisions. However, many contractors
submit their quotes for change orders with the following expression:
“The price quoted does not include any allowance for delay or impact associated
with this change. The contractor expressly reserves the right to claim at a later
date for all costs associated with delay and impact resulting from this change.”
The contractor will not refrain from making a claim at a later date, if the employer 15.059
accepts such quotation. Continuous cost studies will be carried out by the contractor,
particularly on areas in which details have not yet been finalised. No certainty of price
can be obtained by the employer, and the impact of the claim could be substantial.
Impact costs involve costs that are not directly relevant to the changed works. They
are allowances for the increased costs in performing the unchanged portions of the
work. Construction works are interdependent and interrelated, that is, one small
change may cause other changes and delay, and the cumulative changes and delay
may be significant. For this reason, employers frequently include another expression
in their requests for quotes, which require contractors to include the price of all costs
associated with the change, including impact costs, and identify how much of the
delay will be claimed, before any changes are approved.
(g) Possibilities for negotiation
Some basic kinds of changes are instructed and acknowledged by the employer, 15.060
although some are not. The possibilities for negotiation are as follows:
• Both the employer and the contractor agree to implement a change and to
the cost and time for the change. The only thing they have to negotiate is the
arithmetic.
• If the change is a portion of work that has been unit priced only multiplication
of the quantity of work by the unit price is necessary. However, if the portions
of work are not evenly priced, especially when the contractor wanted to keep
its bid low but the real cost turns out to be higher, the employer can refer to
the price of the original bid.
• Contracts that include a variation in quantity clause could reduce the potential
for conflict.
• If the unit price is not applicable to the changed work, the parties shall
agree to a firm price for performing the change. This is known as forward
pricing. In this way, the employer knows the amount it is going to pay, and the
contractor can integrate the changed work into its schedule. Both parties have
an idea of their risks of having the actual costs differ from the agreed ones.

368 MONEY
The forward price is derived from estimation and negotiation by both parties.
The amount agreed on can be a lump sum, a unit price or a cost of the work
with a guaranteed maximum amount.
• Price changes can be negotiated on a time and materials basis. This approach
is suitable for emergency change. It is usually used where unit prices do not
apply and the parties do not want to use forward pricing.
• The basic rules for valuation and variations are laid down in clause 11(4) of
the contract, under which subclause (c) states that where the additional work
is executed under different conditions of similar items found elsewhere in
the contract, the rates shall become the basis of price to be agreed with the
contractor as far as is reasonable. If the variation work is totally different
from anything contained in the contract, a fair valuation or commercial rate
shall be assessed by the quantity surveyor and agreement should be made
with the contractor.17
15.061 When an extra work is ordered by the employer and carried out by the contractor, for
which an expenditure is incurred, the employer, if he or she has taken benefit from
this extra work, must not refuse to pay based on the argument that the work was not
ordered properly. It would be fraud to do so. However, if the work was done and there
was only an oral order made by an agent and then payment was refused, it would not
be a fraud. There is no implied promise to pay if there is an acceptance of work orally
ordered by the architect, and the architect also has no authority to waive a term of the
contract requiring written orders for extra works.
15.062 In Holland Hannen & Cubitts v WHTSO,18 the recovery of payment for extra work
without the prior approval from the architect or employer was disputed. Referring to
the discussion above, if there is no written order made by the architect, the contractor
or subcontractor may not be able to recover extra payment. However, if there is an
implied promise to pay for extra work, the extra work may be recoverable. To restate,
in order to constitute a waiver of the requirement for a written order for recovery of
extra work done, there must be conduct which leads the other party reasonably to
believe that a written order is not compulsory. In Holland Hannen & Cubitts, while
the windows of a hospital were being constructed by a nominated subcontractor, some
defective work was found. Remedial works, together with design changes, needed to
be proceeded with. However the architect refused to issue a variation instruction to
effect the changes. The contractor and subcontractor were not able to recover payment
under their contracts, as the construction of windows was not in accordance with
their contracts. In principle, the contractor and the subcontractor were not entitled to
payment for the extra works without a written order being issued to make changes to
the works. However, it was then held that although the architect refused to issue the
instruction, the employer and the architect had verbally and by conduct agreed to the
alteration of the windows. As a result, a new contract was considered effective between
the subcontractor and the employer directly, and it was held that the employer should
17
Rubin R, Construction Claims (John Wiley & Sons Inc, 1999).
18
[1981] 18 BLR 80.

RIGHT TO WITHHOLD PAYMENT 369
have paid the subcontractor a quantum meruit in consideration that the subcontractor
provided the windows.
(h) Consideration
Consideration, again, is an essential element in payment for extra work. The contractor 15.063
has the right to refuse to carry out extra work if the employer does not promise to pay
for it. If the work is included in the contract for which the contract sum is payable, and
does not appear as extra work, there may be a lack of consideration and the employer’s
promise would not be binding. Therefore, a better-defined contract always results in
mutual benefit. As in the Williams v Roffey Bros case, the benefit of avoiding delay,
penalty and expenses caused by the contractor’s or subcontractor’s delay, defects or
other reasons, is itself consideration when there is an agreement to pay an additional
sum for extra work.
5. RIGHT TO WITHHOLD PAYMENT

(a) ‘Reasonable’ approval of employer
An interim certificate formalises monthly progress payments to the contractor after an 15.064
assessment of work done. It is a condition precedent to payment if the construction
contract states that the contractor will be paid for the amount certified by the architect.
Payment will be made to the contractor after the employer has approved the completed
work, and the approval of the employer must be given reasonably. It is difficult to
define what is reasonable. There can be some terms in the contract to define which
parts of the work and what standards of quality should be met in order for proper
payment to be made. If approval is subject to completion of certain tests, the employer
can disapprove the work that is unable to pass the tests.
There may be situations where the employer prevents the architect from giving 15.065
a certificate. If the architect wrongly neglects, or deliberately refuses to issue a
certificate, and the contractor has done all the works necessary for the issue of the
certificate, the employer cannot take advantage of the absence of the certificate and
refuse to make payment. If the certifier unreasonably refuses to issue a certificate,
the contractor can resort to arbitration or bring legal proceedings for the improper
withholding of the payment certificate. An adjudicator has a statutory right to decide
the rights and obligations of the parties and the sum to be paid to the contractor.
In case of a breach of contract, there are several remedies available to the injured party, 15.066
namely, damages, specific performance, injunction, rescission and quantum meruit. In
the following sections, quantum meruit and damages in relation to money issues are
discussed.
(b) Damages as remedy for breach
Damages are a financial payment as compensation for loss resulting from a breach. 15.067
The purpose of damages is to put the injured party in the same financial position in

370 MONEY
which it would have been if the contract had not been breached. The types of damages
are liquidated damages and unliquidated damages.
15.068 The word liquidated means that the principle to pay money as compensation for
a breach has been established. These are damages stated in the contract; that is,
if there is a breach, an amount of money is payable. In the HK Standard Form,
liquidated and ascertained damages are the compensation paid to the employer by
the main contractor in the event of late completion. The procedure for deducting
liquidated damages is that when the contractor fails to complete works by the date
for completion or agreed extended date, then the architect must certify in written
form, known as a certificate of non-completion, that in his opinion the works ought to
have been completed. Payment for liquidated damages may then be calculated. Such
payment can be made in two ways: progressively in each interim valuation; or by a
final adjustment of the amount due under the final certificate. Unliquidated damages
mean there is no agreement in principle to pay compensation. These are damages not
specified in a contract. The court will decide if a breach has taken place or not, and
will assess the damages.
(c) Relationship between contractor and subcontractor
15.069 With reference to the contractual relationship between a contractor and a

subcontractor, the focal point of Dawnays Ltd v FG Minter & Trollope & Colls
Ltd19 was that the sums certified and paid to contractors as due to subcontractors
must be paid without deductions. Generally, subcontractors should be paid as
long as the contractor received the interim certificate, disregarding any delay of
the subcontractor, and no set-off should be allowed. However, it has been argued
that the principle as derived from Dawnays should not be equally applicable to
the case of Gilbert-Ash (Northern) Ltd and Modern Engineering (Bristol) Ltd,20
as described below. This argument suggested that it was permissible to set off
payments against architect’s certificates. The appeal of Gilbert-Ash (Northern) Ltd
concerned a building subcontract, and whether the contractor was entitled to set
off unliquidated and disputed counterclaims for defects and for delay as a defence
against the subcontractor’s undisputed claim, the sum being the balance of money
certified by the architect under the main contract as due to the subcontractor. A
clause in the principal contract involved in Gilbert-Ash (Northern) Ltd stated that
the contractor became liable to pay only when he received the money from the
employer. The contract also provided that if the subcontractor failed to comply
with any of the conditions of the subcontract, the contractor reserved the right
to withhold payment, and also to deduct amounts from any payment certified as
due. The contractor relied on this clause to counterclaim for delays and defective
work. Thus, it used to be thought that the certificates issued pursuant to building
contracts had equivalent effect as in Dawnays Ltd v FG Minter & Trollope &
19
[1971] 1 WLR 1205. See also Pegram Shopfitters Ltd v Tally Weijl (UK) Ltd [2004] 1 WLR 2082.
20
[1974] AC 689.

PAY WHEN PAID 371
Colls Ltd. However this was overruled in Gilbert-Ash (Northern) Ltd v Modern
Engineering (Bristol) Ltd, and in consequence employers were entitled to set-off
cross-claims against the amount of the certificates, subject to the terms of the
contract.21
6. PAY WHEN PAID

(a) Payment by employer a condition precedent
Nominated subcontractors are usually paid after the contractor is paid by the 15.070
employer and very often, the subcontract will provide that payment to the
subcontractor is contingent upon payment to the contractor by the employer.
This implies that payment by the employer to the contractor becomes a condition
precedent of payment to the subcontractor. The courts held that the waiting time for
the subcontractor’s payment should be reasonable. The ‘pay when paid’ provision22
provides that the subcontractor will be paid within a specified period after the
contractor has been paid by the employer. By postponing the payment, it allows
the contractor to obtain funds to pay the subcontractor. In short, the contractor
should make payment due to the subcontractor after being paid by the employer.
However, this ‘pay when paid’ provision is not absolute. It is a general rule, and
court decisions on this may vary from one jurisdiction to another. In some places,
such as California, North Carolina and Oregon, if a reasonable time elapses but
the main contractor remains unpaid, he or she is still liable to make payment to the
subcontractor for work properly finished. In most circumstances, ‘pay when paid’
applies where there is a completion of work, verification by the architect and the
main contractor has been paid by the employer.
Financing is one of the reasons for having a ‘pay when paid’ clause. In the course of 15.071
the contract, all work has to be financed until payment is made. The clause relieves the
contractor of any obligation to the subcontractor as it clarifies that before payment is
made, self-financing must be continued.
Subclause 27(b) of the HKIS/RICS Standard Form of Contract states that: 15.072
“The Architect shall direct the Main Contractor as to the estimated value of the
work … executed or supplied by a Nominated Subcontractor included in … any
certificate issued under clause 30 … The sum representing such estimated value
shall be paid by the Main Contractor to the Nominated Subcontractor within
fourteen days of receiving from the Employer.”
21
As illustrated in Port of Tilbury (London) Ltd v Stora Enso Transport and Distribution Ltd [2009] 1 Lloyd’s
Rep 391, the term in the contract may provide for a general exclusion of set-off, deduction or counterclaim.
22
This may sometimes be referred to as a ‘pay if paid’ provision. The purpose of such a clause makes the contractor’s
payment obligation conditional on its being paid by the employer; thus transferring a certain part of the risk of
non-payment by the employer to the subcontractor.

372 MONEY
(b) Dispute whether a contractor paid or not
15.073 The employer may become insolvent and the subcontractor may share the contractor’s
risk of not being paid. The subcontractor has no way to force the contractor for
payment if the contractor is not paid by the employer as a result of its insolvency or
refusal to pay. Some disputes arise in the situation where from the subcontractor’s
point of view, contractors were paid. In fact, the contractor may only have been
due a payment from the employer, but is not paid or has its payment set off by the
employer for damages for defects or omitted works. It would be a difficult task to
define whether or not the contractor was paid in such situations. As circumstances
differ from case to case, details of each case have to be looked into so as to make
fair judgment.
15.074 In Ryoden Engineering Co Ltd v Paul Y Construction Co Ltd,23 the plaintiff
subcontractor claimed payment under the architect’s certificates. The defendant
contractor argued that the delay of the plaintiff in completion of subcontract works
caused late completion of the main contract works. As a result, the employer deducted
a sum of liquidated damages from a payment to the defendant, who in turn paid
the plaintiff the sum that they claimed, less the employer-deducted sum. Also, the
defendant argued that there was a clause in the subcontract that gave him the right
to set off liquidated damages against the sums claimed by the plaintiff. The clause
stated that if the plaintiff failed to complete the subcontract works within a prescribed
period, the plaintiff should allow the defendant to retain a sum equivalent to the
resulting loss caused to the defendant, provided that the architect had issued to the
defendant a written certificate stating the period of time within which the plaintiff
ought reasonably to have completed the works. However, no such certificate was
obtained by the defendant. The principles of condition precedent, right to set-off and
‘pay when paid’ were discussed in the dispute.
15.075 In the argument, the architect’s certificate stating the period of time within which the
plaintiff ought reasonably to have completed the works, which was not received by the
defendants, was a condition precedent of payment. It is important in all contractual
agreements to determine whether certificates issued by an architect are a condition
precedent to payment. This should be expressly stated in the construction contract, in
order to avoid ambiguities and disputes.
15.076 It was also argued that the defendant had the right to set-off for the deduction made by
the employer, due to the delay of completion by the plaintiff. The plaintiff pointed out
that on the principle of “pay when paid” the defendants should have made payment
once they received payment. The defendants then argued that they had not been paid
because of the deduction of payment by the employer. In normal circumstances, a
main contractor should pay nominated subcontractors after the employer pays her
or him. However, a problem may arise when there is no actual money being paid
by the employer to the contractor. Sometimes it is arguable, similar to the current
case, that the contractor is considered paid. The contractor should have been paid
23
[1994] 2 HKC 578. See Massford (HK) Ltd v Wah Seng General Contractors Ltd [2005] HKEC 1763. See also
Smith & Smith Glass v Winstone Architectural Cladding Systems Ltd [1992] 2 NZLR 473.

PAY WHEN PAID 373
if there were no damages set off by the employer. If the contractor is paid under
such circumstances, then he or she should also pay the nominated subcontractor.
Therefore, ‘pay when paid’ is a principle, like other principles that cannot be applied
rigidly to all cases, and should be used depending on the situation. The right to set-off
and the ‘pay when paid’ principle are contradictory, and this was an issue in Ryoden
Engineering.
Durabella Ltd v J Jarvis and Son Ltd 24 was a dispute over the ‘pay when paid’ clause. 15.077
In this case, the contract was terminated by the developer because of non-satisfaction
of Jarvis’ performance, specifically the flooring done by the subcontractor Durabella.
The contractor Jarvis then received payment from the developer. The court found that
the ‘pay when paid’ clause was part of the subcontract. However, Jarvis refused to
make payment to Durabella as he denied that he was paid for Durabella’s work. In
some cases, it may not be easy to prove whether the payment that a contractor received
from the employer includes the payment for the subcontractor’s work, and this is
usually the cause of disputes involving ‘pay when paid’ clauses.
Another case, Isovel Contracts Ltd (In Administration) v ABB Building Technologies 15.078
Ltd (formerly ABB Steward Ltd),25 looked at whether a cheque issued can be stopped
when the sub-subcontractor should have received payment under a ‘pay when paid’
clause. In this case, the subcontractor ABB made payment by cheque to the sub-
subcontractor Isovel for the mechanical and electrical work done. After realising that
the main contractor Miller had reduced the value of the work due to non-compliance,
ABB stopped the cheque made out to Isovel before it was cleared. The defendant
was required to make payment at the end. The rationale held by the judge was that a
cheque is the same as a bill of exchange and is as good as cash once it is issued and the
issuing party cannot avoid payment on the basis that the goods have no value and there
is no consideration for payment. It was noted in this case that, despite the argument
concerning whether the cheque issued could be stopped, the sub-subcontractor Isovel
should be paid once the subcontractor ABB was paid by the main contractor under the
‘pay when paid’ clause.
(c) Ambiguity of term ‘payment’
The term ‘receipt of payment’ in ‘pay when paid’ clauses may lead to disputes when 15.079
there is ambiguity in defining the term ‘payment’. Does receipt of payment mean
receipt of cash or its equivalent, or does it mean any action that can be treated as
an equivalent to a settlement of a financial obligation, such as set-off ? Hong Kong
Teakwood Works Ltd v Shui On Construction Co Ltd 26 was another dispute over
whether the receipt of payment is equivalent to receipt of money in cash. In this case,
24
(2001) 83 ConLR 145. See Eugena Ltd v Gelande Corp Ltd [2004] EWHC 3273 and Aristes Trading Ltd v
Interlink Overseas Trading LLC [2005] EWHC 3250.
25
[2002] 1 BCLC 390. See also Re Kaupthing Singer & Friedlander Ltd (In Administration) [2009] 2 BCLC 137.
26
[1984] HKLR 235. See Falcon Building Materials Co Ltd v Fine View Engineering Ltd [2008] HKEC 9. See also
Chung Kiu Development Limited (In Liquidation and Receivership) v Sung Foo Kee Limited [1995] 2 HKC 777;
Schindler Lifts (Hong Kong) Ltd v Shui On Construction Co Ltd [1985] HKLR 118; and Nin Hing Electronic
Engineering v Aoki Corp (1989) 40 BLR 107.

374 MONEY
the employer had set off the amount arising from a claim for liquidated damages
for delay under the main contract against the certificates for the work completed
by the contractor. The contractor then failed to pay the plaintiff subcontractor and
contended in court that the receipt of payment means cash or cheque and therefore
that he had not received any payment from the employer, and thus according to the
‘pay when paid’ clause in the subcontract, he was not obligated to make payment to
the subcontractor. On the other hand, the plaintiff refuted that receipt of payment
means either cash or mutual discharge of an obligation, in this case, the set-off
between the employer and contractor and therefore, the contractor had been paid.
The court held that the plaintiff ’s appeal failed on the basis that receipt of payment
in the clause of contract has a prima facie meaning of ‘receipt of money’, which
is the normal meaning of payment, the actual payment of cash or its equivalent.
The judge also stated that the word ‘payment’ could be given an extended meaning.
However in the Teakwood case, the whole phrase ‘receipt of payment’ could not be
given extended meaning to cover set-off. According to the ‘pay when paid’ principle,
where the contractor’s receipt of payment became a condition precedent to payment
of the subcontractor, the contractor had not been paid and therefore he or she did not
have to pay the subcontractor. The judge reminded the parties that no single word in
the clauses should be missed or grasped carelessly. The prima facie meaning of every
word in a contract would usually be taken and it would be difficult to make arguments
against the terms.
15.080 Schindler Lifts (Hong Kong) Ltd v Shui On Construction Co Ltd 27 is a comparable
case. The employer claimed liquidated damages for delay against the contractor and
set it off against a payment to the contractor. A dispute arose between the plaintiff
subcontractor and defendant contractor as to whether the sums set off amounted to
payment triggering the defendant’s obligation to pay the plaintiff within 14 days. Clause
11(b) again, as in other similar ‘pay when paid’ cases, was in dispute. On appeal, Shui
On used the Teakwood case as a reference to point out that no payment was made by
the employer as the amount was set off, thus he was not obligated to make payment to
the subcontractor under the ‘pay when paid’ clause. The case reminds us that receipt
of payment under such clause cannot be extended to cover set-off.
15.081 In Shun Cheong Electrical Engineering Co Ltd v Wai Shun Construction Co Ltd,28
there was no written agreement. The contractor in the middle said that the downstream
subcontractor was engaged on terms that payment for the plaintiff’s work would be
made only after the Architectural Services Department had made the payment to
the main contractor and after the contractor had received payment from the main
contractor, ie on ‘pay when paid’ terms. Throughout the contract, payments were made
to the plaintiff on such terms and the payment vouchers support this. Further, in an
earlier court action between the parties, where the subcontractor claimed payments for
work done under the same contract, the court had found the payment term was ‘pay
when paid’. The Court of Appeal found that there were triable issues in a summary
judgment application. In Falcon Building Materials Co Ltd v Fine View Engineering
27
[1985] HKLR 118. See Falcon Building Materials Co Ltd v Fine View Engineering Ltd [2008] HKEC 9.
28
[2000] HKCU 950.

NOMINATED SUBCONTRACTOR’S PAYMENT 375
Ltd,29 applying Wo Hing Engineering Limited v Pekko Engineers Limited,30 it was held
that clear and unambiguous words were required to deprive the subcontractor of the
right to payment as opposed to the time at which payment was to be made.
Inclusion of a ‘pay when paid’ clause likewise needs to be proved with justifications. 15.082
In Kin Shing Engineering (HK) Co Ltd v Vinson Engineering Ltd, the suggestion that
there was an implied term for a ‘pay when paid’ clause based on the alleged custom
or practice of payment only upon certification of works by the Housing Authority’s
quantity surveyor was rejected .
7. NOMINATED SUBCONTRACTOR’S PAYMENT

(a) Bound to both main and subcontract
A nominated subcontractor is bound to the terms of subcontract but also to those 15.083
of the main contract. It is the same in the cases of changes or extra works. As the
employer may make changes in the work executed by nominated subcontractors,
the main contractor shall also include similar provisions in the subcontract. In
order for the architect to have an idea about subcontractors’ payment before the
next interim certificate is issued, the main contractor may be required to submit to
the architect or consultant quantity surveyor the proof of the amounts which have
been paid to nominated subcontractors in previous certificates. In the event of
failure to make payment due from the contractor to the subcontractors, the employer
must pay the subcontractors directly and deduct the amount from the sum due to
the main contractor. There may be difficulties in obtaining satisfactory proof that
payments have been made properly to nominated subcontractors because payment
is very often not made until right before the next certificate valuation is due and
also, receipts are not usually issued. If necessary the consultant quantity surveyor
has the responsibility to verify these payments and he should make arrangements
with the contractor at the beginning of the contract. A common method is to simply
ask the contractor to provide receipts for the payments. If the main contractor and
subcontractor fail to come to an agreement on compensation due to changes and
extra work, the subcontractor shall proceed with the changes and the architect will
make a decision on compensation.
29
[2008] HKEC 9.
30
[1999] HKEC 845. In this case, the plaintiff issued invoices to the defendant upon completion of works, but the
defendant only received final payment from the main contractor after the plaintiff commenced legal action for
recovery of the invoiced sums. Suffiad J said:
“… The underlying principle from all these cases seems clear enough – that when having to construe a clause
in a sub-contract that the sub-contractor will only be paid when the main contractor is paid, commonly called
a “pay-when-paid” clause, sufficiently clear words will have to be used before a court will be prepared to
construe that such a clause imposes as a condition payment to the main contractor which had to be fulfilled
before the sub-contractor had the right to be paid as opposed to a clause limiting the time for payment …”
Thus, a provision in the purchase orders that “… [this] contract is based on back to back basis including
payment terms … ” was not sufficiently clear to construe it to mean the plaintiff was only entitled to be paid
when the defendant received payment.

376 MONEY
15.084 Lee Po Hung t/a Lee Po Decoration & Whitewashing Works v Leighton Contractors
(Asia) Ltd 31 involved the main contractor of a construction project, the appellant
and a subcontractor, the respondent. The respondent subcontractor was granted a
sum for fluctuation payments. No appeal was made against the court’s decision on
the liability of the appellant but the only issue was the method of calculation of
the fluctuation payment. Detailed fluctuation provisions were found in the contract
between the appellant contractor and the employer, which allowed the contractor to
recover increases in the costs of labour and materials. However, no express provision
for fluctuation of payment was contained in the subcontract. The judge resolved the
problem in favour of the subcontractor, saying that the subcontract was a labour-only
contract and therefore the only index that was relevant to his fluctuation clause was the
Housing Department’s Index for Labour. The essence of the conclusion made by the
judge was that the true intentions of the parties lie beneath the clauses of their contract,
which gave answer to the dispute.
(b) Employer responsible for payment
15.085 In circumstances where the contractor does not make payment to the subcontractor,
the employer may be the one paying the subcontractor. Some disputes have arisen
because of misunderstandings or ambiguity among the parties concerning which
party should be making payment. In Actionstrength Limited v International Glass
Engineering & St Gobain Glass UK Limited,32 the UK Court of Appeal and
the House of Lords held that the verbal agreement for the employer to pay the
subcontractor directly was not enforceable as it was only a guarantee and therefore
should be in writing. In this case, the contractor International Glass Engineering
was in financial difficulties. The subcontractor Actionstrength complained to the
employer St Gobain that he had not been paid. The employer St Gobain told the
subcontractor Actionstrength verbally that he would pay him direct if the contractor
did not honour payment under the subcontract. The subcontractor proceeded with
the work after this promise. The contractor became insolvent, the subcontractor
went to the employer for payment and the employer denied his promise. Attention
should be drawn to two points in the conclusion of the Court of Appeal. First,
the verbal agreement made by the employer to pay the subcontractor directly did
not constitute an enforceable guarantee, simply because a guarantee should be in
writing to be enforceable. Secondly, the appeal made by the subcontractor was on
the basis of estoppel. The premise that the employer had induced the subcontractor
to proceed with the work by a promise to pay and was estopped from going back
on its promise, had to be dismissed because no estoppel was established on any
facts. A somewhat similar situation can be found in the case of Hong Kong Housing
Authority v Rotegear Corp Ltd.33
31
[1996] 4 HKC 406.
32
[2003] 2 AC 541. See Kinane v Mackie-Conteh [2005] 2 P & CR DG3.
33
[2009] HKEC 1224.

In Golden Sand Marble Factory Ltd v Easy Success Enterprises Ltd,34 there was a 15.086
clause in the contract between the defendant contractor and the plaintiff nominated
subcontractor permitting the first defendant, if the architect issued the required
certificate, to pay the plaintiff directly and deduct the amount from the sum due to
the second defendant. The procedure of paying through the second defendant was
followed until a meeting of all the parties agreed that all future payments in relation
to the nominated subcontractors’ works would be paid directly by the first defendant
to the subcontractors and not through the second defendant. The second defendant
was wound up by a court order some days later. The total amount due to the plaintiff
included retention money. The liquidator of the second defendant argued that the right
to receive the sum was vested in the second defendant and as such the money must
be applied in the satisfaction of liabilities. The case concerned the subcontractor’s
payment and retention money. The question was whether the right to receive this
money was the property of the second defendant or, on the other hand, was vested
in the plaintiff at the time of the liquidation. The court concluded that at the date of
liquidation of the second defendant, no property in the money in dispute was vested in
that company. Therefore, the money did not become part of the fund for distribution to
creditors. There can be no doubt that the plaintiff was entitled to the retention money
as it was a trust money under the subcontract, and, if the second defendant had received
it, it would have held it as trustee for the plaintiff only.
(c) Insolvency
If the contractor goes insolvent, the first thing the architect or engineer should do is 15.087
make sure that the nominated subcontractors have been paid. If it is found that the
nominated subcontractors have not been paid, the architect or engineer shall issue a
certificate to deduct the outstanding payments of nominated subcontractors from the
sum due to the contractor. It is of vital importance that a certificate of valuation should
be prepared accurately and include the value of the subcontractors’ works that have
been done.
In addition, the architect or engineer should inform the quantity surveyor of which 15.088
parts of the works have not been done so that they may be excluded from the valuation.
The site should be closed and secured right after insolvency is announced. Materials
left on the site have to be valued also, and they should not be allowed to leave the
site without the consent of the architect. It is assumed that all materials on the site
are owned by the employer. The liquidator, subcontractor or supplier will then have
to prove that any particular materials are not in the ownership of the employer.
There is always a danger that some materials will be removed from the site as some
subcontractors and suppliers may want to retrieve their own materials not fixed to the
job. The clerk of works has to act as a watchman on the site. If the insolvent contractor
left some plant on site that he or she had hired, the employer may have the benefit of
34
[1999] 2 HKC 356. See Peregrine Investments Holdings Ltd v Asian Infrastructure Fund Management Co Ltd
LDC [2004] 1 HKLRD 598.

378 MONEY
any plant agreement assigned to her or him. The employer may pay for the plant hired
and the expense will rank as one of the expenses to be taken into account.
15.089 Meetings should be held among all concerned parties in order to consider the best
way of completing the contract. The liquidator might not be in the meeting, as the
creditors may not have appointed one yet. However, the trustee should be informed of
the decisions made. Though bondholders have no power to reject the method by which
the work is to be completed, the employer owes a duty, as to the liquidator, to tell them
how it will be dealt with.
15.090 In these circumstances, the quantity surveyor will determine whether it is more
efficient to produce new tender documents or use existing bills for the completion of
the work, and he or she will make recommendations on the most appropriate procedure
for completion. In addition, the quantity surveyor will evaluate the work with in regard
to how the remaining work will be completed and he or she will establish price and
prepare the documents.
15.091 If the contract is just started, it is more reasonable to tender again. If the contract
was partly done but is far from completion, it may be best to get other tenderers to
complete it. If the work is substantially complete, it is better to complete on a prime
cost contract with fixed rates. Where subcontractors have partially executed their work,
the quantity surveyor will discuss with them the price for completing the remaining
works. Solutions to a bankrupt contractor’s contract vary from one case to another;
it depends on how much of the contract has been completed. The subcontractor may
not agree to complete the work unless he or she was paid in full before the insolvency
occurred. Hence, the quantity surveyor has to take into account what it would cost
to have the work completed by another subcontractor. However, it would be more
economical to persuade the same subcontractor to complete the work.
15.092 A provisional sum to cover the costs of rectifying defects left by the bankrupt
contractor is very important in the bills for completion. These defects may not be
apparent until the new contractor is on the site. Therefore, it is essential to make sure
they are covered.
15.093 There is a difference in the position of a nominated subcontractor and the contractor’s
own subcontractors in the event of the contractor’s insolvency under the clause of
the contract. The employer has the discretion to make payment to a subcontractor
who has carried out the work but has not been paid. Should the payment be made to
the nominated subcontractor, the contractor’s trustee will recover the amount from
the employer. If the employer makes payments to the subcontractors itself, whether
nominated or not, it may be paying the contractor at the same time a sum comprising
the amount owing to the subcontractors, and thus, the employer will suffer a loss. The
employer will claim to recover from the trustee; the claim will take place as other
claims of creditors for a dividend out of the bankrupt’s estate. Exercising discretion to
pay a subcontractor directly does not give the employer priority; his or her debt to the
main contractor is not discharged by direct payments to subcontractors.
15.094 The contractor is often required to take out a bond for the completion of work. The
bond can be useful to cover the extra expenses incurred by the employer through the

contractor’s insolvency. The insurance company or bank may be liable to pay the
employer extra money for the completion of the work, but they have no power over
the way the contract is completed. Concerning the suppliers and subcontractors, the
employer has the power to pay them the outstanding amount. However, problems arise
when the employer exercises its right to rely on the bondholder to make the payment,
who will usually object.
On the accounting side, two final accounts should be prepared when a bankruptcy 15.095
occurs. One final account will contain the cost that the original contractor has
completed in an ordinary way. This includes all variation orders before the insolvency.
They are measured and priced at rates used in the first contract. All variations ordered
on the completion contract should be priced at the rates that would have been used
if the first contract had continued. The other account will be a normal account for
the completion contract. It will contain the variations ordered during the completion
contract, and priced at the rates during that period.
Attention should be paid to the extent of variations ordered on the completion contract, 15.096
which can be accounted in the first final account. Normal variations will be recorded
in the first final account but if the variation is extraordinarily large, the trustee may
not agree with it. If the completion contract has to make good any defects that were
caused by the insolvent contractor, these should not be shown on the first final account
as variations because they would not have been shown on that account if the original
contractor had completed the contract normally. Therefore, these remedial works
should be recorded as variations on the completion contract.
An insolvency will cost extra in fees and expenses. For instance, the architect or 15.097
engineer may have to make additional visits to the site and produce additional
drawings, the quantity surveyor will have a lot of measurement and accounting works
for the final accounts and the employer will also have to pay extra workers to take care
of matters after the bankruptcy of the contractor. The employer can charge all these
expenses against the sum due to the trustee in bankruptcy. The following are examples
that may be deducted from the final account:
• the amount of final account for the completion of the contract;
• direct payments to subcontractors and suppliers;
• the cost of remedial works for the work done by the bankrupt contractor;
• the cost of additional insurances;
• overhead costs such as lighting and watching the works after bankruptcy and
before commencement of the completion contract;
• damages claimed by the employer.
(d) Termination by the employer
Termination by the employer can be of two different kinds, optional or automatic. 15.098
Clause 25 of the HKIA/RICS Standard Form of Contract sets out the options in

380 MONEY
subclauses 25(1)(a) to (d) for the employer to terminate the employment of the contractor
under the contract. Briefly, the different reasons for termination are as follows:
• without reasonable cause, the main contractor entirely suspends the works.
Partial suspension is not enough;
• the main contractor fails to proceed regularly and diligently without rea-
sonable cause;
• the contractor persistently refuses or neglects to comply with a written notice

from the architect requiring him to remove defective work or improper
materials or goods, thereby materially affecting the works;
• the contractor fails to comply with clause 17 of.
15.099 Termination by the employer is only valid if the employer follows the proper termination
procedure. The architect will serve notice on the main contractor by registered post,
specifying the default, which gives an opportunity for it to be remedied. Contractor
will have three alternatives open to them upon receiving such notice. They can
dispute the notice and give notice of arbitration if they believe the allegations are not
reasonable. Another option is that they can accept the default, adjust it immediately
and inform the architect that the default stated in the notice has ceased. It should be
noted that if the contractor repeats the default anytime, the employer has the power to
terminate the contractor’s employment without further notice. If the contractor simply
continues the default in the 14 days following the receipt of the notice, the employer
then, may terminate the employment within 10 days after such repetition of default. If
the contractor ceases the default within 10 days after receiving the notice, the employer
has a further 10 days from the date that the default ceased to exercise her or his right of
termination. This is to make sure that the contractor does not make only a temporary
attempt to cease the default and repeat it shortly afterwards. The last option for the
contractor is to ignore the notice and take the risk that the employer will exercise her
or his option to terminate employment. It is important that the employer should notify
the contractor of her or his decision within the 10-day period because the employer
will lose the option to terminate the contractor’s employment for the specified default
if he or she fails to do so. However, other rights or remedies will not be affected, such
as the right to sue for damages.
15.100 Automatic termination can result from the bankruptcy of the contractor. Under the
agreement between the contractor and the employer, the contractor’s employment may
be reinstated. The rights and duties of the parties on termination by the employer are
self-explanatory and are contained in subclauses 25(3)(a) to (d) of the HKIA/RICS
Standard Form of Contract.
(e) Termination by the main contractor
15.101 Bankruptcy of the employer is one of the possible factors that may cause the contractor
to terminate its own employment. However, unlike bankruptcy of the contractor,

bankruptcy of the employer does not result in automatic termination of employment by

the contractor. In such circumstances, the contractor may terminate its own employment
but the contract still remains. Sufficient evidence of the employer’s insolvency should
exist and notice should be given by registered post to the employer or the architect for
the contractor to terminate its employment.
There are some other events that may cause the main contractor to terminate its own 15.102
employment. These events are set out in subclauses 26(1)(a) to (d) of the HKIA/RICS
Standard Form of Contract, which briefly are:
• the failure to honour certificates of payment. The main contractor may use
its right to terminate its own employment under the contract if the employer
does not pay amounts properly due on certificates. The contractor may give
the employer a letter by registered post to demand payment, and notice of
termination will be served if payment is not made within seven days from the
date of receiving the letter.
• interference with or obstruction of the issue of any certificate due under the
contract. The employer may interfere with the architect to prevent him from
issuing a certificate, or lead him to adjust any amounts to be included in a
certificate.
• suspension of works over a prescribed period. Delayed instruction by the

architect is an example. Once the period of suspension has elapsed, the main
contractor may terminate its own employment by giving notice.
• bankruptcy of the employer.
It is not implied that once the employer’s bankruptcy occurs, the contractor becomes 15.103
free to terminate its own employment. The contractor becomes a creditor of the
employer. Subclause 26(2)(b) of the HKIA/RICS Standard Form of Contract states
in detail what the contractor should be paid after taking into account the amounts
previously paid. It includes:
• the total value of work completed at the date of termination;
• the total value of work begun and executed but not completed at the date
of termination – the value being ascertained in accordance with subclause
11(4) of the conditions as if such works were variations required by the
architect;
• any sum ascertained in respect of direct loss and/or expense under subclauses
11(6), 24 and 34 (2) of the conditions (whether ascertained before or after the
date of termination);
• the cost of materials or goods properly ordered for works for which the
contractor has paid or for which the contractor is legally bound to pay, and
on such payment by the employer any materials or goods so paid for shall
become the property of the employer;

382 MONEY
• the reasonable cost of removal under subclause 26(2)(a), that is, removal
from the site of temporary buildings, plant, tools, equipment, goods and
materials which have to be removed by the contractor;
• any direct loss and/or damage caused to the contractor by the termination.
15.104 According to these terms, materials on site that were paid for by the employer become
its property and the contractor has a lien on them until all debts due from the employer
to the contractor are paid. However, it is still not clear whether such lien would be
legally enforceable against the trustee in bankruptcy.
15.105 The architect and quantity surveyor can make sure they can receive their payments
by seeking advice from the trustee in bankruptcy before proceeding to further duties.
Their employment does not end because of the employer’s bankruptcy. If the architect
and quantity surveyor cannot be assured of payment, they cannot be forced to perform
their duties.
8. RETENTION MONEY
(a) Entitlement to retention money
15.106 The purpose of retention money is to provide partial security to the employer if the
work is not complete in accordance with the contract. In other words, retention money
is to secure the main contractor’s obligation to complete the works and make good
any defects. The employer holds retention money as a trustee for the main contractor
but without obligation to invest. In addition, a surety bond serves the function of
guaranteeing contract performance.
15.107 Retention money is another feature created by the contract. The system of retention
is supposed to be a mechanism whereby the employer can build up a fund during the
course of a project which will act as an inducement to the contractor to remedy any
defect during the liability period.
15.108 Retention money is held until entire performance is complete. The contractor is
entitled to payment on a pro-rata basis as the work proceeds, but it is not entitled to the
retention money until the work is substantially complete. It depends on the terms of
the contract, whether substantial completion means perfect completion or completion
with less stringent requirements in order for the contractor to have its retention
money released earlier. Under no circumstances will the employer release all the
retention money to the contractor before final completion. If there is only substantial
completion, where there are still some items of work for the contractor to complete,
the employer will use the retention money to pay for that work if the contractor fails to
complete those items. The elimination of retention money from contract payments can
improve the contractors’ cash flow. Subclause 30(3) of the HKIA/RICS Standard Form
of Contract provides that the employer may retain a certain percentage of the total
value of the work, material and goods. Subclause 30(4) of the HKIA/RICS Standard
Form of Contract states the nature and purpose of retention money and how it should
be paid over to the contractor.

RETENTION MONEY 383
If the contractor is in default and the project is to be completed by the surety, the surety 15.109
may be entitled to the retention money held by the employer. This is so only if the
situation is so simple that there are no outstanding debts. If the face value of the bond
is insufficient to pay the labourers and suppliers, the retention money will be claimed
by these parties and the surety. The court may rule that the labourers and suppliers
have priority to claim the retention money.
(b) Deductions from retention money
Concorde Construction Co Ltd v Colgan Co Ld (No 1)35 involved a dispute about 15.110
whether the employer was entitled to make deductions from retention monies, and
whether mandatory injunction should be granted, to order the employer to set aside
retention monies in a separate trust fund. In the contract the defendant was entitled
to put 10 per cent of the amount of each interim certificate into a retention fund. The
defendant argued that the plaintiff was responsible for a certain amount of defects in the
building. The plaintiff sought a mandatory injunction afterwards, ordering the defendant
to open a trust account and pay the present and future retention monies into the account.
However, the employer insisted that he was entitled to recourse, for the defects the
plaintiffs made, from the retention monies kept in the trust. The main contractor did
not accept that all the defects in the schedule of defects were his responsibility. The
judge disagreed that the employer was entitled to have recourse to the trust of retention
monies simply on the strength of the employer’s own belief that he had a good claim
which entitled him to such monies.36 The purpose of retention money being put into
trust is to minimise the risk taken by the contractor if the employer becomes insolvent,
while at the same time protecting the employer against the defaults by the contractor.
It could not be maintained if the employer could free the retention monies from the
trust whenever he or she claimed appropriate.37 Thus, the Concorde Construction case
discussed whether the retention money set aside could be used to set off damages by
the employer.
35
[1984] 1 HKC 241.
36
Following the principle in Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30, Rhind J held
that the contractor was able to request the owner to set aside the retention money in a separate trust fund for the
benefit of the contractor. In the judgment, he said:
“I do not think that an employer is entitled to have recourse to the trust fund of retention monies simply on
the strength of his own belief that he has a good claim which entitles him to such monies. The court cannot
countenance a situation where the employer would, in effect, be the judge in his own cause and able to say when
he would make deductions from the retention monies. Allowing the employer to free the retention monies from
the trust whenever the employer claimed entitlement to set-off would drive a coach and horses through the whole
system of protection which condition 30(4)(a) seeks to set up … As a matter of common sense, the employer
can only be permitted to deduct substantiated claims for liquidated amounts from the retention monies. How
the employer will substantiate his claims depends on the circumstances … the employer has an arguable case,
judging from the material so far before the court, but nonetheless, its a contentions bout the main contractor’s
responsibility for defects and in relation to the other disputed matters are “speculative” in the sense that it is a
matter for speculation whether the employer will ultimately succeed in proving its contentions …”
37
See also PC Harrington Contractors Ltd v Co Partnership Developments Ltd (1998) 88 BLR 44. See also
MacJordan Construction Ltd v Brookmount Erostin Ltd [1992] BCLC 350, where it was held that the bank’s
interest on floating charges took priority over those of the contractor in relation to the retention money held by
the employer since there were no identifiable assets notwithstanding that the bank had notice of the terms of the
construction contract.

384 MONEY
15.111 Hsin Chong Construction Company Limited v Yaton Realty Company Limited,38
the case discussed below, deals with the issue of whether the subcontractor’s
proportion of the retention fund should be distinguished from the contractor’s
proportion of the entire retention fund in relation to recourse for damages by the
employer.
(c) Whether proportion is due to subcontractor
15.112 The case Hsin Chong Construction Company Limited v Yaton Realty Company
Limited 39 raised an important point in construction contracts. It should be clarified
whether clause 30 creates an effective retention fund in relation to a nominated
subcontractors’ proportion of the fund or whether the fund is effective in the hands of
the employer only. In this case, the date of completion certified by the architect was one
year following the contract date of completion. As such, a sum was held in the main
contractor’s certificate payable as liquidated damages to the employer. The architect
also issued a certificate entitling the employer to deduct against the contractor, a direct
payment to a nominated subcontractor. The plaintiff contractor asked for the total
retention monies to be placed in a trust account, but the defendant employer only paid
the amount remaining after deduction from the total the sums certified and retained.
The plaintiff applied to the court for a mandatory order requiring the defendant to
place the total retention monies into a trust account. In the argument, the plaintiff
main contractor contended that in relation to these monies, the retention fund was
effective in his hands only; the employer must first accumulate the monies in a trust
account; until the money was released, the employer must pay such money to the
main contractor without any deduction; and the only party that was entitled to exercise
any rights of deduction or set-off against any nominated subcontractor was the main
contractor himself.
15.113 On the other hand, the defendant employer contended that clause 30 of the HKIA/
RICS Standard Form of Contract created a single fund, which was not divisible. The
defendant argued further that as the whole fund on release became due and payable
to the main contractor, the employer could resort to the whole fund and not only to
part of it, to recover the damages by deduction. The court concluded that the retention
trust fund had to be held by the employer as trustee until such time as the money
was released by the issue of certificates, it then becomes payable by the employer
only to the contractor. Therefore the main contractor has then an interest in the whole
fund. It also follows that the employer’s right of recourse under subclause 30(4) of
the HKIA/RICS Standard Form of Contract extends to the whole retention fund, and
no distinction should be and could be drawn between the main contractor and the
nominated subcontractor’s proportions of it.
15.114 If there is an early final payment to a nominated subcontractor, then the nominated
subcontractor should be released with half of the retention fund for the value of its
work done. Subclause 27(e) of the HKIA/RICS Standard Form of Contract states:
38
[1987] HKLR 229.
39
[1987] HKLR 229. See Hong Kong Housing Society v Tang Kar Hung [2000] HKEC 88.

RETENTION MONEY 385
“Upon such final payment, the Limit of Retention Fund as defined in the appendix
to these Conditions shall be reduced by the amount of the retention in respect
of such subcontract, and save for latent defects the Main Contractor shall be
discharged from all liability for the work, materials or goods executed or supplied
by such Nominated Subcontractor under the subcontract to which the payment
relates.”
In Re Arthur Sanders Ltd,40 in respect of that portion of the retention money concerning 15.115
the nominated subcontractor, an owner was held liable to the liquidator of the main
contractor, with no right of set-off even for valid counter-claims of the owner against
the contractor. This case concerned a JCT 63 main contract and a subcontract in the
Green Form,41 which in effect extended the trust protection for the retention money
in favour of the nominated subcontractor. Thus, the main contract and the subcontract
operated as an assignment to the nominated subcontractors of the contractor’s right to
receive the retention money. This exposed the employer to the risk of being required
to pay twice when the main contractor, having received the portion of the retention
money on behalf of the nominated subcontractor, became insolvent without paying
the retention money over to the nominated subcontractor. If using this approach, once
such a nominated subcontract has been entered into, the contractor no longer has
any vested beneficial interest as regards the proportion of the retention money due
to the nominated subcontractor. Therefore, the contractor is merely a trustee for the
nominated subcontractor, notwithstanding that the money concerned is still, strictly
speaking, payable to the contractor. Yet, in Hong Kong, this approach is seemingly not
adopted.42
(d) Whether retention money is kept separate
Thus, contractors may question whether the retention monies held by the employers 15.116
have been put aside into separate bank accounts. In Rayack Construction Ltd v
Lampeter Meat Co Ltd,43 the plaintiff contractor was issued six interim certificates
by the architect. There was a dispute about whether, after the issue of the certificates,
the whole of the retention monies had been deposited with a bank. The plaintiff
claimed that the defendant was obliged to pay the sum due, together with all future
retention monies when they were certified, into a separate bank account according
to the trust specified in their agreement. The defendant argued that there was no
express provision regarding the condition requiring the employer to set aside retained
40
(1981) 17 BLR 125.
41
NFBTE/FASS form of subcontract.
42
See Hsin Chong Construction Co Ltd v Yaton Realty Co Ltd (1984) 29 BLR 120, where Hunter J said:
“I regret that I do not find this passage persuasive… and am unable to follow it. Nowhere in his judgment does
the learned judge refer to clause 13 of the sub-contract. This, I regard as a crucial provision. It affords the main
contractor a right of ‘deduction or set-off more widely framed than the right of recourse in clause 30(4)’. He
is by no means a bare trustee: one whose ‘only interest … is as a trustee’. … [I]n my judgment, the employer’s
right of recourse under clause 30(4) extends to the whole retention fund …”.
43
(1979) 12 BLR 30. See Concorde Construction Co Ltd v Colgan Co Ltd (1984) 29 BLR 120. See also PC
Harrington Contractors Ltd v Co Partnership Developments Ltd (1998) 88 BLR 44 and Balfour Beatty Ltd v
Britannia Life Ltd 1997 SLT 10.

386 MONEY
monies in a separate trust account. The judge concluded that there was a condition in
their agreement, which imposed an obligation on the employer to set aside retention
monies in a separate trust fund. The judge also emphasised that the contract subclause
30(4)(a) is to protect both employer and contractor against the risk of insolvency of
the other. The employer was protected by his right to retain a proportion of the sum
certified as due in respect of work done against the risk that claims in respect of any
failure to carry out the architect’s instructions or in respect of delay or other breaches
of the contractor’s obligations will, in the event of the contractor’s insolvency, rank
as unsecured debts. On the other hand, the contractor was protected against the risk
that his claim for payment of monies retained by the employer would similarly rank
as an unsecured debt, save only for the lien conferred by the proviso to condition
26(2). Thus, both parties are protected, to the extent that the employer carries out its
obligation to set aside as a separate trust fund a sum equal to the retention monies.
The judge also disagreed with the defendant’s argument that he might be faced with
a cashflow problem if he had to set aside the retention monies. He stated that it was
wrong to expose the plaintiff to risk in order that the defendant could use the money
to eliminate his own financial risk. In approaching this, it was held that the court
should approach the matter on the broad principle of doing what it can to avoid
injustice.44
9. NON-PAYMENT AND REMEDIES

(a) Non-payment and repudiation
15.117 Whether non-payment amounts to repudiation of a construction contract is a question

that very often arises. In the case of Creatiles Building Materials Co Ltd v To’s Universe
Construction Co Ltd,45 the defendant builder failed to make interim payments due to
the plaintiff contractor. The plaintiff stopped working and the defendant alleged that
the plaintiff had repudiated the contract and as a result the defendant terminated the
contract. The plaintiff also claimed against the defendant for repudiation of the contract
and the defendant counter-claimed against the plaintiff for damages arising from its
repudiation. Clarification should be sought whether the non-payment amounted to a
44
See Cayne v Global Natural Resources Plc [1984] 1 All ER 225.
45
[2003] 2 HKLRD 309. In Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd [2005]
HKEC 1264, it was remarked:
“Mere breach of a payment obligation does not constitute a common law repudiation. What has to be
considered is whether the circumstances of the non-payment show an intention not to be bound by the contract
(para. 4.221 Vol 1, Hudson’s Building and Engineering Contracts 11th Edn). A number of authorities were
cited to me including Mersey Steel & Iron Co. Ltd. v Naylor, Benzon Co. [1881-5] All ER Rep. 365, Decro-
Wall International SA v Practitioners in Marketing Ltd. [1971] 1 WLR 361, Shyam Jewellers Ltd v Cheeseman,
English Court of Appeal, 29 November 2001 and Creatiles Building Materials Co. Ltd. v To’s Universe
Construction Co Ltd [2003] 2 HKLRD 309. Each case, of course, depends on its own facts.”
See also Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive Technology Ltd (Third Party) [2005] HKEC 2152,
where it was held, on the facts, that persistent failure of the defendant to pay, or even to respond at all to demands
for payment evinced an intention on the part of the defendant not to be bound by the contract, thereby entitling
repudiation by the plaintiff.

NON-PAYMENT AND REMEDIES 387
repudiation of the contract in order to come to a conclusion of which party should be

liable. The judge stated that:
“As a starting point, it is correct to say that there is no general right in common
law to suspend work if payment is wrongly withheld.”
The statement is self-explanatory and it seems to be reasonable to apply this principle 15.118
to other similar cases. The judge also restated the argument made by the case Mersey
Steel And Iron Co v Naylor, Benzon & Co.46 In this case, the party that had postponed
an instalment payment under erroneous advice had not shown an intention to repudiate
the contract so as to release the other party from further performance. Actual
circumstances of the case should be looked at in order to determine whether one party
to the contract is relieved from its future performance by the conduct of the other.
Thus, it is noted that whether one party has the intention to repudiate the contract is
the essential element for the resolution of such disputes.
(b) Contractor’s right to determine employment
When the employer fails to make payment regularly, most construction contracts 15.119
provide the contractor with the right to determine her or his own employment.
Shyam Jewellers Ltd v Cheeseman47 showed in what way non-payments can result in
repudiation. In t his case, the employer Jewellers failed to make payment at the various
dates stated in the contract but made partial payment occasionally and failed to do
so afterwards. The contractor wanted to treat the contract as ended. The judge found
that the contractor was justified in considering that the contract was repudiated by the
jeweller. However, the Court of Appeal disagreed with the lower court’s decision. The
court stated that slow payment was different from non-payment. The former would not
result in breach of contract and influence continuing in the performance of the contract.
Besides, the contractor should have complained as soon as he found a payment amount
was less than the stated payment sum.48 Standard forms of contract usually provide
a right for a contractor or subcontractor to determine her or his employment in the
event of non-payment. To succeed in an action for repudiation caused by non-payment,
the terms must be as clear as possible as to what dates the payments are due and the
amount that is due.
46
[1884] 9 AC 434. See Leung Yuk Lin v Karson Oten Fan Karno [2009] HKEC 1137; Creatiles Building Materials
Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309; Hongkong Underground Engineering Ltd
v Welcome Construction Co Ltd [2005] HKEC 1264; and Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive
Technology Ltd (Third Party) [2005] HKEC 2152. See also Federal Commerce & Navigation Co Ltd v Molena
Alpha Inc (The Nanfri) [1979] AC 757; Decro-Wall International SA v Practitioners in Marketing [1971] 1 WLR
361; Langley Constructions (Brixham) v Wells [1969] 1 WLR 503; Household Machines Ltd v Cosmos Exporters
Ltd [1947] KB 217; and Alkok v Grymek (1966) 56 DLR (2d) 393.
47
[2001] EWCA Civ 1818. See Premier Communications International Ltd v Sri Lanka Telecom [2005] EWHC
1861 (Ch). See also Leung Yuk Lin v Karson Oten Fan Karno [2009] HKEC 1137 and Hongkong Underground
Engineering Ltd v Welcome Construction Co Ltd [2005] HKEC 1264.
48
In his judgment in Shyam Jewellers Ltd v Cheeseman [2001] EWCA Civ 1818, Potter LJ held that the potency
and legal effect of such a breach were to be judged in light of the seriousness of the breach and its effect upon the
continuing performance of the contract.

388 MONEY
(c) Lien
15.120 The purpose of a lien is to provide security of payment for suppliers of materials
and labour and to provide credit in the building industry. Money flows from
one party to another, such as, from lender to owner, from contractor to workers
and suppliers. When there is money given from one party to another, the other
party wants an exchange in return, such as work to be done, materials to be
delivered. It is very normal that payment follows performance. However, in many
circumstances, goods are provided on credit. Sale and purchase of high value
goods, like cars and houses may involve mortgages or other payment methods
under which the goods may be repossessed if they are not paid on the agreed
date. Contractors and subcontractors deliver their services, labours and materials
before payments are made but they cannot repossess the work done if payment is
not made properly. They may be unwilling to supply materials and labour without
being paid in advance if they do not have some sort of security. However from the
employer’s point of view, it sounds unrealistic to make payment before having any
work done. A lien can facilitate credit and secure payment, to protect the interests
of all parties: lenders, owners, contractors and any parties working for them. A
lien is a claim against property, which is required to be registered against the title
to the property and which can inhibit transfer of the property for the lien claimant
if the property is sold. The property cannot be sold or bought until the lien is
removed, so the owner would have to deal with any claim before he or she can sell
the property.
15.121 A lien serves as a notice to the public after it is registered that the property is subject
to the lien. Anyone who would like to purchase and lend money against the property
with a lien should be aware that the property is subject to the lien claimant’s interest.
The claimant has priority to be paid out of the proceeds if the property is sold. The
order of priority among mortgage lenders and lien claimants differs from one country
to another.
(d) Trust
15.122 The creation of a trust is an alternative method. A trust is used to separate the legal
interest in property from the equitable interest. The trustee has legal ownership,
may have possession of the property and must use the property for the use and
benefit of the beneficiary. Subcontractors and suppliers under the contract are
usually the beneficiaries in construction. As soon as the contractor has received
payment, the trustee contractor is required to pay all the beneficiaries. Criminal
charges can result from a breach of a trust; it varies from one jurisdiction to
another. Also, directors and officers of the contractor may be personally liable
under some statutes. Breach of trust may occur because of financial difficulty of
the contractor.
15.123 In addition to a lien and the trust method, retention is a method of keeping some of the
contract price out of the hands of the contractor until the project is complete in order
to make sure other parties have been paid.

QUANTUM MERUIT 389
10. QUANTUM MERUIT

(a) Payment not determined by contract
Quantum meruit means the worth of the proportion of work; it is usually used to 15.124
claim for a reasonable sum. There are circumstances where the court awards payment
that is not determined by a contract. If there is an existing contract between parties
to pay an agreed sum, a quantum meruit claim cannot arise. There may be a quantum
meruit claim where an express agreement to pay a reasonable sum exists; or where the
contractor is entitled to a reasonable sum for the labour and material costs for work
done under an expressed or implied contract with no price fixed. If the agreement to
claim a reasonable sum is for a whole work, completion could become a condition
precedent to payment. It is general practice that in the absence of clear words, the
contractor is entitled to demand payment on the value of work he or she has done.
There may also be a quantum meruit claim where there is a quasi-contract. This occurs
when work is carried out, negotiations as to the terms of the contract are proceeding
but agreement is not reached upon essential terms.
(b) Implied contract
There may also be a quantum meruit claim where there is work outside a contract 15.125
at the request of the employer, on the basis of an implied contract. If the contractor
has carried out work under a contract and it was subsequently found to be void or
unenforceable, he or she may be entitled to a quantum meruit for that work49. Of
course, this principle does not apply to an illegal contract.
(c) Assessment of reasonable sum
There are no fixed rules laid down by courts restricting the way in which a reasonable 15.126
sum is to be assessed. However, there are several basic assessment elements in some
particular cases. These may include:
• negotiations as to price;
• overheads and profits added on top of the costs of labour and materials used;
• measurement of materials supplied and work completed;
• professional opinions from quantity surveyors and estimators, etc.
The contractor should be paid at a fair commercial rate for the work done. It is 15.127
incorrect to regard the work as though it had been done under the contract where
a quantum meruit is in fact recoverable for work done outside a contract. It is also
incorrect to apply provisions of a void contract to the assessment of quantum meruit,
49
See, for example, Ma Liu Sha v Pollard Construction Co Ltd [2008] HKEC 1826 and BSC Interior Contract and
Engineering Co Ltd v Shinta Ltd [2008] HKEC 1601.

390 MONEY
where the quantum meruit should be recoverable for the work done pursuant to a void
contract. For an unenforceable contract, in order to assess the work done, it is relevant
to consider the plaintiff ’s conduct in performing the work and whether such conduct
has contributed to unnecessary additional costs to the defendants. This requires
detailed discussion on the basis of price and calculation, measurement of work done
and material supplied, and again, will involve the opinion of quantity surveyors,
builders and professionals in order to reach a conclusion regarding a reasonable sum.
However, it is not a rule of law that the assistance of these professionals be given to
assess a reasonable sum.
(d) Situations attracting quantum meruit
15.128 Quantum meruit claims may arise under the situations listed below.
• The contractor is entitled to a reasonable sum for the work carried out if
negotiations as to the terms of the contract are proceeding while the work is
carried out.
• If the employer prevents the contractor from completing the work, the
contractor can claim for a reasonable sum.
• If there is no fixed price in the contract, the contractor is entitled to a

reasonable sum for the labour and materials supplied, whether the contract
is expressed or implied. The contractor can demand payment periodically
for the value of work he or she has done if there is no express agreement
that completion of work is a condition precedent for reasonable sum
payment.
• If it can be proved that, by implied agreement, a new contract exists to pay

for the work done, the contractor may recover the amount for the work he or
she has completed based on that new contract.
15.129 In William Lacey (Hounslow) Ltd v Davis,50 the plaintiff builder was led to believe
that he would receive the contract, as the employer asked him to provide plans and
estimation work for the reconstruction of the premises. The employer finally sold the
premises instead of rebuilding it. The plaintiff was entitled to a fair remuneration for
the work, as concluded by the Court. In the argument, two points are noteworthy. First,
there was no binding contract between the plaintiff and the defendant even though
the defendant employer had asked the plaintiff to make estimation plans for the
reconstruction of the premises. Secondly, the contractor was entitled to remuneration
for the preparation work done. The plaintiff was led to believe he would receive the
contract because of this relationship but in fact no contractual relationship had ever
been formed. It is very common that when contractors submit tenders for a building
50
7 HKCFAR 79; Profit Boat Development Ltd v Craft Projects (HK) Co Ltd [2007] HKEC 1615; and Professional
Associates v Polytek Engineering Co Ltd [1986] HKLR 20. See also Mowlem Plc v Phi Group Ltd [2004]
BLR 421, where a claim for the costs of removing unsuitable material was held to be too remote to be allowed.

SET-OFF AND ABATEMENT 391
contract, they may be asked to submit plans or estimations. Argument in this case was
against the right for contractors to claim damages for their costs after failing to receive
the contract. Contractors submit tenders and do all the preparation work at their own
cost because they are clear that this is a gamble and it is not certain that they will be
successful in getting the contract. Therefore, they should not be able to claim for any
expenses incurred.
The judge’s reasoning was that the essence of the case should be borne in mind: 15.130
that one should be aware that different circumstances lead to different conclusions
regarding a contractor’s ability to claim damages for expenses. If the contractor merely
did the preparation work in the hope that it would obtain the contract, then it could not
be a sound argument to claim damages. In William Lacey, the judgment was different
because the plaintiff was led to believe that he would receive the contract and the
estimation and planning work was done under that mutual belief.
11. SET-OFF AND ABATEMENT

(a) Dissatisfaction of the employer
Construction contracts usually provide that the work must be approved by the 15.131
employer. For other products, if the satisfaction of the buyer cannot be met and
the sale is rejected, the seller can take its product back. However, the work done
and the material and labour consumed in construction cannot be recovered by the
contractor.
It is usually the case that if the work cannot meet the employer’s requirements, payment 15.132
will still be made under the contract. However, the employer can seek for a reduction in
the contract price by set-off or counterclaim for damages. The same principle applies
when the work has to be approved by an agent of the employer or an architect. If the
architect has issued a final certificate of satisfaction, the employer cannot claim for
damages for defects in the absence of fraud.
(b) Set-off and counter-claim
There is a difference between set-off and counter-claim. Counter-claim means the 15.133
defendant makes an independent claim against the plaintiff. Set-off is where the defen-
dant makes a cross-claim against the plaintiff and wants to diminish the plaintiff’s
claim. A cross-claim is always a counter-claim but not necessarily a set-off. The accrued
right to payment should not be affected by the cancellation or rescission of a contract.
The employer cannot, subject to set-off, refuse to pay unpaid instalments which have
become payable to the contractor under the contract, unless there is a provision to the
contrary, or unless there has been a total failure of consideration.51
51
Keating (2001).

392 MONEY
(c) Set-off when valid certificates are issued
15.134 In Nin Hing Electronic Engineering Ltd v Aoki Corp,52 the defendant failed to pass on
the money to the plaintiff subcontractor in accordance with the terms of the subcontract.
Two architects’ certificates had been issued in respect of the work performed by the
plaintiff. The subcontract works were delayed and it was doubted that the certificates
issued by the architects reflected the delay. In addition, whether these certificates
entitled the plaintiff to payment and whether the contractor had the right to set-off
payments against the certificates were at issue. In the argument, the judgment from
Lord Denning in the case of Dawnays v FG Minter53 was pointed out:
“An Interim certificate is to be regarded virtually as cash. It must be honoured.

Payment must not be withheld on account of cross claims whether good or bad –
except in so far as the contract specifically provides.”
15.135 Following the above principle, an interim certificate must be honoured if it is valid.
Applied to the Nin Hing case, the plaintiff should be paid as long as he or she has
received the interim certificate disregarding any delay, and no set-off should be
allowed. However, it was also argued based on the Dawnays example that the principle
was not accepted in another case: Gilbert-Ash (Northern) Ltd v Modern Engineering
(Bristol) Ltd,54 in which Lord Dilhorne stated that:
“It is, of course, true that the contract makes provision for payments as the work
proceeds but it is to be observed, a fact to which I feel insufficient attention has
been paid, the contractor is only entitled to be paid for work as properly executed.
He is not entitled to be paid on interim certificates for work which is defective.”
15.136 The argument suggested that it was permissible to set off payments against architect’s
certificates. In B Hargreaves Ltd v Action 2000 Ltd,55 the plaintiff Hargreaves was the
subcontractor of Action 2000 to construct a series of petrol stations. Hargreaves was
then wound up by the court. Hargreaves was refused payment by Action 2000 for the
work done but the judge dismissed the claims of set-off made by the defendant in the
court. The defendant argued firstly that, it was entitled to an equitable set-off as all
the contracts it had made with other parties for the petrol station construction project
were so closely related that it was entitled to apply the principle set-off. Secondly, the
monies due on some of the other contracts were debts, and therefore there should be
set-off of mutual debts under the common law doctrine of set-off. Finally, the defendant
sought to rely on insolvency rules and mutual credit and set-off. The appeal made by
the appellant was dismissed on the basis that the claim by the appellant to set off a debt
or money demands were admittedly unconnected; and the amount the plaintiff owed to
the defendant could not be clearly valued. It was different from other cases where the
52
[1987] 3 HKC 516. See Sethia Ltd v State Trading Corporation [1986]1 Lloyd’s Rep 31. See also Pilecon (Hong
Kong) Limited v Mightyton Limited [1993] 2 HKLR 435.
53
(1971) 1 BLR 16.
54
[1974] AC 689.
55
[1992] 62 BLR 72.

SET-OFF AND ABATEMENT 393
amount due was calculable such as the units of stock that were undelivered or work
performed at a certain price per unit.
The judge quoted a comment from Leggatt LJ in Axel Johnson Petroleum AB v MG 15.137
Mineral Group AG:56
“the state of the law is unsatisfactory that allows a set-off at law of debts which
are liquidated, even if unconnected, and in equity of debts which are connected,
even if unliquidated, but not a set-off of debts which are both unliquidated and
unconnected.”
The court also quoted another comment by Cockburn CJ from the case Stooke v 15.138
Taylor.57 In this case, the defendant was sued for failure to pay the rent, keep the
premises in a proper condition of internal repair and for conversion of the plaintiff’s
goods, while he made a counter-claim against the plaintiff for his failure to keep up the
external repair. Cockburn CJ said that:
“by the statute of set-off this plea is available only where the claims on both sides
are in respect of liquidated debts, or money demands which can be readily and
without difficulty ascertained … that when the defendant’s claim is for liquidated
damages, in other words, one of set-off, the plaintiff in his claim can give credit
for the amount, and so avoid the costs of the set-off, whereas, when the claim is
for unliquidated damages, he is unable to protect himself.”
The judge in Hargreaves Ltd v Action 2000 Ltd58 emphasised in his conclusion that 15.139
“the plea of set-off is available only where the claims on both sides are in respect
of liquidated debts, or money demands which can be readily and without difficulty
ascertained.” As the cross-claims made by the defendants in the case were not in
respect of liquidated debts, it could not be said that the sums due to the defendants
could, as at the relevant date, have been readily and without difficulty ascertained and
therefore, the appeal was dismissed.
The principle was reformulated by Lord Hoffmann in Stein v Blake,59 where he 15.140
stated that the relevant debts must be “ … either liquidated or in sums capable of
ascertainment without valuation or estimation”.
56
[1992] 1 WLR 270 at 274H.
57
[1880] 5 QBD 569. See Pacific Islands Shipbuilding Co Ltd v Don The Beachcomber Ltd (No 3) [1963] HKLR
515. See also Aectra Refining & Marketing Inc v Exmar NV (The New Vanguard and The Pacifica) [1994] 1
WLR 1634.
58
[1993] BCLC 1111. See Re Finbo Engineering Co Ltd [1998] 2 HKLRD 695. See also Aectra Refining &
Marketing Inc v Exmar NV (The New Vanguard and The Pacifica) [1994] 1 WLR 1634.
59
[1996] AC 243.

1. OVERVIEW
(a) Importance of timely completion
Construction projects are very complex and tend to be of longer duration than many 16.001
other types of commercial transactions. A large construction project may involve
thousands of separate operations. Each operation has its own time requirement,
and its start depends on the completion of certain preceding operations. Thus, a
typical construction project involves many mutually dependent and interrelated
operations.
Certainly, every employer expects the project to be built for the lowest possible 16.002
price and within the agreed time frame, to be technically sound and aesthetically
pleasing. When a construction project is completed after the required contract
completion date, a substantial cost overrun is said to be the result. The most obvious
effect is the increase in costs directly related to time, ie general overhead and project
overhead. To employers, the later the completion date, the later they will obtain a
return from their investment. The building under construction may be contractually
required for a particular date. For instance, the employer’s current premises have to
be vacated on a particular date, and they need to move into the new building before
that date, or an office building has been leased to future tenants with an agreed
move-in date.
A date for possession and a date for completion are normally stipulated in the contract. 16.003
The practical result is that the contractor is allowed to commence work immediately
after the date for possession and must complete it by the agreed date, failure by the
contractor to comply with this obligation is a breach of contract, carrying with it
liability to pay damages to the employer. For example, clause 22 of the HKIA/RICS
standard form of contract1 stipulates that, in the event of the contractor’s failure to
complete the work by the date for completion, then the contractor is liable to “pay or
allow to the employer a sum calculated at the rate stated in the Appendix …”. When
the works are practically or substantially complete, the architect is obliged to issue a
certificate of practical completion.
Also, to control time, construction contracts of usual forms contain clear terms 16.004
regulating the date of completion of the works,2 the extension of time for completion3
and failure to proceed with the works in a diligent manner.4
1
This refers to the Agreement and Schedule of Conditions of Building Contracts for Use in Hong Kong (1976
edn). It is widely used in private building projects in Hong Kong. It may be used with bills of quantities or without
them. Its structure, wording and arrangement are very similar to the JCT 63 Form. It should be noted that a 2005
version of it has been launched.
2
Apart from a single completion date, it is not uncommon for there to be stipulated, sectioned or phased completion
for the works.
3
The contract provisions for extension of time for completion commonly list the events that empower the engineer
or architect to grant and extend time for the completion of the works.
4
These refer to those provisions stipulating that the contractor is to proceed with the works diligently and they are
usually linked with a contractual power to terminate the contract in case of breach.

398 TIME
(b) Anticipation of delay
16.005 Delay5 is one of the most common causes of dispute, and central issues of
subsequent claims between the contracting parties in construction projects. Some
delays occurring in the design stage or the construction process cannot be prevented,
but they may be anticipated; variation orders are an obvious example. In Hong
Kong, this is explained in most circumstances by projects being rushed into at their
commencement. For instance, some clients are very reluctant to allow sufficient
time for the design team to design, prepare drawings, specifications and bills of
quantities and for coordination of specialist services before the project starts. The
standard forms of contract acknowledge the possibility of delay, and provide for it
by the inclusion of extension of time clauses and liquidated damages provisions.
The period of work may be extended, subject to any extension of time granted
by the architect for delays that are not the fault of the main contractor under the
contract. When a contractor applies for an extension of time, it is often the case
that the architect will take some time before making a decision or postpone until
the delay becomes apparent. In the absence of instruction from the architect, the
contractor cannot recover the cost of acceleration. Therefore, contractors may take
the risk that they will incur liquidated damages for delay rather than spend extra
money on acceleration. It should also be noted that under no circumstances would
the contractor be entitled to receive financial compensation from the employer for
the delay itself, if time can be extended without increasing the overall cost to the
contractor. The entitlement for monetary compensation from the employer is for
direct loss and/or expense suffered by the main contractor as a direct consequence
of the cause.
16.006 Thus, within the usual contractual framework for the completion of the works, there
are provisions for liquidated damages, setting out compensation to the employer
in case of delayed completion. The time or costs implications to the contract that
come with the individual event of delay or disruption are further set out in detail in
the contract. Thus, it is necessary to analyse the cause(s) of a period of delay and
disruption with reference to the causing or contributing event of delay or disruption.
Such an analysis is however usually complicated by the presence of concurrent causes
carrying different consequences as regards compensation in time or money. All of
these further render the analysis less straightforward by the duty to mitigate6 loss on
the part of the innocent party.
5
The word ‘delay’ is often used in distinction to a ‘disruption’ in this context. A disruption means disturbance,
hindrance or interruption of a contractor’s normal work progress, resulting in lower efficiency or lower
productivity than would otherwise be achieved. Thus, a disruption can bring no delay at all to the progress of
the works. Also, a disruption can merely bring about a delay to the progress of the works only, without causing a
contract completion date not to be met. Likewise, a delay to the progress of the works does not equal a delay to
the completion of the works.
6
See, for example, Ruxley Electronics and Construction Ltd v Forsyth [1994] 1 WLR 650.

CONSTRUCTION DELAYS 399
2. CONSTRUCTION DELAYS
(a) Delay claims
Contractors sometimes find it necessary to make formal claims for delay damages and 16.007
extensions of time caused by the employer and a variety of project participants, such as
the architect, engineer, nominated subcontractor, subcontractor or materials supplier.
In such cases, the contractor must be able to establish the cause of the delay and its
total impact on individual activities and on the project as a whole.
Proving the direct effect of a project delay or delays can often be a very complex and 16.008
difficult matter.7 When attempting to ascertain the effect of a delay on the performance
of the contract, a common complication is that the delay affects only certain individual
job activities. Theoretically, the entire project will be delayed if one or more than one
activity on the critical path has been delayed or the remaining activities, which are not
critical, can become critical if the float time is used up.
(b) Types and remedies of delays
Delays can be classified into four major types, according to liability: 16.009
• excusable/compensable delays;8
• excusable/non-compensable delays;9
7
In McAlpine Humberoak Ltd v McDermott (1992) 58 BLR 1, it was remarked that:
“When the defendant’s witnesses came to give evidence, they undertook the task which was never undertaken
by the plaintiff, of tracing the impact of every drawing revision, VO and TQ ... The judge [at first instance]
dismissed the defendants’ approach to the case as being ‘a retrospective and dissectional reconstruction by
expert evidence of events almost day by day, drawing by drawing, TQ by TQ and weld procedure by weld
procedure, designed to show that the spate of additional drawings which descended on McAlpine virtually
from the start of the work really had little retarding or disruptive effect on its progress’. In our view the
defendants’ approach is just what the case required.”
Likewise, in Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd [1999] 66 ConLR 119, it was
observed that:
“[The expert’s] second main technique was to translate cumulative hours recorded on daywork sheets as spent
on salt washing or mud clearing into equivalent working days and to treat those as further justification for
attributing that part of the days lost to water ingress. Again, however, that conclusion simply does not follow.
First, the labourers involved in those activities were only a part, and usually a small part, of the work force,
the rest of which was not necessarily idle (and indeed, so far as the records have been examined with this point
in mind, was usually not so in fact), so even in purely arithmetical terms and logic is flawed if an hour spent
by, say, one or two labourers is equated with an hour lost to the whole project. Second, time lost in this way
could in principle be made up by late working (as, again, often seems to have happened in practice). Third, it
is wrong in principle to ‘carry forward’ a part day if the next element on the critical path is a concrete pour. A
pour, once embarked upon, must be completed before the end the working day. Either it is commenced on the
due date, however late, and completed, or it has to be postponed by a complete day or days; there simply cannot
be a part-day loss on that score to be added to other part days.”
8
This expression is used here in the sense that the contractor is excused for the delay and is entitled to the grant of
an extension of time for completion. A common example for this is adverse weather.
9
This expression is used here in the sense that the contractor is entitled to be compensated in dollars terms for the
delay. A common example for this is variations of works.

400 TIME
• non-excusable delays;
• concurrent delays.
16.010 Put as simply as possible, excusable delays are all delays not caused by the contractor.
It is generally held that a contractor will not be entitled to a time extension for an
excusable delay unless the delay extends to the overall project completion. In order
to be excusable, the delay must be on the critical path for completion of the project.
Non-critical activities may be exempt from time extensions claims, up to the time that
they become critical.
(c) Excusable delays/compensable delays
16.011 Generally, a delay is deemed compensable to the contractor when its cause is within
the control of, is the fault of or due to the negligence of the owner. Examples of
compensable delays could be failure of the employer to furnish the site to the contractor
by an agreed date, faulty design or incomplete drawings and specifications. For this
type of delay, the contractor is entitled to a time extension and damages for extra costs
associated with the delays.
(d) Excusable/non-compensable delays
16.012 These delays occur when the contractor is delayed by occurrences that are not
attributable to either the contractor or owner. Under such circumstances, the contractor
should receive a time extension, but no additional compensation. Examples of
excusable/non-compensable delays would include an industry-wide strike, excessive
bad weather, floods, etc, or delays stemming from those designated as beyond the
control of the contractor in the delay clause – acts of God and so on.
(e) Non-excusable delays
16.013 In this category, the contractor’s own actions and/or inactions have caused the delay,
which could have been avoided if the contractor had taken proper action. These can
result from the fault of the contractor or his subcontractors or suppliers.
16.014 Examples of non-excusable delays by the contractor would include lack of manpower;
use of improper equipment; failure to order materials in a timely fashion; or defective
work that must be removed and replaced.
16.015 The contractor is not entitled to either damages or time extensions from the owner. In fact,
the owner could conceivably recover damages from the contractor. Such delays could
be compensable to the owner in the form of liquidated or actual damages paid by the
contractor for late completion or could be the basis for contract termination by the owner.
(f) Concurrent delays
16.016 The term ‘concurrent delays’ is used to describe two or more independent delays
that occur during the same period, either of which, had it occurred alone would have

CRITICAL PATH METHOD ANALYSIS 401
affected the ultimate completion date. If the concurrent delays consist of delays
attributable to both the owner and the contractor, neither can recover damages from
each other.
Different approaches have been suggested. For instance, the Devlin approach (a cause 16.017
cooperating with and of approximately equal efficacy to another competing cause
is sufficient to carry judgement for the loss);10 the dominant cause approach (the
dominant cause, ie the ruling, prevailing or most influential cause is taken to be the
cause of a delay);11 and the burden of proof approach (a claimant has to show how
much of the damage is caused by the breach, failing which only nominal damages
may be recovered).12 See also Henry Boot Construction (UK) Ltd v Malmaison Hotel
(Manchester) Ltd13and Balfour Beauty Building Ltd v Chestermount Properties Ltd14
for other approaches.15
3. CRITICAL PATH METHOD ANALYSIS

(a) Determining effect of delay
A bar chart is commonly used in construction to indicate activities and their 16.018
corresponding duration in the project. This type of graphical presentation is easily
understood by all levels of people, but there is a difficulty in identifying the impacts
of delays on the construction period. The detailed planning network used for time
management can be an excellent tool for analysing delay effects because it clearly
shows the time interrelationships among the various project segments. The critical
path method (CPM) is a procedure developed especially for the time management of
construction projects.16 It involves the analysis of the sequential and time characteristics
of projects by the use of networks.
To demonstrate the effect of a given delay, either on a given activity, group of activities, 16.019
or the total project a detailed comparison can be made between the as-planned and the
actual as-built networks. Such a comparison can clearly reveal extended durations,
start and completion delays and required changes in logic to recover the delayed time.
In this way, the effects of individual or multiple delays can be analysed, a process
10
See Boiler Inspection and Insurance Company v Sherwin-Williams [1951] AC 196 and Galoon Ltd v Bright
Grahame Murray [1994] 1 WLR 1360.
11
See Turner Page Music Ltd v Torres Design Associates Ltd (1977) CILL 1263.
12
See Government of Celyon v Chandris [1965] 3 All ER 48.
13
[2001] QB 388.
14
(1993) 62 BLR 12.
15
See Balfour Beauty Construction Ltd v The Mayor and Burgesses of the London Borough of Lambeth [2002]
BLR 288 for discussion of these two approaches.
16
See London Underground Ltd v Citylink Telecommunications Ltd [2007] BLR 391 for illustration of its use in
analysing the effects of delays. The critical path method is frequently used by the construction industry in the
United States, the United Kingdom, Hong Kong and elsewhere in planning construction projects and in analysing
the causes of delay. See Mirant Asia-Pacific Construction (Hong Kong) Ltd v Ove Arup & Partners International
Ltd [2008] Bus LR D1 for a helpful summary of the method. See also Hsin Chong Construction Co Ltd v Hong
Kong and Kowloon Wharf and Godown Co Ltd [1986] HKLR 987.

402 TIME
that is of great assistance in establishing compensable damages and contract time

extensions.17
16.020 It may not be sufficient for a contractor to prove that a delay was caused by another
party. If the delayed activities are on the critical path, the delay will very likely have
a financial impact. However, if the delayed activities all have float, and the period of
delay does not exceed the float, it may be difficult or impossible to claim for damages
unless it is proved that these activities have been disrupted. Courts consistently rule
that delays to activities on the critical path are of primary importance in evaluating
delay claims.
16.021 It is relatively easy to look at a critical path schedule to determine if a delayed activity
was on the critical path at the time the delay occurred. An activity with float, if delayed
for a period equal to or greater than the float, will become critical. Such a delay may
also have the effect of making previously critical activities non-critical, thus altering
the critical path. For that reason, a detailed schedule analysis must be done to properly
analyse the effects of any delay.
4. EXTENSION OF TIME
(a) Effect of extension of time
16.022 Most building contracts contain express provisions under which extensions of time can
be granted by the architect or engineer on a variety of specified grounds.18 The effects
of an extension of time are usually to reduce or remove the liability of contractors to
pay liquidated damages for delays in completion due to reasons outside their control
and to set a new completion date beyond which the employer will retain the right to
deduct liquidated damages.
(b) Obligation of contractor in claiming for an

extension of time
16.023 Under the HKIA/RICS standard form of contract, the initiative for the setting in motion
of the extension of time procedures in clause 23 must come from the contractor. The
17
The establishment of the critical path of a particular construction project can itself be a difficult task if one does
not know how the contractor planned the job. Not only that, but the critical path may well change during the
course of the works, and almost certainly will do if the progress of the works is affected by some unforeseen
event. See Royal Brompton Hospital NHS Trust v Hammond (No 6) (2000) 76 ConLR 131.
18
A term empowering the grant of an extension of time for completion has to be clearly provided in the contract
and the court is slow to imply such a term. In Trollope & Colls Ltd v North-West Metropolitan Regional Hospital
Board [1973] 1 WLR 601, a building contract based on the JCT 63 Form provided for works to be carried out
in three phases, each with separate contract sums and its own set of conditions. Phase III was to be completed
by a specified date but the date of commencement for Phase III was to be fixed by reference to the completion
of Phase I. There was express provision for the granting of an extension of time for completion for Phase I but
not for the granting of an extension of time for completion for Phase III if Phase I was delayed. The contractor
contended that a term for extending the date for the completion of Phase III in these circumstances should be
implied. The court held that no such term could be implied since the express terms of the contract were clear and
unambiguous.

EXTENSION OF TIME 403
main contractor must be prompt in taking the initial action by giving notice of delay
and stating the cause of delay though there is no stipulated time period stated in
the contract for giving such notice. Clause 10.5 of the Standard Form of Domestic
Subcontract19 sanctioned by the Hong Kong Construction Association states that:
“The Subcontractor shall support any written claim for extensions of time …
the circumstances giving rise to the claim, the additional sums claimed and the
manner in which such sums are calculated. Provided that if the Subcontractor
fails to supply full and detailed particulars in respect of any such claims, the
Contractor may consider such claim only to the extent the Contractor is able on
the information made available.”
The required notice made by the Main Contractor to the architect should specifically 16.024
refer to delay in progress, not delay in completion. Any subsequent award will be based
upon the assessment of delay in completion made by the architect. Thus, a contractor
should, at the time of giving notice or immediately afterwards, provide details of all
the circumstances surrounding the delay in progress, of any effect it may have on other
concurrent delays and of any delay in completion that might result. The contractor
should estimate the length of the delay, although the architect will make the final
decision. An extension of time can only be validly granted if the procedures that are
laid down in the contract are strictly followed.20
(c) Importance of giving prompt notice
All forms of construction contracts contain requirements for the contractor to serve 16.025
notice to the architect/engineer in the event of a delay to the progress of the works, as
the first step in the procedure for securing an extension of time. However, the giving
of notice under such clauses is not generally considered to be a condition precedent
to the right to an extension of time. However in two recent cases in Australia, Turner
Corporation Ltd v Austotel Pty Ltd 21 and Turner Corporation Ltd v Coordinated
Industries Pty Ltd,22 the employer had caused delay and the contractor failed to serve
notice, received no extension of time and argued that time was at large.
The court reached the following conclusion: 16.026
“where the contract provides an extension of time clause, which can accommodate
delay caused by the principal and provides a contractual regime or mechanism
whereby the delay is to be calculated, the fact that the principal may have caused
delay has the effect that an allowance should be made in accordance with the
19
See, for example, its use in Penta-Ocean Construction Co Ltd v Cwf Piling & Civil Engineering Co Ltd [2007]
3 HKLRD 233.
20
See, for example, London Borough of Merton v Leach (1985) 32 BLR 51 and Peninsula Balmain Pty Ltd v
Abigroup Contractors Pty Ltd [2002] NSWCA 211.
21
27 NSWLR 592. See Hsin Chong Construction (Asia) Ltd v Henble Ltd [2006] HKEC 1555. See also Multiplex
Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] BLR 195 and Gaymark Investments Pty Ltd v
Walter Construction Group Ltd (2005) 21 ConstLJ 70.
22
12 BCL 33.

404 TIME
contract. It does not have the effect that the contractual provisions are thereby
overlooked or put aside or that time is put ‘at large’.”
16.027 These decisions are of great importance for contractors because they confirm that if
contractors are delayed by the employer, then the contractors must comply with the
notice provisions contained in the contract (regardless of whether the notice provisions
are conditions precedent or not) if they are to be entitled to an extension of time. If
the contractors do not do so, they will be unable to claim that time is at large and must
complete the work by the due date and pay liquidated damages.
16.028 In Hsin Chong Construction (Asia) Ltd v Henble Ltd,23 it was argued that the
prevention principle should operate here to prevent the employer from claiming
liquidated damages where the employer’s conduct has led to delay, notwithstanding
that the contractor had failed to give notice.24 In his judgment, Reyes J rejected such
an argument and noting:
“I think that the difficulties with his argument are well-summarised in Hudson’s
Building and Engineering Contracts (11th ed., 1st Supplement, 2004) at §10.026.
That states:-
‘New version of prevention theory
In Australia many forms of contract now contain extension of time clauses
expressly based on acts of prevention or default on the part of the owner or
his agents, thereby successfully defeating attempts to avoid the contractual
liquidated damages machinery on that ground,... As in the case of all other
grounds of extension of time, however, these are commonly conditioned on
notices requesting an extension given by the contractor at the time of the event
in question (for which there are well justified practical reasons, ...). In addition,
some but not all Australian forms confer a discretion or indulgence on the owner’s
A/E to dispense with notice compliance and grant an extension, notwithstanding
the contractor’s failure to apply in time (for which there are again sound practical
justifications in the owner’s interest). A quite new prevention argument, which
seems to have originated in English contractors’ claims circles but which has
first surfaced in litigation in Australia, is that while a sufficiently clear ground
of extension standing by itself will defeat a prevention-based attack on the
liquidated damages machinery, rejection of a contractor’s claim for an extension
on the ground of failure to give the required notice should in some way serve to
resurrect the prevention objection. In the case of Australian standard forms, this
argument has been refined still further as applying only to those forms where
there is no express dispensing power conferred on the A/E (so, it is suggested,
implicitly requiring dismissal of the contractor’s extension of time claim where
a complaint notice has not been given, and thus in some way resurrecting the
prevention theory). While the obvious reply will be that in such a case the liability
23
[2006] HKEC 1555. See also City Inn Ltd v Shepherd Construction Ltd [2008] BLR 269.
24
Gaymark Investments v Walter Construction Group [1999] NTSC 143.

to pay liquidated damages has been caused by the contractor’s failure to give
the required notice rather than by any act of owner prevention, the argument
appears to have been accepted in this form by Bayley J in the Northern Territory
SC in 1999 in Gaymark..., when upholding an arbitrator’s rejection of an owner’s
claim for liquidated damages on this ground and after considering the two NSW
cases of Turner Corporation Ltd. v. Co-Ordinated Industries Ltd.(19950 11 BCL
202 (Rolfe J) and Turner Corporation Ltd. v. Austotel Pty Ltd (19970 13 BCL
378 (Cole J), neither of which lend any support to such a claim. It appears
from the earlier Turner case that there the argument had even been advanced
where the contractor was unable to prove actual delay to progress caused by
the acts complained of, and was also rejected for that reason. Since under these
forms of contract extensions of time based on owner prevention can expressly be
advanced subject only to strict notice requirements applicable to all extension of
time claims, it is submitted that any such contract evinces the clearest intention
to bring all owner prevention delays within the scope of its liquidated damages
machinery, so that the argument seems to be unsustainable both as a matter of
party autonomy and of reasonable commercial intention, while the absence of a
dispensation provision seems irrelevant...’
By contrast, in South Africa, the Appellate Division not only dismissed a
contractor’s prevention allegations ..., but then proceeded to hold the owner
entitled to full liquidated damages as the result of the contractor’s failure to
apply in time for the extension – see Group Five Building Ltd. v. Minister of
Community Development [1993] 3 SA 629 (AD)...”
(d) Timing of granting an extension of time
When architects have received notice of delay from the main contractor, they must 16.029
decide whether the delay is caused by one of the matters for which the main contractor
is entitled to an extension of time under clause 23 of the HKIA/RICS standard form
of contract, and whether the delay, if valid, is going to result in late completion.
The architects are under an obligation to give an extension of time as soon as they
reasonably can, so the main contractor is not left in doubt as to the required completion
date. A failure by employers or their agents reasonably to grant appropriate extensions
of time sufficiently and promptly may make the contractors unable to plan their work
and so may represent a further cause of delay.
However, in some cases (such as strikes, inclement weather, force majeure) the 16.030
architect may not be able to estimate the extension of time until after the original date
for completion and so clause 23 recognises this with the phrase: “so soon as he is able
to estimate the length of delay”. In Amalgamated Building Contractors Ltd v Waltham
Holy Cross UDC,25 the contractor claimed an extension due to difficulties in obtaining
labour and materials. Lord Justice Denning said that since this clause operated every
25
[1952] 2 All ER 452. See Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] BLR 195
and Shawton Engineering Ltd v DGP International Ltd (t/a Design Group Partnership) [2006] BLR 1.

406 TIME
day until the works were completed it was, therefore, not possible to decide on the
appropriate extension until the works were completed.
(e) Grounds for extension of time
16.031 The time for completion can only be extended where the contract permits, and strictly
in accordance with the contract provisions. If delay is caused by some event that the
contract does not cover, then the contractor cannot claim an extension. Thus, in drafting
contracts, it is important that likely causes of delay are covered by the extension of
time clause.
16.032 The following is a summary of the causes of delay, categorised as either the fault of
neither party or the fault of the employer or the architect, for which the main contractor
is entitled to be granted an extension of time by the architect. These are listed under
the HKIA/RICS Standard Form, subclauses 23 (a) – (k). Impliedly, main contractors
are obliged to cooperate with the architect to reduce the effects of any delay which
is not their fault and for which they claim an extension of time. For instance, main
contractors are responsible to coordinate their own work and that of subcontractors,
which involves holding regular meetings to review progress and making changes to the
master programme, as necessary, to prevent likely delays. These implied obligations
should be equally applicable to other forms of contract.
16.033 Fair and reasonable is the measure of the extension of time to be granted to the
contractor in relation to the cause(s) so submitted. In order to assist in the assessment
of a claim for an extension of time, the architect should check the progress of the
works compared with existing programmes and seek the opinion of the clerk of works.
Although, in most cases, it is very difficult to assess an extension of time, the architect
should nevertheless endeavour to see that neither party suffers unnecessary loss as a
result of her or his assessment. Where the architect decides that no extension of time
is necessary, and the main contractor is dissatisfied with the decision, or where the
main contractor is dissatisfied with the period of time granted, the parties may refer
such dispute to the decision of an arbitrator according to clause 36 of the HKIA/RICS
Standard Form.
(f) Fault of neither of the parties
16.034 There are occasions when delays arise due to circumstances over which neither party
to the contract has any control. For any of these matters, the architect has an obligation
to grant an extension of time to the main contractor.
(i) Subclause 23(a) – force majeure

16.035 The terms are used to describe situations where an unforeseeable event makes
execution of the contract impossible or almost impossible at a particular instance
within the contract period. It embraces the matters and events outside the control
of the parties, of such an extraordinary nature that the progress of the works would
be delayed. Such events as earthquake, war, epidemics or legislative interference are
generally included.

(ii) Subclause 23(b) – inclement weather

For the purpose of this subclause ‘inclement weather’ is defined as rainfall in excess 16.036
of 20 millimetres in a 24-hour period (midnight to midnight) as recorded at the Royal
Observatory, or the hoisting of Typhoon Signal No 8 or higher.
For an extension to be granted, it must be shown first of all that the weather is 16.037
exceptionally inclement and not just inclement, and secondly that the progress has
been affected. In considering weather problems, it must always be borne in mind that
there can be no extension of time unless the whole project is actually or potentially
delayed. For instance, if exceptionally adverse weather occurs at a time when most of
the work is carried out indoors it would not be a ground for an extension of time. It is
also important to note that it is the stage of work and the actual effect of weather on the
work that is relevant. It involves specifically the matters at the time when a particular
part of the work was in fact carried out, not necessarily at the time when it was planned
to be carried out.
From the contractor’s consideration, some types of weather conditions other than those 16.038
as stated in the clause, such as abnormal humidity, fog, extreme heat and summer
weather may, to a certain extent, impact execution of the work. Certainly, it is not
claimable. On the other hand, it is quite a common practice by the employer to modify
or delete this clause in the contract and thus the contractor will not be entitled to a time
extension should one of these circumstances occur.
(iii) Subclause 23(c) – loss or damage occasioned by any

one or more of the contingencies referred to in
subclauses 20(A) or (B)
‘Fire’ is the commonly known contingency. It is possible that the loss or damage caused 16.039
by reason of some of the contingencies referred to may be the result of negligence by
the contractor or may result from her or his breach of contract. Even so, this would
not rule out delays from such contingencies being taken into account in assessing
extensions of time.
(iv) Subclause 23(d) – strikes, etc

This condition protects the main contractor from unions and protects the employer 16.040
from increased costs. It may extend to any delays caused by industrial action taken by
any group of people who are employed on the works site, or are manufacturing items
for the works or involved in transporting goods to the works.
(v) Subclause 23(g) – delay of nominated

subcontractors or nominated suppliers
Main contractors can claim for an extension of time if they are late with their work. 16.041
Nominated subcontractors/suppliers are without liability to the employer directly as 16.042
there is not privity of contract. If delay by any nominated subcontractor or nominated
supplier for any reason, including delays that are their responsibility, results in delay
in completion of the main contract works by the contractor, then an extension of time
must be granted.

408 TIME
16.043 However, the contractor should closely monitor the progress of nominated
subcontractors to ensure that they remain on the programme, and so that the contractor
can warn the contract administrator in plenty of time of the likelihood of a nominated
subcontractor delaying the works. Similarly, supplies of goods and materials from
nominated suppliers should be closely checked. Contractors who fail in this may lose
their right to an extension of time, either because they have not taken all practical steps
to avoid or reduce the delay or, more generally, because they have not constantly used
their best endeavours to prevent delay. If the main contractor has done all he or she
can to prevent the delay, the claim will become not arguable and is treated as a delay
caused by neither party to the contract.
(vi) Subclause 23(j) – contractor’s inability to secure

labour, goods or materials
16.044 The extent to which any shortages could or could not have been foreseen may be very
difficult to establish. The comment is often made that any shortage can be overcome if
the contractor is prepared to pay a sufficiently high price. This is unrealistic as the rates of
wages paid and other payments made to overcome shortages must bear some relevance
to those obtainable at the date of the contract. In order to be able to claim an extension
of time under this provision, it must be demonstrable that the contractor could not have
reasonably foreseen such difficulties at the date of the tender.
(vii) Subclause 23(k) – antiquities

16.045 The main contractor can claim if a delay is caused due to the discovery of antiquities.
Delays caused by such discovery or delays in the issuing of the architect’s instructions
to deal with the matter qualify for an extension of time.
(g) Fault of the employer or the architect
(i) Subclause 23(e) – the architect’s instructions

16.046 These may cause an extension of time if the main contractor incurs extra work. The
issue of the architect’s instructions requires the main contractor to complete substantial
extra work, execute substantial amounts of work out of sequence; or is concerned with
a postponement of the work.
(ii) Subclause 23 (f) – lateness of drawings

16.047 This covers the issue of drawings, instructions, details or levels, which the architect
has either failed to supply or is late in supplying, and which the main contractor has
specifically requested in writing. During the progress of the work, the general rule is
that the contractors can decide in what order they will perform the works subject to
any express requirements in the contract. They must, however, give adequate notice
to the employer of the proposed sequence and timing in order to allow the employer
and its designers to supply any information required.
16.048 In reality, when a design team is working on a project there is usually a project timetable
drawn up to set out a series of dates by which various members have to produce
specific pieces of information. However, they hardly comply with the stipulated

time requirements, as in Hong Kong many architectural firms are medium in size,
each employing only a number of architects and draftsmen to provide comprehensive
design services. The situation becomes more noticeable when you imagine that over
‘one inch’ of drawings have to be produced by only a few persons within a short time
span. The contractor will be entitled to an extension of time to cover any delay so
caused by lateness in supplying information provided that:
• the information has been specifically applied for in writing and;
• the written application was not made too early or too late having regard to the
completion date current at the time the application is made.
The words ‘neither reasonably distant from nor unreasonably close to’ in this clause 16.049
establish a theoretically correct date on which the application should be made. In
practice this date is difficult to determine and often leads to dispute. It should not be
forgotten that the reasonableness of the timing applies to reasonable requirements of
both the contractor and the architect.
While the contractor is entitled to complete the works before the due date for completion 16.050
stated in the contract (subject to contract terms constraining early completion), the
contractor is not normally entitled to require the employer to provide information at
a rate to enable early completion. In Glenlion Construction v Guinness Trust,26 the
court decided that the contractor was not entitled to demand of the employer that
information be supplied which would enable the contractor to complete early.
On the other hand, the information so provided must at least be workable and produced 16.051
in an accurate manner, without conflicts or producing a need for rework. It is evident
that most common design errors result from lack of coordination of various design
disciplines. Right through the design and construction stage, the architect needs
to promptly provide consultants with relevant information for the completion of
designs. Upon receiving design drawings and details from consultants, he or she has
to act as the design leader to integrate the architectural drawings, structural drawings,
services drawings and other information as appropriate, ensuring the designs can be
built and resolving any problems that may arise from them. For instance, mistakes
are often made in beam layouts and details. During the design process structural
engineers sometimes fail to thoroughly consider adequate space requirements or
particular dimensions that the building services works needed. Consequently, E&M
contractors subject to a confined design space sometimes interfere with each other
for space, which provides ample opportunity for conflicts to arise. Some contractors
noticed that their original plans were no longer practical to work unless design
changes were made, and this resulted in delay in construction. Other errors are
sometimes due to an inappropriate use of standardised details and specifications
by the architect. In many aspects it is advantageous for the architect’s designs to
cover standardisation of steel-to-steel connections, fixing to curtain walling, floors,
26
(1988) 39 BLR 89. See also Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd [2001]
QB 388.

410 TIME
services and other elements. However, the design sometimes does not take account
of what can actually be built.
(iii) Subclause 23(h) – Delay of artists or tradesmen

16.052 The main contractor can claim for extension of time if artists or tradesmen are late
with their work. The contractor must, by virtue of clause 29, allow the employer to
have work, which does not form part of the contract, carried out by artists, tradesmen
and others. The position of statutory authorities carrying out their authorised
duty in the context of this clause has been examined by the courts. In Henry Boot
Construction v Central Lancashire New Town Development Corporation,27 Judge Fay
considered himself bound by the findings of fact by the arbitrator that the employer
had contracted with the statutory authorities and in carrying out the work under that
contract, they came within the description of ‘artists, tradesmen or others’. Any delay
in completion thereby caused would enable an extension of time to be granted under
this clause.
16.053 If it can be shown that the statutory undertakers are carrying out their duties under
a contract with the contractor, then the risk of delay will be solely a matter for the
contractor, if no contract exists, delays caused by statutory authorities would be
covered by subclause (h).
(iv) Clause 23(i) – inspection and testing of work

16.054 This subclause protects the main contractor against unreasonable inspection and
testing. Delay resulting from inspection and testing may entitle the contractor to
an extension of time if the work is not defective and is in accordance with the
contract.
(h) Interference with contractor’s progress
16.055 In many instances, the contractor cannot proceed with and/or complete the works
without the cooperation of the employer. Apart from the above provisions, there will
normally be a term implied or an express provision in the agreement that the employer
will not interfere with the contractor’s progress. The sources of potential interference
that may be experienced by the contractor include:
• possession of the site;
• failure to provide access to the site;
• insufficient space and work fronts;
• failure to make appointments necessary for the project to operate (eg the
appointment of certifiers, nomination of subcontractors, etc).
27
(1980) 15 BLR 1. See Fenice Investments Inc v Jerram Falkus Construction Ltd (2009) 128 ConLR 124.

(i) Deferment of date of possession
Under this type of clause, an employer is given a right to defer the giving of possession 16.056
for a period of time. If possession is deferred in this way, the contractor is entitled to
an extension of time.
(j) Degree of access that the employer is obliged to grant
The contract may express in some detail the degree and the extent of the possession 16.057
of the site to be granted to the contractor. If it does not, the courts will consider what
terms relating to access should be read into the agreement. For example, a large-scale
muck-shifting project may require complete possession of large tracts of the site. If,
for instance, a subcontractor knows or should have realised that other subcontractors
would also be working in the same general area of the site, the subcontractor cannot
complain that it has not been given complete control of that part of the site.
On some occasions access to the site is impossible because third parties have acted to 16.058
prevent access, either deliberately or inadvertently. For example, an important access
road may be closed to traffic or industrial action may prevent normal access to the
site. The courts tend to treat such occurrences as being at the contractor’s risk. In LRE
Engineering Services Ltd v Otto Simon Carves Ltd,28 the contract required that ‘access
and possession of the site shall be afforded to the contractor by the employer in proper
time for the execution of the work’. A physical route onto the site was provided by the
employer but because of third party industrial action the contractor could not in fact
gain access. The court held that the employer was not in breach since he had provided
the physical route onto the site and the possibility of obstruction by third parties was
a risk carried by the contractor.
(k) Obligation to appoint certifiers, nominated subcontractors, etc
The contract will often require the employer to appoint a certifier to administer the 16.059
contract. Often the contract is unworkable if a certifier is not in place and there will
normally be implied an obligation for the employer to nominate someone to act in this
capacity reasonably quickly.
In the case of contracts where subcontractors are to be nominated to undertake certain 16.060
aspects of the work, there is an implied undertaking on the employer’s part to make the
nomination in reasonable time and in accordance with the terms of the contract. If he
fails to make the appointment, the main contractor may be entitled to an extension of
time, provided that it affects the progress of the construction work. It is important to
note that if a nominated subcontractor ceases work due to some reason, eg insolvency,
this is not in itself grounds for the main contractor to claim an extension of time.
The position is that the contract administrator has a duty to renominate another
28
(1981) 24 BLR 131.

412 TIME
subcontractor within a reasonable time, and that it is only the delay in doing so that
will entitle the main contractor to extra time.
(l) Remedy for delay
16.061 If failure to complete the works by the original date for completion is caused by a
delay that is outside the control of either party, or a delay that is the architect’s or
employer’s fault then the main contractor may, under clause 23 of the HKIA/RICS
Standard Form, apply for an extension of time. The original date for completion would
then be revised to take into account the delay, so relieving the main contractor from
liability for liquidated damages based on the original date for completion.
16.062 If the delay is the fault of neither party, the main contractor is entitled to an extension
of time, but is not entitled to receive any payment for direct loss and/or expense that
he or she may have incurred due to the cause of the delay. However, if the delay is the
fault of the employer or the architect, the main contractor is entitled to submit a claim,
under Clause 24 of the HKIA/RICS Standard Form, for direct loss and expense in
connection with the cause of the delay if any.
5. LIQUIDATED DAMAGES/PENALTY
(a) Meaning of liquidated damages
16.063 ‘Liquidated and ascertained damages’29 is the full expression used in the HKIA/RICS
standard form and it is common practice to use the abbreviated expression liquidated
damages (LD), to describe the monetary compensation paid to the employer by the
main contractor in the event of late completion.30 The word ‘liquidated’ means that
the principle to pay monetary compensation for a breach has been established while
the word ‘ascertained’ means that the amount to be paid has been decided. On the
other hand, unliquidated damages are unascertained damages, and no agreement on
the amount has been made beforehand.
16.064 Under the HKIA/RICS Standard Form, there is no specific or suggested method of
arriving at a sum of money per day that would reflect the employer’s loss, should
the main contractor fail to complete on time. Based on the principle that liquidated
damages aim to provide compensation to the owner for financial and other losses
resulting from delayed completion, this amount is commonly estimated as the
daily rentable value of the property after taking into account likely occupancy
rates.
29
In Polyset Ltd v Panhandat Ltd (2002) 3 HKLRD 319, the Court of Final Appeal stated that, unlike deposits,
liquidated damages focused on the loss considered likely to result from foreseeable breaches and aimed to
quantify in advance the damages payable; and that they also represented the agreed sum of damages payable
regardless of the actual loss.
30
A typical clause is to entitle the employer to deduct HK$X per day or week for the period during which the works
remain uncompleted.

LIQUIDATED DAMAGES/PENALTY 413
(b) Purpose of liquidated damages
The essence of liquidated damages is a genuine pre-estimate of loss from the 16.065
employer resulting from delayed completion. Because of the certainty they bring
to the consequences of breach, they appear to be an efficient means of precluding
litigation or of resolving conflicts as they arise.31 There are also corresponding benefits
to the contractor of knowing in advance the financial liability in the event of late
completion. In construction contracts, it is common to provide that the employer is
entitled to deduct liquidated damages from the contractor, usually upon the issue of a
corresponding certificate by the engineer or architect. It should be highlighted that a
right at common law to set off such liquidated damages may also exist even without
express provisions in the contract for such set off. At tendering stage this is often an
important factor in the contractor’s bid. If the contractor thinks that it cannot complete
the project in the time allowed, it knows how much to add to its bid for anticipated
late completion. During construction, liquidated damages can be used as a basis for
determining a balance between spending more money to complete on time or facing
damages for late completion. The inserted figure is binding on the contracting parties;
it will be enforced even though the actual loss is greater or smaller than the genuine
loss, provided that it is not judged a penalty (described later in this chapter). There
are clear advantages to the employer in this because: (a) it does not have to prove the
loss; and (b) there will probably be a mechanism in the contract for deduction of the
damages from monies due to the contractor.
(c) Differentiation between liquidated damages and penalty
Liquidated damages amounts represent a reasonable reflection of the anticipated 16.066

costs incurred by the owner for late project completion. A penalty is assumed to exist
when the sum is sufficiently above the anticipated costs of late completion so as to
constitute a punitive measure. From the employer’s perspective, such punitive sums
may be desirable in that they provide an added incentive for the contractor to deliver
the project within the contracted project duration.
Penalty provisions are generally not enforceable. Thus, it is important that the amount 16.067
stipulated as liquidated damages bear some resemblance to the actual anticipated costs
of late completion. The amount need not be close to the actual incurred cost of late
31
In Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, Diplock LJ said:
“It is good business sense that parties to a contract should know what will be the financial consequences to
them of a breach on their part, for circumstances may arise when further performance of the contract may
involve them in loss. And the more difficult it is likely to be to prove and assess the loss which a party will
suffer in the event of a breach, the greater the advantages to both parties of fixing by the terms of the contract
itself an easily ascertainable sum to be paid in that event. Not only does it enable the parties to know in advance
what their position will be if a breach occurs and so avoid litigation at all, but if litigation cannot be avoided,
it eliminates what may be the very heavy legal costs of proving the loss actually sustained which would have
to be paid by the unsuccessfully party. The court should not be astute to descry a ‘penalty clause’ in every
provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach
by the former. ”

414 TIME
completion but must be a reasonable approximation of anticipated costs given the

information at the time of the contract award.
16.068 For a liquidated damages clause to be valid, it cannot be in truth of the nature of a
threat in terrorem, ie acting as a mere security to the promisee that the contract will be
performed. In such situation, whatever label being given, the stipulated sum becomes
a penalty and will not be enforced by the court. Thus, whether a clause is one for
liquidated damages or one for penalty is of prime importance as to its legal validity in
effect. It is not an uncommon dispute between the contracting parties whether a sum
stipulated is a penalty or liquidated damages. In these circumstances it is the duty of
the court to decide the issue in light of the rules given by Lord Dunedin in the leading
case Dunlop Pneumatic Type Co Ltd v New Garage and Motor Co Ltd.32 The rules are
briefly outlined below.
• If the sum stipulated is ‘extravagant and unconscionable’ compared with the

greatest amount of loss that could be caused, it is a penalty.
• If the breach consists simply of non-payment of money, and the sum stipulated
is a greater sum, it is a penalty.
• If a single sum is payable for a range of breaches of varying severity, there is

a presumption (but no more) that it is a penalty.
• The fact that an accurate pre-estimation of the likely damage is almost

impossible to achieve does not prevent a stipulation from being classified as
liquidated damages.33
16.069 In the case of Philips Hong Kong Ltd v the Attorney General of Hong Kong,34
the contractor attempted to have the liquidated damages provision invalidated on
the grounds that it could come up with certain hypothetical situations in which the
liquidated damages would exceed the Government’s likely loss. The Privy Council
rejected this approach and said that the question was whether the sum payable in the
event of non-compliance was extravagant, having regard to the likely range of losses
reasonably anticipated at the date of the contract.
16.070 The onus of showing that such a stipulation is a penalty clause lies upon the party who
is sued upon it.
32
(1915) AC 79. In this case, the plaintiff supplied tyres to the defendant under an agreement by which the
defendant bound itself to sell such tyres in a stipulated manner only and to pay by way of liquidated damages
for every tyre sold or offered in breach of such an agreement. See also M&J Polymers Ltd v Imerys Minerals Ltd
(2008) 117 ConLR 88; Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] BLR 271; and Jeancharm Ltd
(t/a Beaver International) v Barnet Football Club Ltd (2003) 92 ConLR 26.
33
See Chow Kee v Transway Construction & Engineering Ltd [2006] HKEC 2314, applying the above. Though the
parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean
what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated
is in truth a penalty or liquidated damages.
34
(1991) (PC) 61 BLR 41. See Seng Sun Development Co Ltd v Hong Kong Resources Investment Co Ltd [2009]
HKEC 1332.

(d) Mechanism of liquidated damages
Clause 22 of the HKIA/HKIS standard form deals with damages for non-completion 16.071
and permits the employer to deduct liquidated and ascertained damages as calculated
at the rate in the appendix from monies due to the main contractor if the works are not
completed by the date for completion or within any extended period of time as granted
by the architect.
Upon the issue of a certificate of non-completion, payment for liquidated damages 16.072
will be calculated by multiplying the rate of liquidated damages to the number of
days between the date for completion or the subsequent revised completion date and
the date of the issue of the certificate of practical completion. Payment for liquidated
damages can be made either progressively in each interim valuation or by a final
adjustment of the amount due under the final certificate. If any liquidated damages
due to the employer are not paid, or otherwise allowed by the main contractor prior to
the issue of the Final Certificate, the employer’s right to recover such amount from the
main contractor is terminated by the issue of final certificate.
Under this arrangement, liquidated damages cannot be levied without the architect’s 16.073
certificate of non-completion and, in that sense, it is settled law that such a
certificate is a condition precedent to the employer’s right to payment.35 In W Hing
Construction Co Ltd v Boost Investments Ltd,36 in dealing with a claim involving
clause 22 of the HKIA/HKIS Standard Form, the court also highlighted that it had
no power to issue a certificate of non-completion itself or waive the requirement
for one in circumstances where the architect has not done so and has never been
asked to do so. The court also noted that the granting of an extension of time and
liquidated damages were not entirely two sides of the same coin, eg without an
extension of time, the contractor might not be able to recover the associated cost
(prolongation cost) irrespective of whether the employer was entitled to liquidated
damages.37
(e) Failure to insert the amount of liquidated damages
For a liquidated damage provision to apply, there must be such a clause in the contract 16.074
and it must be duly completed. Failure to do one or both of them may result in the
employer losing not only the right to liquidated damages but also the right to claim
unliquidated damages.
In the case of Philips Hong Kong Ltd v the Attorney General of Hong Kong,38 the 16.075
standard form used by the parties for a construction contract had the usual provision
in the Appendix for the figure of the liquidated damages to be inserted. Instead of
35
See Pyrok Industries Ltd v Chee Tat Engineering Co Ltd [1988] 2 HKLR 472 and JF Finnegan Ltd v Community
Housing Association Ltd (1993) 65 BLR 103.
36
[2009] 2 HKLRD 501.
37
Pyrok Industries Ltd v Chee Tat Engineering Co Ltd [1988] 2 HKLR 472.
38
(1991) 61 BLR 41.

416 TIME
an amount, the word ‘NIL’ was inserted. The contractor was late in the completion
of the contract and the employer sought to make a claim for unliquidated damages.
The Court of Appeal refused to accept such a right as the clause dealing with the
employer’s right to liquidated damages for late completion already existed in the
contract. This means that the parties to the contract had expressly agreed that
the liquidated damages should be nil, which also excluded an option of claiming
unliquidated damages.
16.076 The main points in the decision of the Court of Appeal in Temloc Ltd v Errill Properties
Ltd39 insofar as it relates to nil damages can be summarised as:
• the effect of a nil entry in the appendix to a liquidated damages clause does
not empower the right of the contractor to treat the clause as ineffective, but
there should be no damages for late completion;
• a claim for general damages cannot be made in an implied term since the
express provisions of the liquidated damages clause leave no room for any
such clause to be implied.
(f) Without liquidated damages provision
16.077 In the circumstances where liquidated damages provisions are not included in the
contract, the normal rules apply. That means that if the contractor fails to complete the
works by the agreed date or a reasonable date, if no completion date is expressed, then
the employer can recover any losses he or she sustains.
(g) Ambiguity in contract completion date
16.078 The effecting of liquidated damages can be prejudiced by the well-known contra
proferentem rule.40 Where one party seeks to rely on a contract term which another
party drafted, any ambiguity in the words used will be in favour of the other party. Since
contract provisions pertaining to liquidated damages are considered by the courts to be
for the benefit of the employer, they are to be construed against an employer who puts
the contract forward.
16.079 In Peak Construction (Liverpool) Ltd v Mckinney Foundations Ltd,41 the contract
contained a liquidated damages clause but no provision for an extension of time in the
event of delay caused by the employer’s fault. As no such provision was included, the
time at which the contract should have been completed was not determinable and so
the time from which liquidated damages should apply was unknown. Hence, in this
case, the employer was not entitled to deduct any liquidated damages.
39
(1987) 39 BLR 30. See Bath and North East Somerset DC v Mowlem Plc [2004] BLR 153.
40
See Steria Ltd v Sigma Wireless Communications Ltd [2008] BLR 79; Multiplex Constructions (UK) Ltd v
Honeywell Control Systems Ltd [2007] BLR 195; and City Inn Ltd v Shepherd Construction Ltd [2003] BLR 468.
41
(1970) 1 BLR 111. See W Hing Construction Co Ltd v Boost Investments Ltd [2009] 2 HKLRD 501 and Ying Ho
Co Ltd v Secretary for Justice (2004) 7 HKCFAR 333.

(h) Liquidated damages as the maximum claimable remedy
A liquidated damages provision has the purpose of limiting the amount of recovery 16.080
by the employer for late project completion. Additional claims by the employer for
the amount of liquidated damages less than the actual cost incurred may not be
honoured.
In the case of Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd,42 a contract 16.081
provided for the construction of a chemical plant. A provision for late completion
in the contract stated that the contractors were required to pay by way of penalty
£20 per working week. The contractors delayed in the completion by some thirty
weeks. During the delayed period, the employers suffered an actual loss of £5,850,
which was much greater than the calculated amount of the liquidated damages. The
attempt made by the employer to recover this amount was unsuccessful.
The court decision hinged on the intent of the liquidated damages provisions. The 16.082
ruling was that reasonable liquidated damages provisions preclude the recovery of
actual damages, even though the actual damages may be in excess of the liquidated
amount. The employers were not in a right position to claim that the liquidated damages
were unrealistic since they had drafted the contract documents and were therefore in
control of the amounts stipulated in the contract. The House of Lords decided that the
owners were entitled to £600 only, which was the figure agreed and the extent of the
owner’s right to claim.
The decided cases appear to suggest that the incorporation of a liquidated damages 16.083
clause into the contract means that the maximum claimable remedy is fixed by the
level of liquidated damages. Therefore, even if employers could prove that their
actual losses due to the contractors’ late completion is in excess of the value of
liquidated damages they are limited to recovering the preset value of the liquidated
damages.
(i) Time at large
It is essential for a building contract to specify a date for completion. If there are 16.084
no express provisions in the contract relating to time, the implied obligation of the
contractor will be to complete the work within a reasonable period of time (time at
large). The significance of not having a fixed date is that a contractor who has caused
part of the delay is still liable to pay general damages for delay, but is not liable for
liquidated damages.
At common law, the contractor’s obligation is to complete the works by the specified 16.085
date. If the contract completion date is missed and the employer delays the contractor
in the execution of the works, time is said to be ‘at large’ under these circumstances,
and the contractor’s obligation is merely to complete the works within a reasonable
42
(1925) AC 20. See also Chung To Chinese Products Co Ltd v Pacific Well Realty Ltd [2004] HKEC 1250. See also
Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399.

418 TIME
time.43 The fact that delay has been caused by matters for which the contractor is
responsible will not deprive the contractor of its right to claim an extension of time for
delay caused by a relevant event.44
16.086 When time is at large the employer loses its right to liquidated damages, and any claims
for damages for late completion (beyond what may be considered a reasonable time)
will have to be made on the basis of general or unliquidated damages, the quantum of
which must be proved. In the case of a contract containing a liquidated damages clause
this will also lead to the employer losing its right to claim liquidated damages. This is
because there is no directly ascertainable date from which such damages would run.
Because of the need to set an ascertainable time for completion, most properly drafted
construction contracts contain very widely drafted extensions of time clauses to avoid
such a possibility.
16.087 When time is at large, a ‘reasonable time’ has been held to mean that “… the party upon
whom it is incumbent duly fulfils his obligations, notwithstanding protracted delay, so
long as such delay is attributable to causes beyond his control and he has neither acted
negligently nor unreasonably”.45 The test is objective46 and what is a reasonable time is
a question of fact, taking into account all the circumstances, including the conditions
operating during the period when the work is being done. As this cannot be decided
in advance, it can only be decided after the work has been done.47 What is required is
completion within reasonable time in ordinary circumstances48.
43
When the time or date for completion of the defined works specified in a contract becomes inapplicable, there
will likewise be an implied obligation to complete the works within a reasonable time. Such situations are
commonly termed “time at large”. See Wells v Army and Navy Co-operative Society Ltd (1902) 86 LT 764,
giving the examples where an act of prevention by the employer creates delay that is not covered by an extension
of time provision; where the provisions for the extension of time have not been properly administered or have
been misapplied; where there has been a waiver of the original time requirements; and where there has been
interference by the employer in the certifying process. See also Percy Bilton Ltd v Greater London Council
[1982] 1 WLR 794.
44
A more modern statement of this principle is found in SMK Cabinets v Hili Modern Electrics Pty Ltd [1984] VR
391, a decision of the Supreme Court of Victoria, where Brooking J said:
“The sole remaining matter is that of the soundness of the ground on which the arbitrator in fact rejected the
defence of prevention [that is, acts of the employer that prevent the contractor from completing on time]. He
evidently considered that where acts or omissions of a proprietor do in fact substantially delay completion,
the proprietor nonetheless cannot be sent to have prevented the contractor from completing by the relevant
date unless the contractor would have been able to complete by that date had it not been for the supposed
prevention … But it has been accepted for more than one hundred years that this is not the law. The cases are
all one way … The principle of the decision is not as clear as one would wish, but appears to be that if the
supposed prevention was such as would in ordinary circumstances have made it impossible for the contractor
to complete in time, then prevention has in law occurred, notwithstanding that the contractor may in fact have
disabled himself by his own delays from completing by the due date.”
45
See Hick v Raymond and Reid [1893] AC 22.
46
This has to be qualified by several factors. First, a party may have expressly or impliedly warranted or reserved
its ability or capacity to maintain progress in a particular situation or at a particular pace; secondly, the parties
can be contracting with a particular factor in mind which is beyond the contractor’s personal control, for example
adequacy of labour as part of risk allocation; thirdly, the parties may be contracting with the contractor’s other
commitments in mind thereby containing a warranty as to sufficient resources for due performance.
47
British Steel Corporation v Cleveland Bridge and Engineering [1984] 1 All ER 504.
48
See Hydraulic Engineering Co Ltd v McHaffie Goslett & Co (1878) 4 QBD 670 regarding the phrase “as soon as
possible” and Lyle Shipping Co v Cardiff Corporation (1900) 2 QB 638 regarding the phase “discharged with all
reasonable dispatch”.

CONTRACTOR’S PROGRESS 419
6. CONTRACTOR’S PROGRESS
(a) ‘Regularly and diligently’
The ‘date for possession’ should be stated in the contract, after which date the 16.088
contractor may commence the works. Actually, contractors are not obliged to start
work on the date for possession but if they do not start reasonably quickly, they may
be liable for not proceeding ‘regularly and diligently’.
Where a construction contract fixes a date for completion, but makes no provision as 16.089
to the rate at which the works are to progress, it appears that the courts will not imply
any such terms. In the absence of any indication to the contrary, the contractor has
absolute discretion as to how the work is planned and performed on time. While many
contracts require the contractor to submit a programme for the works, this does not
mean that he or she is under a contractual obligation to follow the programme. The
contractor’s programme is of use, however, in giving notice to the architect as to when
instructions may be needed. The programme is also some evidence to show diligent
progress. Once the main contractor has taken possession, he or she must regularly and
diligently proceed with the execution of the works and complete on or before the date
for completion.
From an employer’s point of view, it would be very inconvenient to have no control at 16.090
all over the progress of the contract works. It is for this reason that most construction
contracts require the contractor to maintain a satisfactory rate of progress throughout
the project. For example, subclause 21.1 of the HKIA/HKIS standard form of contract
imposes an obligation on the contractor to proceed with the works ‘regularly and
diligently’, and makes failure to do so a ground on which the employer can terminate
the contractor’s employment.
The phase ‘regularly and diligently’ has been construed by the Court of Appeal in West 16.091
Faulkner Associates v London Borough of Newham49 to mean:
“To proceed continuously, industrially and efficiently with appropriate resources

so as to progress the works steadily towards completion substantially in
accordance with the contractual requirements as to time, sequence and quality
of work.”
Generally speaking,50 delay in progress of the works during construction involve no 16.092
damage or loss to the owner, unless and until completion of the works itself is delayed.
49
(1994) 71 BLR 1. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656 and
Goldlion Properties Ltd v Regent National Enterprises Ltd (2009) 12 HKCFAR 512. See also Sindall Ltd v
Solland (2001) 80 ConLR 152 and Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd
[2000] BLR 509.
50
It is remarked in Hudson’s Building and Engineering Contracts (1995) (11th edn) Vol 2 para9-033 that there are
also cases where immediate and serious damage can result for such delay, for example, in the form of liabilities
of the employer to third parties, such as other contractors, suppliers or adjoining landlords or utilities, when
commitments may have had to be undertaken.

420 TIME
Partly to cater for this,51 construction contracts commonly contain an express term
calling for due diligence on the part of the contractor.52 In Greater London Council
v Cleveland Bridge and Engineering Company Ltd,53 it was remarked that “[i]f there
had been a term as to due diligence … it would have been, when spelt out in full, an
obligation as was reasonably required in order to meet the key dates”. Thus, there
cannot be due diligence in the abstract since it has to be related to the objective.
16.093 As in the case of reasonable time for completion, the programme of works submitted
under the contract can be of evidential (and in rare cases, conclusive)54 value as to what
is reasonable progress or time for the works.
7. LOSS AND EXPENSE

(a) Contractor’s ability to claim
16.094 As previously stated, under no circumstances does an extension of time allow for
additional payment to the main contractor as compensation for the extra time involved.
However, the main contractor may, under the of the HKIA/HKIS Standard Form,
make a separate claim for direct loss and/or expense where the cause is either one of
disruption, set out in subclause 24(1) which deals with loss and expense caused by the
disturbance of regular progress of the works; or variation, set out in subclause 11(6); or
the discovery of antiquities set out in subclause 34(3). It should be noted that the term
‘direct loss and/or expense’, is used in the text of each of the clauses under which the
main contractor is entitled to submit such claims.
16.095 The dual phrase “loss and expenses” gives two separate heads of claim. Loss may
arise where the main contractor will not recover what he or she could have expected
to recover as a result of disruption (disturbance of regular progress), variation or the
discovery of antiquities. Expenses will be involved when the main contractor has had to
increase her or his expected expenditure on an item of work to produce the same result,
also as a direct result of disruption, variation or the discovery of antiquities. The word
direct is used in order to make it clear that such claims are directly related to the cause,
and are not incidental losses or expenses.
16.096 There are two basic claim situations, and many potential heads of claim are common to
both. The first situation is when the delay in completion of the contract works beyond
the original completion date: a prolongation claim is the result. The second head of
51
Failure on the part of the contractor to proceed with the works with due diligence during the construction period
may be an important indicator to the employer in showing clearly that the contractor is unable or unwilling to
complete the works as agreed. Hence, such express terms calling for due diligence will almost invariably be
linked to terms empowering the employer to terminate the contract.
52
The remedies available to the employer under such terms vary from recovery of damages to taking over partly or
wholly the works.
53
(1986) 34 BLR 50.
54
This arises essentially when the submitted programme is incorporated as part of the contract documents.

LOSS AND EXPENSE 421
claim, known as a disruption claim, is for the effect of an event upon the contract
works themselves.
(b) Disruption claims
Disruption claims can take many forms and it is possible to discern three broad 16.097
conditions that lead to disruption:
• a change in the sequence and pattern of the intended work, without the
need for changing the final product eventually, perhaps due to delay in or
modification of the information needed to carry out the work;
• the introduction of additional or variation works, which may be seen in

the finished project. It causes a change in the sequence and pattern of the
original work. It is unlikely that a significant omission of work will produce
disruption, however it may lead to financial recompense;
• the introduction of numerous, individually insignificant additions or

omissions or other changes, which cumulatively hinder the smooth running
of the project.
Disruption may or may not extend the overall completion date and thus does not 16.098
necessarily involve a delay in completion of the contract works. A disruption claim
may still arise where the works are completed within the original contract period or
even where they are completed within a shorter period of time by the contractor. It is
also quite common to have subsidiary prolongation of a non-critical activity without
extension of the overall programme.
The essence of each of the above conditions is that contractors have to absorb the 16.099
effects into their programmes of work, when elements of that work are already in
progress, so they cannot plan in advance how to fit them in smoothly and in the
most economical way. Even if they had been given adequate warning, they would
still incur additional costs in performing the original work because of the changed
conditions.
(c) Prolongation claims
By distinction, prolongation occurs without any change in sequence but it lengthens 16.100
the contract period. There is the possibility of substantial amounts of extra work, fed in
as variations instructed well in advance, extending the contract period. Although they
will likely lead to extensions of time, they will not necessarily lead to disturbances as
considered here, since they have appeared in an orderly manner.
(d) Submission of direct loss and/or expense claims
The standard form of building contract allows the contractor, on compliance with 16.101
certain prescribed procedures, to be reimbursed under the contract for the consequences

422 TIME
of delay and disruption. The main contractor must submit a written application within
a reasonable time of the loss and/or expense becoming apparent. As there is no
definition of a reasonable time, it will be for a court or arbitrator to decide in the event
of a dispute.
16.102 The responsibility for producing evidence to support the claim is that of the main
contractor’s staff who should keep records and reports such as weekly and variation
reports, and day works records. From this information, a claim may be built up by the
main contractor’s quantity surveyor.
16.103 Claims may be considered under the heads of:
• materials;
• labour disruption;
• attraction money and bonus payments;
• preliminaries and supervision;
• inflation;
• head office overheads and profit;
• finance charges.
16.104 The contractor must be able to prove the loss and/or expense or, at the very least,
reasonably establish the probability that it has been incurred, eg where reduced
productivity is claimed, while it will probably be possible to prove the actual
expenditure on labour or plant.
16.105 The claim will be assessed by the quantity surveyor, who will negotiate with the main
contractor’s quantity surveyor until an amount acceptable to both is arrived upon. Before
approving the claim the architect must be of the opinion that the direct loss and/or
expense is due to one of the following: disruption – causes listed under subclauses
24(1)(a) – (e); variation – covered by subclause 11(6); or the discovery of antiquities
under subclause 34(2). Once approved by the architect, the claim should be included in
the next interim certificate and not await final settlement. All payments for loss and/or
expense claims are subject to retention.
(e) Subclause 24(1)

16.106 The causes of disruption under subclause 24(1) are as follows:
• the main contractor not having received in time, instructions, drawings,

details or levels;
• opening up for inspection of work;
• discrepancy in or divergence between the contract drawings and/or contract bills;
• delay on the part of artists, tradesmen or others engaged by the employer;
• architect’s instructions issued in regard to postponement of any work.

(f) Mitigation
Contractors should show that they have taken some reasonable step(s) to minimise the 16.107
damage suffered. For example, assume that the client is late in providing information
and that causes delay to the contractor. The contractor must take all reasonable steps to
minimise the delay costs that the contractor will incur. If the contractor can engage the
workers on other work, the contractor should do so. The client would only be liable for
such delay costs that the contractor could not reasonably have avoided.
(g) Distinction between direct and indirect loss
The law draws a distinction between direct and indirect (or consequential) loss or 16.108
damage.
In Saint Line Ltd v Richardsons, Westgarth & Co Ltd,55 Atkinson J discussed the 16.109
distinction.
In the case, he considered the meaning of a contract clause providing that a 16.110
manufacturer’s liability should not ‘extend to any indirect or consequential damages
whatsoever’. The contract was for the supply of engines to a ship, and the manufacturers
broke the contract. The buyers claimed damages for loss of profit for the time they
were deprived of the use of the ship, together with the expenses of wages, etc and
for fees paid to experts for superintendence. The judge held that all these items were
recoverable as being a direct and natural consequence of the breach of contract.
In giving judgment he said: 16.111
“What does one mean by ‘direct damage’? Direct damage is that which flows
naturally from the breach without other intervening cause and independently of
special circumstances, while direct damage does not so flow. The breach certainly
has brought it about, but only because of some supervening event or some special
circumstances.”
A construction industry case where the same distinction was drawn is Croudace 16.112
Construction Ltd v Cawoods Concrete Products Ltd.56 In that case the plaintiffs were
main contractors for the erection of a school and they contracted with the defendants
for the supply and delivery of masonry blocks. It was a term of the supply contract that
the defendants were “not under any circumstances … liable for any consequential loss
or damage caused or arising by reason of late supply or any fault, failure or defect in
any materials or goods supplied by us”. The plaintiffs claimed against the defendants
in respect of alleged late delivery and defective materials. They sought to recover loss
of productivity, inflation costs resulting from delay and the amount of a claim made by
subcontractors in respect of delay to their work.
55
(1940) 2 KB 99. See London Fire and Emergency Planning Authority (LFEPA) v Halcrow Gilbert Associates Ltd
(2008) 24 ConstLJ 103.
56
(1978) 8 BLR 20. See Ferryways NV v Associated British Ports (The Humber Way) [2008] 1 Lloyd’s Rep 639.

424 TIME
16.113 The actual question in the case was whether such damages were to be regarded
as ‘consequential’ loss. The Court of Appeal held that the items claimed were not
excluded as consequential. They were heads of direct loss. Their Lordships quoted
the following statement of Maugham LJ in Millar’s Machinery Co Ltd v David Way
& Son 57that “on the question of damages, the word ‘consequential’ has come to mean
‘not direct’”.
16.114 Croudace Construction Ltd was one of the cases considered by the Court of Appeal
in FG Minter Ltd v Welsh Health Technical Services Organisation,58 which affirms
the view that the term ‘direct loss and/or expense’ in the standard form in effect
means that what is recoverable is substantially the same as the damages recoverable at
common law according to the ordinary principles of remoteness of damage under the
first limb of the rule in Hadley v Baxendale.59
“Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be, either such as may fairly and reasonably be considered arising
naturally, ie according to the usual course of things, from such breach of contract
itself, or such as may reasonably be supposed to have been in the contemplation
of both parties at the time they made the contract, as the probable result of the
breach of it. Now, if the special circumstances under which the contract was
actually made were communicated by the plaintiffs to the defendants, and thus
known to both parties, the damages resulting from the breach of such a contract,
which they would reasonably contemplate, would be the amount of injury
which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated. On the other hand, if these special
circumstances were wholly unknown to the party breaking the contract, he, at
the most, could only be supposed to have had in his contemplation the amount
of injury which would arise generally, and in the great multitude of cases not
affected by any special circumstances, from such a breach of contract”.
16.115 Certain losses may be too “remote”, and for these the plaintiff is not entitled to
compensation. The law must draw the line somewhere and say that damages incurred
beyond a certain limit are too remote to be recovered.
16.116 The modern law regarding the remoteness of damage in contract is founded upon
the case of Hadley v Baxendale. The plaintiff was a miller at Gloucester. The driving
shaft of the mill was broken. The defendant, a carrier, took the shaft to the makers at
Greenwich so that they might use it in making a new one. The defendant did not know
that the plaintiff had no spare shaft and that the mill could not operate until the new
shaft was installed.
57
(1935) 40 Com Cas 204. See Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] BLR 235.
58
(1980) 13 BLR 1. See Robertson Group (Construction) Ltd v Amey-Miller (Edinburgh) Joint Venture 2006 SCLR
772 and Property & Land Contractors Ltd v Alfred McAlpine Homes (North) Ltd (1995) 76 BLR 59.
59
(1854) 9 Ex 341. See P&O Developments Ltd v Guy’s & St Thomas NHS Trust [1999] BLR 3; Amstrad Plc v
Seagate Technology Inc (1997) 86 BLR 34; and Balfour Beatty Construction (Scotland) Ltd v Scottish Power Plc
1993 SLT 1005.

The defendant delayed the delivery of the broken shaft to the maker beyond a reasonable 16.117
time so that the mill was idle for much longer than should have been necessary. The
plaintiff claimed for loss of profits during the period of additional delay. It was held
that the damage was too remote, and the plaintiff’s claim failed.
(h) The remoteness test
An item of damage is recoverable provided that: 16.118
• it would have been regarded as likely to arise in the usual consequence

following the breach of contract;
• it could have been within the contemplation of the parties, at the time that they
made their contract. This means that the plaintiff has advised the defendant
at the time of making the contract that he or she may experience these losses
in the event of a breach.
For example, in a contract for $100 million worth of work, a breach by the client may 16.119
mean that the contractor is delayed in completing the contract due to the client’s faults.
It may be that because the contractor is still tied up on that contract, the contractor
is not able to undertake what would be another particularly lucrative contract for
$150 million, which would render a profit of $5 million. The additional expenditure
by the contractor on labour and overheads during the period of delay is recoverable
as damages arising in the usual course of consequences from such breach of contract
(satisfying the first rule). The loss of the opportunity to undertake the particular
lucrative contract is not damage that arises according to the usual course of things. It
is damage that is peculiar to the particular contractor and the particular circumstances.
It is not damage that was in the contemplation of both parties at the time of entering
the contract. Therefore, it is too remote and not recoverable (thus the second rule is
not satisfied).
Assume prior to the making of the contract for $100 million, the contractor had 16.120
warned the client that delay by the client could prevent him from entering the lucrative
$150 million contract. The client might decide not to take the risk of entering the
contract. However, if after this warning, the client proceeded to enter the contract for
$100 million, then it could be said that the damages of $5 million “may reasonably be
supposed to have been in the contemplation of both parties, at the time they made the
contract, as the probable result of breach of it” (ie satisfying the second rule in Hadley
v Baxendale) and would not be too remote.
In Falcon Construction Engineering Ltd v Kirin Civil Engineering Contractors Ltd,60 16.121
the Hong Kong Court of Appeal dismissed an appeal against a judgment that a sum of
HK$900,000 was too remote to be recovered as delay damages claimed by the building
contractor against the employer which was passed down to the piling contractor due to
deviated pile positions discovered during the building works.
60
[2006] HKEC 599.

426 TIME
8. PRACTICAL COMPLETION
(a) Fit for employer to occupy and use
16.122 As no definition is ever given in standard forms of building contract, including

the HK Standard Form, it will be for the architect to decide when the building is
practically complete. Therefore, when, in the architect’s opinion, the building is fit
for the employer to occupy and use for the purpose for which it is intended, the works
will be considered as practically complete. Completion may not be affected by the
existence of latent defects. The architect may certify practical completion even if
there are trivial defects or omissions in the works, but should not do so where there
are practical defects. Contracts generally use terms such as practical completion
or substantial completion to permit the contractor to achieve completion without
finishing the whole of the work despite the existence of non-material departures from
the contract.
16.123 Practical completion means that the works are fully completed to a state that permits
the employer to enter into full beneficial occupation, ie no outstanding works need
to be carried out save for very minor items of work left incomplete. The phrase
‘substantial completion’ adopted in the Government forms of contract derives from
the ICE Conditions of Contract61 for civil engineering works where functional or
operational occupation is the employer’s primary concern. The term ‘substantial’ when
construed with the other provisions of the completion clause (eg clause 53) requiring
the contractor to provide an undertaking to carry out outstanding works during the
maintenance period, is considered to indicate completion to a less comprehensive
nature than practical completion under the HKIA/RICS Form.
16.124 Substantial completion is therefore completion to a state that permits the employer to
enter into functional or operational occupation, but when minor outstanding works,
which may logically include remedying defects, remain to be completed in the
maintenance period.
16.125 Whether or not a building is ‘complete’ is normally a decision from the contract
administrator, based on an inspection of the works and the exercise of reason. As to
precisely what is required, rulings handed down by the courts have ranged between the
two extremes. In Westminster Corp v J Jarvis & Sons Ltd,62 Salmon LJ in the Court
of Appeal adopted a very functional approach. He defined practical completion as
“completion for all practical purposes that is to say for the purpose of allowing the
employers to take possession on the works and use them as intended”. However, when
Westminster v Jarvis was appealed to the House of Lords in 1970, Lord Dilhorne took
the much stricter line that “what is meant is the completion of all the construction work
that has to be done”.
61
The ICE Conditions of Contract are a family of standard forms issued by the Institution of Civil Engineers.
The more commonly used forms in Hong Kong for engineering works are similar to or derived from the ICE
Conditions of Contract (either the sixth or seventh edition).
62
(1969) 1 WLR 1448.

SECTIONAL COMPLETION 427
In Mariner International Hotels Ltd v Atlas Ltd,63 the Hong Kong Court of Final 16.126
Appeal held that ‘practical completion’ as used in building contracts in Hong Kong
meant a state of affairs in which the works had been completed free from patent
defects other than ones to be ignored as trifling and this was distinct from substantial
performance.64
(b) Effect of issuing the certificate
Generally, full and complete performance is required to discharge contractual 16.127

obligations. However, in construction contracts the purpose of signifying completion
is not to release the contractor, but permit the employer to take possession of the
works and allow the contractor to leave the site. The issue of the certificate of practical
completion marks the beginning of the defects liability period stated in the appendix; six
months unless otherwise stated. For this period of time after the issue of the certificate
of practical completion, the main contractor is required to maintain and repair the
building in respect of damage occurring through her or his poor workmanship, such as
plaster cracking, doors and windows not closing properly, etc. In addition, a number
of contractual consequences will follow.
• The contractor’s responsibility for insuring the contract works comes to an end.
• Liability of the contractor to pay damages for late completion may cease.
This liability may also not be capable of revival if a certificate has been given.
• The contractor becomes entitled to the release of one-half of the retention

money.
9. SECTIONAL COMPLETION
(a) Provisions for phased completion
If the intention of the parties is that the contract work should be completed and handed 16.128
over in phases, it is essential that the contract documents make proper provision for
this. This may be implemented by amending the relevant clauses in the Standard Form,
or by appending the Sectional Completion Supplement to the contract.
The ICE Conditions of Contract (6th edition), for instance, enables different sections 16.129
to be identified in the appendix, each with its own time for completion and its own
liquidated damages. The JCT 80 standard form contains no such provision, but there
is a Sectional Completion Supplement which makes the necessary modifications and
63
(2007) 10 HKCFAR 1.
64
See also P & M Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146; HW Nevill (Sunblest) Ltd v William Press
& Son Ltd (1981) 20 BLR 78; and Emson Eastern Ltd v EME Developments Ltd (1991) 55 BLR 114. Contrast
Big Island Contracting (HK) Ltd v Skink Ltd [1990] 1 HKC 69, which was overruled.

428 TIME
which should always be used. Even this supplement may not be sufficient for projects
in which the starting date of one section is dependent upon completion of a previous
section. In such circumstances, if it is intended that an extension of time on phase one
should delay the start of phase two, then the contract must be specifically amended to
provide for this.
16.130 Clause 16 of the HKIA/HKIS standard form provides for the possibility of the
employer taking possession of some section of the works before practical completion
of the whole, by an agreement made with the main contractor during progress of the
works, rather than forming part of the original contract. Instead of drafting appropriate
contractual terms, parties sometimes attempt to provide for sectional completion by
listing separate phase dates in the bills of quantity. Under JCT 80 such attempts are
doomed to failure, since subclause 2.2.1 prevents anything in the bills from overriding
or modifying what is in the conditions.
(b) Court will not alter clear agreement
16.131 It is important to remember that a court will not make or improve contracts for the
parties. The principle of freedom of contract means that if parties have entered into
a contract that is unreasonable, inconvenient or commercially unwise, it is not for
the courts to change their arrangement. A term will not be implied into a particular
contract just to make it more convenient, reasonable or sensible.
16.132 In the case of Trollope & Colls Ltd v North West Metropolitan Regional Hospital
Board,65 a contract for the construction of a hospital extension in phases provided
that Phase III should commence six months after the issue of certificate of practical
completion of Phase I, but that Phase III should itself be completed by a fixed date.
There were express provisions for an extension of time to be granted in respect of
Phase I, but no express provision for this to have a ‘knock on’ effect on Phase III. Delay
in completing Phase I (for virtually all of which extensions of time were granted)
effectively reduced the period for Phase III from 30 months to 16 months, whereupon
the contractors argued that a term should be implied, permitting the Phase III time to
be extended in accordance with extensions to Phase I.
16.133 However, the House of Lords refused to make any such implication, ruling that since
the contract was clear and unambiguous in fixing a time for completion for Phase III,
the parties must live with the agreement they had made. Another example is Gleeson
(MJ) (Contractors) Ltd v London Borough of Hillingdon.66 In this case, a contract for
the provision of a large number of houses gave a single completion date of 24 months
after the date for possession. In reality, as the preliminaries bill showed, the parties’
intention was that blocks of houses were to be handed over at three-month intervals
from 12 months onwards. When the first blocks of houses were not completed after
12 months, the employer deducted liquidated damages at the contract rate, but this
65
(1973) 1 WLR 601. See Luk Wing Chin v Chan Chi Shing [2008] HKEC 963 and Mimi Monica Wong v Mirko
Saccani [2006] HKEC 1662. See also Ying Ho Co Ltd & Others v Secretary for Justice (2004) 7 HKCFAR 333
and Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] BLR 195.
66
(1970) 215 EG 165. See also Inverclyde DC v Hardstock (Scotland) Ltd 1984 SLT 226.

DEFECTS LIABILITY PERIOD 429
was held to be invalid. The contract made no provision for sectional completion, and
it could not be varied by the contract bills.
Applying clause 12 of the JCT form of contract, it was held that liquidated damages 16.134
could not be deducted until the expiry of the period shown in the appendix. The
decision was based on the strict wording of the contract clause – “nothing contained in
the Contract Bills shall override, modify or affect in any whatsoever the application or
interpretation of that which is contained in these Conditions”.
The Court expressed the view that nothing would have been easier than to add words in 16.135
clause 12 like ‘subject to such conditions as are contained in the bills’. However, this is
contrary to recommended practice and could lead to confusion and uncertainty. Where
additional conditions are necessary, it would seem better to write these in the printed
form so that all the conditions are contained in the same document.
In certain cases the employer may not wish to take early possession. In such 16.136
cases, the building will be practically completed and the architect must issue a
certificate of practical completion of the works to the main contractor. The issue
of this certificate however, does not mean that the main contractor can hand over
the building before the agreed date for completion; this can only happen with the
employer’s consent.
10. DEFECTS LIABILITY PERIOD

(a) Defects clauses
These oblige the contractor to maintain the work and rectify faults appearing within 16.137
a specified period, often 6 or 12 months following completion. The cost of such work
is to be borne by the contractor unless the architect/engineer is of the opinion that the
contractor is not at fault with regard to workmanship or materials. In this circumstance
the value of the work is paid for as additional work.
When a default is due to the contractor’s failure to comply with the contract, it is in 16.138
breach. The maintenance clause permits the contractor to mitigate the effect of the
breach by carrying out rectification itself.
(b) Schedule of defects
The architect must issue a schedule of such defects to the contractor not later than 16.139
14 days after the end of the defects liability period and the contractor then has a
reasonable time to put them right. Once this has been done, the architect will issue a
certificate of completion of making good defects (subclause 15(4) of the HKIA/HKIS
Standard Form), following which the contractor becomes entitled to the remaining
part of the retention money (subclause 30(4)(c) of the HKIA/HKIS Standard Form)
but it does not end the main contractor’s liability for the cost of remedying them.
During a defects liability period, the contractor has the right as well as the obligation to 16.140
put right any defects that appear. This is illustrated by the case of William Tompkinson v

430 TIME
Parochial Church of St Michael.67 An employer refused to allow the original contractor

access to the site to remedy defects, but instead sued the contractor for the cost of
having these rectified by another contractor. The court said that the employer’s decision
amounted to an unreasonable failure to mitigate the loss suffered, and the damages
were reduced by the amount by which the employer’s costs exceeded that which it
would have cost the original contractor to carry out the work.
16.141 The main contractor is to make good defects within a reasonable time of receiving
the schedule. Much depends on the nature and circumstance of a particular defect
as to what may be considered a reasonable time. Where a contractor fails to do the
remedial works the employer may have that work done by others and recover the cost
from the contractor provided it is work that should have been done at the contractor’s
own expense.
(c) Exclusion clause
16.142 It is also worth noting that defects liability period clauses do not act as exclusion
clauses. If a defect is not included on a schedule of defects, and is not noticed by the
contractor or architect before the end of the period, the contractor is still liable for
it. A provision that entitles the employer to have defects rectified within a specified
period does not absolve the contractor from liability for defects appearing after expiry
of the period. Clear words are required to make a maintenance clause operate also
as an exclusion clause. Such words are found in some standard forms of contract for
mechanical and electrical works, where the contractor is expressly absolved of further
responsibility after carrying out the rectification of defects. Otherwise, the main
contractor, under the Limitation Ordinance, may remain liable to the employer for any
breach in complying with contract specifications. The period of the main contractor’s
liability is 6 years for ordinary contracts and 12 years for contracts under seal.
16.143 In the case of sectional completion, the same limitation of action rules apply, the only
difference being that the defects liability period applies only to that section of the
works that has received a certificate of practical completion.
67
(1990) 6 ConstLJ 319. See also Pearce & High Ltd v Baxter [1999] BLR 101, where it was held that, in
circumstances where an employer had not notified the contractor of the work to be performed, the employer
was still entitled to claim damages against the contractor, but the measure of that loss was the notional cost
of carrying out the work to the contractor (which opportunity he had been denied) rather than the actual costs
incurred by the employer. See also Persimmon Homes (South Coast) Ltd v Hall Aggregates (South Coast) Ltd
[2008] EWHC 2379 (TCC).

1. QUALITY IN CONSTRUCTION CONTRACTS
(a) Growing importance of quality standards
As with counterparts in other jurisdictions, standard form construction contracts in 17.001

Hong Kong contain express and detailed provisions dealing with the subject of quality
and workmanship on the part of the contractors. Those provisions set out the standard
of quality and of workmanship with which contractors are expected to comply in
discharging their functions. Due to the nature of construction activities, the standard
can be both scientific – in that it is expressed with reference to accepted specifications
and criteria as to the output, and also empirical – in that it is expressed with reference
to the satisfaction of the engineer or the architect or to the mode of performance
rather than the outcome of such performance. Since the total quality revolution in the
mid 1990s in Hong Kong, there has been a growing impact of quality management
systems, which are almost mandatory for every contract for public works, disputes and
their resolutions in respect of construction contracts. Those involved in the execution
and administration of construction contracts will agree that, given the inherent
features and the developing trend, the question of quality is becoming a more and more
complicated subject. There is also growing emphasis on integrated project success, to
be measured by objective performance indicators rather than subjective judgement.
Also, the focus and expectation of quality in commercial sectors in general and in 17.002
construction contracts in particular are shifting. Quality and indeed the overall
successful performance of construction contracts as a whole are of increasing impor-
tance and the emphasis placed on customer service and customer satisfaction that lies
at the heart of the total quality management and ISO 9000 movement has also altered
the landscape and the balance that has traditionally been placed on other determinants
of project success, such as time and costs. A whole branch of quality professionals has
evolved. The focus of quality management has shifted from testing and inspection to an
objective system for the assurance and delivery of performance as a whole.
(b) Principles of quality management systems
Nowadays, the contemporaneous meaning of quality1 is capable of affecting the 17.003

obligations of the contractor in regard to defective work and the corresponding
knowledge of the employer regarding this liability. All of these need to be examined in
the context of the quality management system that is put into operation. The essence
of quality management, as embraced in the ISO 9000 systems nowadays, is embodied
in three principles. First, quality management systems call for a focus on achieving
customer satisfaction. For this, the needs and satisfaction level of customers must be
assessed and repeatedly reassessed. Customers here embrace a wide definition and
include those external to an organisation as well as those within the organisation.
Second, there is a need for continuous process improvement; this is in the form of
several steps, ie conducting process analysis, targeting specific processes that need
1
For details, see the website of the Chartered Quality Institute at http://www.thecqi.org.

434 QUALITY
improvement, establishing performance improvement indicators and monitoring the

schedule for and the effectiveness of improvement. Third, there is a need for steps that
ensure full involvement of the work force in implementing the quality management
system installed. Another feature that quality management systems bring to
construction contracts is the generation and maintenance of contemporaneous written
records. In resolution of construction disputes, whether by way of litigation, arbitration
or mediation, it is common experience that contemporaneous records of the subject
matter are of much greater force and value. The operation of quality management
systems requires the documentation of all processes that affect the delivery of quality
and of records that such processes were carried out as planned. Thus, depending on
the subject matter of a dispute, these quality records can become a valuable source of
information and evidence that can help to resolve the dispute.
17.004 The concept of quality has evolved to a stage that is very far away from where it
once was. In relation to quality, the world is no longer what it used to be. Although
ISO 9000 is an international standard, it is derived from a British Standard and
its use was and is more widespread in the United Kingdom than elsewhere. Other
countries have different approaches, for example peer review in the United States,
appointment of a prufingenieur in Germany and the use of an independent checker for
decennial insurance in France. Even in the United Kingdom, the implementation of
quality management systems has not been made an express statutory requirement for
contractors or designers in construction. In any event, to stipulate that a designer and
contractor will operate quality management systems operated within the framework of
ISO 9000 only involves a couple of lines in the contract, with words to the effect that
the contractor shall operate a certified quality management system.
(c) Common law approach to quality
17.005 In contrast, the common law regarding quality has traditionally evolved from a simple
and typical commercial transaction of sale of goods. The principal means by which
quality will be ensured is through testing and inspections. There is no specific regard
for any quality system to operate. Even in construction contracts, the approach in
Hong Kong up until now has plainly been to treat quality systems separate from
primary contractual obligations. In most standard forms of contracts in Hong Kong,
the contractual requirement for requiring the contractor and its subcontractors or
suppliers to have installed and in operation a typical ISO 9000 quality management
system is only found in special conditions of the contract or a requisite requirement
in the tendering stage. In the United Kingdom, the continuing move for reform in the
construction industry, benchmarked by the reports of Sir Michael Latham entitled
“Constructing the Team” and of Sir John Egan entitled “Rethinking Construction”,2 has
grown, raising quality systems in the context of contracts to the status of a framework
that operates for ensuring compliance and avoiding defects as far as possible, with
2
For likewise development in other jurisdictions, please visit the websites of the Royal Commission into the
Building and Construction Industry at http://www.royalcombci.gov.au for Australia or of the Construction
Industry Development Board at http://www.cidb.org.za for South Africa; and the NZ Construction Industry
Council at http://www.nzcic.co.nz for New Zealand.

QUALITY IN CONSTRUCTION CONTRACTS 435
the dual aims of forestalling non-compliance of quality requirements and providing

more immediate remedies in case of such non-compliance. In this context, quality
management systems are a device for preventing disputes from escalating.
Similar cultural and mindset changes are going on in Hong Kong. In the report of the 17.006
Construction Industry Review Committee, entitled “Construct for Excellence” released
in 2001, there is a call for fostering a quality culture in the Hong Kong construction
industry so that everyone is committed to achieving excellence rather than merely
meeting the minimum acceptable standards. Recommendations made there are being
implemented, with progress monitored by the then Provisional Construction Industry
Coordination Board and now the Construction Industry Council, the details of which
are at http://www.hkcic.org/.
(d) Engineer’s and architect’s duties in quality control
The general duties of the engineer or architect as provided in typical construction 17.007
contracts include watching and inspecting the work, testing and examining the
material3 and workmanship4. These duties are usually expressly stated to be delegable
to the resident team on site. There is, however, no exact definition of these duties
and industry standards and specifications are the standards against which these tests,
inspections and examinations are measured. In Gibson v Skibs A/S Marina & Orkla
Grube A/B,5 it was held that examination meant a more thorough and scientific process
than inspection and inspection6 meant something less than examination but more than
a mere casual glance, calling for careful and critical looking with the naked eye but no
more than that. Testing and inspection are directed toward checking against defects, and
it is the outcome of such testing and inspection that is important. The process of testing
and inspection is obviously rigorous throughout and further powers of investigation, by
extra testing or inspection, are commonly provided, whether by the industry standard
or the specifications, where a defect is observed in the initial outcome. In McGlinn
v Waltham Contractors Ltd (No 3),7 it was held that an engineer’s or architect’s duty
to make periodic inspections required her or him to tailor the frequency and duration
of inspections to the nature of the works going on at the site from time to time; and
that, depending on the importance of the particular element or stage of the works,
the inspecting professional could instruct the contractor not to cover up the relevant
elements of the work until they had been inspected.8
3
See, e.g. Merton LBC v Crowe (1980) 18 BLR 1; Michael Hyde & Associated Ltd v JD Williams & Co Ltd [2001]
PNLR 233; and Hammersmith Hospitals NHS Trust v Troup Bywater & Anders [2000] EnvLR 343.
4
See, eg Corfield v Grant (1993) 29 ConLR 58 and Victoria University of Manchester v Hugh Wilson (1984)
2 ConLR 43. See also Florida Hotels Pty Ltd v Mayo (1965) 113 CLR 588 and Rowlands v Collow [1992]
1 NZLR 178.
5
[1966] 2 All ER 476. In Paterson v Lees 1993 SLT 48, it was remarked that “[a] person who is competent to carry
out any work is a person who has the knowledge and ability necessary to perform it properly”. See also Re Wing
Fai Construction Co Ltd [2004] 3 HKLRD 357.
6
Inspection is a lesser responsibility than supervision. See Jameson v Simon (1899) Session Cas 1211; Sutcliffe v
Chippendale and Edmonson (1982) 18 BLR 149 at 162; and Corfield v Grant (1992) 29 ConLR 58.
7
[2008] BusLR 233.
8
While it is incumbent on the inspecting engineer or architect to keep adequate records of all inspections, the
engineer or architect does not guarantee that her or his inspection will reveal or prevent all defective work, and
it is thus not appropriate to judge an engineer’s or architect’s performance by the result achieved. See Consarc
Design Ltd v Hutch Investments Ltd [2002] PNLR 31.

436 QUALITY
17.008 Hence, the outcome of testing and inspection in construction contracts is of particular
importance in at least three ways. First, it reveals whether or not a defect is present;
second, it entitles the contractor to follow on with the works after the testing and
inspection for a prior stage is passed; third, it triggers the operation of further
procedures to follow in investigating compliance, in bringing about remedial proposals
or in entitling rejection by the employer.
(e) Contractor’s obligation to fix defects
17.009 The obligations of a contractor in relation to defects are principally governed by the
contractual provisions and the exact scope of obligation differs depending on when the
defects come to light.
17.010 During the defects liability period, whether as designated or extended, the position
is undoubtedly different. The contract contemplates that after the time of practical
completion, the employer shall have the use of the works for the purpose for which
they were built. If the contractor gives possession to the employer of works that do
not comply with the terms of the contract because of latent defects of workmanship
or materials, the employer may sustain consequential damage that cannot be
recompensed by the contractors simply making good the defects. The employer may
have been deprived of the profitable use of the works or the defects may have resulted
in damage to the employer’s plant or goods in the works. Yet, during the construction
stage, the contractor may have a continuing duty to rectify defects found in the work.
This can come from common law or under the express provision of the contract. It was
recognised in Lintest Builders Ltd v Roberts9 that a contractor had a continuing duty
during construction, and not only upon completion, to do the work with all proper
skill and care. In Tomkinson v The Parochial Church Council of St Michael,10 it was
suggested that the employer had a right to call for the rectification of defective work at
the time it was done. For the purpose of statutory limitation, the presence of this right
during the construction stage of the project may help to prevent time from running
from the date when defective work was being carried out.11 In Strathclyde Regional
Council v Border Engineering Contractors Ltd,12 it was observed that time for the
limitation period did not start running at the date when defective work was carried
9
(1978) 10 BLR 120. See however Kaye Ltd v Hosier & Dickinson Ltd [1972] 1 WLR 146 and also Guinness Plc
v CMD Property Developments Ltd (formerly Central Merchant Developments Ltd) (1995) 76 BLR 40.
10
(1990) 6 ConstLJ 319. In Rice v Great Yarmouth Borough Council [2003] TCLR 1, the UK Court of Appeal,
dealing with the alleged repudiatory breach of a maintenance contract, remarked:
“… parallels with building contracts, in the number and variety of the obligations involved and the varying
gravity of the breaches which may be committed, some of which may be remediable and some not.”
In Sutcliffe v Chippendale and Edmundson (1971) 18 BLR 157, it was remarked that, in relation to whether an
employer was justified in terminating a contractor’s employment, it was highlighted that there might come a
point where the defect or the status of the defects became too serious to be treated as a temporary disconformity,
whether they were numerous and frequent or not. See also Adkin v Brown [2002] NZCA 59.
11
Indeed, any deficiencies in construction, design, inspection, manufacture or supply of materials must be referable
to dates before construction of the centre was completed. As a general rule, however, the defaults of contractors
and others attract no legal liability until at least the date of practical completion of the works, and more plausibly
until the date on which a final certificate is issued. See AMN Group Ltd v Gilcomston North Ltd 2008 SLT 835.
12
(1998) SLT 175. See AMN Group Ltd v Gilcomston North Ltd 2008 SLT 835.

QUALITY IN CONSTRUCTION CONTRACTS 437
out and that the contractual obligation to remedy any defect arising in the course of
the contract, which was specifically provided for in that contract, could not reasonably
coexist with a breach that had crystallised to the extent of forming a basis for an
action for damages. In P & M Kaye & Hosier v Dickinson,13 which is considered in
Eu Asia Engineering Ltd v Wing Hong Contractors Ltd,14 it was recognised by Lord
Diplock that, during the construction period it might, and generally would, occur that
from time to time some part of the works done by the contractor would not initially
conform with the terms of the contract either because it was not in accordance with the
contract drawings or the contract bills or because the quality of the workmanship or
materials was below the standard required by the contract. It was further observed that
the contract placed upon the contractor the obligation to comply with any instructions
of the architect to remedy any temporary disconformity with the requirements of the
contract and, if it were remedied, no loss would be sustained by the employer unless
the time taken to remedy it resulted in practical completion being delayed beyond
the date of completion designated in the contract. Obviously, in that event the only
loss caused would be the employer being kept from using its building from the date
on which it was agreed that it should be ready for use, whereby liquidated damages
would become payable. Lord Diplock refused to treat temporary disconformity of the
contract as a breach that entitled the employer to damages and said:
“Upon a legalistic analysis it might be argued that temporary disconformity of

any part of the works with the requirements of the contract even though remedied
before the end of the agreed construction period constituted a breach of contract
for which nominal damages would be recoverable. I do not think that makes
business sense. Provided that the contractor puts it right timeously [sic] I do not
think that the parties intended that any temporary disconformity should of itself
amount to a breach of contract by the contractor.”
(f) Contractor’s obligation to use materials and

carry out work as specified
In respect of contractual obligations, a common framework in standard forms of 17.011

construction contracts provides that the contractor is obliged to carry out its work
with specified material and workmanship in the way stipulated in the contract. That
usually will, by itself, set out the various testing and inspections that the work has to
go through, by reference to industry standards or specifications.15 The employer, via
the engineer or architect, is further conferred with a power to direct the carrying out
of further testing and inspections and the contractor is required to provide support for
these, though the expenses so incurred, if not otherwise provided for in the contract,
13
[1972] 1 WLR 146. See Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1. See also Guinness
Plc v CMD Property Developments Ltd (formerly Central Merchant Developments Ltd) (1995) 76 BLR 40.
14
[1991] HKEC 72. See also Onway Engineering Ltd v Chinney Construction Co Ltd [2005] HKEC 1880 and
Pamax Ltd v Cross Max Interiors Ltd [2008] HKEC 532.
15
See, for example, May Tik Decoration Co Ltd v Ronacrete (Far East) Ltd [2009] HKEC 670, where it was found
that the supplier of tile adhesive materials had warranted compliance with the standards the British Standards
Institute.

438 QUALITY
are normally borne by the employer.16 Since construction work is carried out in various
stages and each stage may cover up the work already carried out in prior stages, there
are also express provisions in the contract prohibiting covering up or putting out of
view any work without the approval of the engineer or the architect and affording full
opportunity for the engineer or the architect to examine and measure such work before
it is covered up or put out of view. In practice, prior to the execution of the next stage of
work, the contractor is normally required under the system set up on the site to notify
the resident team of the engineer or the architect and to obtain the team’s approval
before proceeding on to the next stage of work.
(i) Contractor’s obligation for care and protection of work

17.012 After the work is completed, there is usually a contractual obligation for the care
and protection of the work. Thus, the contractor still bears the risk of the completed
work, until or unless it has been handed over.17 The issue of the practical or substantial
completion certificate equates the commencement of the maintenance or defects
liability period, within which the contractor is under the express contractual stipulation
to rectify any defects found or to complete the outstanding work. The length of the
maintenance or defective liability period may vary according to the nature of the
project and this gives the employer the right to rely on contractual remedies for getting
the defects corrected, rather than necessitating recourse to external dispute resolution
processes. Within the maintenance or defects liability period, the contractor is obliged
to carry out rectification or outstanding work in compliance with the instruction of
the engineer or the architect. All such rectification work is to be carried out by the
contractor at its own expense if it is in the opinion of the engineer or architect that
such work is due to the use of materials or workmanship not in accordance with the
contract or to other default of the contractor.18 If the contractor refuses to perform
accordingly, the employer may, after reasonable notice being given, have such work
carried out by its own or arranged labour and the employer is empowered to recover
the associated costs from the contractor. Fair wear and tear is normally excepted from
the definition of defects for this purpose. Prior to the end of the maintenance or defects
liability period, the engineer or the architect is often conferred with the power to order
the contractor to have such investigation of the cause of any defect, imperfection or
fault carried out, whether by the contractor or by the employer’s own labourers. At
the expiry of the maintenance or defects liability period, the engineer or architect is
required to issue a certificate to that effect, signifying that all defective and outstanding
work has been made good.
16
See, for example, Secretary for Justice v Chong Kui (Group) Co Ltd [2009] HKEC 190, where acceptance of the
materials was subject to testing and inspections. See also Wong Chuk Kin v Millennium Engineering Ltd [2007]
HKEC 1521 and Nippon Kanzai Centre Co Ltd v Ho Biu Kee Construction Engineering Co Ltd [2006] HKEC
2341.
17
As remarked in Woon Lee (HK) Co Ltd v Holyrood Ltd [2010] HKEC 1236, the fact that a defect may not be
evident at the time of handover does not relieve the contractor from responsibility for poor workmanship.
18
Yet, the mere fact that an item does not meet the satisfaction of the employer does not relieve the employer from
the burden of establishing that the matter is a defect which is the responsibility of the contractor. See Woon Lee
(HK) Co Ltd v Holyrood Ltd [2010] HKEC 1236.

DEFECTS IN DESIGN, MATERIALS AND WORKMANSHIP 439
2. DEFECTS IN DESIGN, MATERIALS

AND WORKMANSHIP
Scope and extent of the contractor’s obligations

The general principles governing implied terms are dealt with in chapter 5 of this 17.013
book.19 Specific to the issue of quality in construction projects, the obligations of a
contractor toward the employer are controlled by both the express terms and the implied
terms of the contract.20 Generally speaking, the scope and extent of the contractor’s
obligations depend on the nature of the work undertaken.21 This obligation imposed
on the contractor is generally a continuing duty throughout the stages of construction
works. This covers persons to whom the contractor has delegated the work.22
(a) Design
(i) Definition
Design has been described as including the choice of quality or description of work 17.014
materials and components, as well as the dimensional or structural design of the final
permanent work or product – so that the legal responsibilities arising from it may
involve a wide range of concepts of structural soundness, durability, safety, working
life, quality, suitability, amenity, ease of maintenance and satisfactory performance
after completion.
(ii) Standard of reasonable care and skill

Generally speaking, as noted in Greaves and Company (Contractors) Limited v 17.015
Baynham Meikle,23 the law does not usually imply a warranty that a professional will
achieve the desired result, but only a term that the professional will use reasonable
care and skill.24 Therefore, surgeons do not warrant that they will cure the patient;
nor do solicitors warrant that they will win the case. In the case of George Hawkins v
Chrysler (UK) Limited and Another,25 engineers were employed to design and select
new floors for showers and changing rooms to be used by workers in a foundry and to
supervise the installation. A worker slipped on the floors and was injured. A case was
brought against the engineers alleging that they were in breach of an implied warranty
that the floor surface would be fit for its purpose. It was observed that the engineers
were not supplying anything and they were described as designing the shower area.
19
See also s 5 of the Supply of Services (Implied Terms) Ordinance (Cap 457).
20
See Fairlite Industries Ltd v Fosroc Hong Kong Ltd [2008] HKEC 397.
21
See Chok Yick Interior Design & Engineering Co Ltd v Lau Chi Lun [2010] HKEC 967, where a subcontractor
for tiling work and painting waterproof material was held not liable for the water leakage as there was no implied
guarantee in the contract.
22
See Stag Line Limited v Tyne Shiprepair Group Limited (The Zinnia) [1984] 2 Lloyd’s Rep 211 and Norta
Wallpapers (Ireland) Limited v John Sisk and Sons (Dublin) Limited (1978) 14 BLR 49.
23
[1975] 3 All ER 99. See Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384; CFW Architects v
Cowlin Construction Ltd (2006) 105 ConLR 116; and Platform Funding Ltd v Bank of Scotland Plc (formerly
Halifax Plc) [2009] QB 426. See also Happy Dynasty Ltd v Wai Kee (Zens) Construction & Transportation Co
Ltd [1998] 1 HKLRD 309 and A Pub (HK) Co Ltd v Tang Yuk Lun [2008] HKEC 1929.
24
Young and Marten Limited v McManus Childs Limited [1969] 1 AC 454.
25
(1986) 38 BLR 36.

440 QUALITY
Yet, so far as the floor was concerned, the court was of the view that what they did was
to give professional advice as to its suitability and, hence, their function was purely
advisory and not in supplying any chattel.
17.016 As to the standard expected, in the classic case of Bolam v Friern Barnet Hospital
Management Committee,26 McNair J said:
“…where you get a situation which involves the use of some special skill or
competence, then the test as to whether there has been negligence or not is …
the standard of the ordinary skilled man exercising and professing to have that
special skill. A man need not possess the highest expert skill; … it is sufficient
if he exercises the ordinary skill of an ordinary competent man exercising that
particular art.”
17.017 In Zhuang PP Holdings Ltd v Lam How Mun Peter,27 the Bolam test was applied to
a claim against the property valuation surveyor. The court summarised the law and
remarked:
“… The Bolam test has been sanctioned by long usage. It is of general application
to any person exercising or professing a particular skill and is not confined to
the medical profession which was at issue in that case. The application of the
standard requires there to be a body of professional practice or opinion to which
to refer in assessing the conduct of the defendant criticised. The test as adapted to
the surveying profession has been stated by Stephen Brown LJ in Nye Saunders
& Partners v Alan E Bristow, (1987) 37 BLR 97 at 103 to be whether there was
evidence that at the time a responsible body of surveyors would have taken the
view that the way in which the subject of the inquiry had carried out his duties
was an appropriate way of carrying out the duty and would not hold him guilty of
negligence merely because there was a body of competent professional opinion
which held that he was at fault. If there are conflicting opinions from different
bodies of the profession and if the surveyor’s way of carrying out the duty accords
with the opinion of one of those bodies, he is absolved of liability.
25. In course of time, the courts have made inroads into what used to be the
exclusive realm of the professionals. In JD Williams & Co Ltd v Michael
Hyde & Associates Ltd [2000] Lloyd’s LR 823, after reviewing the
authorities, Ward LJ held at 830 that the Bolam test has been held not to
apply under three circumstances.
26
[1957] 1 WLR 582. See however Bolitho (Deceased) v City and Hackney Health Authority [1998] AC 232. See
also Allied Trust Bank Ltd v Edward Symmonds (1994) 22 EG 116, where it was remarked that a surveyor who
adopted in respect of a wholly private transaction a method of valuation prescribed for valuations that were to
be made public was not criticised for having acted in accordance with such guidance provided by the RICS
Statement of Asset Valuation Practice.
27
[2009] HKEC 1340. See also J&A Developments Ltd v Edina Manufacturing Ltd [2006] NIQB 85.

26. Firstly, in Bolitho And City and Hackney Health Authority, [1997] 3 WLR
1151, Lord Browne-Wilkinson stressed that the court has to be satisfied that
the exponents of the body of opinion relied upon can demonstrate that such
opinion has a logical basis. If it can be demonstrated that the professional
opinion is not capable of withstanding logical analysis, the judge is entitled
to hold that the body of opinion is not reasonable or responsible.
27. Secondly, in Nye Saunders & Partners, Stephen Brown LJ held that where
the evidence of the expert amounted to no more than an expression of
his personal opinion as to what he would or would not have done in the
circumstances, the judge was entitled to take the view that such evidence
falls short of constituting evidence of a responsible body of architects:
see also Midland Bank Trust Co Ltd and another v Hett, Stubbs & Kemp
(a firm) [1978] 3 WLR 167. In effect, in such a case, the initial criteria for
the application of the Bolam test are not met.
28. Thirdly, in Gold v Haringey Health Authority [1988] QB 481 at 490, Lloyd
LJ held that if the giving of advice required no special skill, then the Bolam
test should not apply. In other words, where it is not necessary to apply
any particular expertise to decide whether the defendant has failed to
exercise the skill and care expected of an ordinary member of the surveying
profession, there is no room for application of the test. ”
Here, reasonable skill and care is usually assessed by reference to established practice; 17.018
and it is clear that perfection is not required.28
(iii) Standard of fitness for purpose

In certain circumstances, however, professionals may be under an obligation to attain 17.019
a fit-for-purpose standard, as illustrated by the case of Samuels v Davis,29 which
concerned the supply of dentures by a dentist. It was held that there was an implied
condition in the contract that the dentist would supply dentures that were reasonably
fit for the purpose for which they was intended. In such a situation, the normal
professional standard of reasonable skill and care was deemed to be insufficient.
Accordingly, despite the general implied obligation of reasonable skill and care, it can
be seen that if a professional person, as part of her or his services, contracts to deliver a
chattel, her or his liability is raised to that of fitness for purpose. This concept is related
to the implied obligations imposed by the law of the sale of goods.
In Independent Broadcasting Authority v EMI Electronics Limited and BICC 17.020
Construction Limited,30 the contractor was employed to construct a television mast,
and it subcontracted out its design. The mast collapsed in bad weather after three years.
Lord Scarman remarked in the UK House of Lords judgement:
28
Secan Ltd v Personal Representative of Wong Ping Wai [2003] HKEC 749.
29
[1943] 1 KB 526. See also Lee v Griffin [1861] 30 LJ QB 252 on contracts for the sale of goods.
30
(1980) 14 BLR 1.

442 QUALITY
“… in the absence of a clear contractual indication to the contrary, I see no reason

why one who in the course of his business contracts to design, supply and erect a
television aerial mast is not under an obligation to ensure that it is reasonably fit
for the purpose for which he knows it is intended to be used.”
(iv) Design-build and turnkey contracts

17.021 Clearly, in design-build or turnkey contracts, one of the key roles of the contractor is
to manage and provide the design based on the client brief. The design is normally
subcontracted out to a specialist design team that works in coordination with the
design-build contractor to produce a design that fits the requirements of the employer.
The role that the design-build contractor has in such an arrangement is more involved
and choices as to the structural form, materials used or construction methods are
all within the ambit of its responsibilities. It should however be noted that some
commonly used standard forms of contract for design-build contracts may contain
provisions that dilute the contractor’s design liability to that of a professional, that is,
one of reasonable skill and care. In traditional construction contracts, the role of the
contractor in design is less obvious. The employer prescribes the materials or standard
of workmanship. The contractor is required to work to the design supplied by the
employer. The subcontractors or even suppliers may also be nominated or designated
by the employer. However, there are still certain elements of design involved on the
part of the contractor, particularly where temporary works are involved.
17.022 Where the contractor undertakes a design, it usually bears the obligation to provide
a design that meets the requirements of the employer, ie one that fits the purpose for
which it is supplied. Whether such a design obligation is duly discharged is measured
against the suitability of the work and materials chosen for the intended purpose.
17.023 The idea behind a turnkey contract stems from the name itself; all that an employer
has to do is to turn the key to the front door and start using the building. Likewise,
the term design-build contract covers package contracting, the all-in-one service, the
development and construction and turnkey contracting. Package contracting is an
abbreviated version of design-build. In a design-build contract, the contractor is the
key person and all communication passes one to one, ie between the contractor and the
employer. The scope of responsibilities of the contractor is wide, and the contractor is
responsible for independent consultants employed to assist it and for any mistakes caused
by miscommunication between itself and the consultants. Also, the contractor also bears
responsibility for ensuring that the materials used are fit for purpose and also bears
liability for the design of the project, as illustrated in Independent Broadcasting Authority
v EMI Electronics and BICC Construction Limited.31 In this case, it was accepted, under
the circumstances, that there would be an implied obligation to ensure that the television
aerial mast would be reasonably fit for the purpose for which the designer knew it was
intended to be used,32 in the absence of a clear contractual indication to the contrary.
31
(1980) 14 BLR 1. See Lexmead (Basingstoke) Ltd v Lewis [1982] AC 225.
32
See, for example, Whitecap Leisure Ltd v John H Rundle Ltd [2007] All ER (D) 122 (Jun), where the defendant
was found negligent in relation to cable tow for water-skiers supplied by it when the plaintiff was placing reliance
upon the engineering expertise of the defendant and the fact that the equipment supplied and installed was not fit
for its purpose (such purpose being well known to the defendant).

In the classic case of Hancock v BW Brazier (Anerley) Ltd,33 it is indicated that, 17.024
where a purchaser buys a house from a builder who contracts to build or complete it,
there is a threefold implication that the builder will do her or his work in a good and
workmanlike manner; that he or she will supply good and proper materials; and that
it will be reasonably fit for human habitation. Also, as explained in the Irish case of
Norta Wallpapers (Ireland) Limited v John Sisk & Sons (Dublin) Limited,34 where it
concerned the liability of a contractor for defective design of roof lights in a factory,
such an approach was supported by the fact that there was a chain of contracts. Those
lights had been designed and supplied by a subcontractor chosen by the employer. It
was remarked by Henchy J that:
“In all cases of supply and installation by a subcontractor I conceive the law
to be that, unless the particular circumstances give reason for its exclusion,
there is implied in the contract a term to the effect that the contractor will be
liable to the employer for any loss or damage suffered by him as a result of the
goods, materials or installations not being fit for the purpose for which they were
supplied. The basis for this rule is that, while the contractor is thus made primarily
liable, he will be able, under the subcontract, to have recourse, by third party
procedure or otherwise, against the subcontractor for an indemnity in respect of
the contractor’s liability to the employer.”
In South West Water Services Limited v International Computers Limited,35 failure in 17.025
delivering the corresponding software in time in a turnkey contract for a computer
system entitled the owner to rescind the contract, even if there was nothing wrong with
the hardware installed. In Wu Yin Fai v Ng Kam Tong,36 it was held that the renovation
contract for a house was undertaken as a design-build contract and, as such, the
staircase was built in breach of contract.
(v) Fit for purpose when the work is

designed by a contractor
Thus, it may be appropriate to imply into a construction contract a term that the 17.026
structure to be erected will, when completed, be reasonably fit for its intended
purpose, but that will be so only if and insofar as the structure is to be designed by
the contractor. The existence of the term in that type of case was explained by Lord
Denning MR in Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners.37
However, it is clear from the decision of the Court of Appeal in England and Wales in
the case of Lynch v Thorne38 that there is no such implied term in a case in which the
contractor undertakes to build to a particular specification already, at the date of the
33
[1966] 1 WLR 1317. See also Raymond Construction Pte Ltd v Low Yang Tong (1998) 14 ConstLJ 136 and
Alderson v Beetham Organisation Ltd [2003] 1 WLR 1686.
34
(1977) 14 BLR 49. See also Greater Glasgow Health Board v Keppie Henderson & Partners 1989 SLT 387.
35
[1999] BLR 420.
36
[2004] HKEC 273.
37
[1975] 1 WLR 1095. See also A Pub (HK) Co Ltd v Tang Yuk Lun [2008] HKEC 1924.
38
[1956] 1 WLR 303. See also Chan Yeuk Yu v Church Body of the Hong Kong Sheng Kung Hui & Anor [2001]
1 HKC 621 and Lee Yuk Sum & Another v Lead Bright Ltd [2004] HKEC 796.

444 QUALITY
relevant contract, devised by or on behalf of the employer, and it must follow that there
is no such implied term if the contractor agrees to build in accordance with plans or
specifications to be produced in the future by others. In Bellefield Computer Services
v E Turner & Sons Ltd,39 May LJ pointed out that:
“There is a blurred borderline between architectural design and the construction

details needed to put it into effect. Borderlines of responsibility cannot be defined
in the abstract. A carpenter’s choice of a particular nail or screw is in a sense a
design choice, yet very often the choice is left to the carpenter and the responsibility
for making it merges with the carpenter’s workmanship obligations. In many
circumstance[s], the scope of an architect’s responsibility extends to providing
drawings or specifications which give full construction details. But responsibility
for some such details may rest with other consultants, eg structural engineers,
or with specialist contractors or subcontractors, depending on the terms of their
respective contracts and their interrelationship. As with the carpenter choosing
an appropriate nail, specialist details may be left to specialist subcontractors
who sometimes make detailed ‘design’ decisions without expecting or needing
drawings or specifications telling them what to do. In appropriate circumstances,
this would not amount to delegation by the architect of part of his own
responsibility. Rather that element of composite design responsibility did not rest
with him in the first place.”
17.027 Therefore, where there is a design decision made by a contractor, there is an obligation
on the part of the contractor that the element designed will be reasonably fit for its
intended purpose.
(vi) Employer’s reliance on contractor’s skill

17.028 However, before the contractor may be held responsible for these elements, it seems
from the case of Lynch v Thorne40 that the employer must prove that he had relied on
the skill and judgment of the contractor. In the case of Myers v Brent Cross Service
Co,41 which concerns car repair, it was observed as a statement of principle that a
person contracting to do work and supply materials warranted that the materials which
he used would be of good quality and reasonably fit for the purpose for which he was
using them unless the circumstances of the contract were such as to exclude any such
warranty. This statement of principle has been approved by the House of Lords in the
39
[2002] EWCA Civ 1823. See Holding & Management (Solitaire) Ltd v Ideal Homes North West Ltd (formerly
Broseley Estates Ltd) (2004) 96 ConLR 114.
40
[1956] 1 All ER 744. In this case, the plaintiff agreed to purchase from the defendant builder a plot of land with a
partially erected dwelling house on it and the defendant undertook to complete the dwelling house in accordance
with the plan and specifications annexed to the agreement. It subsequently appeared that water penetrated into the
house through a nine-inch wall built in accordance with the plan. The plaintiff’s claim based on implied warranty
was rejected by the Court of Appeal. See also Tung Kee Garden Horticulture Ltd v Wong Wang Tat [2007] HKEC
1540.
41
[1934] 1 KB 46. See also Rotherham MBC v Frank Haslam Milan & Co Ltd (1996) 78 BLR 1; Gloucestershire
CC v Richardson (t/a WJ Richardson & Son) [1967] 3 All ER 458; and Stewart v Reavell’s Garage [1952]
2 QB 545.

case of Young and Marten Ltd v McManus Childs Ltd.42 Applying this principle in the
Scottish case of Greater Glasgow Health Board v Keppie Henderson & Partners,43 in
respect of a heat distribution system installation, it was held that there was no warranty
on the part of the contractor that the materials or the system would be suitable for
the job since the selection of materials for their suitability for the job was not left to
the contractor. Therefore, no such warranty should be implied unless it was in all the
circumstances reasonable. Where no reliance is placed on the contractor in respect of
a designed element, it seems that there would not be an implied obligation in relation
to the fitness for purpose of the design, as noted in the Australian case of McKone
v Johnson.44 In another Australian case, Frank Davies Pty Ltd v Container Haulage
Group Pty Ltd (No 1),45 concerning the lease of a forklift truck to be used for stacking
containers, the purpose for renting the truck was made known in such a way as to
indicate that the defendant was relying on the supplier’s skill and judgment in relation
to the capabilities or suitability of the truck. It was held that, unless excluded by some
provision to the contrary, there was an implied promise by the supplier to the defendant
that the truck was reasonably fit for the purpose identified.
Thus, if a contractor takes up a design role or selects materials for the work, there 17.029
is generally an implied term that the work and materials will be suitable for their
purpose; conversely, a contractor who is provided with plans and specifications to work
is generally only required to work to these plans and specifications in a workmanlike
manner and is not liable to the employer for any defects in the design.
(vii) Contractor’s duty to warn

Nonetheless, there are cases where the contractor may be under a duty to warn the 17.030
employer about any defects or deficiencies in the design supplied to it for the work if
such defects or deficiencies may result in defects in the work. That duty to warn may
continue even after the work has been completed, as illustrated in Stag Line Ltd v Tyne
Ship Repair Group Ltd, The Zinnia.46
In the Canadian case of Brunswick Construction Ltd v Nowlan, 47 a contractor was 17.031
employed to build a house in accordance with the plans prepared by an engineer
without supervision, but dry rot developed in the roof because of a lack of ventilation.
A majority of the Supreme Court of Canada held that a contractor of this experience
should have recognised defects in the plans, which were so obvious to the architect
subsequently employed by the employer. The employer, having no supervising
architect, was taken to have relied on the skill and attention of the contractor and,
42
[1969] 1 AC 454. See also Rutherford v Seymour Pierce Ltd [2010] IRLR 606.
43
(1989) SLT 387.
44
[1966] 2 NSWR 471.
45
(1989) 98 FLR 289.
46
[1984] 2 Lloyd’s Rep 211. See Plant Construction Limited v JMH Construction Services Limited [2000]
BLR 137, where a duty to warn of a design defect in an installation contract was found against a contractor; and
Aurum Investments Ltd v Avonforce Ltd (In Liquidation) (2000) 78 ConLR 115, where no duty to warn towards a
contractor was found on the part of an excavation subcontractor as the contractor was then advised by structural
engineers.
47
(1974) 21 BLR 27. This case is considered in Sunnyside Nursing Home v Builders Contract Management (1986)
2 ConLJ 240 and Norwich Union Life Insurance Society v Covell Matthews Partnership 1987 SLT 452.

446 QUALITY
as such, the contractor was under a duty to warn the owner of the danger inherent
in executing the works in accordance with the plans. In Equitable Debenture Assets
Corporation v Moss,48 it was held that a contractor engaged to construct a new office
block had a duty to warn the employer of design defects of which the contractor knew.
The relevant defects in that case were in curtain walling to the building, which was
designed, supplied and fixed by a subcontractor. It was observed that, if on examining
the drawings or as the result of experience on site, a contractor formed the opinion that
in some respects the design would not work, or would not work satisfactorily, it would
have been absurd for them to have carried on implementing it just the same. Therefore,
in order to give efficacy to the contract, the term requiring a contractor to warn of
design defects as soon as it comes to believe that they exist is to be implied in the
contract in these circumstances. In Victoria University of Manchester v Hugh Wilson
& Lewis Womersley (A Firm),49 it was again held that there was an implied term in a
main contract requiring the contractor to warn the employer of defects in design which
it believed to exist, where the defects were in tiled cladding to the buildings which had
been installed by nominated subcontractors.
17.032 On the other hand, in University of Glasgow v Whitfield 50 a contractor employed to
construct an art gallery with leakage problems was facing a claim for contribution or
damages either for its negligence in the construction of the gallery or its failure to warn
the employer or the architect of defects in the design of which the contractor knew or
ought to have known. As to the issue whether the contractor owed the employer a
duty of care to warn against defects in design, it was held that no such duty existed
in tort. It was also observed that where there was a detailed contract, there would
be no room for the implication of a duty to warn about possible defects in design,
as in Lynch v Thorne.51 When referring to those cases such as Equitable Debenture
Assets Corporation v Moss52 and Victoria University of Manchester v Hugh Wilson
& Lewis Womersley (A Firm),53 where a duty to warn was found, these were regarded
as situations where there was a special relationship between the parties where the
contractor by its contract undertook to achieve a particular purpose or function.
17.033 Further, in the case of Oxford University Press v John Stedman Design Group,54
there was a contract to construct a warehouse designed and built for the storage
and distribution of books. There were defects in a topping on the floors laid by a
subcontractor. Another subcontractor had designed the substructure and provided the
steel reinforcement for the floors. A series of claims arose among all involved, and
a question in those proceedings arose as to whether the main contractor was under
48
(1984) 1 ConLJ 131. See also Victoria University of Manchester v Hugh Wilson & Lewis Womersley (A Firm)
(1984) 2 ConLR 43 and Department of National Heritage v Steensen Varming Mulcahy (1988) 60 ConLR 33.
49
(1984) 2 ConLR 43. See Plant Construction Plc v Clive Adams Associates (No 2) [2000] BLR 137.
50
(1988) 42 BLR 66. See Tesco Stores Ltd v Norman Hitchcox Partnership Ltd (1997) 56 ConLR 42 on the
corresponding duty of the architect.
51
[1956] 1 WLR 303. See also Artlane Design Consultants Ltd v Chan Wen Mee May [2009] HKEC 1142.
52
(1984) 1 ConLJ 131. See Victoria University of Manchester v Hugh Wilson & Lewis Womersley (A Firm) (1984)
1 ConLJ 162 and Department of National Heritage v Steensen Varming Mulcahy (1998) 60 ConLR 33.
53
(1984) 2 ConLR 43. See Murphy & Sons Ltd v Johnston Precast Ltd (formerly Johnston Pipes Ltd) [2008] All
ER (D) 114 (Dec).
54
(1990) 34 ConLR 1. See Murphy & Sons Ltd v Johnston Precast Ltd (formerly Johnston Pipes Ltd) [2008] All
ER (D) 114 (Dec).

a duty to warn the employer that the floor design was defective. The court observed
that there was no basis for implying such a duty to warn as no reliance was placed
on the judgment of the main contractor, unless it was a defect which might give rise
to danger to the safety of persons or damage to some property other than that which
was the subject matter of the design defect. It was added that, in matters of design,
whether a design was sound or otherwise was very much a matter of skilled judgment
and there was room for differences of opinion about the suitability of a design or a
particular aspect of it. Thus, it was regarded unreasonable for a contractor to be obliged
to raise with its employer matters of design for which it had no express contractual
responsibility and where the employer has commissioned the design from an expert.
(viii) Analysis of implied terms dependent on express terms

Therefore, the starting point of any analysis of implied terms in a construction 17.034
contract must be its express terms. Subject to the express terms, there will normally
be an implied term that the contractor will perform her or his contract with the skill
and care of an ordinarily competent contractor in the circumstances of the actual
contractor. In this regard, the factual extent of the performance that this term requires
will depend on all relevant circumstances and it may vary enormously. In particular
cases, circumstances may include consideration of the size, nature and details of the
works; the experience and perceived expertise of the contractor; relevant elements
of the relationship between the contractor and the employer and of their respective
relationships with others, for example, architects, engineers, surveyors, contracts
managers, clerks of works, subcontractors, local authority building inspectors and so
forth; and crucial details of the particular parts of the works and other facts which give
rise to the question as to whether the contractor fulfilled the obligation that the implied
term imports.
In respect of the duty to warn, it seems that the court has embraced a positive 17.035
implication of a duty, which would appear to reflect a leaning towards a good faith
principle even though not recognised explicitly as such. This may even be regarded
as an extended arm of the general duty to cooperate where the contractor is with
knowledge or reason to suspect that the design is defective.55
(b) Materials
(i) Specification of materials

Construction contracts usually define in detail the materials to be used by the contractor 17.036
for the work. The types of materials to be used are normally detailed in the drawings,
specifications or bills of quantities. The requirements may be given in the form of
specified standards that the materials used need to meet or the methods of construction
that should be adopted or avoided. Alternatively, the specifications may be given in
the form of the specified performance that the item of work needs to achieve. These
are sometimes referred to as performance specifications. In practice, the requirements
55
Contrast with J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024. See also Balmoral Group Ltd v
Borealis (UK) Ltd [2006] 2 Lloyd’s Rep 629.

448 QUALITY
of individual items of work may be governed by specifications in both forms. Take

storm water drainpipes as an illustration. Apart from the specifications as to the pipe
features, in terms of materials or strength, there are also specifications governing how
the jointing together of each section of the pipes should take place. In addition, the
finished pipeline is also commonly smoke-tested before it is covered up.
(ii) Quality control measures

17.037 To ensure quality, quality control measures such as testing and inspection are adopted.
Such testing and inspection normally takes place prior to the materials being used
for the work. Sometimes further or other testing and inspection are required after an
individual item of work is completed and prior to the commencement of the following
item. The way in which testing and inspection are to be carried out, including the
sampling methodology; the nature and conduct of the tests and inspection; and the
follow-up procedure in case of a defective outcome, are contained in the industry
standard or the specifications.
17.038 While it is usually a term of construction contracts, by implication if not expressly,
that the contractor will supply materials of good quality, this is not invariably so, in
particular if the contractor has been directed by the employer to enter into a contract
with a third party to obtain particular materials on terms that exclude or limit liability
for defects.
(iii) Application of implied warranty as to quality

of materials
17.039 As a general rule, where a contractor supplies materials, there are implied warranties
that the materials so supplied are reasonably fit for the purpose for which they are
to be used and that they are of good quality. This is illustrated in the cases of Young
& Marten v McManus Childs56 and Gloucestershire County Council v Richardson.57
These warranties correspond closely to that in the Sales of Goods Ordinance (Cap 26).
These warranties are, of course, subject to express terms or intentions of the parties to
the contrary. In Rotherham Metropolitan Borough Council v Frank Haslam Milan &
Co Ltd,58 cracks appeared in the ground floor slab of a new office building, constructed
over the top of a number of cellars, in a city centre site. These cracks were due to the
unsuitable nature of the fill used around the foundations. The contractor was engaged
to execute the works and did so according to the specification, contract drawings and
bills of quantities as prepared by the employer. Part of the works so specified was the
provision and placing of certain fill material to the level of the underside of the ground
floor slab, except in the basement area. There was provision in the contract for samples
of this fill material to be provided to the architect for testing and approval or rejection,
56
[1969] 1 AC 454. See Incorporated Owners of Greenville Gardens of Shiu Fai Terrace v Win-Tech Engineering
Co Ltd [2004] HKEC 902. See also Rutherford v Seymour Pierce Ltd [2010] IRLR 606.
57
[1969] 1 AC 480. See S&W Process Engineering Ltd v Cauldron Foods Ltd [2005] EWHC 153.
58
(1996) 59 ConLR 33. See also Wu Yin Fai v Ng Kam Tong [2004] HKEC 273, where it was remarked:
“At its lowest level, design involves the choice of appropriate materials and working methods, where not
specified in the contract. At another level, design includes determination of the detailed physical characteristics
of the building or works to comply with stated requirements or performance criteria.”

if necessary. The steel slag used by the contractor as fill materials expanded and caused
heaving of the floor and cracking of the reinforced concrete slabs. It was known to
specialist organisations that steel slag was not inert and should not be used in confined
spaces because of its tendency to expand; this was not, however, known to the parties
at the time of contracting. The employer contended that the steel slag supplied was not
of merchantable quality, since the steel slag was in fact unsuitable and the contractor
had effectively had a choice as to what material to use. The employer also contended
that the steel slag was not fit for the purpose, since it was clearly not suitable as fill in
confined spaces. The court observed that there were specifications as to the type of
hardcore material made by the employer’s architect and engineer which contained the
grading and sulphate content of fill material, and that any freedom of choice regarding
material selection was present only where the architect felt no further specification
was necessary. Further, the court was of the view that the architect was right to regard
himself as more expert than the contractor, who did not have any special material
selection experience, and that the contractor was indeed obliged to provide the hardcore
as specified. In the circumstances, the court held that the contractor was not liable.
Thus, where a person is contracted to do work and supply material, they give an implied 17.040
warranty that the material is fit for the purpose for which it is used, unless such warranty
is excluded by the circumstance of the contract. The critical question in relation to the
obligation of a contractor over the materials used is whether the circumstances show
that the employer does or does not rely on the contractor’s skill and judgment. As a
general rule, where the efficacy of a building or other object depends upon a designer,
it is the designer who may be expected to bear the responsibility for ensuring the
suitability of the components incorporated into it. Where designers rely on those who
have specialist skills, their reliance may show or suggest that they are abrogating that
responsibility in relation to matters within the purview of the specialist. For this, it is
necessary to consider the facts of each case, to determine just who relied on whom
and for what.
(iv) Circumstances where warranty of fitness may not apply

In situations where the employer instructs the contractor to use or obtain specified 17.041
materials, whether from a designated or nominated source, it would seem that the
employer is not relying on the skill and judgment of the contractor in selecting the
choice of such materials. Hence, the implied warranty of fitness that the materials are
fit or suitable for the purpose may have no operation and, when such materials turn out
to be unfit, the employer cannot hold the contractor liable for breach of such a warranty.
This is illustrated in the cases of University of Warwick v Sir Robert McAlpine59 and
Independent Broadcasting Authority v EMI Electronics Ltd and BICC Construction
Ltd.60 In respect of nominated subcontractors or supplies in most standard forms of
construction contract, there is no express acceptance by either the employer or the
contractor of liability for the quality of the nominated materials. The contractor
59
(1988) 42 BLR 1. See also Tung Kee Garden Horticulture Ltd v Wong Wang Tat [2007] HKEC 1540.
60
(1980) 14 BLR 1. See Lexmead (Basingstoke) Ltd v Lewis [1982] AC 225 and Incorporated Owners of Greenville
Gardens of Shiu Fai Terrace v Win-Tech Engineering Co Ltd [2004] HKEC 902. See also Wu Yin Fai v Ng Kam
Tong [2004] HKEC 273.

450 QUALITY
must however comply with the instructions of the engineer or the architect. He or
she must accept the nomination in respect of certain subcontractors and nominated
suppliers. No nominated subcontractor, however, can be employed if the contractor
makes reasonable objection to it or if, inter alia, the subcontractor will not enter
into a subcontract indemnifying the contractor against claims for negligence of the
subcontractor and for obligations in respect of the subcontract as those for which the
contractor is liable in respect of the main contract. These words seem to make it clear
that the contractor is accepting liability in respect of work done by the nominated
subcontractor. The situation with regard to nominated suppliers, however, is noticeably
different. There is no veto on the ground of the contractor’s reasonable objection, nor
on the ground of the nominated supplier refusing to indemnify the contractor. Thus,
for materials provided by nominated suppliers, they have been selected, without giving
the contractor any right to express views, by the employer’s own expert architect who
has decided that the nominated goods are suitable for the purpose and who has made
the preliminary arrangements with the suppliers either before or during the main
contract. The contractor is simply instructed to obtain its supplies from the nominated
supplier. All the circumstances of such nomination appear to exclude any reliance on
the contractor’s skill and judgment.
17.042 On the other hand, the warranty of good quality may still render the contractor liable
to the employer for materials supplied via nominated or designated subcontractors
or suppliers, notwithstanding that there has not been any lack of care or default on
the part of the contractor. The expression “good quality” means reasonably fit for the
purpose for which this material is ordinarily used. As a general rule in such contracts,
there is an implied warranty that the goods supplied will be of good quality, unless the
particular circumstances of the case show that the parties intended otherwise.
(v) Consideration of parties’ intentions

17.043 Therefore, to find the intention, one must consider the express terms of the contract
and any admissible surrounding circumstances. In Gloucestershire County Council
v Richardson (Trading As W J Richardson & Son),61 the contractor was employed
under a contract in RIBA form to erect a building and to supply concrete columns
to be ordered from suppliers nominated by the employer. The columns so supplied
were examined and passed by the architect and the consulting engineers. When
supplied, the columns had defects, which were not detectable but which became
manifest soon after some of the columns were incorporated in the building. Faced
with this, the architect gave instructions to stop all work on the perimeter of the
columns and, in response, the contractor gave notice of termination on the ground
that the work had been delayed for more than one month by reason of the architect’s
instructions. The architect on behalf of the employer authorised the contractor to
accept the supplier’s quotation, which substantially limited the suppliers’ liability
in the event of the columns being defective. The employer sued the contractor for
damages for wrongful repudiation. The court held that the contractor was entitled
to terminate the contract in the circumstances as it did. It was observed that the
61
[1969] 1 AC 480.

architect indeed nominated the supplier to provide the columns upon the terms,
which he instructed the contractor to accept, that the supplier should not be liable
for any delays, defects or deficiencies whatever. Hence, the court was of the view
that it is difficult to see how in law or as a matter of common sense or justice the
contractor could be held liable upon some implied obligation for the failure of
the supplier to deliver the goods. It should also be highlighted that, in this case,
the design, materials, specifications, quality and price of the columns were all
fixed without involvement of the contractor and the contractor did not even have
a right to object to such a nomination, and hence, to insist on a proper indemnity.
In contrast, in Young & Marten Ltd v McManus Childs Ltd,62 in similar factual
settings, it was said that, had the parties been aware that the tile manufacturer
would only sell on terms which excluded a warranty of quality on its part, that
would have been sufficient to exclude the implications of a warranty between the
contractor and the subcontractor. The reason for this must be that the contractor
would understand that, in such circumstances, the subcontractor would not itself
give a warranty of quality. No warranty would therefore be implied notwithstanding
that the attitude of the manufacturer would of itself make the contractor the more
anxious to obtain the warranty of his subcontractor.
Another illustration of this can be found in the Australian case of Helicopter Sales 17.044
Pty Ltd v Rotorwork Pty Ltd,63 which concerned a helicopter lost by reason of a
latent defect in a bolt which had occurred in the manufacture of the bolt. The bolt
had been manufactured by the manufacturer of the helicopter, and had been fitted
in the course of the regular servicing of the machine by a wholly owned subsidiary
of the owner. It was a term of the servicing contract that in maintaining the aircraft,
the service company would conform to the civil aviation department requirements,
inter alia, that replacement parts used would only be obtained from the manufacturer’s
authorised distributor. The service contract required the service company to obtain
from the manufacturer’s authorised distributor in Australia a duly certified release note
in respect of all such replacement parts. Such a note had been obtained in respect of
the parts, which included the defective bolt, stating that the goods had been inspected
and tested and that they complied with specification. It was accepted that the service
company would not have been able to carry out the scientific tests necessary to ensure
the absence of latent defects in replacement parts supplied to it, and that it had no
means of ensuring compliance with the manufacturer’s design requirements as these
were confidential documents not disclosed by the manufacturer. The owner sued the
service company, which joined the manufacturer’s authorised distributor as a third
party. It was held that there was no warranty of quality in these circumstances in
relation to the bolt.
It may be noted that, regarding repair or maintenance contracts, it was also 17.045
observed by Lord Reid in Young & Marten v McManus Childs64 that less cogent
62
[1969] 1 AC 454.
63
(1978) 48 ALJR 390.
64
[1969] 1 AC 454. See also Wai Sing Engineering Co v Walsunion Industries Ltd [2003] HKEC 11; May Tik
Decoration Co Ltd v Ronacrete (Far East) Ltd [2009] HKEC 670, and Secretary for Justice v Chong Kui (Group)
Co Ltd [2009] HKEC 190.

452 QUALITY
circumstances may be sufficient to exclude an implied warranty of quality where

the use of spare parts is only incidental to what is in essence a repairing operation
where the customer’s main reliance is on the skill of the contractor, rather than in
a case where the main element is the supply of an article, the installation of which
is merely incidental.
(c) Workmanship
(i) Obligation to exercise proper skill and care

17.046 In construction contracts, whether as stated in the form of contractual provisions or
not, the contractor is subject to the usual obligations to do the work with all proper
skill and care. This obligation is sometimes expressed as one to do the work in a good
and workmanlike manner.
(ii) Distinction from warranty of materials

17.047 The comparison between the warranty as to workmanship with that as to materials was
considered in the Scottish case of Greater Glasgow Health Board v Keppie Henderson
& Partners.65 A distinction was made between a warranty as to workmanship, where
there is an implied warranty that due skill and care will be used, and a warranty as to
materials, that they are free from any defect and are of the requisite quality. Thus, the
warranty as to the materials extends to latent defects that due care and skill would not
have detected.
17.048 The workmanship obligation can therefore be deemed to be an agreement to supply
services, whereas the supply of materials is related to the sale of goods, and therefore
is subject to a fitness for purpose implied term.
(iii) Determination of degree of skill required

17.049 The standard of workmanship may be defined in considerable detail in the contract
with reference to the industry codes, guides and standards. In deciding what degree of
skill is required, the court can take into account all the circumstances of the contract. In
Harmer v Cornelius,66 the warranty as to workmanship given by a man employed to do
work which requires skill was that he undertook to possess and to exercise reasonable
skill in the art he professes.
17.050 Thus, the obligation is one to use the degree of skill that is to be expected from
professionals carrying out the work they have undertaken to do. In Samake Cons-
truction Co Ltd v Incorporated Owners of Lai Wan Building,67 for instance, in a job
for removing old drains, holes, old spikes and brackets were left on the wall from
65
(1989) SLT 387. See Artlane Design Consultants Ltd v Chan Wen Mee May [2009] HKEC 1142.
66
(1858) 5 CB (NS) 236.
67
[2001] HKEC 1509. See also of Bolam v Friern Barnet Hospital Management Committee [1957] 1 WLR 582;
Bolitho (Deceased) v City and Hackney Health Authority [1998] AC 232; and Allied Trust Bank Ltd v Edward
Symmonds (1994) 22 EG 116.

where the old pipe work used to be. In finding that the work was not carried out
in a workmanlike manner, the court took into account the situation that, if the old
spikes were not removed, they would rust and cause damage to the concrete, leading
to structural damage to the building caused by the loosened and exposed concrete,
thereby giving a reason for the issue of a building order.
(iv) Duty to warn of design defects

The duty as regards workmanship may be extended to a duty to warn of design defects 17.051
of which the contractor is or ought to be aware as in Lindenberg v Canning.68 In that
case, the contractor was engaged orally to carry out preliminary demolition works
in a block of flats and was given a plan prepared by the developer’s surveyor. The
plan erroneously showed the nine-inch internal walls, including a chimneybreast, as
non-load bearing and the contractor started to demolish these walls without propping
the ceiling. The developer contended that the contractor was in breach of an implied
contractual term in the agreement that he would do the work with skill and care and
in a good and workmanlike manner, and that it was negligent to demolish obviously
load bearing walls without propping. The court held that it was an implied term of
the contract that, in carrying out its work, the contractor should exercise the care to
be expected of an ordinary competent contractor and that so obviously an important
structural feature as the chimney breast wall being indicated as non load-bearing
should by itself have caused the contractor to have grave doubts about the plan. Thus,
where the contractor should have realised that the nine-inch walls were load bearing, it
should have proceeded with the very greatest caution or, at the very least, should have
raised doubts with the developer’s surveyor. The court then held that the contractor had
25 per cent liability.
1In Barclays Bank v Fairclough Building Ltd,69 a contractor who sprayed asbestos 17.052
roofs with high pressure hoses, contaminating a building, notwithstanding that this
happened under the direct supervision of the employer’s architects, was found in
breach of a contractual obligation to do the job in a workmanlike manner for failing
to use due care and skill to appreciate the inadequacy of the method and to advise
and warn.
(v) Production of final result

Certainly, under the warranty as to workmanship, a contractor is expected to carry 17.053
out the work in a way that complies with the building regulations and safety laws.
This builds on the general theme that, unless the contract expressly stipulates to the
contrary, the contractor is entitled to choose its own methods of working; the duty of
the engineer or architect is normally confined to stipulating the final permanent result
required.
68
(1982) 62 BLR 147. See also Plant Construction Limited v JMH Construction Services Limited [2000] BLR 137.
69
(1995) 76 BLR 6.

454 QUALITY
3. DEFECTS AND ACCEPTANCE

(a) Defects
(i) Generally
17.054 A defect generally means that some of the work or materials fail to follow or comply
with the stipulated requirements of the contract. By definition, a defect is a breach of
the contract. Obviously, subject to the limitation legislation, the contractor is liable for
the defective work done by it even after the completion of the work. Most construction
contracts confer a power on the engineer or architect to direct the removal and replacement
of defective work. Also, common standard forms of construction contracts do further
provide for the engineer or architect to order the testing and inspection of work carried
out as the work progresses. Thus, the fact that such defective work has been covered up is
not material, save as to the liability for the expenses concerned. A defect here often refers
to the symptom that surfaced rather than the cause that has to be investigated.
(ii) Principle of complete performance

17.055 The general principle at common law is that a contractor, who contracts to carry out work
for a price, is required to complete the work before the entitlement to pay arises.70 There
is thus an obligation for entire and complete performance. The doctrine of substantial
performance evolves into the concept of substantial completion or practical completion
in standard forms of construction contracts, which in turn ties itself to the commencement
of the maintenance period or, now more commonly known, the defects liability period. It
is usual to further link the releases of retention money to the final discharge of the repair
obligation at the expiry of that period. Also, either expressly or impliedly, the liability to
pay for work done by common sense is necessarily confined to such work that is properly
carried out in accordance with the contract, affording a defence by way of set-off or
counter-claim for the expenses or damages consequential upon the repair. The exact
wording used to define what defects are to be made good or whether the contractor is
entitled to be reimbursed for defects not caused by its breach differs among the standard
forms of contracts and each case has to be looked at on its own.
(iii) Defects detected at substantial completion

17.056 Defects detected at the time of substantial completion or practical completion, are
usually listed out in the defects list that accompanies the certificate of substantial
completion or practical completion. There is no definition of these terms in the
standard forms of construction contracts. Yet, it should be noted that, as in Hoenig v
Issacs,71 employers cannot refuse to pay contractors merely because a few defects and
omissions are left over. In considering this, it is normal to take into account the purpose
70
Ibmac v Marshall (Homes) (1968) 208 EG 851 and Sumpter v Hedges [1898] 1 QB 673.
71
[1952] 2 All ER 176. See also San Fai Construction & Decoration Engineering Ltd v Tsang Fuson [2008] HKEC
209, where, in relation to the construction of a village house, it was remarked:
“Imperfection in the works, assuming that it existed, does not necessarily entitle the employer to refuse to pay
the contractor. In an action on a construction contract for a lump sum payable on completion, the employer
cannot repudiate liability to pay on the ground that the work, though substantially performed, is in some
respects not in accordance with the contract. The employer is liable to pay subject to any deduction for cost of
rectifying defects and omissions.”

DEFECTS AND ACCEPTANCE 455
of the work overall, the nature and extent of the defects and the costs and difficulties
for rectifying the defects, as illustrated in the cases of Kiely & Sons v Medcraft,72
Bolton v Mahadeva73 and Technistudy Ltd v Kelland.74 During the maintenance period
or defects liability period, the employer is usually entitled to call for the contractor to
physically return to the site, in order to repair or to make good defects that surface, at
the cost of the contractor.
(iv) Defects detected prior to substantial completion

If defective work or materials are detected prior to the completion or handover, the 17.057
contractor can be required to make good such defects. The concept of temporary
disconformity mentioned in P & M Kaye & Hosier v Dickinson75 has been critically
questioned in subsequent cases: Lintest Builders Ltd v Roberts76 and Surrey Health
Borough Council v Lovell Construction Ltd.77 Indeed, in Sutcliffe v Chippendale
& Edmondson (A firm),78 it was observed that a contractor who continued with the
defective work after notice could be held to have evinced an intention not to be bound
by the contract, constituting a repudiation that entitled the employer to bring an end
to the contract.
Notwithstanding the duty to rectify on the part of the contractor, in everyday situations 17.058
in construction works the option to demolish and rebuild may not be realistic or
acceptable to the parties. Defects with adverse financial or time implications to a
project may sometimes be abused as a bargaining factor. Hence, in many standard
forms of construction contracts, there are express provisions in the contract to equip
the employer with certain powers to deal with the situation. These include the powers
to stop work and investigate; to order further testing and inspection; to direct the
removal or replacement of defects; to vary the work; to accept the defective work with
an appropriate adjustment in the contract price; and to declare the work as substantially
completed leaving the defects to be made good during the maintenance period or
defects liability period. Also, there may be other justifications for using express
provisions in the contract to deal with the situation and outline consequences when
defects are found. For instance, in Fairclough Building Limited v Rhuddlan Borough
Council,79 it was held that, following the termination of a nominated subcontractor’s
employment in a contract in the JCT 1963 Standard Form, the cost of putting right the
nominated subcontractor’s defective work should have been borne by the employer
and, in the absence of express provisions to that effect, the employer could not charge
72
(1965) 109 SJ 829. See also H Dakin & Co v Lee [1916] 1 KB 566.
73
[1972] 1 WLR 1009. See also Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 and McGlinn
v Waltham Contractors Ltd (2007) 111 ConLR 1.
74
[1976] 1 WLR 1042. See also Giles (Electrical Engineers) Ltd v Plessey Communications Systems Ltd (1984)
29 BLR 21.
75
[1972] 1 WLR 146. See also Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 and McGlinn v
Waltham Contractors Ltd (2007) 111 ConLR 1.
76
(1978) 10 BLR 120. See also Guinness Plc v CMD Property Developments Ltd (formerly Central Merchant
Developments Ltd) (1995) 76 BLR 40.
77
(1988) 42 BLR 30. See W Lamb Ltd (t/a Premier Pump & Tank Co) v J Jarvis & Sons Plc (1998) 60 ConLR 1.
78
(1971) 18 BLR 149. See also Rice v Great Yarmouth BC The Times, 26 July 2000; Surrey Heath BC v Lovell
Construction Ltd (1988) 42 BLR 25; Adkin v Brown [2002] NZCA 59; and Eu Asia Engineering Ltd v Wing
Hong Contractors Ltd [1993] HKLY 839.
79
(1985) 30 BLR 26. See CIB Properties Ltd v Birse Construction Ltd [2005] BLR 173.

456 QUALITY
the contractor with the cost of the remedial work. In that case, the contractor objected
to the renomination of the subcontractor, inter alia, on the ground that the remedial
work left over by the originally nominated subcontractor had not been covered. The
JCT 1980 standard form has been amended to make it clear that the employer is
entitled to a credit from the main contractor in respect of sums certified and paid for
work, which subsequently proves to be defective, in such situations.
(b) Acceptance
(i) Periodic checks and approval of work

17.059 As the work progresses, the employer, via the engineer or the architect, may be asked
from time to time to approve the further proceeding of the work and to accept the work
carried out. Interim payment is also effected for work carried out at designated intervals.
17.060 The first principle is that the employer does not necessarily accept the work done merely
by resuming occupation or by continuing in possession of the land, as in Munro v Butt.80
The position seems to be the same notwithstanding that the possession is made after
there had been an objection to the materials and workmanship at the time the work was
in progress. Yet, in special circumstances, the conduct of the employer may amount to
an acceptance of the work done and this will give rise to an obligation on its part to pay.
In the Canadian case of Tannenbaum & Downsview Meadows Ltd v Wright-Winston
Ltd,81 the builder of a housing project was entitled to terminate a contract with the owner
of the adjoining land since the owner failed to build a pumping station to serve both the
properties. Instead, the builder built a pumping main that cut into the sewer constructed
by the adjoining owner. The court observed that, though the owner did not perform
an essential term of the contract thus entitling the builder to terminate the contract,
the obligations under the contract were not discharged until the builder terminated the
contract. In the circumstances, the court held that, in accepting the benefit of such work,
the builder was liable to pay the agreed sum less the cost of the pumping station.
(ii) Liability for defects extends past receipt of full payment

17.061 The employer is certainly not prevented from complaining of defects in the work even
though the price has been paid in full, as in Davis v Hedges.82 In Mondel v Steel,83 a
80
(1858) E&B 738. See also Lau Leung Wood v Standard Oil Co of New York (1906-7) 2 HKLR 192 and Cleveland
Bridge UK Ltd v Multiplex Constructions (UK) Ltd [2010] EWCA Civ 139.
81
(1965) 49 DLR (2d) 386.
82
(1871) LR 6 QB 687. See Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd (2006) 107 ConLR
1 and Mellowes Archital Ltd v Bell Projects Ltd (1998) 87 BLR 26.
83
(1841) 8 M&W 858. See Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2009] HKEC 1115
where it was remarked:
“…where an action was brought for an agreed price of a specific chattel sold with a warranty or a work which
was to be performed according to contract, the defendant was allowed to plead by way of defence in reduction
of the claim that the chattel, by reason of non-compliance with the warranty, or the work in consequence of the
non-performance of the contract, was diminished in value.”
See also Sports Technology (Asia) Ltd v Claridge House Ltd [2006] HKEC 954; Safeway Stores Ltd v
Interserve Project Services Ltd (formerly Tilbury Douglas Construction Ltd) (2005) 105 ConLR 60; Henry Boot
Construction Ltd v Alstom Combined Cycles Ltd [2005] BLR 437; Multiplex Constructions (UK) Ltd v Cleveland
Bridge UK Ltd (2006) 107 ConLR 1; and Econet Satellite Services Ltd v Vee Networks Ltd (formerly Econet
Wireless Nigeria Ltd) [2006] 2 All ER (Comm) 1000.

DEFECTS AND ACCEPTANCE 457
ship owner was allowed both to plead a diminution of the price for defective work in
an action brought by the ship builder and to sue the ship builder separately for loss of
the use of the ship during repairs. In Moss v London & North West Railway Co,84 the
payment of 90 per cent of the price did not create an estoppel against the deduction for
the cost of the defective work. In Whitaker v Dunn,85 the mere knowledge of defects at
the time when the work was done did not prevent the employer from later complaining
of the defects.
Thus, even if the employer has accepted the work and the liability to pay arises, it may 17.062
claim a set-off or bring a separate action for consequential damages in respect of the
defective work. It should be noted that, in most construction contracts, the work is
sometimes expressly to be done to the satisfaction of the employer, or the engineer or
architect on its behalf.
In the classic case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) 17.063
Ltd,86 it was held that interim payment and certification did not impose a finality, even
for the interim period, as to acceptance of the work done. Also, the interim valuation
of work done has to mean a valuation of the work properly done. The same principle
applies between a contractor and a subcontractor, as in Acsim (Southern) Ltd v Danish
Contracting and Development Co Ltd.87
(iii) Defective materials approved by the employer

Construction contracts commonly provide that materials or samples have to be 17.064
submitted for approval before the work can proceed on a full scale. Where the approval
is given, the employer may be bound by it if the submitted materials or samples do not,
to the knowledge and notice of the employer or the engineer or architect, comply with
the specified requirements. In Adcock’s Trustee v Bridge Rural District Council,88 the
contractor was not liable for the bricks used for manholes, supplied in conformance
with the approved sample and specifications, that failed to keep out water. In this case,
no defect of a concealed type is concerned.
The nature of power to approve differs with the actual wording used in the contract. As 17.065
illustrated in Leedsford Ltd v City of Bradford,89 contract documents, and particularly
specifications, frequently reserve the right to approve the use of alternative materials
by the engineer or architect. An insistence on the use by the contractor of specified
materials and a consequent failure to approve alternatives generally would not entitle
the contractor to recover the additional cost incurred where the specified materials
are more expensive than the proposed alternative. The specifications in Leedsford
84
(1874) 22 WR 532.
85
(1887) 3 TLR 602. See H Dakin & Co v Lee [1916] 1 KB 566 and Forrest v Scottish County Investment Co Ltd
1914 2 SLT 348.
86
[1974] AC 689. See Vickers v Lynn & Jones [1981] CLY 188; Henry Boot Construction Ltd v Alstom Combined
Cycles Ltd [2005] 1 WLR 3850; and Pilecon (Hong Kong) Limited v Mightyton Limited [1993] 2 HKLR 435. See
also W&JR Watson Ltd v Lothian Health Board 1985 SC 352 and Wong Chuk Kin v Millennium Engineering Ltd
[2007] HKEC 1521.
87
(1989) 47 BLR 55. See Mellowes Archital Ltd v Bell Projects Ltd (1998) 87 BLR 26; Macob Civil Engineering
Ltd v Morrison Construction Ltd [1999] BLR 93; and Multiplex Constructions (UK) Ltd v Cleveland Bridge UK
Ltd (2006) 107 ConLR 1.
88
(1911) 75 JP 241. See Department of National Heritage v Steensen Varming Mulcah (1998) 60 ConLR 33.
89
(1956) 24 BLR 45.

458 QUALITY
Ltd v City of Bradford provided for the use of artificial stone to be obtained from a
designated source or “other approved firm”. It was held that these words entitled the
architect to insist on the named source without giving reasons. In J Crosby & Sons Ltd
v Portland Urban District Council,90 the specification provided that the pipes were to
be manufactured by either one of two named sources. The engineer insisted on one
whereas the contractor wished to supply from another. It was held that the wording
conferred an option on the contractor to choose the pipe it preferred and an insistence
by the engineer on one of the named sources amounted to a variation.
17.066 Yet, in respect of approval of defective work, it seems that no issue or waiver or
estoppel arises in general unless the approval is an express one and is made with full
knowledge of the defect.
4. MAINTENANCE AND CERTIFICATE

(a) Scope of maintenance period
17.067 The maintenance period or defects liability period starts on substantial completion or
practical completion, when the employer enters upon the site and takes possession. It
has the accompanying effects of terminating any further accrual of liquidated damages
for delayed completion and of releasing in full or in part the retention money. Such
a period comes to an end upon the issue of a certificate by the engineer or architect
in accordance with the contract, certifying the making good of defects has been
completed.91
(b) Whether the certificate is considered

conclusive as to acceptance
17.068 The effect of the certificate, whether it is termed maintenance certificate or final
certificate,92 has been the subject of many cases. The gist of the dispute is whether the
issue of that certificate has conclusive effect as to the acceptance and satisfaction of
the employer so far as the quality of the work is concerned.
17.069 In East Ham Borough Council v Bernard Sunley & Sons Ltd,93 the contract was in
the RIBA 1950 edition standard form and it was provided that, upon expiration of the
defects liability period or upon completion of making good defects, the architect was
to issue a final certificate of the value of the works executed by the contractor and such
final certificate, save as regards all defects and insufficiencies in the works or materials
that a reasonable examination would not have disclosed, was to be conclusive evidence
90
(1967) 5 BLR 121. See also How Engineering Services Ltd v Lindner Ceilings Floors Partitions Plc (1999) 64
ConLR.
91
Subject to the provision in the contract, a maintenance certificate issued is usually not conclusive evidence on
the quality of the work completed. See however Loundonhill Contracts Limited v John Mowlem Construction
Limited (2001) 80 ConLR 1.
92
See Wong Chuk Kin v Millennium Engineering Ltd [2007] HKEC 1521 regarding interim certiticates.
93
[1966] AC 406. See Cantrell v Wright & Fuller Limited [2003] BLR 412.

TEMPORARY WORK AND PERMANENT WORK 459
as to the sufficiency of the said works and materials. The stone panels fixed to the
exterior walls fell off owing to defective fixing some two years after the architect
issued the final certificate. It was held that the final certificate was conferred with a
special provision for a special purpose and, as such, the final certificate was conclusive
and could not be reopened save in the exceptional circumstances as provided in the
contract. Subsequent to this, the RIBA form was amended to the form as it appeared
in the 1963 edition, with added exceptions. In P & M Kaye Ltd v Hosier & Dickinson
Ltd,94 the contract provided that the final certificate was to be conclusive evidence
in any proceedings arising out of this contract and it was held to have the effect of
preventing any further legal action, including the legal proceedings started long before
the certificate was issued.
In Hong Kong, the same question came before the Court of Appeal in Attorney- 17.070
General of Hong Kong v Wang Chong Construction Co Ltd.95 In this case, the
contractor was engaged for the construction of four blocks of a housing estate,
which were completed in 1976. The maintenance certificate was issued in June 1977.
In 1988, defective cement was found following a structural investigation of the
blocks. Clause 105 of the contract provided that the maintenance certificate could not
be a bar to any claim arising from an obligation under the contract which remained
unperformed by the contractor; cl 117(4) of the contract was drafted in the widest
possible terms and indicated that it was the intention of the parties that the arbitrator
would have full power to open up and review any decision of the architect, including
that contained in the maintenance certificate. Under the circumstances, it was held
that the court would only come to a view that the maintenance certificate was
conclusive if that was set out in the contract in the clearest possible terms and the
contract in issue did not do so.
Yet, as suggested in Adcock’s Trustee v Bridge Rural District Council,96 once a 17.071
contractor has become entitled to a certificate from the engineer or the architect that
the work has been executed in conformance with specifications, the onus then rests on
the employer to show that defects have emerged.
5. TEMPORARY WORK AND PERMANENT WORK

(a) Definition of temporary works
As regards permanent work, there are normally detailed requirements on materials 17.072
and workmanship that the contractor needs to meet. Yet, work under a construction
contract usually means all the work and things to be executed or supplied by the
contractor under the contract and this includes temporary works. Temporary works
94
[1972] 1 All ER 121. See Johnston v WH Brown Construction (Dundee) Ltd [2000] BLR 243 and Wharf
Properties Ltd & Another v Eric Cumine Associates (1986) 29 BLR 106. See also AMN Group Ltd v Gilcomston
North Ltd 2008 SLT 835.
95
[1991] HKLY 160. See Cantrell v Wright & Fuller Ltd [2003] BLR 412 and Wong Chuk Kin v Millennium
96
(1911) 75 JP 241. See Department of National Heritage v Steensen Varming Mulcahy (1998) 60 ConLR 33.

460 QUALITY
mean those works that the contractor needs to carry out in order to build the permanent
work. For example, in order to lay a drain under the road, the contractor may need to
erect temporary support to the surrounding soil so as to enable the work to be carried
out. Depending on the nature of the work, temporary work can involve very costly
operations.
17.073 There are, in some cases, restraints imposed by the specifications or drawings,
prohibiting the use of individual methods of construction by the contractor. These
restraints may be required due to safety or environmental considerations.
(b) Contractor responsible for the design of

temporary works
17.074 Unlike the permanent work in traditional forms of construction contracts, the contractor
is responsible for the design of the temporary works. The contract provisions may
call for submission of the design for temporary works, usually in the form of design
calculations or method statements, to the engineer or the architect. There may be
an added requirement that such design for temporary work is first to be vetted and
checked by an independent professional prior to its submission.
17.075 In most standard construction contracts, it is the contractor who must take full
responsibility for the adequacy, stability and safety of all site operations and methods
of construction. As such, the contractor is its own master regarding temporary works.
The employer is normally concerned with the output of the permanent work required
in the contract and, save as otherwise provided in the contract, neither it, nor the
engineer or architect on its behalf, bears further responsibility toward the contractor
to assist in the actual mode and method of carrying out the work. In the Canadian
case of City of Moncton v Aprile,97 the contractor was required to lay a line of pipes
with proposed working methods to be submitted for approval. After failing twice, the
contractor refused to continue working without specific instructions from the engineer.
It was held that the employer had validly terminated the contract without any duty to
give such instructions.
(c) Impossibility
17.076 The contractor is responsible for how the construction process is carried out. In the
absence of a specification telling the contractor how to do the works, it decides how
they are executed. Generally, in undertaking the contract, the contractor warrants
that the works can be built. The contractor takes on responsibility for the design
of the temporary works. In other words, it designs those works that are not to be
permanent, but which are necessary to put in place the permanent works. Once the
contractor has determined that it can carry out the works and has warranted that it
97
(1980) 29 NBR 63. In this case, the contract provided that the contractor would bear full responsibility for the
adequacy of methods of excavation. It was also held that, where plans and a specification for the execution of a
certain work were prepared for the use of those who were asked to tender for its execution, the person asking for
tenders did not enter into any implied warranty that the work would be successfully executed according to such
plans and specifications.

TEMPORARY WORK AND PERMANENT WORK 461
will do so by a method that is its responsibility, there is no room for the proposition
that the engineer or architect warrants the viability of the design by the successful
contractor.
Since the contractor undertakes to carry out and complete the works, in circumstances 17.077
where it encounters difficulties in executing the permanent design, its warranty of
buildability may cause it severe hardship: the contractor is contractually obliged to
complete. From time to time, there are arguments advanced by contractors that the
defects that surfaced were due to the faulty design or impossibility of the specifications.
In AMF International v Magnet Bowling Ltd,98 it was remarked that:
“It is the function and right of the builder to carry out his own building
operations as he thinks fit. The architect, on the other hand, is engaged as the
agent of the owner for whom the building is being erected, and his function is,
inter alia, to make sure that, in the end, when the work has been completed,
the owner will have a building properly constructed in accordance with the
contract.”
In Oldschool v Gleeson,99 it was expressly remarked that the provision of temporary 17.078
support and the mode of demolition and excavation in that case were matters for which
the contractor, and not the consulting engineers, was responsible.
If it is physically impossible for the contract to be performed at the time when the 17.079
contract is entered into, the contractor may be excused from performance. However,
the contractor may still be liable in damages if it has warranted the possibility of the
work or if it has positively and absolutely contracted to do the work. For example, in
Clifford v Watts,100 the contract involved the excavation of a minimum of 1,000 tons of
clay per annum at a stated rate. Although it was impossible to extract that amount, the
court was prepared to imply a term allowing for a pro rata calculation of this rate, as
there was no reservation that a minimum payment would be made irrespective of the
quantity of clay present.
98
[1968] 1 WLR 1028. See also Linfield Ltd v Taoho Design Architects Ltd & Brooke Hillier Parker (Third Party)
[2006] HKEC 547.
99
(1976) 4 BLR 103. See G Percy Trentham Ltd v Beattie Watkinson and Partners 1987 SLT 449. See however Hart
Investments Ltd v Fidler (t/a Terence Fidler Partnership) [2007] BLR 526.
100
(1870) LR 6 QB 115. It was remarked by Mr Justice Willes:
“Where the performances of the thing covenanted to be done is not made impossible by the law of this country,
the case falls within the principle laid down in the leading case of Paradine v Jane (1647) Aleyn 26: 82
ER 897 … where the law creates a duty or charge, and the party is disabled to perform it, without any default
in him and had no remedy over, there the law will excuse him; but where the party by his own contract creates a
duty or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable
necessity, because he might have provided against it by his contract; and therefore if the lessee covenant to
repair, though it be burnt by lightning or thrown down by enemies, yet he ought to repair it. Where a thing
becomes impossible of performance by the act of the third person, or even by the act of God, its impossibility
affords no excuse for its non-performance: it is the defendant’s own folly that has led him to make such a
bargain without providing against the possible contingency.”
See also Hickie v Lowe, Bingham and Matthews, Liquidators of the Affairs of B Beilken, An Alien Enemy (1915)
10 HKLR 53.

462 QUALITY
(d) Doctrine of frustration
17.080 Where, during the performance of a lawfully entered contract, there are changes so
fundamental that the nature of the contract is altered, the contract may be terminated
by the operation of the doctrine of frustration. The classic decision in this area is in
the case of Davis Contractors v Fareham.101 In that case, the contract was for the
building of 78 houses at a fixed price within 8 months, but the contractor was hit with
unanticipated shortages of labour and materials. It took 22 months for the work to be
completed. It was held that these facts did not amount to a frustration of the contract
and the contractor had to bear all the losses. Lord Radcliffe said:
“[Frustration] occurs wherever the law recognises that without default of either
party a contractual obligation has become incapable of being performed because
the circumstances in which performance is called for would render it a thing
radically different from that which was undertaken by the contract. Nob haec in
foedera veni. It was not this that I promised to do.”
17.081 In deciding whether there is frustration, it is not simply hardship or inconvenience

or material loss that calls into play the principle of frustration. What is needed is a
significant change in the obligation such that the thing undertaken would, if performed,
be a different thing from that which was contracted for. This is, as noted in Pioneer
Shipping v BTP Tioxide (The Nema),102 a question of law and the ultimate analysis is
one of degree. In McAlpine Humberoak v McDermott International Inc (No 1),103 it
was held that the issue of a large number of revised drawings, which called for follow
up with technical queries, did not have the effect of frustrating a steel fabrication
contract that provided time and costs compensation for such changes. This is because
of the general principle that an event cannot frustrate the contract if the express terms
of the contract indicate that such an event has been contemplated and provided for by
the parties. Injustice is a prerequisite of frustration and there will be no injustice if the
parties are held to the contract. Yet, as in Wong Lai Ying v Chinachem Investment Co
Ltd, 104 notwithstanding such express terms, the court may form the view that the event
is so abnormal in fact or in nature that it falls outside the contemplation of the parties.
In that case, the frustrating event was a landslip above the building site, resulting in
debris from collapsed buildings and many hundreds of tons of earth obliterating the
building works already completed. The express term in issue was a general clause
and could not be construed as making provision for the possibility of this particular
unforeseen contingency. In the Australian case of Codelfa Construction Proprietary
Ltd v State Rail Authority of New South Wales,105 the construction of an underground
101
[1956] AC 696. In McAlpine Humberoak Ltd v McDermott International Inc (No 1) (1992) 58 BLR 1, it was held
that a contract was not frustrated by events known to the parties before it was signed and for which the contract
made express provision.
See Gold Group Properties Ltd v BDW Trading Ltd (formerly Barratt Homes Ltd) [2010] BLR 235.
102
[1982] AC 724.
103
(1992) 58 BLR 1. See also John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2002] BLR 393.
104
[1980] 1 HKLR 1. See E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400. See also Fu Kai Wa v Luk Ngai
Ling [2006] HKEC 1505.
105
(1989) 149 CLR 337.

DAMAGES FOR DEFECTIVE WORKS AND OUTSTANDING WORKS 463
railway was so noisy that third parties successfully applied for an injunction restraining
evening and Sunday work. The court was of the view that performance by means of
a two-shift operation, necessitated by the grant of the injunctions, was fundamentally
different from that contemplated by the contract and, therefore, the contract had been
frustrated.
(e) Unexpected difficulty no excuse for non-performance
However, generally speaking, unexpected difficulty or expenses in carrying out the 17.082
work cannot be an excuse for non-performance. In McDonald v Mayor of Workington,106
it was held that the contractor was not excused for its ignorance of defects in the
ground, resulting in the work not being able to be performed in the manner set out in
the invitation to tender. The contract is not affected by the unanticipated and wholly
abnormal rise or fall in prices, unless, as illustrated in Staffordshire Area Health
Authority v South Staffordshire Water Works107 and British Movietonews Ltd v London
& District Cinemas Ltd,108 they are of such gravity as to frustrate the contract.
Thus, if the method of constructing the works proves impossible, the contractor has 17.083
to adopt another method and is not entitled to abandon the contract nor demand
additional payment. This is on the basis of the contractor’s agreement to carry out and
to complete the work and that the employer is not generally taken to have warranted
that the design is practicable.
6. DAMAGES FOR DEFECTIVE WORKS AND

OUTSTANDING WORKS
(a) Cost of repair
In construction contracts, the measure of damage for defective works, whether under 17.084
the common law or the contractual provisions, is normally the cost of making good
and repair. If this is unreasonably high, a lower measure of diminution of value may
sometimes be adopted. There are other consequential damages, such as compensation
for loss of use or liabilities incurred toward third parties.
Following the classic case of Ruxley Electronics and Construction Ltd v Forsyth,109 the 17.085
measure of the loss will then be the cost of repairs, if it is reasonable to repair, or the
depreciation in the market value if it is not. In that case, a swimming pool designed
with a maximum depth of 7 feet 6 inches was built to a maximum depth of 6 feet
9 inches only. The court recognised that the purpose of damages for breach of contract
106
(1893) 9 TLR 230. See Nash Dredging Ltd v Kestrel Marine Ltd (Interest on Contract) 1986 SLT 62.
107
[1978] 1 WLR 1387. See Bosie Cascade Canada v The Queen In Right of Ontario (1979) 106 DLR (3d) 501.
108
[1952] AC 166. See Gold Group Properties Ltd v BDW Trading Ltd (formerly Barratt Homes Ltd) [2010] BLR
235.
109
[1996] AC 344. See Pamax Ltd v Cross Max Interiors Ltd [2008] HKEC 532; Jessleton Ltd v Joseph Sy &
Associate Ltd [2001] HKEC 1442; and Interform (Interior & Marble) Co Ltd v Far East Wagner Construction
Ltd [1999] HKEC 1209. See also GW Atkins Ltd v Scott (1980) 46 ConLR 14.

464 QUALITY
was to compensate the employer for the loss that had been suffered as a result of the
breach of contract by the contractor. As to the question of the measure of such a loss,
the court observed that it would be unreasonable to carry out remedial work and, hence,
the difference in value became the primary measure. Thus, for defective works, as
approved by Interform (Interior & Marble) Co Ltd v Far East Wagner Construction
Ltd,110 a plaintiff is entitled to the reasonable cost of having the remedial work done
if, in all the circumstances, it is reasonable for the plaintiff to insist on having the
work done and he or she has actually had the work done, undertakes to have it done
or shows a sufficient intention to have the work done if he or she receives damages on
this basis. The case of C R Taylor v Hepworths111 is an example of when the employer
has no prospect or intention of rebuilding. Also, in George Fisher Holdings Ltd v Multi
Design Consultants Ltd,112 the employer is entitled to recover the diminution in value
that existed, notwithstanding that the necessary remedial works had been successfully
carried out.
(b) The employer has a duty to mitigate loss
17.086 The employer has a duty to mitigate the loss. Thus, in case of outstanding remedial
work, there seems to be an ordinarily implied duty on the part of the employer to give
a willing and ready contractor an opportunity to rectify such defects or to carry out
the remaining work. Where the employer is able to reduce the loss by taking prudent
steps following the breach, this will be taken into account in assessing damages, as
in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric
Railways Co of London Ltd.113
(c) The employer is entitled to recoup additional costs
17.087 In contrast, where there is work left outstanding and incomplete by the contractor, the
employer is normally entitled to the difference between the actual costs of completion,
including those necessary for completing the outstanding work and the original
contract price. An illustration of this is Mertens v Home Freeholds Co.114 Of course,
in the exceptional case where the overall cost of completion is less than the contract
price, the employer is entitled to nothing other than nominal damages. An illustration
of this is the case of DO Ferguson & Associates v Sohl.115 In this case which concerned
works at shop premises left incomplete, it was held that restitution of sums paid for
contract work not done would be ordered on the grounds that as to that part of the work
there had been a total failure of consideration.
110
[1999] HKEC 1209. See also Wide Project Construction (HK) Ltd v Incorporated Owners of Yen Dack Building
[2006] HKEC 421.
111
[1977] 1 WLR 659. See Liu Hong Keung v Liu Ching Leung [2006] HKEC 422.
112
(1998) 61 ConLR 85. See also McGlinn v Waltham Contractors Ltd (2007) 111 Con LR 1 and Pegler Ltd v Wang
(UK) Ltd (No.1) [2000] BLR. 218.
113
[1912] AC 673. See Dimond v Lovell [2002] 1 AC 384 and Pamax Ltd v Cross Max Interiors Ltd [2008] HKEC
532.
114
[1921] 2 KB 526. See DO Ferguson Associates v Sohl (1992) 62 BLR 95.
115
(1992) 62 BLR 95. See also Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] 2 All ER (Comm) 823.

1. TERMINATION OF CONSTRUCTION CONTRACTS
(a) Termination and determination
Termination, or sometimes termed determination in construction contracts, means a 18.001

process through which a party to the contract unilaterally brings about the end of
the contract prior to the completion of the work or full performance of the contract
in question. Typically, construction contracts contain provisions setting out events
the occurrence of which give a right to termination in accordance with the stipulated
procedures and consequential rights and obligations of the employer and the contractor.
In long-term contractual relations with complex activities, such as construction 18.002
contracts, a termination clause has a valid role to play. It influences performance
whether it is put into operation or not. In some ways, it acts as a safeguard against
breach of contract since the party who is able to rely on the termination clause may
obtain a very beneficial settlement of any dispute regarding breach, in view of the
consequences that can follow.
(b) Interaction between express provisions and

common law rights
Under a typical construction contract, the power to terminate a contract and the 18.003
procedures to be followed to effectuate a valid termination can come from an express
clause of the contract or, if the breach of the contract by a party is fundamental, from
the common law right to repudiation. At common law, short of an outright refusal
to perform,1 a contract may nevertheless be terminated or repudiated if performance
is such as to deprive the injured parties of substantially the whole benefit which it
was the intention of the parties that the injured parties should obtain from the further
performance of the contract. Where the consequence of the breach if continued or
the consequence of the threatened breach is such as would deprive the injured parties
of a substantial part of the benefit to which they are entitled under the contract so
that it would be unfair to hold them to the contract and leave them to their remedy in
damages, then the breach is a repudiatory breach, thereby entitling the innocent parties
to terminate the contract.2
These two sources of power are independent of, but interact with each other and 18.004
sometimes overlap. The interaction between the two is considered in the case of
1
The examples are: walking off the site long before completion or failing to comply with plans in a very
fundamental way, like by not building a third storey when contractually bound to do so. In Wing Hing Engineering
Investment Ltd v Foric Ltd [2008] HKEC 1968, a contractor was found in repudiatory breach for by failing to
terminate a workers’ strike and mobilising workers to resume work.
2
Courts are careful before deciding a contractor’s breach is a repudiatory breach. While the standard of proof is on
a balance of probability, this standard is nevertheless a very high one in the case of construction contracts. See
Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656.

468 TERMINATION
Lockland Builders Ltd v Rickwood.3 This is a decision of the Court of Appeal in

England and Wales. In this case, the owner purchased a plot of land and entered into an
agreement with a builder for the building of a house on the plot. It was the arrangement
that, in return, the owner was to convey a part of the plot to the builder who was to
build a second house thereon for sale at the advantage of the builder, and the owner was
also to make a further cash payment to the builder. This arrangement was formalised
in two contracts, one between the owner and a buyer, which was a company closely
associated with the builder, providing for the sale of the plot to this buyer, and one was
between the owner and the builder providing that if the owner was dissatisfied with
progress or quality it might follow a certain procedure to determine the agreement
and enter upon the works and call upon another builder to complete the works. The
owner evicted the builder from the site without following the stipulated procedure.
Proceedings were issued by the buyer for the specific performance of the contract
for the sale of land and the owner sought damages from the builder for defective
work. At issue was whether the owner was entitled to determine the employment of
the builder. There were no saving words in the determination clause preserving the
common law rights and remedies of the owner. On appeal, it was held that the owner
was limited to the rights of determination that it had under the contract and the absence
of such saving words came with the effect that such common law rights were impliedly
excluded and the owner was precluded from terminating the contract otherwise than
by exercise of his rights under the express provisions, save for cases such as where the
builder had refused to continue the work or where the contravention displayed a clear
intention not to be bound by the terms of the contract.
18.005 Thus, according to the approach in Lockland Builders Ltd v Rickwood, circumstances
otherwise within the scope of the termination provisions but falling short of the precise
terms would in the author’s judgment not give rise to the right to terminate at common
law for the very reason that the parties agreed when and how such circumstances should
have that consequence.4 This seemingly reverses the earlier concept, as illustrated in
Architectural Installation Services Ltd v James Gibbons Windows Ltd,5 that express
contractual rights of termination do not limit common law rights of termination unless
there is a provision to the contrary. That case was a first instance decision, concerning a
3
(1995) 46 ConLR 92. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656,
where Deputy High Court Judge To remarked:
“In my view, whether a termination clause, like Clause 25 in the instance case, co-exists with the common law
right to accept a repudiation is a matter of construction of the terms of the contract. It is open to the parties
by contract to exclude a remedy for breach of contract which would otherwise arise by operation of law.
But in construing such a contract one starts with the presumption that neither party intends to abandon any
remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this
presumption.”
See also Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689.
4
In Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27, it was held in relation to a shipbuilding contract
that the buyer who exercised a contractual right to terminate on the seller’s default was not thereby prevented
from treating the contract as repudiated at common law and from recovering damages for loss of bargain. The
court observed, on appeal, that the contractual clause did not displace the right to treat the contract as repudiated
since its primary purpose was to provide an agreed measure of compensation for breaches of contract by way of
delay in delivery and deficiencies in capacity and performance which, although important, did not go to the root
of the contract.
5
(1989) 16 ConLR 68. See also See Ellis Tylin Limited (now known as Dalkia Technical Services Limited) v Co-
Operative Retail Services Limited [1999] BLR 205.

TERMINATION OF CONSTRUCTION CONTRACTS 469
subcontract for the labour-only installation of window units and for ancillary services.
The termination clause in issue was condition 8 which provided for termination of the
subcontract upon certain events, including suspension of work continued for seven
days after notice of such default had been given to the subcontractor, by a two-notice
procedure. The main contractor there contended that it had given such a proper notice
of default and, although 11 months later, a proper notice of termination under condition
8. It was then remarked that common law rights were not expressly excluded and
existed independently of the subcontract. Also, termination clauses in construction
contracts do not normally impose limitations on the right to terminate a contract for
a fundamental breach at common law. An illustration for this can be found in JM Hill
& Sons Ltd v London Borough of Camden,6 which involved a situation in which the
employer was withholding money legitimately due.
(c) No reliance on the termination clause of own default
Where a contract term provides that the contract is void on the happening of a certain 18.006
event, the impact of the termination on the respective legal positions between the
parties can be even more complicated. In Hong Kong, such a situation may arise in
the context of the so-called ‘licence borrowing’ subcontract setting. In a government
building maintenance contract City Top Engineering Ltd v Lee Shing Yue Construction
Co Ltd,7 the defendant was on the approved list of contractors of the government
and was awarded the government contract. Through a subcontract, the defendant
contracted with the plaintiff to perform all the works, with the defendant keeping
4 per cent of the monies received from the government and paying the remaining 96 per
cent to the plaintiff. One of the clauses in the subcontract provided that the subcontract
was not to come into effect until the further execution of the contract, and within
10 days of the subcontract the plaintiff was to demonstrate to the defendant its capacity
in carrying out the works by producing, inter alia, proof of an overdraft facility and a list
of subcontractors together with their written undertakings to carry out each respective
part of the work. It was expressly provided that failure to produce the documents so
required meant that the subcontract had not taken effect, deeming the same to be
cancelled and of no effect. After work had been carried out for three months, the
defendant terminated the subcontract on the ground that the plaintiff failed to produce
such documents. The court observed that the purpose of this clause was simple and
obvious in that, if the defendant was entrusting its government contract, and therefore
its reputation as a government contractor, to a subcontractor for a fee of 4 per cent,
it would want to be satisfied that it had both the financial and material resources to
carry out the works. The court referred itself to the case of New Zealand Shipping Co
6
(1980) 18 BLR 31. See Muir Construction Ltd v Hambly Ltd 1990 SLT 830 and John Jarvis Ltd v Rockdale
Housing Association (1985) 5 ConLR 118. See also Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd
[1999] HKEC 675 (affirmed on appeal [1999] HKEC 1221).
7
[2001] HKEC 710.

470 TERMINATION
Ltd v Societe Des Ateliers Et Chantiers De France8 and held that the subcontract was
voidable and, hence, could be terminated at the option of the defendant.
18.007 In Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd,9 it was remarked:
“the dicta in that case seems to tell me that the court believed that this conduct
by the employer was such that the contractor was not acting unreasonably
in determining the contract. It seems to me to follow from this dicta that the
withholding of a substantial sum legitimately due to a contractor would be
unreasonable. I believe that an architect exercising his balancing function when
considering whether or not to issue a notice under clause 25 must consider
whether or not a suspension was with “reasonable cause” when the employer is
deliberately, without any reasonable cause, withholding a substantial amount of
money rightly due to the contractor. I think that, if an architect had done this, it
would have been inevitable that he would have concluded that the suspension was
not without reasonable cause because it would be totally unreasonable to expect
a contractor not being paid a large sum undeniably due to him to continue with
the works and, in effect, finance the employer’s building operations to an extent
beyond that contemplated by the contract.”
18.008 In New Zealand Shipping Co Ltd v Societe Des Ateliers Et Chantiers De France,10 Lord
Atkinson said in relation to a contract term of likewise effect that if the stipulation was
that the contract was to be void on the happening of an event which one or either of
parties could by its own act or omission bring about, then the party, who by its own
act or omission brought that event about, could not be permitted either to insist upon
the stipulation itself or to compel the other party, who was blameless, to insist upon it,
because to permit the blameable party to do either would be to permit it to take advantage
of its own wrong, in the one case directly and in the other case indirectly, but either way
putting an end to the contract. Thus, applying the principle that a party shall not be
permitted to take advantage of its own wrong, this necessarily leaves the blameless party
to decide whether it will or will not insist on the stipulation that the contract shall be
void on the happening of the named event, rendering the contract voidable.11
8
[1919] AC 1. As held in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381, it is a well
settled principle of law that a person is not permitted to take advantage of his own wrong. In the contractual
context, the “prevention principle” operates to prevent a party who is in breach of an obligation owed to the other
party from asserting rights or claiming benefits which arise as a consequence of the breach. In some cases, the
principle can be given effect as a substantive principle of law precluding the wrongdoer from taking advantage
of his own wrong, whatever the contract may say; in other cases, it can be given effect by applying it as a canon
or presumption of construction.
9
[1999] HKEC 675.
10
[1919] AC 1. In this case, the respondents were shipbuilders who had contracted to build a steamer for the
appellants, to be delivered by a stipulated date but subject to certain time extensions. The contract also provided
that in the event of France becoming engaged in a European war so as to delay delivery by 18 months from the
agreed delivery date, the contract “shall become void and all money paid by the purchasers shall be repaid to
them” with 5 per cent interest. The steamer’s construction was delayed by more than the 18-month period because
of France’s continued engagement in the First World War. The builders therefore contended that the contract had
become void. The appellants however argued that the relevant clause should be construed as making the contract
voidable solely at their option and not void, as stated in the contract. An umpire found that the delays were due
to causes beyond the respondents’ control and that they were entitled to rely on the clause which deemed the
contract void. This was upheld in the House of Lords.
11
See also Rede v Farr (1817) 6 M & S 121.

CONTRACTOR REMAINING ON SITE 471
(d) Differing consequences of termination under common law versus

contract terms
The distinction between a termination at common law and a termination under a 18.009
contractual right can be significant in terms of their consequences. Where a party
is entitled to terminate the contract at common law, the usual remedy, ie damages,
is available to compensate it for its loss; where a contract is terminated under a
termination clause in the contract, it may be allowed nothing more than the stipulated
remedy under the contract. In a termination by an employer at common law, as in
Marshall v Mackintosh,12 the employer could recover extra costs to completion by way
of damages. Yet, in Thomas Feather & Co (Bradford) Ltd v Keighley Corporation,13
where a contractor was expressly prohibited from subcontracting its works to erect
houses without the employer’s consent, providing also a right to terminate the contract
in the event of such subcontracting without consent, it was held that the employer was
not entitled to the extra cost for employing another contractor to finish off the work
after such termination. The court observed that there was no express provision for
obliging the contractor to be liable for damages consequential upon the termination
and that the ground supporting termination in itself did not normally entitle the
employer to terminate the contract at common law. Nonetheless, it is open for the
parties to impose an extra right to terminate the contract, without prejudice to other
rights or remedies that the parties otherwise may possess. Also, another key aspect of a
termination under the express term of a construction contract is to entitle the employer
to seize the plant and materials on site, which are otherwise not the property of the
employer, at the time of contract termination.
Whether a right to terminate a contract arises from common law or under a termination 18.010
clause, it must be exercised in an unqualified manner by an act sufficient to show that
that power has actually been necessary. Thus, some clear act invoking the operation
of common law or the termination clause must take place. In Drew & Co v Josolyne,14
a construction contract provided that the employer could forfeit the contract in case
of the insolvency of the contractor and the contractor did become insolvent. The
employer took no active steps to forfeit and the trustee in liquidation completed the
work. It was held there that it was necessary as a matter of fact that such a power to
forfeit had been actually exercised.
2. CONTRACTOR REMAINING ON SITE

(a) Right of the contractor to remain
A direct consequence that flows from the termination of a construction contract is that 18.011
the right of the contractor, whose contract is terminated, to remain on site ceases. In
most construction contracts, the giving of the site by the employer to the contractor is
12
(1898) 78 LT 750. See Chan Yat v Fung Keong Rubber Manufactory Ltd [1967] HKLR 364. See also Stephens v
Junior Army & Navy Stores Ltd [1914] 2 Ch 516.
13
(1953) 52 LGR 30.
14
(1887) LR 18 QBD 590.

472 TERMINATION
a pre-condition for the obligation to commence works. A contractor does not normally
have any legal rights to remain in possession of the site against the wishes of the
employer. The nature of the contractor’s interest in the possession of the site has been
the subject of a range of cases but the better analysis is that the contractor occupies
the site, for the purpose of carrying out the works, by way of a licence that is lost
when such a purpose comes to an end. Such a right to possession does not mean
exclusive possession since there are other contractors or trades of workers who need
to be present on parts of the site to carry out their work at the same time.
18.012 In Hounslow London Borough Council v Twickenham Garden Developments Ltd,15 it
was held that a contractor occupied the site by way of a licence to enter upon the land
and to do work there but that such a licence could only be validly revoked in strict
compliance with the termination clause in the construction contract. This approach has
not been followed in some jurisdictions, such as New Zealand in the case of Mayfield
Holdings Ltd v Moana Reef Ltd16 or Australia in the case of Graham H Roberts Pty Ltd
v Maurbeth Investments Pty Ltd,17 where such an injunction was granted enabling the
eviction of a contractor from the site under such circumstances.
(b) Employer’s right to evict upon termination
18.013 In Mayfield Holdings Ltd v Moana Reef Ltd, the contractor was the plaintiff and was
claiming, inter alia, an injunction to restrain the defendant from entering upon the
site to remove the plaintiff or its subcontractors; the employer counterclaimed for,
inter alia, an injunction restraining the plaintiff from hindering him from completing
the building. The contract was for the erection of a motel complex. The employer
alleged faulty workmanship but these claims were contested by the contractor and
its subcontractors. The employer refused to make further payments until the defaults
of the subcontractors had been rectified and the construction work then stopped. The
employer gave notice determining the contract unless sufficient men were on the
site by a specified date. The contractor thereupon issued the writ and applied for an
interim injunction restraining the owner from entering the site in order to remove the
contractor and its subcontractors from the site. The employer then served written notice
of termination of the contract. It was held that the licence granted to a contractor to go
onto the employer’s land to erect a building was not licence coupled with an interest so
as to make it irrevocable in the absence of lawful termination of the contract and there
was no implied term in the construction contract that the employer would not revoke
the licence in breach of contract. It was further held that, even if there could be implied
15
[1970] 3 WLR 538. See Vipac Engineers & Scientists Ltd v Mark Karpovich [1990] 1 HKLR 725. See also
Amec Civil Engineering Ltd v Secretary of State for Transport [2005] 1 WLR 2339; West Faulkner Associates
v Newham LBC (1995) 71 BLR 1; and Manchester Airport Plc v Dutton [2000] QB 133. Contrast Mayfield
Holdings v Moana Reef [1973] 1 NZLR 309 and Tara Civil Engineering v Moorfield Developments Ltd (1989)
46 BLR 72.
16
[1973] 1 NZLR 309. See Kong Wah Housing Sdn Bhd v Desplan Construction Trading Sdn Bhd [1991] 2 MLJ
117.
17
[1974] 1 NSWLR 93. See South Dowling Pty Ltd v Cody Outdoor Advertising Pty Ltd [2005] NSWCA 407,
where it was remarked that equitable remedies for contractual licences are not ordinarily available.

CONTRACTOR REMAINING ON SITE 473
such a term, the contractor could not rely upon such a term to remain on the site since
that would amount to indirect specific performance of the contraction contract.
The case of Mayfield Holdings Ltd v Moana Reef Ltd was later followed in the 18.014
Malaysia case of Kong Wah Housing Development Sdn Bhd v Desplan Construction
Trading Sdn Bhd.18 Even in the English case of Tara Civil Engineering Ltd v Moorfield
Developments Ltd,19 which concerned a contract in ICE (5th edition) standard form, the
approach in Hounslow London Borough Council v Twickenham Garden Developments
Ltd has not been adopted.
Moreover, support for the grant of an injunction to evict the contractor off the site 18.015
can also be found in the Australian case of Porter v Hannah Builders Proprietary
Limited.20 In that case, when considering a dispute between the Minister for Education
and a builder who was building a school for the Education Department, where the
employer plaintiff purported to determine the builder’s licence to remain on the
premises and the builder sought to restrain the plaintiff from so acting, the court
held that the licence could be terminated and the licensee, upon termination, was
transformed into a trespasser even if the termination involved a breach of contract.
In reaching this decision, the court followed the rationale of Latham CJ in Cowell v
Rosehill Racecourse Company Limited21 where it was said:
“... an ordinary building contract enables the building contractor to go upon the
land for the purpose of conducting building operations so that he can perform
his contract and earn his expected profit. His right continues to exist even if
the building owner wrongfully repudiates the contract. But the only remedy of the
building contractor for infringement of the right is in damages. If he goes on the
land against the will of the owner he may be treated as the trespasser.”
(c) Injunction preventing termination
However, there may still be instances where, on the balance of convenience, an injunction 18.016
may be granted to restrain the employer from exercising the power to terminate
the contract, thereby evicting the contractor from the site. This is illustrated in the
Australian case of Robert Salzer Constructions Ltd v Elmbee Ltd,22 where a contractor
succeeded in obtaining an injunction restraining the employer from terminating the
18
[1991] 2 MLJ 117.
19
(1989) 46 BLR 72. See Amec Civil Engineering Ltd v Secretary of State for Transport [2005] BLR 227. Contrast
Wiltshire Construction (South) Ltd v Parkers Developments Ltd (1997) 13 ConLJ 129. See also Hover Base
Investments Ltd v Best Concept Management Ltd [2004] HKEC 1497.
20
[1969] VR 673. See Chermar Productions Pty Ltd v Prestest Pty Ltd (1991) 7 B & CL 46. See also Graham
H Roberts Proprietary Limited v Maurbeth Investments Proprietary Limited [1974] 1 NSWLR 93 and Graham
H Roberts Pty Ltd v Maurbeth Investments Pty Ltd [1974] 1 NSWLR 93.
21
(1937) 56 CLR 605. Contrast Foster and Dicksee v Hastings [1903] 19 TLR 204.
22
(1990) 10 ACLR 64. See, however, McBreen Jenkins/Hauraki Piling Ltd Joint Venture v Kerikeri Cruising Club
Inc (1996) 5 NZBLC 104 at 132, where it was held that there needed to be compelling grounds established
to justify the granting of an injunction to prevent the employer from entering into possession of the works
and terminating the contract and that circumstances could exist if the contractor was able to establish strong
arguments in support of its claim that the principal had no valid grounds for terminating, but, even then, the court
needed to be satisfied that the contractor and the principal would be able to work harmoniously in future.

474 TERMINATION
contract before the notice to terminate was issued. The evidence tendered indicated no
need of the owner to recover possession of the site since the progress was satisfactory
and there was no suggestion that bad work was being carried out.
(d) Remedy in damages for contractor
18.017 As to the nature of the contractor’s right to site possession, in the recent English case
of Manchester Airport Plc v Dutton,23 it was held that a contractor’s right to occupy
the wood for the purpose of carrying out the specified works gave rise to a sufficient
interest for the purposes of an application for summary possession of the site as
against intruders, entitling it to evict them from the site. Yet, even so, the remedy that
the contractor may have in case of a wrongful termination is one of damages and, as a
general rule, the court will not restrain the employer from even wrongfully exercising
the power of termination, as the contractor can be compensated in damages for any
loss it may sustain by reason of the forfeiture.
18.018 This approach in Manchester Airport Plc v Dutton is in line with its counterpart cases
in Hong Kong. As explained in the earlier case of NC Chan v Chung Lee Construction
Company (Cheong Kee) (A Firm),24 the court will not force the employer to employ a
person to perform the works to whom it reasonably or unreasonably objects since such
a relief would be analogous to specific performance. Taking into account the decision
in American Cyanamid Co Appellants v Ethicon Ltd,25 which called for consideration
of the balance of convenience in considering the grant of an injunction, the court in Yau
Fook Hong Co Ltd v Man Cheong Construction Co,26 observed that damages would
not be an adequate remedy for the employer who wanted to get on with the building
but, on the other hand, the contractor could clearly be compensated in damages and
would be protected by the undertaking in damages. In granting the injunction evicting
the contractor from the site, it was also remarked that it would be rare in a building
dispute of the kind, where a court would be justified in taking a decision to preserve
the status quo by not granting such an injunction.
(e) Illustration of issues: Hong Kong Housing Society v Hing Lee Construction
Co Ltd
18.019 The case of Hong Kong Housing Society v Hing Lee Construction Co Ltd 27 illustrates
the issues arising from the termination in Hong Kong of a construction contract. The
contractor was engaged to build a number of units at a housing estate in 1995. The
original completion date was November 1996 but the work was not completed by then.
On 3 March 1998, the architect served a default notice on the contractor for failure to
23
[2000] QB 133. It was held that the remedy to the licensee to claim possession against a trespasser may be
necessary in order to vindicate and give effect to the contractual right of the licensee to occupy. In each case, one
has to consider the reach of the licensee’s right and whether the wrongdoer’s act violated such right.
See also Riseway Properties Ltd v Star River Imitation Ornaments Ltd [2008] HKEC 160.
24
[1964] HKLR 254.
25
[1975] 2 WLR 316. See Kwan Toi Ming v Man Kit Construction Co Ltd [2003] 2 HKLRD G3.
26
[1981] HKLR 60.
27
[1998] HKLRD 133 (Yrbk).

REPUDIATION AT COMMON LAW 475
proceed regularly and diligently with the contractual works, setting out in the notice
the details of the complaints and warning against termination of the contract if the
default continued for 14 days. On 19 March 1998, the architect issued a certificate of
non-compliance with the default notice, and on 23 March 1998, gave the contractor
a notice of termination of the contract, requiring it to vacate the site immediately as
it proposed to re-enter the site. The contractor refused to move out and excluded the
employer from the site. When the employer sought injunctive relief, the contractor
claimed that the notice of default and termination were vexatious and unreasonable
and that the balance of convenience lay in its favour. The contractor also issued a notice
of arbitration pursuant to the contract, which provided for the resolution of any dispute
as to the certificate or notices from the architect and issued proceedings claiming
a right to continue with the contract. The court was of the view that public interest
demanded that a party should not benefit from its refusal to accept the legitimate form
of exercise of a right to terminate a contract, when there was in any event in existence
an agreement as to how disputes arising should be resolved. In granting an injunction
in favour of the employer, it was noted that there was no bad faith on the part of the
employer. Also, the court observed that intimidating conduct and postures were not
part of the civilised scene and every day that the contractor remained in occupation
aggravated the position of the employer.
3. REPUDIATION AT COMMON LAW

(a) Non-payment
Many construction contracts have termination clauses that, invariably, permit the 18.020
contractor to terminate under the provisions of the contract on the grounds of non-
payment by the employer. The obligation to pay on the part of the construction contract
employer is one of the most important obligations that the employer has. A refusal to
honour payment obligations, at least insofar as it relates to a relatively sizeable sum of
money due or the threat not to pay further sums due in accordance with the contract
must be capable of being repudiatory.
(b) Consequences based on the importance of broken terms
The consequences of a breach depend upon the importance of the term broken. A 18.021
minor breach of an important term, a condition, may entitle the innocent party to
terminate the contract; yet, a breach of a less important term, a warranty, would only
attract damages. The case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha
Ltd,28 as referred to by Lord Wilberforce in Bunge Corporation v Tradax Export SA,29
illuminated the existence in contracts of terms that were neither, necessarily, conditions
nor warranties, but in terminology that had since been applied to them, intermediate
28
[1962] 2 QB 26. See Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 4 HKLRD 447. See also
Bunge Corp v Tradax Export SA [1981] 1 WLR 711; BS & N Ltd (BVI) v Micado Shipping Ltd (Malta) [2001]
1 Lloyd’s Rep 341; and Seadrill Management Services Ltd v Oao Gazprom (2009) 126 ConLR 130.
29
[1981] 1 WLR 711.

476 TERMINATION
or innominate terms capable of operating, according to the gravity of the breach, as

either conditions or warranties. It should be emphasised that it is still open to the
parties to agree that a term is so important to them that it should have that effect and,
as pointed out by Lord Roskill in Cehave NV v Bremer Handelsgesellshaft mbH (The
Hansa Nord),30 in suitable cases, the courts should not be reluctant, if the intentions
of the parties as shown by the contract so indicate, to hold that an obligation has the
force of a condition.
18.022 In the Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd case, the dispute
in issue was observed to be a typical case of a ship owner seeking to find an excuse to
bring a long-term time charter to a premature end in a rising market. In the words of
Diplock LJ, he said:
“It is like so many other contractual terms an undertaking one breach of which
may give rise to an event which relieves the charterer of further performance of
his undertakings if he so elects and another breach of which may not give rise
to such an event but entitle him only to monetary compensation in the form of
damages.”
18.023 In that case, it was argued on behalf of the contractor that the appropriate test of a
repudiatory breach was: does the occurrence of the event deprive the party who has
further undertakings still to perform of substantially the whole benefit which it was
the intention of the parties as expressed in the contract that he or she should obtain
as the consideration for performing those undertakings? Hence, in contracts of single
obligation, just as it is plain as can be that many of the breaches cannot be brushed aside
as trivial, so it is plain as can be that even cumulatively the breaches relied upon cannot
be said to have substantially deprived the defendant of the whole benefit for which it
contracted. However, in the case of contracts of multiple, separate obligations, such as
building contracts, the doctrines of commercial common sense are to be invoked to see
whether a breach that deprived the innocent party of substantially the whole benefit of
substantially any aspect of the contract should be regarded as repudiatory.
18.024 On whether a term is a condition or innominate term, as highlighted in Okachi (Hong
Kong) Co Ltd v Nominee (Holding) Ltd,31 in considering an agreement for sale of
Hong Kong Futures Exchange shares, the Hong Kong Court of First Instance was
asked to decide whether a term was a condition or innominate term in the agreement.
It was held that the basic principles of construction for determining whether or not
a term was a condition remained as before and the court would look at the relevant
clauses in the context of the entire agreement, which in turn was to be construed
against the surrounding factual matrix at the time of its making.32
30
[1976] QB 44.
31
[2005] 4 HKLRD 447.
32
In doing so, particular regard should be given to the parties’ underlying commercial aims and objectives in
entering into the agreement, the commercial importance of these terms in relation to the agreement, and the
importance of commercial certainty. See BS & N Ltd (BVI) v Micado Shipping Ltd (Malta) [2001] 1 Lloyd’s
Rep 341.

There may be a situation where the term in question is interpreted as a condition 18.025
precedent, rather than a condition or innominate term. In Mariner International
Hotels Ltd v Atlas Ltd,33 the Hong Kong Court of Final Appeal held that a term calling
for practical completion of a hotel was a condition precedent in a sale and purchase
agreement of a hotel then under construction.
(c) Categories of repudiatory breach
On closer analysis of construction contracts, there can be identified three categories 18.026
of repudiatory breach. They are: (a) those cases in which the parties have agreed
either that the term is so important that any breach will justify termination or that
the particular breach is so important that it will justify termination; (b) cases in
which contractors simply walk away from their obligations thus clearly indicating an
intention no longer to be bound; and (c) those cases in which the cumulative effect
of the breaches that have taken place is sufficiently serious to justify the innocent
party in bringing the contract to a premature end. So far as the cumulative effect of
breaches is concerned, they can likewise be divided into three classes according to the
inference that comes with them. Firstly, there are cumulative breaches that justify an
inference that the contractor would continue to deliver a substandard performance in
relation to substantial portions of the contract, thereby allowing them to be assessed
as repudiatory. Secondly, breaches that evince an intention by the contractor to render
a continuing substandard performance in respect of a defined and significant part of
the works may likewise be repudiatory. Thirdly, breaches of such significance as to be
individually repudiatory, being substantial in themselves and not truly compensated
for by contractual remedies, can similarly justify the termination of the contract.
(d) Significance of cumulative breaches
Here, the technical term is ‘repudiatory’ but that is just a label to describe the possible 18.027
consequence. It is not always an entirely satisfactory label, as it implies that the conduct
itself must always be such as to demonstrate an intention to abandon contractual
obligations: while this will sometimes be so it is not an invariable requirement. Indeed,
in construction contracts, given the number and variety of the obligations involved, the
breaches that may be committed are of varying gravity – some may be remediable and
some may not. In Sutcliffe v Chippendale and Edmundson,34 HH Judge Sir William
Stabb QC said:
“I take the view that the whole combination of circumstances that then existed
and to which I have already alluded did justify the plaintiff in ordering the
contractors off the site. I think that their manifest inability to comply with the
completion date requirements, the nature and number of complaints received
from subcontractors and [the architect’s] own admission that in May and June
the quality of work was deteriorating and the number of defects was multiplying,
many of which he had tried unsuccessfully to have put right, all point to the
33
(2007) 10 HKCFAR 1.
34
(1971) 18 BLR 157. See South Oxfordshire DC v SITA UK Ltd [2007] EnvLR 13.

478 TERMINATION
truth of the plaintiff’s expressed view that the contractors had neither the ability,
competence or the will by this time to complete the work in the manner required
by the contract.”
18.028 As noted in Rice (t/a Garden Guardian) v Great Yarmouth BC,35 the question for the
court was whether the cumulative effect of the breaches of contract complained of was
so serious as to justify the innocent party in bringing the contract to a premature end. In
that case, the issue was whether the appellant local authority was entitled to terminate
after seven months two contracts made with the respondent contractor, to provide
Leisure Management and Grounds Maintenance services for a four-year period. The
Court of Appeal in England and Wales observed that building contracts differed from
these contracts in that there would be an end product; defects might or should be
remedied during or, in some cases, after completion; and, also, delay in completion could
be compensated. These maintenance contracts contemplated a multitude of different
results at different times: cricket pitches ready for the summer season, football pitches
ready for the autumn, flower beds in full bloom at the appropriate times, properly mown
grass on lawns and bowling greens, raked bunkers in a pitch and putt course, edged and
weeded rose beds, pruned shrubs, cleared litter, and so on. Thus, it was noted that, in
contracts such as these, the court was entitled to look at the contractor’s performance
over a year, the most important part of which was the spring and summer, but it must
still ask itself whether the council was deprived of substantially the whole benefit of
what it had contracted for during that period. On the other hand, it was observed that
these maintenance contracts were not like building contracts in that the accumulation of
past breaches was relevant, not only for its own sake, but also for what it showed about
the future. Therefore, it was held to be right to ask whether the cumulative breaches
were such as to justify an inference that the contractor would continue to deliver a
substandard performance. The appeal was dismissed on the facts.
18.029 In Leung Yuk Lin v Karson Oten Fan Karno,36 in relation to an agreement for provision
of tutorial services to a tutorial school, Deputy Judge Anthony To explained:
“Whether the triggering breaches when viewed against a history of persistent,

wilful and serious breaches despite repeated warning, constituted a repudiatory
breach as would justify the innocent party in treating himself as discharged
depends on the consequence of the breaches. A number of expressions have been
used to describe the circumstances that warrant a discharge. The most common
being that the breach must ‘go to the root of the contract’ or ‘affect the very
substance of the contract’ or ‘frustrate the commercial purpose of the venture’.
At the present day, the test which is most frequently applied is that stated by
Diplock LJ, as he then was, in Hong Kong Fir Shipping co Ltd v Kawasaki Kisen
Kaisha Ltd: ‘Does the occurrence of the event deprive the party who has further
undertakings to perform of substantially the whole benefit which it was the
intention of the parties as expressed in the contract that he should obtain as the
35
(2001) 3 LGLR 4. See Dominion Corporate Trustees Ltd v Debenhams Properties Ltd [2010] 23 EG 106 and
Alan Auld Associates Ltd v Rick Pollard Associates [2008] BLR 419.
36
[2009] HKEC 1137.

consideration for performing those undertakings?’ But I would prefer the more
modern formulation of the test by Potter LJ in Shyam Jewellers Ltd v Cheeseman
that the potency and legal effect of such a breach falls to be judged in the light
of the seriousness of the breach and its effect upon the continuing performance
of the contract. In that case the breach was a failure or delay in payment of an
instalment. I think the test is capable of general application. The court has to
examine all the circumstances of the breach and consider the seriousness of the
breaches, the consequences, the implications for the future performance of the
contract and the likelihood of repetition. The court has to assess the nature and
effect of the breach objectively. It can only concern itself with the reasonable
perceptions and reactions of the party asserting a repudiatory breach.”
Termination at common law takes place by operation of law. The effect of such a 18.030
termination is to release both parties from further performance of the contract,
entitling the innocent party the remedy by way of damages for breach of contract.
Such damages may include those resulting from the loss or termination of the contract
itself. Thus, the innocent party has, as in other cases, a duty to mitigate its loss and is
required to act reasonably.
(e) Monies owed at time of termination may be recoverable
At the time of termination, there may often be unpaid monies of other claims already 18.031
due under the contract; there may be deductions not yet made. In such cases, these
sums or deductions accrued at the time of termination may be recoverable as of right.
In Hyundai Heavy Industries Co Ltd v Papadopoulos,37 in relation to a shipbuilding
contract, the purchaser was to pay the price in five instalments. The ship builder, on non-
payment, was conferred with a right to cancel the contract and sell the ship at auction,
retaining the money already paid. The purchaser did not pay the second payment and the
ship builder cancelled the contract. In a claim by the ship builder against the guarantors
of the ship building contract for the second payment instalment with interest, it was held
by the House of Lords that the buyer remained liable for the second payment instalment
since that liability arose before the termination of the contract and, in turn, the guarantor
was liable on the wording of the guarantee. Thus, in construction contracts such as
this, without express provisions to the contrary, it may be considered that, following
the termination of a construction contract, the contractor is still liable for all liquidated
damages already accrued on the date of termination. The same principle seems to apply
whether the employer or the contractor, in such a situation, is the one who terminates the
contract, as suggested in Dies v International Mining and Finance.38
At common law, the innocent party to a repudiation may choose to sue for damages 18.032
for loss of the contract on general principles or to obtain a reasonable price for the
37
[1980] 1 WLR 1129. See Bright Islands Corp v Chao [2002] 2 HKLRD 97.
38
[1939] 1 KB 724. See Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222; Mimi Monica
Wong v Mirko Saccani [2006] HKEC 1662; and Polyset Ltd v Panhandat Ltd [2002] 3 HKLRD 319. See also
Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574.

480 TERMINATION
works done or service carried out, ie on a quantum meruit basis. In Lodder v Slowey,39
the respondent was held to be entitled to treat the contract as at an end and to sue on
quantum meruit. Yet, interestingly it is quite possible for contractors to be paid more
on a quantum meruit basis for the same work if the cost plus method is used than they
would have been entitled to if a contract had been entered into and they had been paid
in accordance with the contractual rates. For example, in British Steel Corporation
v Cleveland Bridge,40 a subcontractor engaged in the construction of a large dam,
who left the dam near completion, was paid US$25,000 on a quantum meruit basis
representing the market value of its unpaid services and labour, even though only
US$20,000 was still due under the contract.41 Situations like these occur when, for
example, the contract was substantially underpriced or there was a ‘front-end loading’
element in favour of the contract prices.
18.033 However, this limb of alternative remedy will only become available to a contractor if
it is aware of the repudiatory breach of the employer before completion of the work.
In Morrison-Knudsen v British Columbia Hydro & Power Authority,42 the contractor
building a portion of a large hydroelectric project on the Peace River in northern
British Columbia claimed that the employer had wrongfully refused to pay the cost
of accelerated work necessitated mostly by delays caused by the employer. It was
found that the employer was in fundamental breach of the contract because it had not
paid for the accelerated costs, and because, while agreeing with the contractor that
it would process claims for accelerated costs, it had given the Government a private
assurance that it would not pay accelerated costs as a policy. The contractor continued
to work until the project was completed and did not discover the assurance given to the
Government until the action was commenced. It was held that the employer’s policy
decision not to pay for any acceleration to be both an improper interference with the
duty of the engineer to act judicially and a breach of contract with the contractor. Yet,
the contractor’s remedy was limited to damages for breach of contract and its claim
39
[1904] AC 442. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656 and
Professional Associates v Polytek Engineering Co Ltd [1986] HKLR 20. See also ERDC Construction Ltd v HM
Love & Co (1994) 70 BLR 67 and Morrison-Knudsen Co Inc v BC Hydro & Power Authority (1978) 85 DLR (3d)
186.
40
(1981) 24 BLR 94. See Four Seas Union (Holdings) Ltd v Hong Kong & Macau Scent On Engineering &
Construction Ltd [2003] 1 HKLRD 653 and Shanghai Tongji Science & Technology Industrial Co Ltd v Casil
Clearing Ltd (2004) 7 HKCFAR 79. See also RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co
KG [2010] BLR 337; Whittle Movers Ltd v Hollywood Express Ltd [2009] 2 CLC 771; MSM Consulting Ltd v
Tanzania (2009) 123 ConLR 154; Cobbe v Yeoman’s Row Management Ltd [2008] 1 WLR 1752; Diamond Build
Ltd v Clapham Park Homes Ltd (2008) 119 ConLR 32; and Cubitt Building & Interiors Ltd v Richardson Roofing
(Industrial) Ltd [2008] BLR 354.
41
In the judgment of Goff J, he said:
“In my judgment, the true analysis of the situation is simply this. Both parties confidently expected a formal
contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one
requested the other to commence the contract work, and the other complied with that request. If thereafter, as
anticipated, a contract was entered into, the work done as requested will be treated as having been performed
under that contract; if, contrary to their expectation, no contract was entered into, then the performance of
the work is not referable to any contract the terms of which can be ascertained, as the law simply imposes an
obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant
to that request, such an obligation sounding in quasi-contract or, as we now say, in restitution.”
42
(1978) 85 DLR (3d) 186.

CONTRACTUAL TERMINATION 481
for quantum meruit was not allowed. In ERDC Construction Ltd v H M Love & Co,43
it was also acknowledged that, in a situation of fundamental breach, a contractor could
choose to repudiate the contract and claim quantum meruit. Yet, the contractor, having
elected to receive payment under the contract and thereby affirming the contract, could
not subsequently claim quantum meruit.
On the other hand, where the contractor has been overpaid at the time of termination, 18.034
the innocent employer is entitled to recover such overpayment by way of restitution
or unjust enrichment, even though the employer suffers no damage as a result of the
termination. In DO Ferguson & Associates v Sohl,44 for example, a contract ceased
work prior to completion and was, at that time, paid £4,673 in excess of the sum
found due under the contract. The employer engaged another contractor to complete
the overall work at an overall price even less than the balance of the contract price still
due. It was held that the employer was entitled to be repaid £4,673 as overpaid money
that the contractor had received.
(f ) Notice to perform
Also, notice calling on a party to perform its obligation, which is not complied with by 18.035
the party in default, may assist in establishing the necessary intention no longer to be
bound, but if the breach is sufficiently persistent, absence of notice may not be crucial
as illustrated in the Australian case of Carr v JA Berriman Pty Ltd.45 In every case, the
conduct of the party will be looked at in a realistic light to see if it evinces the necessary
intention not to continue to be bound by the contract and the modern tendency is
certainly not to interpret the conduct of the parties too legalistically. The first principle
as Atkin LJ said in Spettabile Consorzio Veneziano di Armamento e Navigazione v
Northumberland Shipbuilding Co Ltd46 is that “[i]t must be shown that the party to the
contract made quite plain his own intention not to perform the contract”.
4. CONTRACTUAL TERMINATION
(a) The purpose of termination clauses
The purposes of inserting express termination clauses in construction contracts 18.036

are at least twofold. First, it delineates the events in which a right to termination
will arise, particularly where complicated issues of facts and law are involved for
establishing a likewise remedy at common law; second, termination clauses seek to
43
(1995) 70 BLR 67. See Stocznia Gdanska SA v Latvian Shipping Co [2001] 1 Lloyd’s Rep 537.
44
(1992) 62 BLR 95. See Guinness Mahon & Co Ltd v Kensington and Chelsea RLBC [1998] 3 WLR 829.
45
(1953) 89 CLR 327. See Floods of Queensferry Ltd v Shand Construction Ltd (No 2) [1999] BLR 319 and Amec
Building Limited v Cadmus Investments Company Limited [1997] 51 ConLR 105.
46
(1919) 121 LT 628. See Charter View Development Ltd v Golden Rich Enterprises Ltd [2000] HKLRD 161
(Yrbk). See also Vaswani v Italian Motors (Sales and Services) Ltd [1996] 1 WLR 270; Woodar Investment
Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277; and Federal Commerce & Navigation Co
Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757.

482 TERMINATION
set out and define the ancillary rights and remedies of the respective parties flowing
from a termination of the contract over matters that are not normally provided for at
common law.
(b) The difference of termination under common law
18.037 A termination under contract differs from one at common law in two material aspects.
Firstly, there is no need for the stipulated event providing for the right to terminate to
be one of fundamental breach; secondly, a contractual termination provides no remedy
to the innocent party beyond what is expressly set out in the termination clause itself,
as remarked in Thomas Feather & Co (Bradford) Ltd v Keighley Corporation.47
(c) Formalities must be fully complied with
18.038 For a termination under contract clause to be valid, exact and meticulous compliance
by the terminating party with all formal or procedural requirements stipulated in the
termination clause, for example those in relation to written notices or time limits, is
essential. This is illustrated in JM Hill & Sons Ltd v London Borough of Camden,48
which concerns a building contract substantially based upon the terms of the JCT
standard form. The employer did not pay at once an interim certificate issued in favour
of the contractor. The contractor responded during the 14-day period within which
the certificate had to be paid by cutting its labour force on site and removed certain
items of plant, while maintaining the supervisory staff, site insurance and canteen
facilities. When the certificate was still not paid at the expiry of the 14-day period,
the contractor gave notice to the employers pursuant to clause 26(1) of the contract
requiring payment of the certificate within seven days. That notice was delivered by
hand on the same day and also sent by recorded delivery, arriving the following day.
Eight days later, the certificate still unpaid, the contractor purported to determine its
employment under the contract by a letter received by the employer the following
day. While holding that the cutting of the labour force and the removal plant did not
evidence an intention to no longer to be bound by the contract and, hence, was not a
repudiatory breach, the court remarked that the notice to terminate the contract was
effective since on general principles a notice to terminate was effective when brought
to the attention of the other party.
(d) Overlapping of contractual and common law termination
18.039 Obviously, termination under contractual provisions and at common law can easily
overlap since both may concern breaches of sufficient severity to undermine the further
performance of the contract. In such case, a termination, otherwise not complying
47
(1953) 52 LGR 30.
48
(1980) 18 BLR 31. See Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd [1999] HKEC 675. See also
Muir Construction Ltd v Hambly Ltd 1990 SLT 830.

with the stipulated requirements, may still be valid at common law based on the same
factual setting. An illustration of this can be found in the Australian case of Bysouth v
Shire of Blackburn & Mitcham,49 where the employer in a roadworks contract served
a notice under the termination clause to terminate the contract, alleging in the notice
that the contractor had wilfully breached the contract by not completing on time and
not carrying out certain work in accordance with the specification. The termination
clause entitled the employer to terminate the contract, if in the opinion of the engineer,
there was a failure of due progress or defective work was not remedied within seven
days of the written request. It was found that the descriptions of breaches in the notice
did not fall within the ambit of the termination clause. However, the Supreme Court
of Victoria left it open on whether, by amendment of pleadings, the employer was still
entitled to validly terminate the contract on the facts at common law.
In terminations initiated by contractor, as illustrated in Lodder v Slowey,50 there is an 18.040
option at common law to claim quantum meruit, thereby enabling a contractor in an
under-priced contract to be paid a higher reasonable price.
(e) Termination by the employer
So far as the employer is concerned, there are a great variety of grounds entitling 18.041
the employer to terminate the contract. A two-tier approach is commonly adopted
in termination clauses in Hong Kong construction contracts in respect of default of
progress and defective works. It operates by way of an early warning or notice of
default from the engineer or architect and focuses on the continuation or reoccurrence
of such default before a definitive notice to terminate the contract is served. This
normally applies in relation to the progress of the work. In case of defective work, a
likewise two-tier approach is adopted based on the failure to rectify or remove such
defective work upon notice or warning from the architect or the engineer.
An example of termination clauses can be found in clause 81 of the Hong Kong 18.042
Government General Conditions of Contract for Civil Engineering Works (1999
edition). The events that trigger the employer’s power to terminate can exist without
the involvement of the engineer. These include where the contractor becomes insolvent
or where the contractor assigns the contract without the employer’s prior consent in
49
[1928] VLR 562. In Ming Kee Shipping Service (Far East) Co Ltd v China Light & Power Company Limited
[1998] HKEC 952, the employer terminated the contract of the contractor by written notice arising from disputes
as to the ability of the contractor to perform one of the three phases under the contract. The contractor claimed for
the sum under the contract and the employer claimed for extra costs for engaging another contractor to perform
phase three. The main dispute at trial was on whether the termination of the contract was in accordance with the
contract. The contract clause allowed termination by notice based on the holding of an opinion of incapability.
The court held that, as no reason for the holding of the opinion was called for, the court was not to be concerned
with whether the opinion was right or wrong or reasonable or given with sufficient grounds being advanced or
even whether there were reasonable materials in existence at the time to form that opinion.
50
[1904] AC 442. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656 and
Professional Associates v Polytek Engineering Co Ltd [1986] HKLR 20. See also ERDC Construction Ltd v HM Love
& Co (1994) 70 BLR 67 and Morrison-Knudsen Co Inc v BC Hydro & Power Authority (1978) 85 DLR (3d) 186.

484 TERMINATION
writing. There are other events that call for the engineer to form an opinion. These
include the situation where the engineer is of the opinion that the contractor:
• has abandoned the contract;
• has failed to commence the works without reasonable cause;
• has suspended the progress of the works for 14 days after receiving written
notice from the engineer to proceed;
• has failed to comply with an order from the engineer for the removal of
unsatisfactory material and work;
• is failing to proceed with the works with due diligence or is persistently

in breach of its obligations under the contract, notwithstanding previous
warning by the engineer; or
• has sublet the whole of the works or any part of the works to the detriment of
good workmanship or in defiance of instruction from the engineer.
18.043 In the case of the happening of these instances, the employer has the option of
terminating the contract after giving the contractor at least seven days’ notice in
writing. Thereupon, the employer can enter the site, evicting the contractor from
it. The employer may complete the work by itself or employ another contractor to
complete the same. In doing so, the employer is entitled to use the plant, material and
temporary facilities that are its property for the completion of the work or to sell the
same applying the proceeds of sale towards the account between the employer and
the contractor. For ensuring effective operation, it is also expressly provided that, as
soon as practicable after such entry and expulsion by the employer, the engineer is
under a duty to ascertain and record the quantity of work completed up to the time
of termination and the quantity of unused or partially used materials. The engineer is
also under a duty to ascertain and record the plant, materials and temporary facilities
that have become the property of the employer. The employer is also entitled to ask,
at its own option, the contractor to assign to it the benefits of agreements that the
contractor secured in relation to the renting of plant or supply of materials. In any
event, the employer, in case of a termination, is relieved from any liability to pay to the
contractor any interim payments otherwise due pending the completion of the work
up to the time when the maintenance certificate is issued. Thereafter, the employer
is entitled to, upon certification of the same by the engineer, recover or deduct from
the contractor’s account the cost of completion and maintenance, damages for delay
in completion and all other expenses incurred. Obviously, if there is a balance due
to the contractor after such deductions by the employer, the contractor may, upon
certification by the engineer, demand the payment of such balance from the employer.
(f ) Termination by the contractor
18.044 As to termination by the contractor, most standard forms of contract, particularly those
used in the private sectors, contain no express provision allowing termination by the
contractor on the happening of specified events. Some termination clauses dealing
with the non-payment by the employer also adopt the two-tier approach, addressing a

continued failure to pay by the employer upon written notice or request for a specified
period of time. An example of such termination clauses can also be found in clause 88
of the Hong Kong Government General Conditions of Contract for Civil Engineering
Works (1999 edition): where the employer fails to pay the contractor any sum certified
in accordance with the contract, the contractor may give 14 days’ written notice to
the employer demanding the employer to make payment of such sum due. Express
reference to the termination clause in the notice is called for. If no payment is effected
after the 14-day period, the contractor is entitled to terminate the contract. In such
situations, the property of the plant, materials and temporary facilities brought on site
by the contractor is to be revested in the contractor and the contractor may remove
them from the site.
In practice, there are of course variations. In John Jarvis Ltd v Rockdale Housing 18.045
Association,51 upon the terms of the 1980 edition JCT standard form of building
contract, the employer engaged the contractor to construct 50 flats and ancillary
accommodation, using nominated subcontractors to carry out the piling work. After
the piling subcontractor withdrew from the site, the architect instructed the contractor
to stop work pending investigation and decision regarding defective piles. This
instruction was issued under clause 23.2 of the contract. One month passed and the
contractor wrote to the employer without warning, terminating its employment pursuant
to clause 28.1.3.4 of the contract on the grounds that the whole or substantially the
whole of the uncompleted works had been and were suspended for a continuous period
of one month. There was a specific proviso in clause 28.1.3.4 that exempted from its
operations such termination was to be allowed unless caused by the negligence or
default of the contractor; there was another proviso that the termination should not
be unreasonable or vexatious. At the trial on the preliminary issues regarding whether
such a termination had been unlawful, it was held that the phrase “negligence or default
of the contractor” in the termination clause referred to that of the main contractor, his
servant or agents, but not to his nominated subcontractors. In relation to the word
“unreasonably” in the clause, it was considered to be a general term and connoted
something outside the band of possible reasonable decisions with which opposite
conclusions were possible. Regarding the word “vexatiously” in that same clause, it
connoted an ulterior motive to oppress, harass or annoy. In the circumstances, the
exercise of the right to terminate was found valid, notwithstanding that the architect
had, in the meantime, taken all steps open to secure a second nomination and was
astonished and stunned to receive the termination letter.
(g) Reasonable exercise of the power to terminate
In relation to termination clauses in construction contracts, some may provide drastic 18.046
consequences for forfeiture where there are only minor breaches by the contractor
or the employer. Such termination clauses may call into question the reasonableness
in terminating under the contract. In the New Zealand case of Brown & Doherty v
51
(1987) 10 ConLR 51. See Ferrara Quay Ltd v Carillion Construction Ltd [2009] BLR 367 and Reinwood Ltd v
L Brown & Sons Ltd [2007] BLR 10.

486 TERMINATION
Whangarei County Council,52 the engineer had failed to give a sufficiently clear update
of his intention to terminate the contract after he acquiesced in the continuation of the
work under the contract following earlier complaints at meetings. It was held that the
subsequent termination was unfair and was invalid.
18.047 Thus, in relation to the exercise of the power to terminate, such powers are usually
additional to, and not to be confused with, a party’s right at common law to treat itself
as discharged from further performance as a result of a breach of condition, ie what
traditionally is known as a repudiation, by the other party. As such, some termination
clauses may also provide that the powers shall not be operated vexatiously. There has
thus perhaps developed an expectation within the industry in some jurisdictions that a
clause conferring a power of termination will be one that is reasonably exercisable on
the grounds of breach by the other party.
18.048 In Australia, however, the leading case on this subject is Renard Constructions Ltd v
Minister of Public Works,53 in which the New South Wales Court of Appeal held that a
power of determination under a construction contract should be exercised reasonably.
It may be considered that such an approach is to be applicable particularly to
construction contracts rather than to contracts of engagement for professional services.
In that case, a finding by the arbitrator that the termination was unreasonable and,
hence wrongful was upheld. The contract was terminated some three months before
the likely completion of the contract by the contractor, after the most difficult and
unprofitable part of the work had been completed. The termination clause, however,
conferred a maximum of discretionary power to terminate on the part of the employer
and such a procedure could be activated even following quite trivial defaults.
18.049 Yet, the development of the concept of good faith in relation to commercial contracts
may mean that this area will have to be revisited in subsequent cases.
18.050 A different approach is shown in Hadley Design Associates Ltd v Westminster City
Council,54 where the question involved was whether or not a power of termination was
subject to any limitation, such as might be expected if one is familiar with the standard
forms. The Technology & Construction Court in England and Wales held, in that case,
that the exercise of the power to terminate a contract of engagement for surveying
services was not subject to implied limitations that the termination provision was to
be exercised reasonably or in good faith or on the grounds of breach. Support for this
rationale can be found in the case of White & Carter (Councils) Ltd v McGregor,55
where it was remarked that:
“It might be, but it never has been, the law that a person is only entitled to enforce
his contractual rights in a reasonable way, and that a court will not support an
52
[1988] 1 NZLR 33. See Watson v Watson [1953] NZLR 266; Snell v Potter [1953] NZLR 696; and Canterbury
Pipe Lines Ltd v The Christchurch Drainage Board (1979) 16 BLR 76. See also Pepper (Inspector of Taxes) v
Hart [1993] AC 593.
53
(1992) 26 NSWLR 234. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656.
See also Harmon CFEM Facades (UK) Ltd v Corporate Officer of the House of Commons (2000) 67 ConLR 1.
54
[2004] TCLR 1. See Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] BLR 435.
55
[1962] AC 413.

attempt to enforce them in an unreasonable way. One reason why that is not the
law is, no doubt, because it was thought that it would create too much uncertainty
to require the court to decide whether it is reasonable or equitable to allow a party
to enforce his full rights under a contract.”
(h) Failure to proceed regularly and diligently
Among the various reasons, one common ground that triggers the termination of 18.051
construction contracts is that the contractor fails to proceed with the works regularly
and diligently despite notice, or reasonably in accordance with the progress of the
works. There may however be some uncertainty as to the exact meaning when put
into operation. In Hounslow London Borough Council v Twickenham Garden
Developments Ltd,56 it was observed by Megarry J that these were elusive words,
“regularly and diligently”, on which the dictionaries helped little, and that the words
conveyed a sense of activity, of orderly progress, and of industry and perseverance
but such language provided little help on the question of how much activity, progress
and so on was to be expected. It was there said that it remained somewhat uncertain
as to the concept enshrined in these words. In the case of Piggot Foundations Ltd
v Shepherd Construction Ltd,57 which concerned a clause in the JCT standard form
of domestic subcontract that provided that the subcontractor was to carry out and
complete the subcontract works “reasonably in accordance with the progress of the
works”, it was held that those words only required that the subcontractor carried out
its works so that they would not unreasonably interfere with the actual carrying out of
other works that could conveniently be carried out at the same time.58 Regarding the
meaning of “regularly and diligently”, in West Faulkner Associates v London Borough
of Newham,59 Brown LJ remarked that:
“My approach to the proper construction and application of the clause would
be this. Although the contractor must proceed both regularly and diligently with
the works, and although each word imports into that obligation certain discrete
concepts, which would not otherwise inform it, there is a measure of overlap
between them and it is thus unhelpful to seek to define two quite separate and
distinct obligations. What particularly is supplied by the word ‘regularly’ is not
least a requirement to attend for work on a regular daily basis with sufficient in
56
[1970] 3 WLR 538. See Vipac Engineers & Scientists Ltd v Mark Karpovich [1990] 1 HKLR 725. See also
Amec Civil Engineering Ltd v Secretary of State for Transport [2005] 1 WLR 2339; West Faulkner Associates
v Newham LBC (1995) 71 BLR 1; and Manchester Airport Plc v Dutton [2000] QB 133. Contrast Mayfield
Holdings v Moana Reef [1973] 1 NZLR 309 and Tara Civil Engineering v Moorfield Developments Ltd (1989)
46 BLR 72.
57
(1993) 42 ConLR 98. See Tridant Engineering Co Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656.
58
This case was not concerned with interpretation of the term “regularly and diligently”. The issue there was
whether the obligation to carry out works “reasonably in accordance with progress of work” includes an
obligation to comply with the contractor’s programme of works.
59
(1994) 42 BLR 1. See also Goldlion Properties Ltd v Regent National Enterprises Ltd (2009) 12 HKCFAR 512
as to the approach of constructing clauses of similar nature,

488 TERMINATION
the way of men, materials and plant to have the physical capacity to progress the
works substantially in accordance with the contractual obligations.
18.052 What in particular the word ‘diligently’ contributes to the concept is the need to apply
that physical capacity industriously and efficiently towards that same end.
18.053 Taken together the obligation upon the contractor is essentially to proceed continuously,
industriously and efficiently with appropriate physical resources so as to progress the
works steadily towards completion substantially in accordance with the contractual
requirements as to time, sequence and quality of work.”
18.054 These have been taken into account in Tridant Engineering Co Ltd v Mansion Fire
Engineering Co Ltd,60 where it was held that the obligation to progress regularly and
diligently did not exist in vacuo and it had to be measured against, on the one hand,
the contractual requirements as to time, sequence, quality of work and programme of
works and on the other, supply of labour and materials. In that case, an implied term
was found on the part of the subcontractor to work to the programme of the contractor.
(i) When payment is unreasonably withheld by the employer
18.055 Likewise, in JM Hill & Sons Ltd v London Borough of Camden,61 the termination
clause in a construction contract provided that the employer, without prejudice to any
other rights or remedies which the employer might possess, had a right to terminate
the contract if the contractor failed to proceed regularly and diligently with the works
or if it wholly suspended the carrying out of the works without reasonable cause.
In this case, there was a situation in which the employer was withholding money
legitimately due, and the dicta in the case suggested that the court believed that this
conduct by the employer was such that the contractor was not acting unreasonably in
determining the contract. Therefore, the withholding of a substantial sum legitimately
due to a contractor can be unreasonable, and an architect or engineer exercising her
or his balancing function when considering whether or not to issue a notice under a
termination clause, it seems, should take into account whether or not a suspension is
with reasonable cause when the employer is deliberately, without any reasonable cause,
withholding a substantial amount of money rightly due to the contractor. Similarly,
where the termination clause provides that the notice of termination given by the
employer shall not be given unreasonably or vexatiously, it seems that an employer who
seeks to terminate a contract on the grounds that the contractor has suspended work
or is failing to proceed regularly and diligently with them, when the employer well
knows that this is because he or she has failed to pay the contractor a considerable sum
of money which he or she has assessed as properly due, is acting unreasonably.
60
[2000] HKEC 656. See also the Hong Kong Court of Appeal decision of Tridant Engineering Co Ltd v Mansion
Fire Engineering Co Ltd [2001] 1 HKLRD 783.
61

(j) Knock-on termination
In construction contracts, it is not uncommon that termination of one contract has 18.056
knock on effects for other contracts in the chain. For instance, in standard forms of
contracts for nominated subcontractors, it is often provided that the termination of
the main contract brings about the automatic termination of the subcontract. In those
circumstances, the stipulated damages recoverable are normally for the works done and
materials supplied, unless the termination of the main contract is in consequence of the
breach of the subcontract on the part of the subcontractor. As illustrated in Stocznia
Gdanska SA v Latvian Shipping Co, Latreefer Inc,62 the respective rights of the parties
are then governed by the termination and their common law rights are, sometimes,
displaced.63
(k) Contractual notice requirement
In relation to the contractual notice requirement, the typical two-tier notice is 18.057
commonly required by termination clauses in standard form construction contracts,
whether with or without requiring the continuation of the breach for a specific period
of time after the first notice before a second definitive notice of actual termination
is to be given. Close compliance with the content and timeframe is essential for
the notice to be valid. It seems from Re Stewardson Stubbs & Collett Pty Ltd and
Bankstown Municipal Council64 that a contractual notice to terminate referring to the
termination clause and pointing out the default in issue should generally be sufficient.
On the other hand, strict compliance of any time limits or procedural requirements
imposed are expected, failing which the contractual notice to terminate may become
ineffective, as illustrated in Roberts v Bury Improvement Commissioners.65 Indeed,
in Re Stewardson Stubbs & Collett Pty Ltd and Bankstown Municipal Council, a
notice posted on the last day of the 14-day period and purporting to terminate the
contract forthwith, which was received after the expiry of the 14-day period, was held
not effective in terminating the engagement of the contract. Also, in George Bevan
Enterprises Ltd v Robert Patrick Ltd,66 in a situation akin to that of Re Stewardson
62
[2002] 2 Lloyd’s Rep 436. See Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222 and
Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79. See also
Gold Group Properties Ltd v BDW Trading Ltd (formerly Barratt Homes Ltd) [2010] BLR 235; Bournemouth
University Higher Education Corp v Buckland [2010] 4 All ER 186; and Stocznia Gdynia SA v Gearbulk
Holdings Ltd [2009] BLR 196.
63
As to delay in accepting a repudiation, the question was whether the length of time was consistent only with an
affirmation of the contract, or if circumstances surrounding the delay dictated that the innocent party must have
affirmed the contract or, at least, were such that the party in default could raise an estoppel. Lapse of time did not
operate against a party who was entitled to elect to repudiate liability under a contract, unless there was prejudice
to the defendant or rights of third parties had intervened or the delay was of such a length as to be evidence
that they had in truth decided to accept liability. Delay alone could not bar an innocent party’s right to accept
repudiation. See Cheung Ching Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324.
64
[1965] NSWR 161. See Hooker Constructions v Chris Engineering Co [1970] ALR 821 and Engineering
Construction Pte Ltd v Attorney General of Singapore (1998) 14 ConLJ 120.
65
(1870) LR 5 CP 310. See CFW Architects v Cowlin Construction Ltd (2006) 105 ConLR 116 and Royal Brompton
Hospital NHS Trust v Hammond (No 9) (2002) 88 ConLR 1.
66
(1988) 7 ACLR 34.

490 TERMINATION
Stubbs & Collett Pty Ltd and Bankstown Municipal Council, it was held that a notice
that did not purport to take effect at once but from a further named date was still
invalid in terminating the contract as it was posted by registered mail before the default
period had expired and, as such, was premature. Obviously, as in Drew v Josolyne,67
no additional requirements other than those stipulated in the termination clause are
lightly allowed. In some cases, a certain degree of laxity is even exhibited when there
is infringement of the contractual requirements. In Goodwin & Sons v Fawcett,68 a
notice required by the RIBA form to be by registered post had in fact been served by
recorded delivery. While acknowledging that registered post did not include recorded
delivery and that in law they remained different things, the court held that the notice
was validly served, observing that “the whole contract must be construed in a common
sense business way as a building contract, and this notice had been properly served on
the true interpretation of the words used”.
18.058 In Muir Construction Ltd v Hambly Ltd,69 however, the termination clause provided
that the contractor might by notice by registered post or recorded delivery to the
employer or architect forthwith terminate the employment of the contractor. In the
case, an issue arose as to whether, instead of being served by hand, it was essential to
the validity of the notice that it be served by registered post or recorded delivery. In
that case, the building contractor, engaged under a JCT (1980 edition) standard form
of contract to carry out development work, served a warning notice on the employer
seeking payment under an interim certificate and, thereafter, no payment having been
made, purported to terminate the contract by service by hand delivery of a notice of
determination. The court found that the notice of termination served by hand was
invalid since there was nothing contrary to common sense in concluding that those
precise words in carefully structured provisions were intended by the parties to have a
precise effect in carefully structured procedures. In another Australian case Kennedy
v Collings Construction Co Pty Ltd,70 where service of the second-tier notice to
terminate was required in the termination clause to be effected by registered post, the
court, after taking into account that the second-tier notice had unquestionably been
received, held that the notice was effective notwithstanding that there was no evidence
of such service by registered post.71
67
(1887) LR 18 QBD 590. See Wilkie v Scottish Aviation Ltd 1956 SC 198 and Re Tout and Finch Ltd [1954]
1 WLR 178.
68
(1965) 195 EG 27. See Muir Construction Ltd v Hambly Ltd 1990 SLT 830.
69
(1990) SLT 830. See Batt Cables Plc v Spencer Business Parks Ltd 2010 SLT 860; Ben Cleuch Estates Ltd
v Scottish Enterprise 2008 SC 252; Scrabster Harbour Trust v Mowlem Plc (t/a Mowlem Marine) [2006] BLR
207; and City Inn Ltd v Shepherd Construction Ltd 2002 SLT 781.
70
(1991) 7 B&CL 25. See Chapman v Larrescy [1978] 1 NSWLR 592. See also Aussie Invest Corp Pty Ltd
v Pulcesia Pty Ltd [2005] VSC 362.
71
In his judgment, Giles J referred to the authority in which contractual provisions for the service of a notice by
registered post had been held to stipulate permissible, rather than obligatory, means of giving notice and held
that a condition in a building contract requiring service of a dismissal notice by registered post should be seen as
merely facultative, rather than excluding other methods, such as personal service. His Lordship considered that
there would be sufficient compliance with the condition if the notice were given by any other means which was
shown to have resulted in its receipt and observed that the argument based on non-complying service was “wholly
unmeritorious”.

(l) Risk of an invalid notice
The case of Lubenham Fidelities & Investments Co Ltd v South Pembrokeshire District 18.059
Council72 illustrates the risk involved in issuing an invalid notice to terminate the
contract under a termination clause. In that case, the construction contracts in issue were
in the JCT (1963 edition) standard form. The original contractors went into liquidation
and the bondsman, instead of paying on the performance bond, stepped in to perform
the contract itself by engaging subcontractors to carry out the work. The bondsman
discontinued work and then purported to terminate the contract under a termination
clause for non-payment, not of what had been certified in the architect’s interim
certificate, but of what ought to have, but in fact had not, been certified. The architect
appeared to have made two errors when certifying – the first was that he disallowed
sums for defective work after, and not before, calculating and deducting retention, thus
presumably increasing by a small amount the retention deduction; the second was that
the architect mistakenly deducted liquidated damages from the certificate and this was
compounded by the fact that the contract date for completion had not even arrived,
nor had any certificate otherwise provided for in the contract been issued upon which
any right to deduct would depend. Yet, the architect appeared to have considered in
good faith that certain intermediate programme dates in the contract documentation
justified a claim for liquidated damages before completion of the whole and, no doubt
for this reason, would not cooperate by issuing a corrective interim certificate. The
bondsman, after protesting in vain, wrote to terminate the contract for the alleged
breach, ordering the subcontractors to cease work. The employer then served notice
of termination upon the bondsman on the ground that the bondsman was in default
by wholly suspending the carrying out of the works without reasonable cause. The
bondsman served notice under clause 26(1) claiming that the employer was in breach
of its obligations to make payments under the interim certificates and then issued a
writ for such payments. It was held that the bondsman had repudiated the contract by
not complying with the contractual terms and was in breach notwithstanding that the
employer had been wrong in deducting liquidated damages at that stage. The Court of
Appeal in England and Wales also remarked that, by serving invalid notice to terminate
and then issuing writ, the bondsman had indicated an intention not to be bound by the
contract thereby entitling the employer to accept such a repudiation, bringing an end
to the contract.
There are instances where the content of the contractual notice is the subject of dispute. 18.060
For example, a default as required in the termination clause in Woolworths Ltd v Crotty73
meant “not doing something that you ought to do, having regard to the relations which
you occupy towards the other persons interested in the transaction”. In Pauling v The
Mayor, Aldermen, and Burgesses of the Borough of Dover,74 the termination clause in
72
(1986) 6 ConLR 85. See Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd [1999] HKEC 675,
affirmed by the Hong Kong Court of Appeal ([1999] HKEC 1221). See also Karl Construction Ltd v Palisade
Properties Plc 2002 SLT 312; Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850;
and Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10.
73
(1942) 66 CLR 603.
74
(1855) 10 Ex 753. See also Morgan v Tarte (1855) 11 Ex 82.

492 TERMINATION
a building contract entitled the employer to terminate the contract where it appeared
to the employer or the engineer that the contractor was not proceeding to execute
the work properly or with due expedition. The court held that a notice stating “I give
notice to you to supply all proper materials and labour for the due prosecution of the
works, and to proceed therewith with due expedition, and further, that if you shall
for seven days after giving this notice fail or neglect to comply therewith, I shall, as
engineer, and on behalf of the Corporation, take the works wholly out of your hands”
was not a valid notice, as it was too general. Thus, generally speaking, if the engineer
or employer desires the contractor to do some particular act, for example, to pull down
some of its work, it ought to give the contractor a notice to that effect, specifying to
what extent it wished to have the work pulled down.
18.061 As to the effective date of a termination, the general view, as in Hill v London Borough
of Camden,75 is that it takes place when the notice to terminate is served on the party,
rather than at the time of posting.
(m) Termination based on erroneously held beliefs
18.062 A complicated situation arises when a party acting in good faith terminates the
contract for one of the reasons stated in the termination clause but then finds that the
reason given does not exist at the time of termination at all. The governing principle
in such a situation is found in Haneet Chandru Vaswani v Italian Motors (Sales &
Services) Limited,76 where the sole distributor of Ferrari cars, based on its genuinely
held but erroneous views on the effect of the contract, had demanded from the buyer
a sum in excess of that due. Yet, the distributor had never gone so far as to indicate
to the buyer that it would have been purposeless to pay the correct sum, and the
distributor was not required to deliver the car until the buyer had paid the correct
sum. In default of payment by the buyer, the car was later resold. The Privy Council
found that there was no conduct by the distributor that was totally inconsistent with
the continuance of the contract until after the buyer had made it clear he would not
make any further payment. The Council held that the distributor had not therefore
repudiated the contract and was entitled to forfeit the deposit. In reaching such a
decision, the rationale in the case of Woodar Investment Development Ltd v Wimpey
Construction UK Limited77 was followed. In that case, which concerned a sale and
purchase of land, the contract provided for the purchaser’s right to rescind the contract,
if prior to completion, the process of compulsory purchase were to commence.
75
76
[1996] 1 HKLR 8. This case is distinguished in Wong Kam-Lan v Well Win Investment Limited [1996] 2 HKLR 96.
77
[1980] l WLR 277. See Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003]
2 HKLRD 309 and contrast Okachi (Hong Kong) Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55. See also
Shaffer v Findlay Durham & Brodie [1953] 1 WLR 106 and Sweet & Maxwell v Universal News Services [1964]
2 QB 699. See further Jim Ennis Construction Ltd v Combined Stabilisation Ltd [2010] CILL 2820; Nottingham
Building Society v Eurodynamics Systems Plc [1995] FSR 605; and Mayhaven Healthcare Ltd v Bothma
(t/a DAB Builders) [2010] BLR 154.

In fact, prior to the exchange of contracts, compulsory purchase proceedings in

respect of the land had been commenced. Subsequently, the purchaser purported to
rescind the contract on the grounds of the commencement of those proceedings. The
seller did not accept this but indicated that the courts could decide the issue, and
then issued proceedings seeking a declaration that the purchaser was not entitled
to rescind. When the matter came before the court, the seller contended that the
purchaser’s action amounted to a repudiation of the contract which the seller now
accepted and claimed damages accordingly. It was held by the House of Lords that,
in attempting to rescind, the purchaser was seeking to rely, albeit erroneously, upon
the terms of the contract itself and there was no evidence that it intended to repudiate
the contract or refuse future performance if the issue as to the right to rescind was
decided against them.78
Thus, the mere fact that a party has insisted on its rights under a contract, including 18.063
those rights under a termination clause, even though it may have been wrong about
them, is not to be treated as evincing an intention to repudiate the contract. Yet,
in construing the terms of the contract, it will be a question of fact whether such
a mistake is made in good faith, as in Creatiles Building Materials Co Ltd v To’s
Universe Construction Co Ltd,79 where there was conduct or knowledge inconsistent
with such a construction of the term.
(n) Set-off and cross-claim issues
A special problem arises from time to time in the case of termination of construction 18.064
contracts by the contractor in cases of non-payment of sums due or interim payments
certified under termination clauses operating with two-tier notices. Such a system
calls for the continuation of the non-payment during the interim period between the
two notices. Hence, the validity of the second-tier notice may be subject to challenge
when set-off or cross-claims are raised by the employer in view of the preservation
of, at least, a common law right of set-off as in Gilbert-Ash (Northern) Ltd v Modern
Engineering Bristol Ltd.80 Whether the employer may be allowed to raise such set-
off or cross-claims in these circumstances, naturally, depends on the wording of the
termination clause.
78
In the judgment, as per Lord Wilberforce:
“.. in considering whether there has been a repudiation by one party, it is necessary to look at his conduct as a
whole. Does this indicate an intention to abandon and to refuse performance of the contract?”
See Okachi (Hong Kong) Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55.
79
[2003] 2 HKLRD 309. In the judgment of Cheung JA, he said:
“The position would appear to be that it may not be a repudiation for one party to put forward his genuine, but
bona fide, interpretation of what the contract requires of him but that where that party performs in a manner
which is not consistent with the terms of the contract, it is no defence for that party to show that he acted in
good faith.”
See also Owt Asia Ltd v Cpcnet Hong Kong Ltd & Proactive Technology Ltd (Third Party) [2005] HKEC 2152
and Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd [2005] HKEC 1264.
80
[1974] AC 689.

494 TERMINATION
5. RIGHTS UPON TERMINATION
(a) Kinds of remedies
18.065 It is now not unusual to find in contracts, particularly contracts envisaging an ongoing
relationship between the parties, two kinds of remedies for breach or default: remedies
which authorise the innocent party to bring the contract to an end; and remedies
which, whilst assuming the contract to remain on foot, authorise the innocent party to
take such steps as are provided for in the contract, for example, to continue the work
contracted to be done and to recover damages. The difference between clauses of these
two kinds is that in the one, the innocent party may bring the obligations of both parties
under the contract to an end and, special cases apart, has as its remedy the right to sue
for damages for breach. In the other class of cases, the power that the innocent party
exercises does not bring the contract to an end but brings into force the rights given
to it under the contract itself, and the innocent party is not entitled to sue for common
law damages for termination or repudiation for such a breach. Whether a contractual
provision is of one or the other kind depends, of course, upon its construction in the
context of the contract as a whole.
18.066 A party terminating a contract at common law is generally allowed damages, including
those flowing from the termination of the contract itself. A party terminating under
a termination clause is normally conferred only with the rights as stipulated under
the contract. If, however, a contractual termination can also justify a common law
termination, damages assessed under the common law may also be recoverable.
(b) Rights of employer
18.067 For termination by the employer, the termination clause usually gives it a right to enter
upon the site and to use plant and materials left over for the completion of the works.
Such a right is exercisable at the discretion of the employer. As seen from earlier cases,
there are four key areas which are covered – seizing of materials as in Rouch v Great
Western Railway Company,81 seizing of money in hand as in Walker v London and
North Western Railway Company;82 completing the works as in Mohan v Dundalk
Railway Company;83 and the contract becoming void or voidable as in Re Garrud, Ex
p Newitt.84 In modern times, some of these may be regarded as penalties and rendered
invalid.
18.068 When the employer completes the work following a termination, it is usually duty
bound to account to the contractor for the calculation of the costs of completion and
for making any necessary allowances or deductions for the final work contemplated to
be completed as under the original contract. In Sharp v San Paulo Railway Company,85
81
(1841) 10 LJQB 89.
82
(1876) 1 CPD 518.
83
(1880) 6 LR Ir 477.
84
(1881) 16 ChD 522.
85
(1873) LR 8 Ch App 597. See Hurst Stores & Interiors Ltd v ML Europe Property Ltd [2003] BLR 391.

CONSTRUCTION INSOLVENCY 495
it was remarked that, in the absence of fraud or extreme negligence, the contractor
could not complain if the work had been carried out in an uneconomical manner and
that every allowance should be made in considering the conduct of the employer for
the position in which the default of the contractor had placed it.
(c) Interim rights
The interim effect of a termination clause has been considered by the Hong Kong 18.069
Court of Appeal in Attorney General v Ko Hon-Mau.86 In that case, under the terms
of a building contract, certain plant and equipment on site was to belong to the Hong
Kong Government if the contractor was in breach, and to the contractor if the Hong
Kong Government was in breach. Both parties alleged breach by the other, and both
claimed the plant and equipment. The Hong Kong Court of Appeal held that the
contractor was entitled to repossess and remove the plant since a notice by either party,
alleging breach by the other, had similar interim effect for the purposes of interim
specific relief.87
6. CONSTRUCTION INSOLVENCY
(a) Overview of the insolvency procedure
The corporate regime of insolvency laws in Hong Kong is primarily governed by Pts V, 18.070
VI and X of the Companies Ordinance (Cap 32). As with its counterpart legislation in
other jurisdictions, the fundamental purpose of insolvency laws is to provide a fair and
orderly process for dealing with the financial affairs of insolvent companies. Its goal is
to retain and reinforce the pari passu principle, ie the principle of equal sharing among
unsecured creditors.88 This is the basic concept that the free assets of an insolvent
company at the commencement of the liquidation should be distributed rateably
amongst its unsecured creditors as at that date. This is achieved by the statutory
mechanism for preventing the dissipation of company assets to the detriment of its
creditors or for the preference of one or more of its creditors over and above others.
As such, the first-come-first-served clamber by creditors can be prevented. To this end,
there are provisions for regulating the commencement or continuance of proceedings
against the company and the disposition of the company assets in case of winding-
up. These provisions also have a crucial effect on outsiders. Generally, no action or
proceedings can be continued or commenced against the company except with the
leave of the court under s 186 of the Companies Ordinance (Cap 32); the liquidator is
appointed to take control of, or preserve, the assets of the company. The duty of the
liquidator is to collect the assets and apply them in discharge of the liabilities of the
86
[1989] 1 HKLR 351.
87
In this case, having regard to the practicalities and the need to reconcile in practice these conflicting clauses,
the Hong Kong Court of Appeal noted that there was no reason for attributing a greater provisional value to one
notice rather than the other or for treating one notice as practically destructive of the other.
88
See Yukio Takahashi v Cheng Zhen Shu [2008] HKEC 1537; Yew Sang Hong Ltd v Housing Authority [2008]
3 HKLRD 307; and Re Tai Kam Construction Engineering Co Ltd [2005] HKEC 507.

496 TERMINATION
company. Powers are conferred, inter alia, on the liquidator to carry on the business
of the company for its beneficial winding-up, to realise its assets and to compromise
claims. Upon winding-up, only the liquidator is conferred with the power to act for
the company and all the directors of the company are discharged in this context. The
administration of an insolvent company is not a simple matter. It can be a difficult
task to recover assets, particularly in situations where the company does not have the
cash to fund the recovery actions, and there are often difficulties in getting the former
owners to cooperate with each other and with the liquidator.
18.071 Further, a point to note is that the date of commencement of winding-up is different
from the date when the winding-up order is made. For a compulsory winding-up, it is
deemed to commence at the time of the filing of the petition as per ss 184(2) and 209B(a)
of the Companies Ordinance (Cap 32). For a voluntary winding-up, it commences at
the time when the resolution for voluntary winding-up is passed as per ss 184(1) and
230 of the Companies Ordinance. Therefore, this may retrospectively prevent a person
from retaining against the liquidator the benefits of any transaction, judgment or arbitral
award obtained in the interim period. Unless otherwise approved by the court, any
disposition of property of the company after the commencement of the winding-up,
including things in action, are void and can be traced back. It should, however, be noted
that such property does not include property merely held on trust by the company.
(b) Impact of the main contractor’s insolvency
18.072 When insolvency hits the main contractor or others in the middle of the pyramid, the
situation is frequently very complex. The employer will normally want construction
to continue, as will most other parties. Yet, there are several practical realities that
should not be overlooked. First, as to liabilities, the insolvent contractor will be
unable to pay for past work carried out; it will not be able to provide any meaningful
warranties for its works; and the liquidator will not normally be able to confirm
payment to subcontractors and suppliers. On the other hand, as to assets, it is often
the case that, when it goes into liquidation, it has few assets other than the rights and
benefits of the construction contracts in hand. Thus, upon winding-up, it is important
to understand that certain contract provisions may no longer be operative. Failure to
recognise this may result in unpleasant financial surprise, sometimes with disastrous
consequences.
18.073 At common law, the general principle is that, when a contractor intimates that it
cannot continue with a contract by reason of insolvency, it will repudiate the contract
and the employer has no positive option save to accept. In theory, the liquidator of
a contractor has the power to carry on the business of the insolvent contractor by
continuing to perform its outstanding obligations pending under contracts. Yet, it is
in practice unusual for the liquidator to wish to do so. This may perhaps be due to the
inherent personal element of the functions of control and coordination of contractors
that prevents the vicarious performance of construction contracts. Furthermore, if the
contractor becomes insolvent, the first effect is usually that the work is brought to a
stop by the inability to continue financing the work. This may produce a potentially
serious financial loss for the other parties, which will not be satisfied by the insolvent

party. Such loss may be reduced or even avoided by the owner appropriating retention
money or the contractor’s plant and goods or by enforcing a surety bond.
(c) Standard provisions addressing insolvency
Therefore, in standard form construction contracts of any size, there are almost 18.074
invariably provisions enabling and dealing with the termination of the contract. Such
provisions are included usually with a view to regulating the respective rights of the
parties. They allow the owner to invoke the benefits of the contract even after the
employment of the contractor has been terminated. In these standard forms, there
are provisions protecting and containing the impact and intensity of consequences
that flow from the insolvency of contractors. Based on their nature, the protection
that is offered by these provisions may be classified as (a) proprietary safeguards,
which affects the proprietary rights of property and money of the contractor; and (b)
contractual safeguards, which concern contractual rights over property or money. The
former category includes measures such as direct payment and retention money; the
latter refers to those measures, such as a plant and material vesting clause and surety
bonds. However, their validity in operation has to be examined with reference to the
insolvency laws in issue.
(d) Proprietary safeguard
(i) Direct payment clauses

For instance, in relation to the use of nominated subcontractors, which is common 18.075
within the construction industry, engineers or architects frequently indicate in their
certificates for interim payment to the main contractor what proportion of the sums
so certified is referable to nominated subcontractors. This is done with a view to
assisting them to obtain payment from the contractor. Yet, there are direct payment
clauses in construction contracts enabling the employer to pay to the nominated
subcontractors directly. This power to pay the nominated subcontractors directly
stems from the desire to safeguard the employer as to the progress of the works in
case of the insolvency of the main contractor. This power is designed to ensure the
continued performance of important subcontractors on the project in situations where
the main contractor may be delaying or disputing payment without justification, or
for reasons with which the employer does not agree. Its aim is to help preserve the
employer’s commercial interest as regards the completion of the works. Thus, direct
payment clauses are of practical worth to the employer. It is crucial to note that this
power is usually conditioned on failure of the main contractor to pay the subcontractor
and is not targeted at or conditioned on the main contractor’s insolvency. In effect, the
operation of such a clause may involve the employer paying twice for the subcontract
work, and subsequently deducting from any later sums due to the main contractor. It
is thus arguable that such direct payments are invalid, being in apparent contravention
of the pari passu principle that all unsecured creditors rank equal. The risk the
employer runs in making direct payments to nominated subcontractors is that, if such
payments are subsequently held to be invalid, it still has to pay the liquidator of the
main contractor.

498 TERMINATION
18.076 An illustration of the problem and the risk in dealing with a contractor in liquidation
can be found in the case of Re Luen Cheong Tai Construction Co Ltd.89 In this case,
the applicant, who was a subcontractor to a contractor in liquidation for a government
works project, applied for a retrospective validation order pursuant to s 182 of the
Companies Ordinance (Cap 32) in respect of a number of payments that it had received
from the contractor after the presentation of the winding-up petition of the contractor
but before the making of the winding-up order. The issue for determination before
the court was whether the existence of knowledge of the presentation of a winding-
up petition was by itself fatal to a retrospective validation application. A substantial
amount of the total payment in issue was for works done by the subcontractor after
the presentation of the winding-up petition by another creditor of the contractor.
The court considered that such payment benefited the unsecured creditors of the
contractor in general and held that a retrospective validation order should be made
in the circumstances. In reaching such a decision, the court also observed that the
principle of securing pari passu distribution had no application to post-liquidation
creditors, such as the subcontractor, to the extent that payments to it were made in
respect of subcontract works carried out and after the presentation of the winding-up
petition. By keeping the subcontractor working and the government contract afloat,
such payments did not lead to a reduction and dissipation of the contractor’s assets. In
any case, the fact was that these were made in the ordinary course of business of both
the subcontractor and the contractor.
(ii) Direct payment and insolvency laws

18.077 In relation to a direct payment clause, the construction industry worldwide has operated
on the presumption that such direct payment to the nominated subcontractor does not
infringe the insolvency laws. This stance is inconsistent with the legal proposition
that a person is not allowed, by stipulation with a creditor, to provide for a different
distribution of her or his assets in case of insolvency from that which the law provides.
Indeed, the legitimacy of direct payment is in real life a subject of controversy in
different jurisdictions. In Re Wilkinson Ex p Fowler,90 the use of a direct payment
clause on a public authority development was upheld by the English court on grounds
of public policy. In another English case, Re Tout and Finch Ltd,91 such a power
to effect direct payment was treated as an authority conferred by the contract that
was also binding on the liquidator of the contractor. Similar views in support of the
validity of direct payment can be found in the Australian case of Re CG Monkhouse
89
[2004] 1 HKLRD 735. See also Siu Ping v Chan Wai Chi Louis [2010] HKEC 462 and Re Supershine Ltd [2009]
HKEC 1543.
90
[1905] 2 KB 713. See also Re Tout and Finch Ltd [1954] 1 WLR 178 and Glow Heating Ltd v Eastern Health
Board [1992] 8 ConLJ 56.
91
[1954] 1 WLR 178. Contrast Re McLaughlin & Harvey Plc (In Liquidation) (1996) 86 BLR 1, where it was held
that once the contractor went into liquidation the exercise of the employer’s right to make direct payment would
remove the sums so paid from the property which should come to the hands of liquidator, so as to reduce the
amount divisible among the general creditors and that such a result would offend against the pari passu principle.

Pty Ltd. 92 On the other hand, in the South African case of Administrator (Natal) v
Magill, Grant & Nell (Pty) Ltd (In Liquidation),93 in refusing to uphold such direct
payment, it was held that the exercise of the election to make direct payment, after
liquidation had supervened, would disturb both the realisation and distribution of the
assets as prescribed by the insolvency laws and that, if upheld, the door would be opened
to contractual stipulations expressly designed to accord, on insolvency, preference to
selected creditors who would otherwise be merely concurrent. In the Singapore case
of Jo Yee Construction Pty Ltd v Diethelm Industries Pty Ltd,94 applying the principles
derived from the House of Lords decision in British Eagle International Air Lines
v Cie Nationale Air France,95 it was held that implementation of a direct payment
following a liquidation was irreconcilable with, and would contravene, the pari passu
provisions of the Singapore insolvency laws. In the British Eagle case, it concerned a
right, if in credit, to receive a payment from the clearinghouse to settle mutual rights
and liabilities between the airlines related to IATA. The effect of the arrangement was,
on its face, to allow a distribution of a company’s assets in a manner different from that
as prescribed by the insolvency laws. In holding that such an arrangement was invalid,
the House of Lords noted that it was irrelevant that the parties to the clearinghouse
arrangements had good business reasons for entering into them and did not direct their
minds to how the arrangements might be affected by the insolvency of one or more
of the parties.
In Hong Kong, the status of a direct payment clause has been examined by the Hong 18.078
Kong Court of Appeal in Chevalier (HK) Ltd, The Joint Liquidators of Right Time
Construction Co Ltd,96 where the direct payments made were found invalid, thereby
enabling the liquidators of the contractor to ask the employer to pay again. In that
case, it was held that the employer was merely acting, in effect, as the agent of the
contractor in paying the sums to the nominated subcontractors, thereby rendering
such payments an indirect disposition of the contractor, contrary to s 182 of the
Companies Ordinance (Cap 32). In Golden Sand Marble Factory Ltd v Easy Success
92
(1968) 88 WN 238. See also New Cap Reinsurance Corp Ltd and Anor v Somerset Marine [2003] NSWSC 540.
93
(1969) 1 SALR 660. See Golden Sand Marble Factory Ltd v Easy Success Enterprises Ltd [1999] 2 HKC 356.
94
(1990) 2 MLJ 66.
95
[1975] 1 WLR 758. See Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2009] 2 BCLC
400; International Air Transport Association v Ansett Australia Holdings Ltd [2008] BPIR 57; and Joo Yee
Construction Proprietary (In Liquidation) v Diethelm Industries Proprietary (1990) 2 MLJ 66. Contrast Re
Maxwell Communications Corp Plc (No 2) [1993] 1 WLR 1402; Glow Heating Ltd v Eastern Health Board
(1992) 8 ConLJ 56; and Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (In Liquidation) [1984]
3 WLR 1016.
96
[1990] 2 HKLR. 223.

500 TERMINATION
Enterprises Ltd,97 however, where it involved a direct payment clause similar to the
JCT 63 standard form of contract, permitting the employer defendant to directly
pay the nominated subcontractor plaintiff and to deduct the same from sums due
to the contractor, upon certification by the architect, a different result was reached.
Such a direct payment procedure started after a meeting in March 1995, in which
all the interested parties attended and agreed that all future payments in relation
to the nominated subcontractor’s works would be paid directly by the employer.
The contractor was wound up in June 1996; the architect settled the final account
which included a sum of HK$318,362.55 in respect of works done by the nominated
subcontractor. The liquidator of the contractor asserted that the right to receive
the sum was vested in it and the money should be applied pari passu as regards
its creditors. Findlay J granted a declaration that the nominated subcontractor was
entitled to receive the whole sum of the money and said:
“It is, in my view, not arguable on the facts of this case that any property in this
money was vested in the [contractor] at the date of liquidation ... Accordingly, I
conclude, on the base of principle and there being nothing in the authorities to the
contrary, that as at the date of liquidation of the [contractor], no property in the
money in dispute was vested in that company, and therefore, the money does not
become part of the fund for distribution to creditors pari passu.”
18.079 In the circumstances, there is unavoidably a degree of uncertainty in effecting direct

payments. It would thus be prudent for the employer to ensure that any such direct
payment is advanced on the basis that if it is subsequently invalidated, the nominated
subcontractor will agree to and have the means to pay back the same. It should be noted
97
[1999] 2 HKC 356. See Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (In Liquidation) [1985] Ch
207 and Fraser & Others v Oystertec Plcs [2003] All ER (D) 46. See also Peregrine Investments Holdings Ltd v
Asian Infrastructure Fund Management Co Ltd LDC [2004] 1 HKLRD 598, where Cheung JA said:
“148. It is clear that the rationale of principle is to ensure that the assets of an insolvent is made available
for distribution to its creditors who will share it on an equal footing. I am happy to accept that this is a
matter of public policy in light of the insolvency law. But what is equally clear is that this public policy
is developed from a situation of an insolvent making provisions prior to his insolvency in respect of
his own property. In such a situation, the public policy will interfere and set aside the transaction made
pursuant to the arrangement of the insolvent and another party. This is no doubt a drastic measure but is
nonetheless an acceptable one because the court is only interfering with an arrangement that had been
made personally by the insolvent who had put his assets out of the reach of the creditors.
149. However, there has never been a case, like the present case, where the insolvent had not made an
arrangement in respect of his own property and yet the principle was nonetheless applied. Although in
both Higinbotham v Holme (1811) 19 Ves 88 and Re Jeavons, ex p Mackay (1872-73) LR 8 Ch App 643,
there were statements which seemed to refer to a wider principle that no one can have the benefit from a
contract that is a fraud on the bankruptcy law, the courts there were really concerned with an arrangement
made by the bankrupt himself. These statements were made in respect of the corollary of the situation,
namely, how the other party to the transaction would be affected when there was a fraud of the bankruptcy
laws. The courts held that they could not take the benefit of the arrangement. They were not propounding
a free-standing principle which would apply whenever the property of a bankrupt is affected as a result
of his bankruptcy irrespective of whether the bankrupt has made the arrangement himself or not.
150. Likewise the cases on the disposal of the insolvent’s assets at an undervalue were merely illustrations of
the original principle. They did not articulate a free-standing wide principle which is to be applied as soon
as the value of the insolvent’s property is affected by an arrangement not entered into by him personally.”

that in the decisions of Re Wilkinson, Ex p Fowler and Re Tout and Finch, there was
nothing done in relation to effecting direct payments before liquidation supervened,
and the right to receive payment still belonged to the company in liquidation at the
time of winding-up. While in the case of Golden Sand Marble Factory Ltd v Easy
Success Enterprises Ltd, at the date of liquidation, the court found that there was no
basis on which it could be suggested that the contractor had any right at all to receive
the money. Thus, it seems that the key question to be asked is whether the contractor is
still vested with the right to receive such payment at the time of liquidation. However,
in answering this, close examination of the factual context is essential. As Illustrated
in Sydenhams (Timber Engineering) Ltd v CHG Holdings Ltd,98 the exchange between
the employer and the subcontractor could be held as constituting a binding contract
between the two in some circumstances.
(iii) Abuse of insolvency regime to collect payment
Of course, the court is conscious of those situations where the regime of insolvency 18.080
is merely abused in the money collecting process. Where the court has come to the
view that a company does have a serious and genuine cross-claim not less than the
petitioning debt, there is a prima facie rule that the court would exercise its discretion
not to wind up the company but would dismiss or stay the petition in the absence
of special circumstances, as in Seawind Tankers Corporation v Bayoil SA.99 In Re
Yat Kwai Construction Co Ltd,100 there were issues on whether there was a genuine
and serious cross-claim that exceeded petitioning debt and whether there were special
circumstances justifying departure from the general rule. The petitioner commenced
an action against the contractor who filed a defence and counter-claim. The petitioner
obtained an interlocutory injunction with costs and served a demand for the costs.
When no payment was made, the petitioner petitioned to wind-up the contractor on
the ground that it was unable to pay its debts. In opposing the petition, the contractor
raised the issue that it had a serious and genuine cross-claim against the petitioner
that exceeded the petitioning debt. The court observed that it would be unfair for the
winding-up proceedings to stifle the counter-claim of the contractor. In dismissing the
petition, the court remarked that matters such as the finality of and inability to appeal
the judgment debt that formed the basis of the petition; the concern as to the potential
commercial insolvency of the contractor; and the absence of any real evidence that
the petitioning debt could be paid, were not regarded as special circumstances. In Re
Hyundai Engineering & Construction Co Ltd (No 2),101 the contractor established a
bona fide dispute and the petition was struck out. The debt in that case arose from
agreements for the hire of plant and equipment. The petitioner claimed that the
contractor was insolvent and unable to pay outstanding plant hire charges and therefore
petitioned for the contractor to be wound up under s 177(1)(d) of the Companies
98
(2007) 112 ConLR 49.
99
[1999] 1 Lloyd’s Rep 211. See Re Zhuang PP Holdings Ltd [2006] HKEC 1066 and Re The Sun’s Group Ltd
[2004] 3 HKLRD 65.
See also Southern Cross Group Plc v Deka Immobilien Investment GmbH [2005] BPIR 1010.
100
[2003] 2 HKLRD F13.
101
[2002] 2 HKLRD 354.

502 TERMINATION
Ordinance (Cap 32). The contractor contested the petition on the ground that that there
was a bona fide dispute of the debt on substantial grounds. The court remarked that,
though the onus was on the contractor to adduce sufficiently precise factual evidence
to satisfy the court that it had a bona fide dispute of the debt on substantial grounds, it
was not incumbent on it to prove that it was solvent at this stage. The issue of solvency
of the contractor would not become relevant unless and until it had failed to establish
a bona fide dispute and the winding-up petition was allowed to proceed.
18.081 Also, where there is substantial dispute on the underlying debt supporting the petition,
the petition will generally be dismissed.102 Furthermore, where there is a cross-claim
that equals or exceeds the petitioner’s claim, the court has discretion whether to stay
or dismiss the petition or to make the winding-up order. In Re Finbo Engineering
Co Ltd,103 the contractor sought to wind up its subcontractor for payment of the
subcontractor’s employees’ wages in respect of that work pursuant to s 43C of the
Employment Ordinance (Cap 57), which became a debt due from the subcontractor
to the contractor. The subcontractor opposed the petition arguing that the debt was
substantially in dispute as it was entitled to a legal or equitable set-off due to a pending
action it had commenced against the contractor in respect of the contract, for work done
by the subcontractor. In any event, the subcontractor contended that the court should
dismiss the petition application as its claim might exceed that of the contractor. The
court dismissed the petition application and observed that the subcontractor had an
arguable defence based on legal set-off and equitable set-off, and this rendered the debt
substantially disputed on bona fide grounds. The court also remarked that, in exercising
the discretion to stay or dismiss a petition, the relevant factors to consider included the
extent of the connection between the admitted debt forming the basis of the petition and
the disputed debt of the cross-claim; where the cross-claim proceedings were pending
or contemplated, whether the company had been guilty of any delay in seeking to have
the cross-claim determined; the ages of the admitted debt and the cross-claim; and the
nature and extent of any dispute in relation to the cross-claim. In doing so, it was also
held that the court could not go into the merits of the allegations made and the court
would assume that the allegations were the facts unless any of those allegations were
demonstrably wrong or unfounded. Thus, where a set-off or cross-claim was relied on
by the company, the court would look at the evidence and reach a conclusion whether
the set-off or cross-claim had substance. If it did and it exceeded the amount of the
petitioning debt, the court would ordinarily dismiss or stay the petition.104
(e) Contractual safeguard
(i) Plant and material ownership

18.082 Materials brought onto the site by the contractor remain its property until and unless
they are affixed to the land. When being built into the works, materials become the
102
See Re City Top Engineering Ltd [2006] 2 HKLRD 562, Re Wang Full Constructions Ltd [2008] HKEC 1170 and
Re Golden Sand Trading Ltd [2010] HKEC 170.
103
[1998] 2 HKLRD 695.
104
See Re City Top Engineering Ltd [2006] 2 HKLRD 562; Wong Wai Kuen v Polygon Contracting Ltd [2002]
2 HKLRD 569; and Re Ho Yip Shing [2002] 2 HKLRD 564.

property of the landowner. Thus, materials worked by the contractor into the property
of another become part of that property. As remarked in Appleby v Myers:105
“Bricks built into a wall become part of the house; thread stitched into a coat
which is under repair, or plants and nails and pitch worked into a ship under repair,
become part of the coat or ship, and therefore, generally, and in the absence of
something to show a contrary intention, the bricklayer, or tailor, or shipwright, is
to be paid for the work and materials he has done and provided.”
Similar principles apply towards a plant erected and fixed to the land, such that 18.083
there are sometimes express contractual clauses providing for their removal by
the contractor. In Jordan v May,106 for instance, the batteries for a power generator
which was attached to a concrete bedding were held not to be fixtures while the
generating plant was a fixture. In Hendy Lennox (Industrial Engines) Ltd v Grahame
Puttick Ltd,107 the engines linked to other equipment were held not to have lost their
identifiable quality when incorporated into other plant. In Orient Leasing (Hong Kong)
Ltd v NP Etches,108 certain units of a central air-conditioning system installed in a
building were held to be fixtures. In deciding whether a plant in issue is a fixture,
regard is to be given to the ease of removal and degree of attachment to the land, as
illustrated in Potton Developments v Thompson.109 The items in issue were portable
pre-assembled units of bedroom accommodation that were hired out by their
manufacturer for use in pubs, hotels and similar accommodation. The items were
large and had to be put in situ with the use of a crane. They were fixed by being bolted
with brackets embedded in the concrete slab. It was held that they were chattels. The
court remarked that the test included the consideration of the mode of installation
and removal, the question of whether or not the items were kept in place by their own
weight and the manner in which they are attached to the realty. It was also noted that,
although the use of brackets was indicative that the item became a fixture, it was not
a conclusive factor.
(ii) Plant and material vesting clauses

It is yet common for construction contracts to include a provision which vests the 18.084
property of plant and material brought to the site upon the owner, even before they
are fixed to the land. On top of these, in case of insolvency of the contractor, there is
also a power of sale conferred upon the owner in respect of those plant and materials
so vested.
105
(1867) LR 2 CP 651. See The Wai Lee Firm v Ku Chung Ming (1911) 6 HKLR 146 and Tridant Engineering Co
Ltd v Mansion Fire Engineering Co Ltd [2000] HKEC 656. See also FC Shepherd & Co v Jerrom [1987] QB 301
and Empresa Exportadora De Azucar (CUBAZUCAR) v Industria Azucarera Nacional SA (IANSA) (The Playa
Larga and Marble Islands) [1983] 2 Lloyd’s Rep 171.
106
[1947] 1 KB 427. See Penta Continental Land Investment Co Ltd v Chung Kwok Restaurant Ltd [1967] HKDCLR 22.
107
[1984] 1 WLR 485. See Glencore International AG v Metro Trading International Inc (No 2) [2001] 1 All ER
(Comm) 103 and Stroud Architectural Services Ltd v John Laing Construction Ltd (1993) 35 ConLR 135.
108
[1985] HKLR 292.
109
[1998] NPC 49. See Wessex Reserve Forces and Cadets Association v White [2005] 22 EG 132.

504 TERMINATION
18.085 Thus, there can be express agreement between the employer and the contractor as
to the transfer of property for plant and materials brought onto the site. However,
an agreement between the contractor and the supplier in that regard cannot of itself
affect the employer’s position. Once the materials or goods are incorporated into the
works, the general principle applies and they become the property of the employer
even if there is a clause in the supplier’s contract retaining its title to them prior to full
payment. In Borden (UK) Ltd v Scottish Timber Products,110 it was held that resin for
the manufacture of chipboard, once used, ceased to exist as a distinct entity. In Hobson
v Gorringe,111 a gas engine, sold on hire purchase term to a contractor who defaulted
on payments, was fixed to the land by screws and bolts to a concrete base laid in the
soil. It was held that the seller’s claim for possession of the engine failed as its right to
possession posed no obligations on the part of the landowner.
18.086 The primary aims of such a property-vesting clause are to provide a security to the
owner for money advanced and to enable it to obtain the speedy completion of the
works by another contractor in the event of the original contractor’s default. Thus,
such a clause seeks to provide materials and plant on the site that are ready to use and
are free from the claims of the original contractor, its creditors or liquidator. However,
whether or not the clause can achieve its purpose depends on the wording used, which
must be read in the context of the contract. For example, in Bennett & White (Calgary)
Ltd v Municipal District of Sugar City (No 5) 112 it was held that using the wording
“deemed to be” the property of the owner would be ineffective and the property
remained in the contractor.
18.087 Yet, as in Re Cosslett (Contractors) Ltd,113 there have been incidents where the court
held that a vesting clause of this type in the standard forms of construction contracts did
not operate to pass legal ownership in the plant. That case involved two coal washing
plants under a contract which provided, by clause 53(2), that all plant, goods and
material owned by the contractor were, when on site, deemed to be the property of the
council and, by-clause 63(1), that if the contractor went into liquidation or abandoned
the contract the council could enter the site and expel the contractor without releasing
it from any of its responsibilities under the contract. Under this clause, in the event
of the company being expelled, the council could retain possession of the plant and
use it to complete the works without further payment to the company; sell the plant
on completion of the works; not complete the works; or apply the proceeds of sale
towards whatever sums might be or become due from the company under the contract.
The contractor, after having established two washing plants on the site, encountered
financial difficulties and abandoned the site, leaving the plant there. Pursuant to clause
63(1) of the contract the council expelled the contractor. The contractor’s administrator
applied under s 234 of the Insolvency Act 1986 for return of the washing plants or
payment for their use. In the judgement of Millett LJ, he said:
110
[1981] Ch 25. See Re CKE Engineering Ltd (In Administration) [2007] BCC 975 and T Comedy (UK) Ltd v Easy
Managed Transport Ltd [2007] 2 Lloyd’s Rep 397.
111
[1897] 1 Ch 182. See Dalkia Utilities Services Plc v Celtech International Ltd [2006] 1 Lloyd’s Rep 599.
112
[1951] AC 786.
113
[1998] Ch 495. See Ashborder BV v Green Gas Power Ltd [2005] BCC 634; Re Beam Tube Products Ltd [2006]
BCC 615; and Gotham v Doodes [2007] 1 WLR 86.

“In the present case there are several indicia that the legal ownership of plant
and materials brought onto the site does not pass to the council. Such plant and
materials are described throughout as ‘plant and materials which have been
deemed to become the property’ of the council, a circumlocution which might
well have been dispensed with if they had become the actual property of the
council. The company is prohibited by clauses 53(6) from removing the plant and
materials from the site without the consent of the engineer (a similar clause was
said in Re Keen & Keen to be unnecessary if the plant and materials belonged
to the Council). Finally, clause 53(9) exempts the Council from liability for loss
of or injury to plant and materials brought onto the site (a provision which was
also said in Re Keen & Keen to be inconsistent with the property having passed
to the Council).”
(iii) Vesting clauses under Hong Kong standard forms

In the Hong Kong Government standard forms of contracts, plant and materials that 18.088
are owned by the contractor become the property of the owner when brought to the
site. The property only revests in the contractor upon completion of the works. The
plant and material vesting clause provides:
“All Constructional Plant and temporary building owed by the Contractor shall
when brought onto the Site be and become the property of the Employer but
may be removed from the Site by the Contractor at any time unless removal is
expressly prohibited by the Supervising Officer in writing. Upon removal as
aforesaid or under the terms of Clause 88(2) [which provides for the revesting of
the property in the contractor upon termination of the contract by the contractor]
such Constructional Plant and temporary buildings shall re-vest in the Contractor.
Upon completion of the Works the remainder of such Constructional Plant and
temporary buildings shall, subject to clause 81[which deals with the termination
of the contract by the employer], re-vest in the Contractor.”
In contrast, the commonly used standard forms of building contracts of the Hong Kong 18.089
Institute of Architects and the Royal Institution of Chartered Surveyors (Hong Kong
Branch) merely allows the owner to, in case of insolvency of the contractor, employ
others to complete the works using the plant and materials. As such, the plant and
materials left behind after completion would revert to the liquidator of the contractor
for distribution pari passu among its unsecured creditors.
(iv) Effectiveness of property-vesting clauses

Whether a vesting clause is effective to transfer property to the employer, in case 18.090
of insolvency or termination of the contract, depends squarely on its terms. In
Bennett & White (Calgary) Ltd v Municipal District of Sugar City No 5,114 a clause
provided that all machinery, tools, plants, materials and things whatsoever provided
by the contractor for the works was, from the time of their being so provided and
114
[1951] AC 786.

506 TERMINATION
until the final completion of the said work, to be the property of the employer for the
purposes of the said work. The Privy Council observed that, for tax purposes, the
legal possession of this property was redelivered to the contractor for the purpose
of carrying out the work. In Banbury & Cheltenham Railway Company v Daniel,115
where the contract provided for the monthly certification of the amount payable to the
contractor in respect of the value of the materials delivered and such certificates were
payable by the employer within seven days of their presentation, it was held that the
property in the materials delivered passed to the employer only upon the certification
by the engineer.
18.091 The plant and material vesting clause in a construction contract may expressly
require the contractor to ensure that any subcontract contains an undertaking by the
subcontractor not to remove from the site materials or plant delivered and to vest the
property of them in the employer through the contractor. An example is clause 54 of
the ICE (6th edition) standard form of contract. This helps in dealing with a situation
like Dawber Williamson Roofing Ltd v Humberside County Council.116 In that case,
slates were supplied to the contractor, who became insolvent and subsequently did
not pay for them. There was a retention of title clause in the supplier’s contract. The
employer sought unsuccessfully to rely on the plant and materials vesting clause in
the JCT (1963 edition) standard form of contract to defend the supplier’s retention of
title claim. It was held that property in such materials could not pass to the employer
in circumstances where title to the same had not been passed from the supplier to the
contractor.
18.092 Also, for a plant and materials vesting clause to be effective, there may be some formal
procedures to follow. In Stroud Architectural Systems Ltd v John Laing Construction
Ltd,117 the plaintiff supplied glazing units to the defendant’s subcontractor, who
became insolvent. The plaintiff then claimed title to the glazing units, asserting a claim
in conversion for the return of the glazing units or their value by the defendant. It was
held that the interest of the plaintiff over the glazing was only a floating charge that,
through lack of registration under s 395 of the Companies Acts 1985, was void against
the liquidator and administrator and any creditor of the company.
18.093 In the recent United Kingdom House of Lords decision of Smith v Bridgend County
Borough Council,118 it was held that the owner who exercised the right to sell the plant
and materials vested in it under the ICE Conditions of Contract (5th edition) was
held liable for conversion toward the administrator of the contractor. It was held that
this property was the subject of a registrable but unregistered floating charge under
the Insolvency Act 1986 and, accordingly, being unregistered it was void against the
administrator and the contractor company in administration. Lord Hoffmann said in
his judgment:
115
(1884) 54 LJ Ch 265. See Western Wood v William Bell, James Rhodes and Frederic Moser (1856) 6 El & Bl 355.
116
(1979) 14 BLR 70. See Archivent Sales & Developments Ltd v Strathclyde Regional Council (1984) 27 BLR 98.
117
(1993) 35 ConLR 135. See Re Cosslett (Contractors) Ltd [1997] Ch 23.
118
[2002] BLR 160. Charge over plant, machinery or other equipment is generally floating in nature since the parties
must have contemplated that the contractor will be free to carry on its business in the ordinary way. See Re Beam
Tube Products Ltd [2006] BCC 615 and Hollins v Russell [2003] 1 WLR 2487. See also Myatt v National Coal
Board [2007] 1 WLR 554, but contrast Marcq v Christie Manson & Woods Ltd (t/a Christie's) [2004] QB 286.

“And because the property subject to condition 63 (constructional plant, temporary

works, goods and materials on the site) was a fluctuating body of assets which
could be consumed or (subject to the approval of the engineer) removed from the
site in the ordinary course of the contractor’s business, it was a floating charge ...
The answer to this question may come as a surprise to the parties but that is no
reason for adopting a different characterisation.”
(v) Dispute over ownership

In case of insolvency of the contractor, there may, not uncommonly, be a dispute 18.094
between the owner and the liquidator of the contractor as to who owns the plant
and materials in issue. In Hong Kong, s 80 of the Companies Ordinance (Cap 32),
likewise, requires the registration of charges created by companies. Failing to do
so may render the concerned charge void against the liquidator and any creditor of
the company. In Smith v Bridgend County Borough Council, the earlier case of Re
Cosslett (Contractors) Ltd was not cited in the judgement. In that case, the Court of
Appeal in England and Wales held that the vesting clause in the ICE Conditions of
Contract (5th edition) did not operate to pass legal ownership in the two coal-washing
plants installed on site by the expelled contractor. In reaching this decision, Millett LJ
reviewed the authorities and said “This depends on the terms of the contract and is a
pure question of construction.”
Thus, whether such a property-vesting clause is effective in passing the property to 18.095
the owner has to be examined on a case-by-case basis and there can be certain legal
formalities to be complied with before it becomes valid. In the circumstances, when
such a clause comes into operation, it would be prudent to consider and examine its
validity with reference to the insolvency laws.

1. STANDARD FORM CONTRACTS IN HONG KONG
(a) Introduction
Standard forms of construction contracts evolve over times of differing interests and 19.001
dividing aims. Most standard forms currently in use give a confused impression as to
the ultimate goal to be achieved and the effect of achieving them. Furthermore, they
respond only with limited flexibility to the corresponding evolution that is going on in
the management concepts of total quality, risk allocation, alliancing and relationship
contracting and project management. This is one of the reasons why discussions
and projects have been launched regarding the re-engineering of standard forms
for construction contracts that are commonly in use locally1 and internationally2.
Such movements include that by the Institution of Civil Engineers in respect of the
introduction of the New Engineering Contract and the International Federation of
Consulting Engineers in relation to the publication of the 1999 forms of building and
engineering contracts.
(b) Use of standard contract documents
Standard forms of contract documents are widely used in the construction industry. 19.002
The use of a standard form serves many functions. It is a clear record of the
business deal and avoids confusion; it is a plan for allocating risks and providing
for contingencies; it is a manual of management procedures; it is the tool for dispute
resolution; and it is a benchmark standard for the industry. Above all, by adopting a
standard form which everyone in the industry understands and uses, the ideal situation
is that all involved know what is expected and what to do. While the law applicable
to construction contracts is the general law of contracts,3 through their use, standard
forms of construction contracts produce a second layer of legal principles with their
standard content and common terms, which are superimposed on the law applicable
to the contract between the employers and contractors. The standard forms are also an
attempt to reflect the local customs and practice.
(c) Benefits of standard forms
Standard forms and standard contract documents can be beneficial in a complex 19.003
environment and are surely a useful technique for facilitating communication and
reducing resource input. Standards are everywhere in the construction industry.
There are industrial standards such as the British Standards that are still commonly
1
See, for example, Grove III J, “Consultant’s Report on Review of General Conditions of Contract for Construction
Works for the Government of the Hong Kong Special Administrative Region” (1998).
2
See, for example, Bridgewater, Ramphul & Dymond “Standard Construction Contract Forms” (2009) 26 ICL
Rev 2009 519 – 523.
3
See Gilbert–Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, where Lord Diplock, at 917,
stated:
“…a building contract is an entire contract for the sale of goods and work and labour for a lump sum price
payable by instalments as the goods are delivered and the work is done.”

512 STANDARD FORM OF CONTRACT
used in Hong Kong and local codes such as the Construction Standard. In the
context of contract documents, there are standard documents such as the general
conditions of tender, general specifications, the standard methods of measurements
and the conditions of contract. Parties in the industry are familiar with the standard
documents and the respective roles and duties to be expected from the personnel
involved.
(d) Problems with standard forms
19.004 Yet, it remains the case that existing standard forms of contracts are widely
criticised. For instance, in Amalgamated Building Contractors Ltd v Waltham Holy
Cross UDC,4 with reference to a contract in the RIBA form, it was remarked by
Denning LJ that the contract resembled a legislative code, which gave rise to added
interpretation problems since the court was not able to consider the intentions of
the drafters; in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd,5
Salmon LJ said:
“Indeed, if a prize were to be offered for the form of building contract which
contained the most one-sided, obscurely and ineptly drafted clauses in the United
Kingdom, the claim of this contract could hardly be ignored, even if the RIBA
form of contract was amongst the competitors.”
19.005 In using standard forms, one thing to keep in mind is that a construction contract is often
drawn up by the engineer, architect or surveyor from traditional, often inconsistent and
sometimes mutually destructive stipulations and provisions of various kinds that have
been consolidated for years or recently been put forward, with a view to producing
various legal results. When put into practice, the problems with standard forms of
contracts are further escalated by the incorporation, or simply pulling together, of
other provisions into the contract, whether derived from in-house practice or from the
last similar project, without an overview of the legal implications. This obviously runs
more risk of producing a poorly drafted contract, which fails to accurately achieve
the desired legal effects or to provide sufficient contingencies against the inherent
uncertainty in construction works. Yet, once a contract is entered into, the potential
problems for both parties are locked in. The damage is done. It is only a matter of
time, or luck, as to when and how it surfaces. In Mitsui Construction Co Ltd v Attorney
General of Hong Kong,6 the contract for the construction of a tunnel, modified from
standard documents, was remarked on by the Privy Council as being an obviously
badly drafted contract, and it was held, even so, that the court would revert to the
fundamental rule of construction of contractual documents that the intention of the
parties was to be ascertained from the language they had used, interpreted in light of
the relevant factual situation in which the contract was made.
4
[1952] 2 All ER 452.
5
(1970) 1 BLR 111.
6
[1987] HKLR 1076.

STANDARD FORM CONTRACTS IN HONG KONG 513
Even with standard forms of contracts, it is only to some extent decisions regarding 19.006
one contract may help by way of analogy or illustration in the decision involving
another contract. Lord Wright has highlighted in Luxor (Eastbourne) Ltd v Cooper
that however similar the contracts may appear, the decision as to each must depend on
consideration of the language of the particular contract read in the light of the material
circumstances of the parties in view of which the contract is made.7
Moreover, as observed recently by in W Hing Co Ltd v Boost Investments Ltd:8 19.007
“One of the principal complexities of construction law is that previously decided

case law is rarely determinative, even of an identical issue for the simple reason
that the conditions of contract are rarely identical; and increasingly so, in modern
times, where the various standard form contracts are almost invariably heavily
amended by the SCC for each particular contract.”
(e) Main contracts
Up until recently, there were two principal models of standard forms of construction 19.008
contracts commonly in use in Hong Kong. Both of them have not changed much in
format over at least the last 30 years.
(i) Public works

For public works, ie those of the government or public authorities, the principal model of 19.009
standard forms of construction contracts is the Government of Hong Kong General
Conditions of Contracts (1999 edition). There are various versions of it covering civil
engineering works, building works and electrical and mechanical works. There are
also special versions dealing with design and build contracts and team contracts. The
present form of these standard contracts evolves from the ICE Conditions of Contract9
that preceded the New Engineering Contract and, in itself, broadly represents a fairly
sophisticated and extensive set of general conditions that are accepted internationally.
The ICE Conditions of Contract were created in 1945 and there were successive
7
[1941] AC 108, 130.
8
[2009] 2 HKLRD 501. See also Penta-Ocean Construction Co Ltd v CWF Piling & Civil Engineering Co Ltd
[2007] 3 HKLRD 233, where it observed in relation to the Hong Kong Construction Association’s Standard Form
of Domestic Subcontract that:
“… whilst words of amendment made by the parties to a standard form contract may be ‘one-off’, the question
of what is the effect of the amending words in the standard form is a general one.”
9
ICE stands for the Institution of Civil Engineers, an independent engineering institution with over 80,000 civil
engineers worldwide. The ICE Conditions of Contract are produced by the Conditions of Contract Standing Joint
Committee (CCSJC) and jointly sponsored by the Institution of Civil Engineers (ICE), the Civil Engineering
Contractors Association (CECA) and the Association of Consulting Engineers (ACE). As noted by Pearson LJ
in Tersons Ltd v Stevenage Development Corporation [1963] 2 Lloyd’s Rep 233 at 368, where, in the context of
a contra proferentem argument, that maxim had little if any application to the case before the court, since the
conditions of contract were not a partisan document or “an imposed standard contract”, but were a general form
in common use prepared and revised jointly by various representative bodies including the Federation of Civil
Engineering Contractors, and would naturally be incorporated in contracts of the kind under consideration. See
also Langstane Housing Association Ltd v Riverside Construction (Aberdeen) Ltd (2009) 124 Con LR 211.

revisions in 1950, 1951 and 1955.10 In 1973, the body of the present form of
Government of Hong Kong General Conditions of Contracts (1999 edition) appeared
as the fifth edition. The sixth edition of the ICE Conditions of Contract was released
in 1991, and this was followed by the seventh edition in 1999.
19.010 The ICE Conditions of Contract, and hence, the Government of Hong Kong General
Conditions of Contracts that were modified based on it, is a remeasurement contract,
and its nature is to measure and value. The employer undertakes to pay the actual
quantities of work executed, which are measured according to stipulated methodologies
with reference to the bills of quantities. A central element in this form of contract is
the bills of quantities. Although it is modified by the Government of Hong Kong to
suit other works such as building works or maintenance works, the theme and structure
are maintained.
(ii) Private sector

19.011 For the private sectors, there are many standard forms in use. Certain local developers
have derived their own standard form of contract to use for their projects. The more
common type in general use in the private sectors is the Agreement and Schedule
of Conditions of Building Contract (Standard Form of Building Contract) for Use
in Hong Kong, Private Edition (With Quantities or Without Quantities). A second
edition (1976) of it (May 1979 Revision) is published by the Hong Kong Institute
of Architects and a 1986 edition is published by the Chartered Institute of Surveyors
(Hong Kong Branch), both of which are essentially the same in substance. The prime
difference between the With Quantities version and the Without Quantities version
is that the bills of quantities will be produced for use in the former version and a
specification and a schedule of rates is used instead of the bills of quantities in the
latter situation. These standard forms of contracts closely resemble their counterparts
in United Kingdom, ie the JCT 1963 Standard Form. The JCT forms are termed
Standard Forms of Building Contracts and are issued by the Joint Contracts Tribunal,
which is made up of representative bodies in the construction industry.11 The history
of the JCT forms can be traced back to the end of the nineteenth century and versions
appear in 1909, 1931, 1939, 1963, 1980 and 1988. These forms of contract are derived
ultimately from a building contract developed in 1870 for use in London by the Royal
Institute of British Architects, ie the RIBA, and the Builders’ Society, the former body
of the Chartered Institute of Building, ie CIOB. There are variants including those
with quantities, those without quantities, those for use by local authorities and those
10
In August 2010, the ICE Council announced the withdrawal of support from the ICE Conditions of Contract and
the endorsement of only the “New Engineering Contract” NEC3 Suite of Contracts, with a view to promoting
a more collaborative approach to contract management, which offers value for money to clients and the
construction industry in general. The ICE Conditions of Contract have been in use for over fifty years and were
designed to standardise the duties of contractors, employers and engineers and to distribute the risks inherent in
civil engineering to those best able to manage them.
11
The Joint Contracts Tribunal was established in 1931 and has been producing standard forms of contracts,
guidance notes and other standard documentation for use in the construction industry. It was then a consultative
group. The group became incorporated in May 1998 and now comprises seven members: the British Property
Federation, the Contractors Legal Group Limited, the Local Government Association, the National Specialist
Contractors Council, the Royal Institute of British Architects, The Royal Institution of Chartered Surveyors and
The Scottish Building Contract Committee.

STANDARD FORM CONTRACTS IN HONG KONG 515
for private use. Each of these creates a lump-sum contract whereby the contractor is
required to complete the whole of the work for a lump sum. A further discussion on
this and the concept of an entire contract can be found in Tern Construction Group
v RBS Garages Ltd.12 It provides conditions in the form of a private code of law, and
where so provided, replaces the operation of common law with detailed provisions.
Criticisms of this standard form mainly concern its unnecessary length, complexity
and obscurity and the fact that it still contains gaps, in failing to deal with situations
that frequently occur in practice. The lump sum so provided is an illusory one since
various situations can occur to bring about adjustments of the price to the benefit of
the contractor.
Corporations such as the Mass Transit Railway Corporation have a full set of 19.012
standard contract documents for their own use, including the conditions of contract
and particular specifications. Such contract format appears as an improved and
modernised version of those in use by the Government of Hong Kong and the private
sector, with more emphasis and flexibility placed on project management and dispute
resolution.
(f) Subcontracts
Subcontracts may be based on individual forms promulgated by separate companies 19.013

or trade associations. This is the dominant practice in Hong Kong, particularly
in the lower tiers of subcontracting; the subcontract may contain no more than a
few pages, if it is ever put into writing. Not uncommonly, a subcontract may be
entered into on a back-to-back basis with the main contract, which is a potentially
ambiguous phrase.
Yet, standard forms of subcontracts, whether nominated or domestic, are also in 19.014
common use in construction projects in Hong Kong.13
(i) Public works

For public works, these include the earlier version of Government of Hong Kong 19.015
Subcontract Articles of Agreement and Conditions for Civil Engineering Works
(1988 edition) and the Government of The Hong Kong Special Administrative Region
Subcontract for Building Works (2000 edition).
(ii) Private sector

In the private sectors, standard forms for use are also available, such as the Standard 19.016
Form of Domestic Subcontract (2008 edition) published by the Hong Kong
Construction Association.
12
(1992) 34 ConLR 137.
13
See for example, the subcontract Conditions for use where the subcontractor is under the Standard Form of
Building Contract for Hong Kong, First RICS (HK Branch) (1986 edn). The Hong Kong Provisional Construction
Industry Coordination Board has also published Guidelines on Subcontracting Practice (March 2003) and
Guidelines on Standard Forms of Domestic Subcontracts for Basic Trades (May 2005).

2. THE NEW CONTRACT FOR

HONG KONG
(a) Rationale for revision
19.017 In Hong Kong, a new form of building contract has been introduced in 200514 with
a view to replacing the ones currently in use in the private sectors published by the
Hong Kong Institute of Architects and the Royal Institute of Chartered Surveyors,
which have been in use for some 25 years. Although the Hong Kong and overseas
construction industries have changed drastically and a whole stream of construction
disputes have developed, very few revisions have been made over the years. This task
is undertaken by the Joint Contracts Committee, which comprises representatives
from interested professional bodies within the construction industry. When widely
adopted in use, the contractual landscape governing the respective duties and
responsibilities of parties in the Hong Kong construction industry will be changed
fundamentally.
19.018 The aim is to produce a contract that is fair and equitable to both the employer
and the contractor, with a sensible allocation of risks. Contemporary rationale as
to risk allocation is to place risk on the party who can best control events in order
to prevent risk from occurring or, where such a risk is beyond the control of both
parties, on the party who is best able to cater for it. Addressing the problems of the
present forms, it is also the aim that the new building contract should be concise
but fully comprehensive, precise and clear in wording, consistent throughout,
free from ambiguity and user-friendly. Also, it is the aim of the new contract to
balance the goals of the employer and the contractor and to facilitate effective
dispute resolution.
(b) The 2005 standard form of building contract

19.019 Since its introduction, the common use of the 2005 standard form of building contract
is yet to be more widely embraced by the Hong Kong construction industry.
19.020 This 2005 form of building contract makes reference to the 1996 draft of the previous
contracts committee of the Hong Kong Institute of Architects, the Hong Kong Institute
of Surveyors and the Society of Builders but the principal starting point for the 2005
form is the JCT 1980 standard form.15 Of course, as the work on it has proceeded,
the drafts have moved further and further away from that form, so as to respond to
the changing directions and philosophies in the construction industry in Hong Kong
and overseas. Effort has been made to draft the new contract in plain language while
retaining the common law contract style of wording.
14
It was launched on 11 April 2005 by the Joint Contracts Working Committee of the Hong Kong Institute of
Architects, the Hong Kong Institute of Construction Managers and the Hong Kong Institute of Surveyors.
15
While the JCT forms have subsequently undergone substantial amendments over the years, these have not been
adopted in the Hong Kong standard forms of contract.

THE NEW CONTRACT FOR HONG KONG 517
It has taken some 10 years for the 2005 building contract to go from the drafting desk 19.021
to use on site. For the drafting of the 2005 contract, areas that were reviewed include
the role of the architect and her or his instructions; the effect of the final certificate;
the variations, measurement and valuation provisions; the insurance provisions; the
subcontracting, nomination and naming and choice of subcontracting modes;
the direct loss and expenses provisions; the extension of time, notification provisions
and liquidated damages; the determination provisions; and the dispute resolution
mechanisms.
At present, it seems that the 2005 standard form of building contract, in comparison 19.022
with the earlier standard form, has intended to change several major features.
(c) Contractor’s obligations
Under the 2005 form, the contractor’s obligations are widened considerably to reflect 19.023
the roles that contractors play in today’s construction projects. A chain of design
responsibility is established and the use of warranty in favour of the employer, which
is common in the United Kingdom, is provided for. The contractor also has a more
positive express duty to warn of discrepancy and divergence in the provided design,
which can affect its entitlement to the grant of an extension of time for completion in
case of default.
As to the requirements of the programme, the contractor is required by the conditions 19.024
of the contract in the 2005 form to supply more details, in addition to the master
programme, method statement and list of site management personnel. This, in part,
is due to the changing practice of project management and in part, is to enable better
communication and monitoring of the progress of the work.
(d) Power of an architect
As to the power of the architect, in the new building contract, a contractor needs to 19.025
comply with the architect’s instruction notwithstanding that the basis of such work, for
example, whether the work concerned is variation, may be in dispute. The architect is
also expressly entitled to issue instructions for making good defects without waiting
for the commencement of the defects liability period. Yet, the architect is only allowed
to sanction variations carried out without written instructions in case of emergency
work and all instructions from the architect requiring a variation need to be in writing.
Express requirements are provided setting out the format and content of the instructions
from the architect regarding variations.
(e) Variation
In relation to direct loss or expenses resulted from a variation, all events giving rise 19.026
to them are grouped together under one heading in the 2005 form. Further, the new
building contract expressly allows adjustment to the contract rates where a variation
has substantially changed the quantity of the work, and variation for extra work
ordered after practical completion will be paid for at a fair valuation rather than the
contract rate.

19.027 To avoid problems, an attempt has been made in the new building contract to call for
the specifications and the bills of quantities to be read together, with the former one
serving to amplify and supplement the latter.
(f) Completion issues
19.028 In the new building contract, a long definition for ascertaining when the work is
substantially complete is included, and the architect has an express discretion to issue
the practical completion certificate when the unfinished work and uncorrected defects
are only of a minor nature, not preventing the employer from taking possession. Where
sectional completion is provided, each section has its own separate defects liability
period and certificates of completion of making good defects.
19.029 Regarding the issue of a non-completion certificate, which is needed for the employer
to charge the contractor liquidated damages, the new building contract allows the
cancellation of such a certificate by fixing a new completion date. This instils a
certain degree of flexibility that may be useful in the mutual protection of commercial
interests.
19.030 In respect of the grant of an extension of time for completion, the list of events entitling
the contractor to an extension of time is consolidated in the new building contract. A
fixed timeframe is set out for the giving notice of delay, effect of delay, provision of
details of delay, and the determination of the amount of delay by the architect. Failure
to follow the timeframe can result in the claim being barred. Likewise, in relation
to the events entitling the contractor to compensation due to disruption of progress,
the new building contract also provides a fixed time frame for dealing with and the
resolution of the same.
(g) Nominated subcontractors and suppliers
19.031 As for nominated subcontractors and suppliers, this is retained in the new building
contract. Such a mechanism enables the employer to select the subcontractor or
supplier on the basis of capability and price and then have them under the management
and responsibility of the main contractor. This still has many problems and pitfalls.
The case of North-West Metropolitan Regional Hospital Board v TA Bickerton & Son
Ltd,16 in relation to a contract in the JCT 1963 standard form, was a nightmare for
those involved. The new building contract seeks to implement the best of the system
but without the pitfalls. It confers a strong right on the main contractor to object
to the selection of the nominated subcontractors. Yet, once accepted, the position
of the nominated subcontractors will almost be the same as that of the domestic
subcontractors, so far as responsibility on the part of the main contractor is concerned.
Also, in response to the practice in Hong Kong that the nominated subcontractor is
requested to work to the progress and programme of the main contractor, a clause
is added to reflect the situation when the grant of an extension of time for the
main contract virtually means the grant of an extension of time for the nominated
16
[1970] 1 WLR 607.

CERTAIN FEATURES OF STANDARD FORM CONTRACTS 519
subcontractor’s work. A provision that deals with the situation of renomination is also
included. In the new building contract, approaches are likewise adopted in respect of
nominated suppliers. Also, a system for named subcontractors and named suppliers is
also installed as an alternative.
(h) Final certificate
Regarding the finality of the final certificate, the ruling in East Ham Borough Council 19.032
v Bernard Sunley & Sons Ltd17 is taken into account. Under the new building contract,
the contractor is not absolved from liability for defects that were not reasonably visible
at the time of the issue of the final certificate, appearing after its issue, though the
final account cannot be reopened except by reason of fraud, dishonesty or fraudulent
concealment.
(i) Determination and dispute resolution
Also, the rights and events entitling the determination of the parties are rewritten 19.033
in the new building contract. An express provision for the contractor to deliver the
possession of the site to the employer is introduced.
In relation to dispute settlements, a more structured and extensive dispute resolution 19.034
mechanism is aimed for, with arbitration retained as the ultimate device for resolving
disputes.
3. CERTAIN FEATURES OF STANDARD FORM CONTRACTS

(a) Summary and review
The consultant report on the Review of General Conditions of Contract for Construction 19.035
Works by Grove III in 1998, which contains a critical review of the standard forms
of construction contracts used in Hong Kong and overseas, is a useful summary
of the features of the standard form contracts in use in Hong Kong. The study was
commissioned with a view to aligning the Government of Hong Kong General
Conditions of Contract with international developments and practice in the industry.
(b) Acceleration and recovery of delay
For standard forms of contracts in Hong Kong, many of them do not contain any 19.036
provisions enabling acceleration of the works. Those that do may also contain
provisions that allow recovery of delay by proposal of delay recovery measures for the
contractor, as in the standard form adopted in the Mass Transit Railway Corporation
projects. Likewise, there is no provision whereby the employer is entitled to terminate
the contract for convenience.
17
[1966] AC 406.

(c) Risk of unforeseen conditions
19.037 The risks of unforeseen ground conditions usually rest upon the contractor, as is the case
in the Government of Hong Kong General Conditions of Contract, regardless of whether
the contractor has been misled by insufficient or inaccurate information. As such, the
contractor must bear the financial consequences of discovering the unexpected, whether
it is natural or manmade. This is not in line with international practice elsewhere.
(d) Impossibility
19.038 In relation to the issues of impossibility, some standard contracts provide an excuse
for non-performance in case of legal or physical impossibility, such as clause 15 of
the Government of Hong Kong General Conditions of Contract. Though commercial
impracticability has been the issue of claims, though unsuccessfully, in some public
works projects, it is not the international practice to allow for such a claim and, in this
respect, the standard forms of contract in Hong Kong are in line with those widely
used elsewhere.
(e) Care of works
19.039 The care of the works, save as to loss or injury arising from occurrence of those
stipulated excepted risks, has always been the full responsibility of the contractor. This
is in line with international practice. Yet, the exact insurance coverage to be obtained
by the contractor is not made explicit.
(f) Third-party interference
19.040 The risks of interference from a third party, such as utility undertakers, usually fall on the
contractor, as in the case of unforeseen ground conditions. The contractor is to bear such
risks even in relation to clashing of underground utilities, some of which may indeed
have been put there by the employer, for example in projects of the Government of Hong
Kong. In Hong Kong, utilities are everywhere and they often appear at locations different
from those expected by the contractor. In practice, it is the deemed responsibility of
the contractor to determine and make arrangements for the underground utilities.
Disturbance to progress by such third parties may afford grounds for the grant of an
extension of time for completion. However, the contractor is still left with the burden of
the consequential financial losses resulting from such delay. On this point, in international
practice there seems to be no united view as to the proper contractual arrangement.
(g) Risk of legislative changes
19.041 In recent years, legislation on the environmental and safety aspects of construction
activities has been growing rapidly in Hong Kong. The standard forms of contracts
place the risks of changes in the law on the contractor, even in contracts where the
Government of Hong Kong is the employer. In international settings, some standard
forms of contracts provide relief to the contractor if the costs and time of performance
are adversely affected consequentially upon changes in the law.

THE FIDIC FORMS 521
(h) Payment issues
There have been quite a number of collapses of contractors in Hong Kong recently. 19.042
Many standard forms in use do not intervene in the payment arrangement between
the main contractor and the nominated subcontractor. Direct payment provisions are
usually expressed in terms of discretion on the part of the employer, rather than a right
on the part of the nominated subcontractor.
In other jurisdictions, there are movements toward more legislative intervention on 19.043
payment issues. These include the United Kingdom Housing Grants, Construction and
Regeneration Act 1996 and the New South Wales Building and Construction Industry
Security of Payment Act 1999. In the United States, the development as regards the
use of payment bond and the legal right of the mechanic’s lien also come to assist
the unpaid subcontractor. In Hong Kong, there is no sign to indicate that similar
movements along this line are forthcoming. The Hong Kong Provisional Construction
Industry Coordination Board has published the Guidelines on Subcontracting Practice
in 2002, which sets out the principles of good subcontracting practice for the industry
to follow at will. Among the principles, the need for subcontracts to achieve equitable
payment terms and timely payment of wages is recognised. The effectiveness of such
guidelines is yet to materialise and these principles are of persuasive force only and
are not binding. At present, with the current standard forms of contracts and the legal
landscape, subcontractors in Hong Kong are more exposed to payment difficulties
than elsewhere.
(i) Claims
The timely notice and assessment of claims can be of mutual benefit to the employer 19.044
and the contractor. Many standard forms of contract in Hong Kong do include a
contractual timeframe for the contractor and the employer to follow, of which failure
to observe may bring about the operation of time bar provisions prohibiting the claims.
Yet, in practice, strict enforcement of these time bar provisions is still not frequent.
Indeed, there is no united view on whether and when strict enforcement should be
made in the international context. There is, however, a trend in construction contracts
that calls for a bar to those claims that fail to observe the contractual time frame.
Obviously, whether the time bar provisions are effective in also barring the common
law remedies depends on the wording of the contract. However, it should be noted that
the duty on the part of the contractor to furnish details for claim assessment does vary
among the standard forms of contracts in use in Hong Kong.
4. THE FIDIC FORMS

(a) Background
The International Federation of Consulting Engineers or Fédération Internationale 19.045

des Ingénieurs-Conseils (FIDIC) represents the international business interests of
firms belonging to the national member associations of engineering-based consulting

companies. It was founded in 1913 by the national associations of three European

countries and now has membership from over 60 countries. It publishes one of the
most widely used international standard forms of contracts both for building work and
engineering work.
19.046 The FIDIC standard forms of contracts are widely used in construction projects
involving international favour. In particular, they are used in many construction
projects in mainland China and, as such, their relevance to the Hong Kong construction
professionals, who are becoming more and more involved in such projects, are
growing.
19.047 In 1999, FIDIC published four editions of contract, respectively referred to commonly
as the Conditions of Contract for Construction, which is for use in building and
engineering works where most of the design is provided by the employer; the
Conditions of Contract for Plant and Design-Build, which is recommended for use
in relation to the provision of electrical and mechanical plants and the design and
execution of building or engineering works; the Conditions of Contract for EPC
Turnkey Projects, which is suitable for use on a turnkey basis, in the provision of a
process or power plant, or a factory or similar facility, or of an infrastructure project or
other type of development where the contractor takes the responsibility for the design
and execution of the project and a high certainty of price and time is called for; and
the Short Form of Contract which can be used for a small contract in terms of overall
price or span of time or in terms of complexity of the work. There is also the Dredgers
Contract for dredging and reclamation works published in 2006 and some earlier form
of agreement for engaging consultants and subcontractors, and for joint ventures.
(b) New underlying principles
19.048 New principles exist behind this 1999 suite of standard conditions of contract. They
are outlined below:
• They are written with more consistent wording and improved clarity. Lack of
consistency and clarity seems to be a universal problem among all standard
forms of contracts, which is understandable in view of the complexity of
construction activities.
• The format and layout is more user-friendly. Together with the FIDIC
Contracts Guide that was published in 2000, users are better equipped to
choose and use the form of contract that suits their purposes.
• They attempt to create a balance between legal precision and practicability.

In doing this, the aim is to ensure compatibility between concepts from both
common law and civil law jurisdictions.
• They are prepared by engineers for practical use and are intended to serve as
manuals of good engineering practice.
• The role of the engineer and the engineer’s representative is expressly to

be fair and reasonable so as to be better aligned with the international
developments in this regard.

THE FIDIC FORMS 523
• The theme is to enable work to continue regardless of differences, by

encouraging an amicable settlement. In particular, adjudication, preceding
arbitration, is introduced in the dispute resolution process.
• Strong measures for financial management are installed; for example,

the various detailed claim procedures are made mandatory in terms of
compliance.
(c) Certain features found in the FIDIC

new standard forms
In clause 2.4 of the conditions of contract for major projects, for example, the employer 19.049
is obliged, on request, to provide to the contractor reasonable evidence that financial
arrangements have been made and are being maintained, which enable the contractor
to be paid for the estimated contract price.
Further, the contractor is obliged to provide monthly progress reports to the employer 19.050
and, as provided in clause 4.21, a detailed list of documents that are required to be
included in each of those reports is set out. Also, under clause 14.3, the contractor is
required to submit to the employer the supporting documentation which shall include
the report on the progress during the current month in the application for payment
and, under clause 14.6, the engineer’s obligation to issue interim payment certificates
is conditional upon the receipt of the supporting documentation. This, in effect, makes
the progress report a condition precedent for obtaining payment.
As to the defects notification period, clause 11.3 allows for an extension of such a 19.051
period by not more than two years where the work cannot be used for the purposes for
which they are intended by reason of defect or damage.
Claims by the contractor are governed by clause 20.1, which provides that if the 19.052
contractor fails to give notice of the claim within 28 days of when the contractor
became aware, or ought to have become aware, of the event giving rise to the
claim, the employer is discharged from all liability. On the other side of the coin,
the engineer is also imposed with a duty to respond and handle the claim within a
fixed timeframe. The employer is likewise, under clause 2.5, required to provide the
contractor with a notice of its claims against the contractor and such notice is to be
given, however, merely as soon as practicable after the employer became aware of the
event giving rise to the claim. Nonetheless, all parties involved have a duty to act in
a timely manner.
Termination at will by the employer is allowed on 28-day notice and, upon termination, 19.053
the contractor is paid for the work that it has done and for expenses for demobilisation
only. Yet, the employer is not allowed to terminate the contract under this contractual
arrangement in order to allow the work to be executed by itself or by another.
There is also a right to suspend or reduce the rate of work under clause 16. Under 19.054
that clause, where the employer fails to pay a certificate or fails to provide reasonable
evidence that a financial arrangement is in place that enables it to meet the contract
price, the contractor is conferred with a right to suspend the work or reduce the rate of

the progress of the work. The contractor is likewise conferred with such a right, upon
giving notice, if the engineer fails to issue an interim payment certificate.
19.055 The contractor is expressly required to provide strict indemnity to cover the employer
from claims relating to physical injuries, diseases or deaths of any person that arise
out of the contractor’s design, execution of the work or the rectification of the defects.
5. THE NEC FORMS

(a) Background
19.056 In the early 1990s, the Institution of Civil Engineers (ICE) developed the New
Engineering Contract (NEC) with a view to introducing a new type of non-adversarial
form of contract strategy with more effective and smoother management of construction
projects in mind. It was originally launched in 1993. The second edition (NEC2) was
launched in 1995. NEC is now in its third edition (NEC3), and this edition, launched
in 2005, is the result of feedback from the industry on many years of success. It is now
an integrated set of contract documents designed for project-focused outcomes, and
contains project objectives in terms of ultimate quality, performance, cost and time.
19.057 Use of NEC3 has been endorsed by the ICE and the Construction Clients’ Board in the
United Kingdom. Use of the NEC is also growing around the world and it has been
used in public works projects in places like Australia, India, the United Arab Emirates,
South Africa and New Zealand.
19.058 The pilot use of NEC in Hong Kong has also been seen. The Works Branch of the
Development Bureau has been piloting contractual partnering using the NEC since
August 2009 in a contract for drainage improvement works worth a contract sum of
HK$50 million.
(b) Rationale and structure

19.059 The NEC3 is a family of contracts and is designed around the key principles of
flexibility, clarity and stimulus to good management.
19.060 Drafting of the NEC is underpinned by relational contracting concepts, embodying
efficient management processes and collaborative teamwork. The use of the NEC aims
at stimulating good management of relationship between the parties to the contract,
and hence good management of the project. It is intended to be a clear and simple
document. Unlike traditional forms filled with legal terms, the language and structure
used are straightforward and easily understood. Also, the NEC contracts anticipate and
encourage active risk management, with a view to ensuring that people use active risk
management; that the risk is allocated to the party best able to manage it; and that the
parties have are able to manage the risk successfully.
19.061 The NEC contracts include the Engineering and Construction Contract (ECC) for use
for appointing a contractor for engineering and construction work, including any level
of design responsibility; the Engineering and Construction Subcontract (ECS) for use
for the appointment of a subcontractor for engineering and construction work where

THE NEC FORMS 525
the contractor has been appointed under the ECC as a back-to-back set of terms and
conditions. There is also the Engineering and Construction Short Contract (ECSC)
for use as an alternative to the ECC for contracts which do not require sophisticated
management techniques, comprise straightforward work and impose only low risks
on both client and a contractor; and the corresponding Engineering and Construction
Short Subcontract (ECSS). The Framework Contract (FC) is also provided as an
umbrella contract in conjunction with one or more of the other NEC3 contracts
for the appointment of one or more suppliers to carry out construction work or to
provide design or advisory services on an as instructed basis over a set term, with a
sophisticated call off mechanism. Apart from these, there are also the Term Service
Contract (TSC); the Term Service Short Contract (TSSC); the Professional Services
Contract (PSC); the Supply Contract (SC); the Supply Short Contract (SSC) and the
Adjudicator’s Contract (AC).18
In the ECC, the employer is provided with six options for contract forms with different 19.062
risk sharing and reward arrangements, namely, Option A (priced contract with activity
schedule); Option B (priced contract with bill of quantities); Option C (target contract
with an activity schedule); Option D (target contract with a bill of quantities);
Option E (cost reimbursable contract); and Option F (management contract). These
are supplemented by some 15 secondary options on performance bonds, parent
company guarantees, advance payments to contractors, multiple currencies, sectional
completion, limitation of contractor’s liability for design to reasonable skill and care,
price adjustment for inflation, retention, bonus for early completion, delay damages,
changes in law, Construction (Design and Management) Regulations, trust fund and
additional conditions of contract. There is also the project account option.
18
See http://www.neccontract.com/ for further details.

1. FEATURES OF CONSTRUCTION LITIGATION
(a) Operation of construction industry
The construction industry is one of the main pillars of Hong Kong’s economy. It is a 20.001
large employer and the workforce comprises a vast diversity of personnel from different
disciplines at managerial, professional, technician and tradesman levels. Yet, there are
a number of shortcomings in the industry’s mode of operation. Construction costs
are comparatively high. Delivery programmes are often unrealistically compressed.
The built products are seldom defect-free. The industry is very fragmented and
is beset with an adversarial culture. Many participants adopt a short-term view
on business development and there is a tendency to award contracts to the lowest
bidders. Accountability is undermined by the prevalence of non-value adding multi-
layered subcontracting and lax supervision. Many of these problems stem from
long-established practices and processes. With all these, it comes as no surprise that
construction disputes surface all the time.
Construction litigation is mainly about those disputes that arise out of projects for 20.002
construction work concerning the execution of work necessary for the implementation
of the project. Construction litigation is not a new phenomenon. Indeed, experience
elsewhere suggests that periods of strong economic growth seem to be accompanied
or followed by periods of increased construction litigation. A somewhat similar
experience can also be observed in Hong Kong by comparing the number of
construction litigations before and after economic turmoil in the region.
Naturally, the parties to the contract have different interests in the implementation 20.003
process. With each party wishing to safeguard its own interests, it is but natural
that disputes arise during the course of the implementation process. Whereas the
supervising professionals look after the interests of the employer, the contractor is
interested in profits generated from the business venture of construction works. Those
disputes that cannot be settled mutually and amicably give rise to claims and counter-
claims, calling for a suitable process for their resolution. It can therefore be expected
that a substantial portion of construction litigation will have its genesis in contracts or
the performance of contractual obligations.
(b) Common causes of disputes
With the nature and lifespan of a construction project, the performance of the contract 20.004
is subject to external factors. It is thus axiomatic that construction litigation is caused
by a variety of factors, not all of those being fully controllable or containable by
the parties in the construction industry. For example, it is not uncommon for risks
to be practically unmanageable; personalities of persons or parties involved can
introduce tendencies toward aggressiveness or self-interest, particularly in view of the
competitive bidding process; and non-payment or delayed payment by one often
triggers an attempt to spread the impact among the others affected.
There is, thus, always exposure to the stress of unforeseen events, or, albeit having 20.005
been foreseen, not adequately dealt with in the contract. The resultant reality is that

such factors create risks that parties to the contract did not contemplate, or if they
were contemplated, agreement was never reached on how to deal with such risks and
their allocation among the parties. The ultimate impact of all this is on the execution
and progress of the work, exposing the parties to financial consequences. This is the
principal cause for construction litigation.
20.006 Common causes of construction disputes are unforeseen or changed project conditions,
changes in the work, late provision of drawings, access issues, permits, equipment
or materials, inadequate drawings or specifications and interference in the work. In
this aspect, as with other types of disputes, there can be three main areas in dispute:
what has happened; who should be liable; and what the remedies should be. However,
there are certain features in construction disputes that call for special care in their
handling. Firstly, the disputes are closely related to and affected by the risk allocation
mechanisms in the contracts. Secondly, the disputes can be complicated by the number
of technical or factual issues involved. Thirdly, the claims are governed by a contract,
the meaning of which may have to be found out from reading across many documents.
(c) Characteristics of construction contracts
20.007 Outside the context of the dispute itself, there are also certain common observable
characteristics of construction contracts. Their execution and administration involves
a whole variety of persons in various capacities and with different interests, and they
are operating within a spectrum of contractual arrangements. The contracts rely on
and adopt documents based on standard documentation pulled together from different
sources, and the lifespan of the contracts usually covers a time period calculated in
years, thereby adding further uncertainties to their execution and the resolution of
disputes that arise.
(d) Drawbacks of construction litigation
20.008 Thus, construction litigation needs careful handling. Litigation is the only option
if there is no agreement to arbitrate and the dispute cannot be resolved by other
alternative dispute resolution methods. The court fees are generally much less than
the arbitrator’s fees but the other factors involving technical completeness and total
time can increase the costs substantially. It has been widely believed that construction
litigation is inevitable, costly and non-productive. Indeed, there are a number of
matters that contribute to the commonly perceived deficiency of construction litigation
as a means of effectively and efficiently resolving disputes. Among them, the more
important ones are these.
(i) Documents involved

20.009 In the context of construction litigation, documents certainly play a large role. Yet,
equally true is that, in every construction project of sensible size, innumerable
documents are generated on a daily basis from design to completion. Voluminous
records of correspondence, reports, minutes of meetings, submissions, programmes,
method statements, drawings, site instructions, variation orders, daily reports, site
memos, requests for information, photos and other documents can be involved in

FEATURES OF CONSTRUCTION LITIGATION 533
finding the truth in support of a party’s position. The recent adoption of management
systems on quality, environment and safety and health also significantly escalates the
situation even further. In Hong Kong, many of these documents may be in Chinese or
a combination of Chinese and English and, as such, the translation costs involved can
become an added dimension in terms of the costs of litigation.
(ii) Parties involved

In the construction industry, apart from the parties to the contract, other participants are 20.010
also drawn into the litigation. They may typically include the engineer, the architects,
the main contractor, nominated or domestic subcontractors, the material supplier and
plants hirers or sureties. This often gives rise to a multiplier effect in terms of time and
costs in the litigation.
Discovery and standard of proof

The mutual disclosure and production of documents for the purpose of litigation is yet 20.011
another area of deficiency in construction litigation. On the one hand, the volume of
documents is sheer; on the other hand, the degree of preparation of lawyers for trial has
to be adequately reached. This is complicated by the standard of proof imposed by law
as required in litigation, which obliges lawyers to carefully ensure that the evidence
presented to the court is able to meet such a standard. As a result, prolonged trial and
preparation for the trial is not uncommon.
Time to trial
With the above, it may take at least two to three years for an action to reach the stage 20.012
of judgement after litigation has started. This is of crucial and sometimes fatal impact
to parties in the construction industry where cashflow is lifeblood.
(iii) Expert evidence

Another common feature of modern construction litigation is the inappropriate or 20.013
excessive use of experts. The nature of expert evidence requires the expert to be
familiar with all the documents and sources of factual information about the dispute.
This inevitably increases costs, the duration of proceedings and their complexity.
(e) Civil justice reform
With the civil justice reform that has been implemented in Hong Kong,1 it can be 20.014
expected that there will be a shift towards case management in litigation. The modern
judicial approach has moved away from leaving all matters to be resolved by the trial
judge at trial to an emphasis on effective pre-trial case management. The ultimate aims
include the enhancement of cost-effectiveness of court procedure and expeditious
disposal of costs. Construction litigation lies at the frontline of this movement and
should in time render litigation a more user-friendly mechanism for resolving disputes
for those in the construction industry.
1
For details, see http://www.civiljustice.gov.hk/.

20.015 As set out in Order 1A of the Rules of High Court (Cap 4A), the underlying objectives
are to increase cost-effectiveness, to ensure cases are dealt with expeditiously, to
promote reasonable proportion and procedural economy, to ensure fairness between
parties, to facilitate settlement of disputes and to ensure fair distribution of court
resources.2 Under Order 1B of the Rules of High Court, the court is vested with
general powers of management with a view to achieving these objectives.3 Practice 31
on Mediation has also been implemented for encouraging the use of alternative dispute
resolution procedures.4
2. COURTS AND PROCESS OF LAWS

(a) Adversary system
20.016 The Hong Kong courts of civil jurisdiction inherit an adversary system where the
parties themselves initiate the proceedings and decide what issues of fact and law
shall be put forward for decision by the court. The function of the court is to decide
the issues presented to it based on the evidence placed before it by the parties. In civil
proceedings, the standard of proof, ie the standard on which a party has to discharge
the evidence to establish a piece of fact, is ‘on the balance of probabilities’, as opposed
to the standard of ‘beyond reasonable doubt’ required in criminal proceedings.
(b) Initial proceedings
20.017 In Hong Kong, the District Court now hears civil disputes of a value over HK$50,000
but not more than HK$1,000,000. Thus, quite a number of disputes concerning
material suppliers or subcontractors are dealt with in the District Court. Proceedings
may be transferred from the District Court to the Court of First Instance, or vice versa.
20.018 Of course, most of the construction litigation over a project of a normal size comes
under the jurisdictions of the Court of First Instance of the High Court of Hong Kong.
It has jurisdiction of unlimited financial value.
20.019 A Construction and Arbitration List is established within the Court of First Instance to
facilitate the disposal, by the designated judge in charge of the list, of the specialised
classes of litigation concerning matters of civil or mechanical engineering, building
or other construction work, claims regarding professionals or bodies specialising
in practice related to the construction industry and arbitration. The judiciary issues
practice directions (PD6.1) particularly pertinent to construction litigation, which
encourage the productive exchange of experts and the effective use of mediation as an
alternative dispute resolution method. Detailed case management procedures are also
set out for the preparation of the case for hearing and for other interlocutory matters.
A party proposing to enter its action in the list shall mark on the face of the pleadings
2
See rule 1 of Order 1A of the Rules of High Court (Cap 4A).
3
See rules 1 and 2 of Order 1B of the Rules of High Court (Cap 4A).
4
See Resource Development Ltd v Swanbridge Ltd [2010] HKEC 841.

COURTS AND PROCESS OF LAWS 535
the words “Construction and Arbitration List”. There can also be transfers to and from
the list. The judge in charge may from her or his own motion or on application by any
party to the litigation order a case to be placed on the Construction and Arbitration
List. Once a case is on the Construction and Arbitration List, all interlocutory matters
are returnable only before the judge in charge.
(c) Appeal proceedings
On appeal, the matters will be dealt with by the Court of Appeal and, if necessary and 20.020
allowed, the Court of Final Appeal which is the highest court in Hong Kong. Appeals
conducted by the Court of Appeal are at present by way of rehearing. It is open to the
Court of Appeal to reassess the facts, albeit generally only on the basis of documentary
record rather than by rehearing oral evidence afresh.
No appeal is easy. Yet, in construction litigation, the prospective appellant faces added 20.021
dimensions of difficulties. The appellant court may be reluctant to intervene or change
the findings of fact of the trial judge, particularly if the trial judge had the benefit of
inspecting the site or the subject matter in dispute. Also, given the fine details of the
factual investigation by the trial judge, the appellant court would be slow to embark
on further enquiry. Thus, unless and until such finding is shown to be wrong, weight is
invariably attached to the finding of primary facts of the trial judge who, while possibly
equipped with more exposure to specialist technical matters, rested his conclusions on
the evaluation of oral evidence or testimony of factual witnesses. It is though true to
say that the appellant court should be more willing to intervene when the challenge is
over the secondary inference drawn from the primary finding of facts.
In Ting Kwok Keung v Tam Dick Yuen t/a Tam Dick Yuen Engineering,5 the Court of 20.022
Final Appeal dealt with legal principles that concern the resolution of disputes of fact
at trial and how such disputes are to be approached on intermediate appeal and on
final appeal. The issue in this case turned on whether the plaintiff who was injured
on a demolition site was an employee, in which case he was entitled to compensation
under the Employees’ Compensation Ordinance (Cap 282), or whether he was just
an independent contractor, in which case he was not so entitled. The trial judge
made a finding of primary fact that the plaintiff was an employee at the time of the
accident. The Court of Appeal thought that the trial judge had, in reaching that finding,
overlooked some important evidence and misapprehended the effect of other important
evidence, including a note written on the printout of an ATM machine, indicating
that the plaintiff had been a subcontractor at another site, which was denied by the
plaintiff. While noting that appeals against findings of primary fact were approached
very differently from appeals against findings of fact made by a process of inference,
Mr Justice Bokhary PJ remarked in his judgement that:
“The question for the Court of Appeal is whether, even though it does not enjoy
the advantages enjoyed by the trial judge who received the evidence at first-hand,
it is nevertheless satisfied that his conclusion on the facts is plainly wrong. The
5
[2002] 3 HKLRD 1.

Court of Appeal should intervene if so satisfied. But if not so satisfied, the Court
of Appeal should defer to the trial judge’s conclusion even if in some doubt as to
its correctness.”
20.023 In Secretary for Justice v Chong Kui (Group) Co Ltd6 the Hong Kong Court of Appeal
dismissed the appeal and remarked that an appellant court should only interfere with
the trial judge’s findings of primary fact, if it is satisfied that the trial judge’s conclusion
on the facts was plainly wrong, otherwise the Court of Appeal should defer to the trial
judge’s conclusion even if in some doubt as to his correctness.
(d) General process of litigation
20.024 As to the litigation process, it is initiated when one party (the plaintiff) serves a legal
claim against another party (the defendant). The writ of summons is one of the usual
forms of document or originating process that commences litigation. It is normally
used to commence an action based on contract, tort, fraud, damages for personal
injuries or death, damages to property arising out of a breach of duty, and generally
for all actions likely to involve a substantial dispute of facts. The plaintiff sets out a
statement of claim (a concise statement of its claim together with the facts it relies on
and the relief and remedy claimed) in Chinese or English. Upon service of the writ
and acknowledgement of service on the defendant, the defendant must indicate if it
wishes to defend the action, within the time on the prescribed form. The defendant
must then serve a defence explaining why it is disputing the claim, and may include
a counter-claim against the plaintiff. The plaintiff may then file with the court and
serve on the defendant a reply to any defence so filed, setting out additional facts in
answer to it. If the defendant files a counter-claim, the plaintiff will have to file and
serve a defence to the counter-claim if it wishes to dispute it. All these documents are
generally referred to as the pleadings in an action. The next stage, after the pleadings
are closed, is discovery, where each side must disclose to the other the documents it
possesses that relate to the case, and allow inspection. When a case is ready for trial,
the parties will ask for the case to be set down for trial. At the trial hearing, the court
will hear the evidence of factual and expert witnesses and the submissions of the
parties, prior to the rendering of a judgement on the case.
3. PLEADINGS
(a) In general
20.025 The purpose of pleadings is primarily to define the issues and inform the parties about
the case that they have to meet. With precision, pleadings help ascertain the matters
on which both parties wish a determination by the court. In their appropriate forms,
pleadings offer a benefit to the parties by defining which matters are left in dispute and
6
[2009] HKEC 1641.

PLEADINGS 537
which are not and for knowing precisely what facts they have to establish at trial. In
brief, pleadings provide an agenda for trial.
The statement of claim must include a concise statement of the facts on which the 20.026
plaintiff relies. Generally speaking, only material facts that are necessary to establish
the cause of action and the quantum of damages should be included. Failure to do so
risks the pleadings being struck out. Also, the factual matrix surrounding construction
claims can be complicated. The courts acknowledge the blurring, in recent times,
of the distinction between pleadings and particulars as noted, for example, in the
Australian case of Beech Petroleum NL v Johnson,7 where von Doussa J referred to the
tendency now towards narrative pleading, as there is a growing concern that pleadings
according to traditional rules do not adequately make known to the court and to the
parties the nature of the opposing cases in complex matters. Thus, to assist the court
to have the matter properly looked at in the context, there may be circumstances when,
at an appropriate juncture, a relatively narrative approach needs to be adopted to put
forward the history and development of the matters. Indeed, in some construction
cases, such an approach should be adopted.
Likewise, in the defence, apart from answering the plaintiff’s contentions, the 20.027
defendant often raises material facts in reply and in support of a further pleading by
way of a counter-claim. A common situation might be where the contractor asks for
payment of outstanding sums for variations under the contract, the employer, apart
from disputing the variations on their value, often includes in the defence a counter-
claim for damages due to the defective works or delay to completion.
By Order 41A of the Rules of High Court (Cap 4A), pleadings must be verified by 20.028
a statement of truth. A statement of truth might not be an affidavit or an affirmation
but the Rules themselves treated it with similar seriousness. The effect of this is that it
is much harder for parties to make amendments to pleadings. As highlighted in Tong
Kin Hing v Autron Mauritius Corp,8 where it had been demonstrated that a pleading
should never have been verified by a statement of truth, the court should be very slow
to permit any amendment to that pleading. If the central part of the pleading was
defective, the court might well consider exercising its discretion by striking it out and
leaving the party to bring new proceedings.
(b) Global or composite claim
(i) Need for detail

In construction cases, as noted, it is often desirable to plead facts in great detail. If a 20.029
pleading is vague or otherwise contains insufficient particulars, the other side may
apply for further and better particulars of the pleading. This right to ask for particulars
leads to a type of procedural dispute, commonly labelled as ‘global’ or ‘composite’
claims.
7
(1991) 105 ALR 456 at 466.
8
[2010] 1 HKLRD 77.

20.030 Where a contractor’s claim depends on an extremely complex interaction of the

consequences of events, disruptions or changes, it may be difficult or even impossible
to make an accurate apportionment of the total extra time or costs between such
several or concurrent events.9 To bypass the causation requirement, it is not uncommon
for a global claim10 (for an extension of time and for additional payments) to be put
forward.11
(ii) Contribution of separate causes

20.031 This arises when the party, in advancing a claim or counter-claim, is unable to specify
in its pleading the causation link that it alleged between the factors that contributed to
the delay or extra cost. The difficulties here are that a number of separate causes have
each contributed to the claim or counter-claim.
9
In McAlpine Humberoak Ltd v McDermott [1992] 58 BLR 1, it was remarked that:
“When the defendant’s witnesses came to give evidence, they undertook the task which was never undertaken
by the plaintiff, of tracing the impact of every drawing revision, VO and TQ. ... The judge [at first instance]
dismissed the defendants’ approach to the case as being ‘a retrospective and dissectional reconstruction by
expert evidence of events almost day by day, drawing by drawing, TQ by TQ and weld procedure by weld
procedure, designed to show that the spate of additional drawings which descended on McAlpine virtually
from the start of the work really had little retarding or disruptive effect on its progress’. In our view the
defendants’ approach is just what the case required.”
Likewise, in Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd [1999] 66 ConLR 119, it was
observed that:
“[The expert’s] second main technique was to translate cumulative hours recorded on daywork sheets as spent
on salt washing or mud clearing into equivalent working days and to treat those as further justification for
attributing that part of the days lost to water ingress. Again, however, that conclusion simply does not follow.
First, the labourers involved in those activities were only a part, and usually a small part, of the work force,
the rest of which was not necessarily idle (and indeed, so far as the records have been examined with this point
in mind, was usually not so in fact), so even in purely arithmetical terms the logic is flawed if an hour spent
by, say, one or two labourers is equated with an hour lost to the whole project. Second, time lost in this way
could in principle be made up by late working (as, again, often seems to have happened in practice). Third, it
is wrong in principle to ‘carry forward’ a part day if the next element on the critical path is a concrete pour.
A pour, once embarked upon, must be completed before the end the working day. Either it is commenced on
the due date, however late, and completed, or it has to be postponed by a complete day or days; there simply
cannot be a part-day loss on that score to be added to other part days.”
10
A global (or composite) claim is one where a global sum or amount in time is put forward as the measure of
compensation (in time or cost) when two or more separate matters of claim or complaint are relied on and it is
said to be impractical or impossible to provide a breakdown or subdivision of that sum or amount among the
matters. See John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2004] BLR 295, where it was
said that:
“For a loss and expense claim under a construction contract to succeed, the contractor must aver and prove
three matters: first, the existence of one or more events for which the employer is responsible; secondly, the
existence of loss and expense suffered by the contractor; and, thirdly, a causal link between the event or events
and the loss and expense. ... Normally individual causal links must be demonstrated between each of the
events for which the employer is responsible and particular items of loss and expense. Frequently, however,
the loss and expense results from delay and disruption caused by a number of different events, in such a way
that it is impossible to separate out the consequences of each of those events. In that event, the events for
which the employer is responsible may interact with one another in such a way as to produce a cumulative
effect. If, however, the contractor is able to demonstrate that all of the events on which he relies are in law
the responsibility of the employer, it is not necessary for him to demonstrate causal links between individual
events and particular heads of loss. In such a case, because all of the causative events are matters for which the
employer is responsible, any loss and expense that is caused by those events and no other must necessarily be
the responsibility of the employer. That is in essence the nature of a global claim ...”
11
See J Crosby & Sons Ltd v Portland Urban District Council (1967) 5 BLR 121.

PLEADINGS 539
In principle, the loss attributable to each cause or breach needs to be separately 20.032
identified and particularised. Yet, separating them may not be easy or even possible.
This results in the not uncommon use of ‘global claim’ or ‘composite claim’ as an
attempt to bypass the need to demonstrate such a causal relationship between the
breaches and the losses. As stated in “Prolongation and Disruption – Problems of
Causation in Building Contracts. Is Arbitration the Answer”:12
“Claims for direct loss and/or expenses are usually prepared by quantity surveyors
who are the first to be called upon by contractors who perceive that they have a
legitimate grievance. In the past, contractors have tended to avoid complicated
arguments of causation by pleading that the claims for reimbursement arose by
adopting the overall period of delay together with all the constituent causes of
that delay relied upon with no attempt to demonstrate either periods or duration
of each individual delay caused the totality of the delay. This obviated the need
for any precise investigation analysis and any exhaustive detail which in due
course gave rise to cost savings for the contractor.”
In the English case of Crosby Ltd v Portland UDC,13 a lump sum award made by an 20.033
arbitrator for claims arising under various terms of the contract was being considered
by the court, which said that since the extra cost incurred depended upon an extremely
complex interaction between the consequences of various matters, it might well be
difficult or even impossible to make an accurate apportionment between the several
causes, and that there was no need to make an artificial appointment which had no basis
in reality. The focus would be on the total extra or additional costs, without looking
at the extra costs for individual items. Hence, it was held that in such circumstances,
a single lump sum award was proper provided the arbitrator had ensured that there
was no duplication. Yet, it seems also clear that, if such a claim using this total costs
approach is allowed to proceed, it should only be on the basis that, on proof of any
non-trivial damage or additional costs being established for which the employer is not
contractually responsible, the entire claim will be dismissed.
(iii) Failure to establish a causal link
Thus, a global claim may fail in total if some of the causes relied on cannot be 20.034
established and the courts are left without any basis for allowing a claim less than the
whole.
Indeed, failing to meet the need to demonstrate the causal link between the breaches 20.035
and the damages runs the risk of having the claim struck out by the court. In Wharf
Properties Ltd v Eric Cumine Associates, Architects, Engineers and Surveyors,14 the
developers sued the architects for breach of contract arising out of a contract for the
completion of a residential and commercial development – Harbour City in Hong
12
Brown, J, “Prolongation and Disruption – Problems of Causation in Building Contracts. Is Arbitration the
Answer” (1995) 11 ConstLJ 101.
13
(1967) 5 BLR 121.
14
[1991] 2 HKLR 154.

Kong. Among the allegations was the failure to properly supervise contractors and
subcontractors, thereby resulting in delay to completion. The statement of claim
covered 155 pages and was supported by schedules running a further 300 odd pages.
Upon the request of the architects, the court directed the developers to provide for
further and better particulars of such allegations, covering the essential link between
the various heads of breach and the damages claimed. The architects succeeded
before the Hong Kong Court of Appeal in an application to strike out the statement
of claim on the grounds of disclosing no reasonable cause of action and as an abuse
of process of the court. The developers then appealed to the Privy Council, arguing
that some particulars could not be given until the trial. The Privy Council agreed with
the decision of the Hong Kong Court of Appeal and noted that the obligation of a
plaintiff remained to be to plead its case with such particularity as was sufficient to
alert the other party to the case that was going to be made against it at the trial. In this
case, the Privy Council considered that the developers had failed even to attempt to
specify the factual consequences of the breaches pleaded in terms of periods of delay,
ie the nexus between the wrong alleged and the consequent delay.
20.036 The Hong Kong Court of Appeal has been called upon to examine the circumstances
in which a global claim could be dismissed in Attorney General v Shimizu Corporation
(formerly known as Shimizu Corporation Co Ltd).15 In his judgement upholding the above
approach, Mayo JA remarked that global claim was hazardous but, if successful, highly
rewarding and, as such, no question of unfairness could possibly arise in such an election.
20.037 Whether the contractor should be allowed to use a global claim depends on the facts
of the case and there is no universal rule that a global claim must be embarrassing
so as to be not allowed.16 As held in Attorney-General v Shimizu Corp (formerly
known as Shimizu Construction Co Ltd),17 a global claim made in accordance failed
when it was demonstrated that any costs had been included over and above the lowest
common denominator of costs. Thus, by making a global claim without including
a fall-back position, a situation can arise in which the claim fails entirely if, as
transpired, the court or arbitrator is unable to quantify the claim on the basis of the
material presented.
(iv) Forms of global claim

20.038 A global claim can appear in different ways but will usually be in one of three forms.
First, it may assert that the court should allow a reasonable price for the work done,
using a quantum meruit approach. Second, it may be put forward by listing various
allegations of faults, failures or deficiencies, while giving at the same time adequate
particulars or showing the link between the alleged effects and such faults, failures or
deficiencies. Third, it may be advanced with precise and specific proof for breaches,
using voluminous evidence, but accompanying the same with a financial claim lumped
together for all breaches, without stating which loss is caused by individual breaches.
15
[1997] HKLRD 297.
16
See British Airways Pension Trustees Ltd v Sir Robert McAlpine & Sons Ltd (1994) 45 ConLR 1.
17
[1997] HKLY 187.

PLEADINGS 541
(c) Scott Schedule
(i) Useful procedural device

Where there are many issues or potential issues, which often happens in construction 20.039
disputes, the claim on each issue, the defence or response to it, and the reply to the
defence may be conveniently presented in schedule form, often known as a Scott
Schedule, so that the court can see, in one document, the opposing contentions on
each and every issue that requires determination. This practice of pleading by way of
schedule tends to expedite the preparation of the pleadings but a great deal depends on
the accuracy and completeness of the plaintiff’s input in completing it.
The Scott Schedule is a useful procedural device that achieves considerable savings 20.040
in time and money. A typical form of a Scott Schedule in construction litigation is
divided into columns for consecutive numbering of the items, the full description of
each, the contention of each party against each item as to liability or quantum or both,
and a column for the use of the court. These columns (see the example below) are to
be completed at different stages of the proceedings, one after the other. In effect, the
parties are respectively required to give full particulars of their cases in respect of each
item in dispute.
Ref Description Particulars Amount Amount, Plaintiff’s Amount For use

No of Item of Work claimed by if any, Observations in of Court
of Work Plaintiff admitted Dispute
by the
Defendant
With the case stated in a schedule form that will readily enable the other side to 20.041
know how the amounts were derived and why they were incurred, the other side
will then have no excuse for not putting forward the reasons why liability does
not exist or if liability exists, why the amounts claimed are nevertheless not due.
Also, the party who disputes the reasonableness of the amount charged or incurred
for an individual item has to state what it contends a reasonable or proper charge
should be.
(ii) Tailored to dispute requirements

There is no definite form for a Scott Schedule and it should rather be tailored to suit 20.042
the dispute at hand. Depending on the nature of the disputes, the use of more than
one Scott Schedule in construction litigation is not uncommon. The Scott Schedule
may also be extended to include references to the documents and other related
evidence.
For example, a schedule for additional work and disputed valuation may take the 20.043
following form.
Ref Item Plaintiff’s Case Plaintiff’s Defendant’s Price, if any Amount For use
No of Instruction for Valuation Response to admitted by in Dispute of Court
Extra Extra Work Plaintiff’s Defendant
Work Case

20.044 On the other hand, as another illustration, a schedule for counter-claim for defective
work may adopt the following format.
Ref Item Alleged Defendant’s Amount Liability Plaintiff’s Amount For use
No of defect case claimed case of Court
Work Remedial Remedial
Work work
20.045 In the United Kingdom, it has been a matter of historical practice for Scott Schedules
or Official Referee’s Schedules to be ordered in many construction litigations, so as to
allow the setting out of the details of allegation made and the response or opposition
thereto.
(d) Set-off and counter-claim
(i) Counter-claim or defence

20.046 It is not uncommon that the defendant in a litigation invokes a claim against the
plaintiff, in addition to merely responding to the matters in the plaintiff ’s claim.
This may be raised as a counter-claim; this may also be invoked as a defence for
the purpose of a set-off. If raised as a counter-claim, it is to be treated by the court
essentially in the same manner as if it were an original plaintiff ’s demand and is
to be decided upon quite independently of the decision on the plaintiff ’s claim,
irrespective of the outcome of the same. On the other hand, a set-off defence needs
to be decided upon only if and to the extent the plaintiff ’s claim is well founded.
By Order 18 rule 17 of the Rules of High Court (Cap 4A), a defence of set-off
against the plaintiff ’s claim may be included whether or not it is also added as a
counter-claim.
(ii) Common law and equitable set-off

20.047 The right to set-off has been reviewed in Hanak v Green,18 where it was held that
the mere existence of a cross-claim is not enough and that the cross-claim had to
have in it an equity that went to the very root of the plaintiff’s claim so that it would
be manifestly unjust to allow the plaintiff to recover without taking into account the
cross-claim.
20.048 The position in short is that set-off at common law is allowed over mutual liquidated
debts and that set-off in equity is also possible if it is so closely connected with the
claim that it would be manifestly unjust to allow the claim without taking into account
the cross-claim, liquidated or unliquidated.
20.049 In his felicitously expressed statement of the principle in Compania Sud Americana
De Vapores v Shipmair BV (The Teno),19 Parker J also said:
18
[1958] 2 QB 9.
19
[1977] 2 Lloyd’s Rep 297.

PLEADINGS 543
“... where the cross claim not only arises out of the same contract as the claim
but is so directly connected with it that it would be manifestly unjust to allow the
claimant to recover without taking into account the cross claim there is a right of
set-off in equity of an unliquidated claim.”
(iii) Set-off under contract

Apart from the common law and equitable set-off, set-off under the contract, ie 20.050
contractual set-off, may also be allowed. This is by way of the express provisions in
the contract between the parties, conferring power to allow or make for deduction of
cross-claims arising out of the same contract or otherwise. An example in which the
issue of contractual set-off is raised can be found in Wing Shing Air-flow Co Ltd v
Cemac Engineering Co Ltd.20
(iv) Contractual limitation on right to set-off

In the same way that parties by contract create a right for contractual set-off, the parties 20.051
may by contract limit or exclude the common law and equitable rights to set-off.
This was considered by the House of Lords decision in the English case of Gilbert-Ash
(Northern) Ltd v Modern Engineering (Bristol) Ltd.21 In that case, the contractor
entered into a contract in the RIBA Form with the employer to carry out building
work on a market development scheme. Under the contract, upon certification by the
employer’s architect, the contractor was to pay over to the nominated subcontractor
the certified sums within 14 days of certification. At first instance, Judge Edgar Fay
sitting as the Official Referee held that the terms of the contract provided for payment
being withheld if the contractor considered it had a right of set-off and that it was
accordingly entitled to defend the action on that basis. It was clearly a somewhat
courageous decision in view of the then existing authorities. Not surprisingly the
subcontractor appealed and the Court of Appeal, presided over by Lord Denning, also
not surprisingly followed their previous decision in Dawnays Ltd v FG Minter Ltd and
Trollope and Colls Ltd22 and allowed the appeal. Leave was however granted to appeal
to the House of Lords and there the Court of Appeal decision was reversed. The House
of Lords in a unanimous decision held that the terms of the contract did provide for
the right to set-off but went on to also hold that the right of set-off was a fundamental
common law right. As such, it was held that it was always open to the parties to a
contract to remove such a right, but they had to do so in clear and express terms. The
House of Lords held that there was nothing sacrosanct about an architect’s certificate
and that one had to look to the terms of each individual contract to see whether the
right of set-off was available to the contractor. If it had not been clearly removed
then it could defend an action brought by a subcontractor by a claim for set-off.
In particular, the House of Lords held that this right of set-off was not limited to
liquidated and ascertained amounts and, provided the set-off could be quantified, it
could be pleaded.
20
21
[1974] AC 689.
22
[1971] 1 WLR 1205.

20.052 The principles in Gilbert-Ash (Northern) Ltd have been adopted by the Hong
Kong courts, for example in Ryoden Engineering Company Ltd & Others v Paul Y
Construction Company Ltd,23 the nominated subcontractor for electrical works applied
for summary judgement based on three certificates by the architect. Pursuant to the
subcontract, the main contractor had to pay over to the subcontractor the total value
certified less any retention money and previous payment within 14 days of the receipt
of payment from the employer. Also, the subcontract allowed the main contractor to
withhold a sum equivalent to any loss or damage suffered or incurred by the main
contractor and caused by the failure of the subcontractor, if the main contractor was
issued with a certificate in writing by the architect for the same. No such certificate had
been issued. In contesting the summary judgement application, the main contractor
said that, as money had been deducted as liquidated damages by the employer, there
was no payment received as within the definition of contract and, further, the main
contractor retained a common law right to claim set-off against the subcontractor for
such delays. It was held by the court that the main contractor succeeded in raising
issues for trial.
(v) Abatement
20.053 In addition to a set-off entitling the extinguishment of the whole claim, a common
situation in construction litigation is for the defendant to simply defend by showing
how much less the defendant should pay. For example, as in Slater v Duqemin Ltd,24
an employer is entitled to claim an abatement against a contractor for defective works
which are left incomplete even though the employer is liable to the contractor for
wrongful repudiation of the contract. This is the situation where an abatement exists
as a reduction or diminution of the amount of the whole claim. By definition, an
abatement cannot exceed the total of the sum to which it is applied.
4. DISCOVERY
(a) Production of documents
20.054 An important step towards the preparation for trial is the disclosure and inspection
of documents. This takes place after the pleadings of the case are closed and each
side has to disclose to the other, by way of a list of documents, all documents which
are relevant to the matter in dispute. Applications to the court can also be made to
compel the disclosure or production of documents that should have been included in
the list and there are also other devices, such as interrogatories and the notice to admit,
which can be utilised to achieve better understanding of the other side’s case. In the
following, the focus is placed on the discovery of documents, which is both important
and costly in construction litigation.
23
[1994] 2 HKC 578.
24
(1992) 29 ConLR 24.

DISCOVERY 545
Documents here generally mean anything in which information is recorded and 20.055
include, for example, tape recordings and computer files. The documents to be
disclosed include those that are or had been in the possession, custody and power of
a party.
(b) Determination of document relevance
Whether a piece of document is relevant to the matter in question between the parties is 20.056
reviewed with reference to the pleadings. One of the inherent problems in construction
litigation is the huge burden of documents. The controlling test is set out in the case
of Compagine Financière du Pacifique v Peruvian Guano Co,25 where Brett LJ held
that a document would be relevant if it were reasonable to suppose that it contained
information which might enable the party either to advance its own case or to damage
that of its adversary, or if it were a document which might fairly lead to a train of
inquiry which might have either of these two consequences.
This is no doubt a broad formulation of relevance for discovery. In contrast, in O Co 20.057
v M Co,26 the court, while noting that the formulation in the Peruvian Guano case
had probably contributed more to the increase of the costs of civil and commercial
litigation in recent years than any other factor other than the development of the
photocopying machine, however pointed out that:
“The principle was never intended to justify demands for disclosure of documents
at the far end of the spectrum of materiality which on the face of it were unrelated
to the pleaded case of the plaintiff or defendant and which were required for purely
speculative investigation … On the contrary, the document or class of documents
must be shown by the applicant to offer a real probability of evidential materiality
in the sense that it must be a document or class of which in the ordinary way
can be expected to yield information of substantial evidential materiality to the
pleaded claim in the defence to it in the broad sense which I have explained. If
the document or class cannot be demonstrated to be clearly connected to issues
which have already been raised on the pleadings, or which would in the ordinary
way be expected to be raised in the pleadings, if sufficient information were
available, the application should be dismissed.”
This more limited approach has been considered by the Hong Kong courts. 20.058
In A v B,27 in the course of litigation over a large building project, the approach in O Co 20.059
v M Co was adopted and applied by Findlay J in dismissing an application for further
disclosure relating to payment certificates missing from the 183 bundles of documents
disclosed. In the judgement, the court referred to the principles in O Co v M Co and
held that it had not been demonstrated that the documents requested could clearly be
connected to issues raised in the proceedings. It was also remarked that mistakes in
25
(1882) 11 QBD 55.
26
[1996] 2 Lloyd’s Rep 347.
27
[1998] HKLRD 542.

discovery were to be expected in a case of this magnitude and it was not sufficient
to make a wide-ranging request on the chance that something of marginal relevance
might be found.
20.060 On the other hand, in Mariner International Hotels Ltd Plaintiff v Atlas Ltd,28 it was
held that the approach in O Co v M Co should not be applied in an overly restrictive way
and if it were, discovery would be necessary for doing justice to the claim. In this case,
discovery was sought against a real estate developer of a major building project who
contested the application on the ground that such documents were in the possession of
the main contractors, architect, etc. This the court held to be an unrealistically narrow
and wrong stance to adopt, since in such a project the contractual chain and framework
can become very complex and, at times, artificial. Hence, for the purposes of the
discovery exercise, it may be right and proper for the architect, engineer or others in
similar capacity to be regarded as an agent of the employer, thereby giving power over
the documents generated as a result of this relationship.
Privileged documents and the ‘without prejudice’ rule

20.061 Documents that are otherwise relevant may be privileged from production. For
construction litigation, they may be conveniently categorised as documents protected
by legal professional privilege and documents covered by the ‘without prejudice’ rule.
20.062 The principles of the legal profession protect communications between a party and its
legal advisers when they are acting in a professional capacity for the purpose of legal
advice. Also protected are those communications passing between a party or its legal
advisers with a third party or professional party when litigation is contemplated or
pending. Where legal professional privilege exists and has not been waived, either by
agreement or conduct, it is absolute other then where the document in issue has come
into existence for the purpose of fraud or illegality.
20.063 ‘Without prejudice’ communications refer to those communications between parties
in litigation for the purpose of and with a view to resolving or settling their disputes.
These communications are not admissible in evidence due to the public policy of
encouraging settlement. As noted in Rush & Tompkins v Greater London Council,29
the ‘without prejudice’ rule excludes all negotiations genuinely aimed at settlement,
whether oral or in writing, from being admitted in evidence. The use of the phrase
‘without prejudice’ is not conclusive on whether this rule is of application, and the
surrounding circumstances overall have to be examined to determine whether the
parties are then really seeking to compromise. In Hong Kong construction disputes, a
ready example of the application of such a rule occurs in the modern alternative dispute
resolution method of mediation, which normally further provides for confidentiality
of the process by way of agreed mediation rules. In Pacific Telecommunications Ltd v
BB Telecom Ltd,30 it was held that a letter asking for payment in full of the demanded
sum by instalments was not a ‘without prejudice’ communication between the parties.
28
(2002) (unrep, HCA 10714, HCA 10752 & HCA 10821 of 1998 Burrell J)
29
[1989] AC 1280.
30

INTERLOCUTORY APPLICATIONS 547
5. INTERLOCUTORY APPLICATIONS
(a) Definition
Interlocutory applications refer to all applications to the court that are required between 20.064
the commencement of the proceedings and the final trial of the action. The success or
failure of an interlocutory application in an individual case can have a crucial impact
on the final settlement of the case.
As in other cases, interlocutory applications in construction litigation take many 20.065
forms and proceed at various paces. However, given the importance of cash flow in
the construction industry, parties are keen to try disposing the case by way of instant
remedies such as summary judgement or by way of partial relief or protection such as
interim payment or security for costs.
(b) Summary judgement
(i) Appropriate only when no defence to claim

The application for summary judgement is a process provided for under Order 14 of 20.066
the Rules of High Court (Cap 4A). The purpose is to enable a plaintiff to obtain a quick
judgement where there is plainly no defence to the claim, for example when the only
defence is on a short point of law or when it can be demonstrated on documents that
the defence has no real prospect of success at trial.
In such cases, application for summary judgement can be made after the defendant 20.067
gives notice of intention to defend. The burden is then shifted onto the defendant
to show cause against the plaintiff ’s application, usually by showing a defence upon
merits and, in doing so, the defendant has to ‘condescend upon particulars’. This
means that the defendant is under a duty, not only to show that it has a defence, but to
provide sufficient, if not all, the material details to support its claim that its defence
is with merits. Failure to do so is likely to bring adverse inference on the defendant’s
case in the application for summary judgement, as held in Man Earn Ltd v Wing Ting
Fong,31 regarding a real or bona fide defence. The test here is simply whether the
defendant’s case is believable.
It has to be noted that application for summary judgement, powerful as it may be, is 20.068
only for clear-cut cases in which there is no serious material factual dispute, otherwise
the procedure is entirely inappropriate. If the court is of the view that there is a
triable issue, the court may dismiss the application or grant unconditional leave for
the defendant to defend the plaintiff’s claim. Yet, the court is also conferred with the
discretion to order that leave to defend be given only upon condition, for example, by
way of payment into the court of a substantial sum. Construction contracts in Hong
Kong commonly provide that sums certified by the engineer or architect as due and
payable, for example, as interim payments, are in the nature of debts owed to the
31
[1996] 1 HKC 225.

contractor by the employer if the contractor has not received such sums after the
stipulated time.
(ii) Importance of set-off or counter-claim

20.069 However, such an application for summary judgement is likely to be met with a set-off
defence or counter-claim and the contractor is in no better position than other ordinary
plaintiffs when the employer raises a bona fide defence.
20.070 Indeed, the issue of set-off and counter-claim can be of vital importance particularly
for contractors facing or opposing an application for summary judgement. In Shenzhen
Baoming Ceramic Co Ltd v Companion-China Ltd,32 Keith JA cited with approval the
following passage from the Supreme Court Practice 1999:
“An analysis of the authorities as to what orders should be made where the
defendant raises a set-off or counter-claim shows that there are four different
classes or groups of such orders, namely:
(a) where the defendant can show an arguable set-off, whether equitable
or otherwise, he is entitled to leave to defend to the extent of the set-off
and the court had not discretion;
(b) where the defendant sets up a bona fide counter-claim arising out of
the same subject matter as the action and connected with the grounds
of defence, the order should not be for judgement on the claim,
subject to a stay pending trial of the counter-claim, but should be for
unconditional leave to defend, even if the defendant admits the whole
or part of the claim;
(c) where there is no defence to the claim but a plausible counter-claim of
not less than the claim is set up, judgement should be for the plaintiff
on the claim with costs, stayed until trial of the counter-claim;
(d) where the counter-claim arises out of a separate and distinct transaction
or is wholly foreign to the claim, judgement should be for the plaintiff
with costs without a stay; the lack of clarity between classes (b), (c)
and (d) gives the court freedom to respond to the perceived justice of
the individual case …” 33
20.071 Thus, as elsewhere, there is a body of case law in which application for summary
judgement is sought by the contractor, suing upon the engineer’s or architect’s
certificates, as a form of instant remedy.
20.072 In Young’s Engineering Co Ltd v Hang Sing Construction Co Ltd,34 the effect of the
engineer’s certificate was illustrated in the context of a summary judgement application.
The plaintiff was a nominated subcontractor to the defendant for the air-conditioning
32
[2000] 2 HKC 790 at 796.
33
Supreme Court Practice 1999, Vol 1 at 179.
34
(unrep, HC No 460 of 1984).

and refrigeration works and the contract, as usual, contained a provision whereby on
receipt of an engineer’s certificate by the defendant, the defendant was required within
seven days to pay to the plaintiff any sum that the engineer had certified was due and
owing in respect of the subcontract. The defendant failed to do so. The plaintiff applied
for summary judgement. The defendant contended that it was entitled to set-off an
amount against such payment as a result of delays due to the fault of the plaintiff,
including additional expenses suffered by way of overheads. Applying the principle in
Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd,35 the court held that
the usual payment provisions in Hong Kong did not go so far as to remove the right
to set-off.
Yet, not all sums are liable to be set-off. In Paul Y Construction Company Ltd v 20.073
Attorney-General,36 sums arising under separate contracts between the same parties
were held not to be sufficiently connected for mutual set-off.
(iii) Stay of proceedings to arbitration

In earlier times, if there were an arbitration clause in the construction contract, an 20.074
application for summary judgement was often also met with an application for the
stay of the proceedings pending arbitration. The logic is that if there is no genuine
dispute or difference so that summary judgement can be entered, there is no dispute
or difference left to be submitted for resolution by arbitration. An illustration is Big
Island Construction (Hong Kong) Ltd v Abdoolally Ebrahim & Co (Hong Kong) Ltd,37
where an application for summary judgement for the contractual debt due under
certificates was opposed by allegations of defective works and liquidated damages and
an application for stay of proceedings pending arbitration.
Following the amendment to the Arbitration Ordinance (Cap 341) in 1996, Art 8 of 20.075
the UNCITRAL Model Law on International Commercial Arbitration applies to all
arbitration in Hong Kong by virtue of s 6 of the Arbitration Ordinance (Cap 341). The
effect of Art 8 is that a stay of proceedings to arbitration is mandatory unless the party
seeking a stay of proceedings has admitted the claim or the party opposing the stay
could show that the arbitration agreement is null and void, inoperative or incapable of
being performed, as in Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV.38
This is the same even if there can be no genuine dispute to an application for summary
judgement.
In Hip Hing Construction Co Ltd v Holyrood Ltd,39 the plaintiff commenced two 20.076
actions supported by certificates totalling HK$28,000,000. The defendant, contesting
that a dispute was assumed to exist until an unequivocal and complete admission was
made, applied for both actions to be stayed for arbitration pursuant to the arbitration
clause in the contracts. In granting the stay of proceedings, the court remarked that,
even if the court was of the view that the summary judgement could and should
35
[1974] AC 689.
36
[1992] 2 HKLR 120.
37
[1994] 2 HKLR 161.
38
[1996] 1 HKC 363.
39
(unrep, HCA No 15907 of 1999 and HCA No 16242 of 1999).

practically be granted in this situation, the court could not do so because a defendant
in a stay application did not have to show he had an arguable defence but was merely
required to identify the existence of a dispute.
20.077 Thus, if there is in existence a valid arbitration clause, litigation proceedings have to
be stayed unless and until the concerned claim is admitted. It will then be left to the
arbitration proceedings to see whether instant remedy can be available to assist.
(iv) Summary of court’s approach

20.078 The approach of the court has been conveniently summarised in the case of Getwick
Engineers Ltd Plaintiff v Pilecon Engineering Ltd 40 as follows:
“(1) The court first construes the relevant arbitration agreement to see just
what matters are intended to be referred to arbitration. Among the most
usual expressions are, for example, ‘all disputes or differences between
[Party A and Party B] ... in connection with (or in relation to or in respect
of) this contract’. The present arbitration agreement is not unusual in this
regard.
(2) Where the words ‘in connection with’ are used, while every contract
must of course be construed in accordance with its ordinary and natural
meaning (and arbitration agreements are no exception), it seems to me
that they are wide in nature. They would in general cover all disputes
other than one entirely unrelated to the transaction covered by the
contract in question: see Mustill & Boyd: Commercial Arbitration 2nd
Edition, at 119.
(3) The existence or non-existence of a dispute or difference as envisaged
under the relevant arbitration agreement between the parties is crucial
to the granting of a stay. For this purpose, a dispute will exist unless
there has been a clear and unequivocal admission not only of liability
but also quantum: see Louis Dreyfus v Bonarich International (Group)
Ltd [1997] 3 HKC 597; Tai Hing Cotton Mill Ltd v Glencore Grain
Rotterdam BV [1996] 1 HKC 363, at 375A-B. In the absence of
admissions as to both these aspects, a mere denial of liability or of
the quantum claimed, even in circumstances where no defence exists,
will be sufficient to found a dispute for the purposes of section 6 of the
Ordinance (and Article 8 UNCITRAL Model Law). Thus, finding out
whether a dispute (as defined in this way) exists, is the only exercise
that the court carries out in a stay application (apart of course from
construing the arbitration agreement to discover its full ambit): it does
not involve itself in evaluating the merits of the claim.
(4) A clear and unequivocal admission of liability and quantum can no
doubt take a variety of forms. Admissions contained in correspondence
or any other documents or even by conduct may, in my opinion, suffice.
40

And, as will be apparent later in this judgement, the issuance of a

cheque can (and does in the present case) suffice to establish the clear
and unequivocal admission of liability and quantum (in the amount
stated in the cheque).
(5) Once the court comes to the view that a dispute or difference exists,
the granting of a stay is mandatory. On the other hand, if the court
comes to the view that no dispute or difference exists, then the matter
falls to be determined in the court proceedings. Of course, the relevant
dispute or difference must relate to matters which are stated to be
referable to arbitration in the relevant arbitration agreement. A dispute
or difference in relation to a matter not intended to be referred to
arbitration obviously does not come within the arbitration agreement
and no stay can be granted in such circumstances.
(6) Where the court comes to the view that no dispute or difference exists,
it is free to (and often, if not inevitably, will) decide the matter on an
application for summary judgement. This would explain the practice
of still having a plaintiff ’s application for summary judgement under
RHC Order 14 heard at the same time as a defendant’s application for a
stay (although, as observed by Burrell J in Strategic Finance Relations
Ltd v Chun Tai Holdings Ltd (unrep, 30 November 2000, HCA 7940
of 2000), the stay application is heard and determined first). Before
the introduction of section 6 of the Ordinance in its present form (and
Article 8 of UNCITRAL Model Law) this was also the practice since
the rationale was that the two applications were seen as mirror images
of each other: the determination of one application determined the
other. This, it is to be emphasised, however, is no longer the rationale.
For this reason, cases like Peter Leung Construction Company Ltd v
Tai Poon Company Ltd [1985] 1 HKC 285 and Pilecon (Hong Kong)
Ltd v Mightyton Ltd [1993] 2 HKLR 435 (two of the cases in which
both the stay and the summary judgement applications were before
the court) must be viewed in the light of the statutory changes. In
other words, the absence of an arguable defence for O 14 purposes,
does not mean by itself that a stay will not be granted unless there is
a clear and unequivocal admission of both liability and quantum as
stated above.”
(c) Interim payment
(i) Application for interim payment

It is not unusual for an application for summary judgement to be made together with an 20.079
application under Order 29 of the Rules of High Court (Cap 4A) for interim payment
as an alternative.
An interim payment is defined as a payment on account of any damages, debt or other 20.080
sum (excluding costs), which a party may be held liable to pay to or for the benefit of
the other party.

20.081 Application for interim payment will likely be successful when the defendant has
admitted liability, when the plaintiff has obtained judgement against the defendant for
damages to be assessed, or when the court is satisfied that, if the action proceeded to
trial, judgement would be given for a substantial amount to the plaintiff.
20.082 As noted in Shanning International Ltd v George Wimpey International Ltd,41 an
application for interim payment is approached by the court in two stages: first, the
court has to be satisfied that, if the action proceeds to trial, the plaintiff will obtain
judgement for a substantial sum; second, the court has to also satisfy itself that it
should exercise its discretion to order an interim payment. Only if the court is satisfied
that the burden for the first stage has passed does it move on to consider the secondary
stage.
(ii) Conditional leave to defend

20.083 Obviously, if the application for summary judgement is dismissed, it seems illogical
that an application for interim payment will be successful. However, the situation
is different where conditional leave to defend is granted in respect of the summary
judgement application.
20.084 In Chun Lee Engineering Co Ltd v Aoki Corp,42 the court was facing an application
for summary judgement and for interim payment. It chose to follow the reasoning in
British and Commonwealth Holdings v Quadrex Holdings,43 the court accepted that,
where the evidence indicated sufficient doubt as to the genuineness of the defence to
give only conditional leave to defend under the summary judgement application, it
was still possible for a court to be satisfied that the plaintiff would succeed at trial and
to order an interim payment if it seemed sensible and desirable to do so. The court in
this case entered summary judgement for the plaintiff but that was reversed on appeal.
(d) Security for costs
(i) Award of security for costs

20.085 The costs of construction litigation are surely not low. Thus, with an award of security
for costs, it can ensure that, if the defendant is able to defeat the action brought against
it at the end of the day, the defendant can recover at least some of the costs of the
litigation from the plaintiff.
20.086 Jurisdictions to order security for costs exist under Order 23 of the Rules of High
Court (Cap 4A) and, so far as companies are concerned, s 357 of the Companies
Ordinance (Cap 32).
20.087 Under Order 23 of the Rules of High Court (Cap 4A), the court may order security for
costs to be given by the plaintiff if it thinks fit, having regard to all the circumstances
in any one of the four situations. These situations are: (a) when the plaintiff is
ordinarily resident out of jurisdiction; (b) when the plaintiff is a nominal plaintiff
41
[1988] 3 All ER 475.
42
[1991] HKLY 87.
43
[1989] QB 842.

who is suing for the benefit of some other person and there is reason to believe that
it will be unable to pay the costs of the defendant if ordered to do so; (c) when the
plaintiff ’s address is not stated or is incorrectly stated unless that is made innocently
or without the intention to deceive; and (d) when the plaintiff has changed its address
during the course of the proceedings with a view to evading the consequences of the
litigation.
A real discretion is conferred on the court in considering the matter of security for 20.088
costs, including whether to make such an order and the extent of the amount for such
an order.
A useful summary can be found in the judgement of the Court of Appeal in Wing Hing 20.089
Provision, Wine & Spirits Trading Co v Hanjin Shipping Co Ltd44 by Godfrey JA.
(ii) Balancing exercise for courts

In brief, the court has complete discretion whether to order security, and accordingly 20.090
it will act in the light of all the relevant circumstances. The possibility or probability
that the plaintiff company will be deterred from pursuing its claim by an order for
security is not in itself a sufficient reason for not ordering security. The court must
carry out a balancing exercise – weighing, on the one hand the injustice to the plaintiff
if prevented from pursuing a proper claim by an order for security against it, and
on the other hand, the injustice to the defendant if no security is ordered and the
defendant finds himself unable to recover costs from the plaintiff in due course. In
considering all the circumstances, the court will have regard to the plaintiff company’s
prospects of success, although, it should not go into the merits in detail unless it
can clearly be demonstrated that there is a high degree of probability of success or
failure. Also, the court may order any amount up to the full amount claimed by way of
security, provided that it is more than a simply nominal sum; it is not bound to order
a substantial amount. Before refusing to order security on the ground that it would
unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it
is probable that the claim would be stifled. In this regard, there may be cases where this
can properly be inferred without direct evidence. The court should consider not only
whether the plaintiff company can provide security out of its own resources to continue
the litigation, but also whether it can raise the amount needed from its directors,
shareholders or other backers or interested parties. The burden is on the plaintiff to
satisfy the court that it would be prevented by an order for security from continuing the
litigation. Furthermore, although the likelihood of the plaintiff succeeding in its claim
is relevant, it is also clear that the court should not go into a detailed examination of
the merits of the case too readily.
The court’s power to order security of costs under Order 23 of the Rules of High Court 20.091
(Cap 4A) overlaps with that under s 357 of the Companies Ordinance (Cap 32) which
enables the court to order security where there is reason to believe that a plaintiff
limited company may be unable to pay the defendant’s costs in the event of its being
successful in the action.
44
[1998] 4 HKC 461.

20.092 Likewise, s 357 of the Companies Ordinance (Cap 32) gives the court power to make
an order for security when the conditions it contains are satisfied, if it thinks fit, but the
power is discretionary and not mandatory, a discretion to be exercised having regard
to all the circumstances of the particular case. Obviously, a company in liquidation is
sufficient evidence that it is unable to pay the costs.
20.093 The operation in practice, and the resultant impact, of an application for security for
costs can be illustrated in the case of UBC (Construction) Ltd v Sung Foo Kee Ltd,45
where the plaintiff was ordered by the Court of Appeal to provide security for costs by
way of a bank guarantee in the sum of HK$400,000.00. In this case, the plaintiff was
a small limited company and had no substantial sum in its bank account. It claimed
for work done under a construction subcontract and the defendant, as usual, denied
its liability to pay and counter-claimed. The assets that the plaintiff had were nominal
which covered only two vehicles and some office equipment. It did not have any
overdraft nor outstanding liabilities but it had to pay off a debt of HK$2,300,000.00
owed to its shareholders. At first instance, the judge hearing the application by the
defendant refused to order for the security for costs to be provided. However, the Court
of Appeal considered that, while its key shareholder and director made affirmations
stating that he would use his own financial resources to ensure that the plaintiff was
paid for the work done, he did not indicate his willingness to pay any costs to which
the defendant might become entitled. In the circumstances, the Court of Appeal
considered that there was reason to believe that the plaintiff would be unable to pay
the defendant’s costs if successful in its defence.
20.094 It is interesting to note that, in Hong Kong, many disputes in the construction industry
are between the subcontractor and the main contractor. In most of those cases,
the assets of the subcontractor plaintiff, if any, on the face of it may not be of any
substantial extent. Thus, the subcontractor would be exposed to the risk of facing an
order to provide for security for costs. This, in itself, can be an added barrier on the
path of getting paid.
6. EXPERT EVIDENCE
(a) Role of expert evidence
20.095 In Hong Kong, as elsewhere, expert evidence is often crucial in litigation and expensive
to prepare. The role of an expert is to assist the court to determine the issues in dispute,
where technical or specialised areas of knowledge are involved.
20.096 Expert evidence is treated very differently from purely factual evidence and has always
been subject to great control by the court. Section 58(1) of the Evidence Ordinance
(Cap 8) provides that, where a person is called as a witness in any civil proceeding,
her or his opinion on any relevant matter on which he or she is qualified to give expert
evidence shall be admissible in evidence. Thus, to be admissible, expert evidence has
45
[1992] HKLY 828.

EXPERT EVIDENCE 555
to be on a subject matter of opinion and relevant to the issues being litigated, in which
the expert is qualified to give evidence.
In construction litigation, a convenient classification can be made according to the 20.097
body of expertise that the expert can offer: technical expertise and knowledge of
professional practice. Examples of technical knowledge on which experts commonly
provide evidence include valuation of variations or other works, identification of needs
or extent for works, delay and disruption analysis, defective design, works or materials,
productivity of labour or plant, or causes of collapse or failures. Examples of the areas
of expert evidence of professional practice cover matters ranging from the standard
of supervision, procedures of construction process, steps in contract administration,
appropriateness or adequacy of design or value of professional works done.
Although in former years it was said that experts should not give opinions on “the 20.098
very issue which the court has to decide”, that restriction is no longer in force, at
least in civil actions.46 However, it is not for experts to attempt to make findings of
fact. Instead, they should express their opinion on the area in which they have their
expertise on the basis of assumed facts which should be clearly identified and stated
in their expert report.
(b) Admissibility of expert evidence
The use of expert evidence in litigation in Hong Kong is regulated by Order 38 rules 20.099
35 to 43 of the Rules of High Court (Cap 4A). The mutual disclosure of the substance
of the expert evidence, usually in the format of an expert report, is required.
Not all expert evidence is admissible before the court in litigation. As stated by 20.100
Evans-Lombe J in Barings Plc v Coopers & Lybrand,47
“[t]he fact that an expert report comes within the meaning of the words ‘expert
evidence’ as used in s 3(1) [of the Civil Evidence Act 1972 (which is similar in
wording to s 58(1) of the Evidence Ordinance (Cap 8))] does not mean that the
Court must admit it in evidence and it will not be admitted unless it is relevant to
any of the issues which the Court has to decide, relevant meaning ‘helpful’ to the
Court in arriving at its conclusion.”
In Hung Hau Che v Tsoi Sze Chuen,48 it was remarked: 20.101
“Under Civil Justice Reform, the requirement of ‘relevance’ will be approached

broadly. The new approach will be that of Evans-Loombe J as meaning ‘helpful’
to the Court in arriving at its conclusions. The Judge stated that the evidence ‘…
can still be excluded by the court if the Court takes the view that calling it will not
be helpful to the Court in resolving any issue in the case justly’”.
46
See JP Morgan Chase Bank v Springwell Navigation Corp [2007] 1 All ER (Comm) 549.
47
[2001] Lloyd’ s Rep Banking 85.
48
[2008] HKEC 1773.

(c) Duties and responsibilities of experts
20.102 It is the expert’s responsibility to provide the court with criteria to enable the expert
opinion to be assessed, so that the court may be able to assess the factual evidence
adduced in the light of the expert’s opinion. The duties of the expert witnesses in civil
cases are also to present the Court with expert evidence which is, and should be seen
to be, the independent product of the expert uninfluenced as to the form or content by
the exigencies of litigation. As noted in The Ikarian Reefer49 and UBC (Construction)
Ltd v Sung Foo Kee Ltd,50
“An expert gives evidence to assist the Court. Of course, he wishes to advance
his client’s case and that is why he has been retained, but at all times it is vital
for an expert to stand back and take a wider perspective of events if he is to be of
assistance to the Court and continue to enjoy the confidence of the Court.”
20.103 In R v Balfour Beatty Civil Engineering Ltd,51 it was remarked that failure to abide by
the guidelines of The Ikarian Reefer will not only damage an expert’s credibility but
could also be very costly to the instructing party. A failure to understand the procedural
requirements and evidential criteria that have to be fulfilled in obtaining and adopting
expert evidence can lead to costly mistakes. The duties and responsibilities of expert
witnesses laid down in civil cases include the following:
1. Expert evidence presented to the court should be, and should be seen to be,
the independent product of the expert uninfluenced as to form or content
by the exigencies of litigation.
2. An expert witnesses should provide independent assistance to the court
by way of objective unbiased opinion in relation to matters within their
expertise, and should never assume the role of an advocate in litigation.
3. Expert witnesses should set out the facts or assumptions upon which their
opinion is based. They should not omit to consider material facts that could
detract from their concluded opinions.
4. Expert witnesses should make it clear when a particular question or issue
falls outside their expertise.
5. If an expert’s opinion is not properly researched because he or she considers
that insufficient data is available, then this must be stated with an indication
that the opinion is no more than a provisional one. In cases where an expert
witness has prepared a report with qualification, such qualification should
be stated in the report.
49
[1993] 2 Lloyds’ Rep 68.
50
[1993] 2 HKC 458.
51
[1999] CILL 1487.

EXPERT EVIDENCE 557
6. If, after the exchange of reports an expert witness changes her or his view
in material matter having read the report of the other side’s expert or for
any other reason, such change of view should be communicated, normally
through the legal representatives, to the other side without delay and, when
appropriate, to the court.
7. Where the expert evidence refers to photographs, plans, calculations,
analyses, measurements, survey reports or other similar documents, these
must be provided to the opposite party.52
With the Civil Justice Reform, the duties and responsibilities involved in expert 20.104
evidence are given more prominence, with a view to addressing the concerns of the
perceived lack of partisanship and independence of experts. Rule 35A of Order 38 of
the Rules of the High Court (Cap 4A) is introduced and provides:
“(1) It is the duty of an expert witness to help the Court on the matters within
his expertise.
(2) The duty under paragraph (1) overrides any obligation to the person
from whom the expert witness has received instructions or by whom he
is paid.”
Failure to comply with the duty may mean that the expert witness risks being reported 20.105
to the relevant professional body by the court,53 in addition to the risk of the evidence
being rejected.54
(d) Use of experts in stages of dispute
To further safeguard against any such failures, the use of an expert should be examined 20.106
in stages, from engagement to trial.
It is vital to engage the expert early. In construction cases, an expert is often simply an 20.107
indispensable member of the team. Early engagement of the expert, in cases involving
technical issues, can help in advising on the issues to be addressed. Also, for some
areas in construction litigation, the available experts in Hong Kong who qualify
are not that many. Obviously, the experience and qualification of the expert has to be
in the exact area to which the dispute relates.
After being engaged, an expert can assist in identifying the underlying issues and 20.108
in providing directions for the party’s case for litigation. In some cases, it may be
52
See Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd [2010]
HKEC 1468 and AXA Versicherung AG v Hong Kong Housing Authority (2006) 9 HKCFAR 98.
53
See Pearce v Ove Arup Partnership Ltd (2002) 25(2) IPD 25011. See also Pei Zheng Middle School v China Pui
Ching Educational Foundation Ltd [2010] HKEC 658 and Guangzhou Green-Enhan Bio-Engineering Co Ltd &
Another v Green Power Health Products International Co Ltd [2005] HKEC 513.
54
See SPE International Ltd v Professional Preparation Contractors (UK) Ltd [2002] EWHC 881 (Ch) and
Lingfield Properties (Darlington) Ltd v Padgett Lavender Associates [2007] EWHC 2989.

beneficial for the expert to assist or to support settlement negotiations, whether by

providing advice for such negotiations or by attending ‘without prejudice’ meetings
with the expert of the other side.
20.109 In preparing the report, the expert should provide the court with such information,
including the field of specialised knowledge of the expert, the expert’s qualifications,
the facts or assumptions that form the foundation of the expert’s opinion and how
the specialised knowledge of the expert applies to those facts and/or assumptions to
produce the expert’s opinion. To achieve this, care should be taken at the outset to
ensure that any experts instructed understand their roles in this regard and are supplied
with all necessary documents for such a purpose. It can be extremely embarrassing for
an expert to admit, during cross-examination in the witness box, that he or she has not
read some relevant documents because the lay client or the legal advisers had withheld
them from her or him.
20.110 In Hong Kong, the Practice Directions PD 6.1 encourages the use of joint meetings
of experts to help narrowing, if not resolving altogether, the issues in dispute.55 Such
a meeting is intended to bring together the experts instructed in the case for a full and
frank discussion. The outcome of the meeting may be an agreement as to all or most
of the technical matters involved, thereby enhancing the chance for early settlement of
the case or at least saving time at the trial. Even if no agreement at all can be reached,
such a joint meeting may still be of benefit in highlighting problems and exchanging
reasons in relation to the dispute, so that better informed and more focused reports
may be prepared.
20.111 At the trial, it is not uncommon for the expert to help summarise and present the
evidence in construction cases by way of graphics, models or schedules. Indeed, visual
aids can be extremely valuable in supporting oral evidence.
7. TRIAL AND PREPARATION

(a) General
20.112 In the adversary system, it is for the parties to decide what evidence or which witness
should be presented to the court. By issuing a witness subpoena, a party may compel
the attendance at the trial of any person whom it wishes to give evidence or produce
documents.
20.113 At the trial, the court will hear the evidence of witnesses and the submissions of the
parties.
(b) Trial process
20.114 Normally, the plaintiff begins with the opening of its case, laying down the background
and issues for the attention of the court. Then, the plaintiff calls its witnesses one
55
See also rule 37A – rule 37C Order 38 of Rules of High Court (Cap 4A).

COSTS AND INTEREST 559
by one. The witness will initially be asked questions by the plaintiff’s counsel. This
is the examination-in-chief of the plaintiff’s evidence. In construction litigation,
due to the complicated factual matters involved over a long period of time, witness
statements will usually be prepared and exchanged in advance and be relied on as
evidence-in-chief during the trial. After the examination-in-chief, the plaintiff’s witness
will be questioned by the counsel for the defendant. This is the cross-examination
stage, where the general goal is to undermine the reliability or credibility of the
witness. In contrast with the examination-in-chief, leading questions, ie questions that
suggest the answer, are allowed during cross-examination. The cross-examination is
followed by the re-examination of the witnesses by the plaintiff’s counsel. The purpose
and scope of the re-examination is to clarify or supplement evidence arising from
the cross-examination. In giving evidence, the witness may refer to or be taken to
the documents placed before the court. After all the plaintiff’s witnesses have given
evidence, the plaintiff’s case is closed.
Then, though the defendant may in theory make a submission that there is no case 20.115
to answer on the plaintiff’s evidence, the defendant will normally need to answer the
plaintiff ’s case by calling its own witnesses. The defendant’s counsel may likewise
open the defence before calling the witnesses. After all witnesses for the defendant
have given evidence and been cross-examined and re-examined, the defendant’s
counsel can make a closing speech, which is followed by a reply from the plaintiff’s
counsel.
(c) Witness statements
One point to note in the preparation for trial is the use of witness statements. At 20.116
common law, it is the cardinal principle of the adversary system of justice that
a party should so far as possible be allowed to decide how to present his case.
In heavy cases such as construction litigation, it is the not uncommon but much
criticised practice of the parties to overload the evidence and invest disproportionate
effort and expenditure in the preparation of witness statements. The preparation of
witness statements has developed into quite an industry in itself. This is partly due
to greater emphasis by the court on written documents rather than oral presentation.
Yet, with the changing tide toward case management, matters peripherally connected
to the key issues for determination at trial may in the future be regarded as not of
sufficient relevance to justify the time and expense which would be required to
investigate them.
8. COSTS AND INTEREST

(a) Court discretion to award costs
In construction litigation, costs can be an important aspect in the dispute. The general 20.117
rule is that a party who succeeds in litigation is entitled to an order for the payment of
the costs by the losing party. Thus, the losing party has to pay its own costs as well as
the costs of the winning party.

20.118 Yet, the award of costs is still within the ambit of discretion of the court and the
proportion of costs recoverable is subject to the full control of the court. For instance, if
a claim has been too exaggerated, or if the conduct of the winning party has resulted in
wasted time, then the court may order that only a percentage of the costs be recovered
by the winning party. The same approach may apply when there is a counter-claim and
each party succeeds in part of its claim or counter-claim.
20.119 Where a party has a costs order in its favour, but the parties cannot agree, the actual
amount of costs received may be ascertained through the process of taxation. In
taxation, the assessment of the costs recoverable will be approached on different bases,
as ordered by the court. There are generally three such bases for taxation of costs in
Hong Kong, as provided by Order 62 rule 28 of the Rules of High Court (Cap 4A).
(b) Party and party basis
20.120 For the ‘party and party basis’ approach, which is the normal basis in default of an
order to the contrary, the winning party will be allowed all such costs as were necessary
or proper for the attainment of justice or for enforcing or defending the rights of the
party. Thus, any charge merely for better conducting the litigation may be regarded as
a luxury and not recoverable on taxation.
(c) Common fund basis
20.121 Another basis is the ‘common fund basis’. This is a more generous basis than the
‘party and party basis’. Using this approach, the amount of costs allowed will be a
reasonable amount in respect of all costs reasonably incurred.
(d) Indemnity basis
20.122 The third basis is the ‘indemnity basis’ where all costs shall be allowed except in so far
as they are of an unreasonable amount or have been unreasonably incurred. In case of
doubts as to reasonableness, such doubts are resolved in favour of the receiving party.
(e) Interest
20.123 A further matter that arises and can be of important relevance is interest. Almost all
construction litigation takes quite some time to resolve and the interest lost on the
sums in issue, on the date of judgement or payment, can be a vital amount.
20.124 Under s 48 of the High Court Ordinance (Cap 4), the court is empowered to order
simple interest on all debt or damages between the period when such debt or damages
should be paid and the date of judgement. Such pre-judgement interest can be ordered
at such rate and for such period as the court sees fit. The overriding principle is that
interest should be awarded not as compensation for the damage done but for being
kept out of money that ought to have been paid.
20.125 Also, under s 49 of the High Court Ordinance (Cap 4), the court is likewise empowered
to order interest on sums adjudicated due and owing in the judgement from the date

SETTLEMENT AND COMPROMISE 561
of judgement to the date of payment. Again, such post-judgement interest may be

calculated at different rates in respect of different periods.
One matter not to lose sight of is that the judgement interest rate is not insignificant. 20.126
In the past five years, it has ranged from 8 per cent to 12 per cent per annum. The
importance of interest and the issues that may arise in connection with interest in
construction litigation cannot be lightly ignored. In addition, given the discretionary
nature of the award of interest, it is hardly a matter of exact science or calculation.
This can be illustrated in the case of Tridant Engineering Co Ltd v Mansion Holdings 20.127
Ltd.56 In that case, an award of interest of an amount of HK$6,998,693.18 was
involved. The defendant was a building services subcontractor to the plaintiff in a
development project in Guangzhou and was found to have wrongfully repudiated the
subcontracts in the circumstances. This led to the engagement and payment of new
subcontractors by the plaintiff, after a notice of termination in October 1995. It was
held that a judgement sum of HK$15,798,893.00 should be paid, with interest running
at prime plus one percent from 1996 to mid-2000. On appeal, the defendant took
issue on the basis that interest should only run from the date upon which the plaintiff
would have paid the money and it was suggested that, as the plaintiff’s claim was only
quantified in November 1998, interest should only run at the earliest from that date.
The Court of Appeal accepted as a general proposition that interest should only run
from a date which payment should be made, but regarded this as a special situation. It
was remarked that, taking into account the substantial outlay in respect of the newly
engaged subcontractors at a much earlier time than the plaintiff would otherwise
have had to do, the trial judge had set the period from the time at which the plaintiff
had expended in costs an amount equivalent to 50 per cent of the damages that were
ultimately awarded. In the circumstances, the trial judge’s order was not disturbed.
9. SETTLEMENT AND COMPROMISE

(a) Benefits of early settlement
Most litigation is resolved through settlement. Both the courts and the court rules 20.128
encourage early settlement of disputes. Parties in litigation frequently do recognise
that settlement can achieve substantial cost savings and preserve relationships. Unlike
litigation, it also provides certainty in the outcome. The emphasis on settling disputes
has led to a dramatic increase in the interest and use of alternative dispute resolution
methods. As more and more cases are resolved through settlement, this is becoming
more important in the practice of law and administration of justice.
(b) Settlement by voluntary payment of sum into court
In any litigation over a debt or damages, the defendant may at any time adopt 20.129
the procedure under Order 22 of the Rules of High Court (Cap 4A) to encourage
56
[2001] HKEC 888.

settlement by way of a voluntary payment into court of a sum of money in satisfaction

of the plaintiff ’s claim. When the plaintiff accepts the amount paid regarding a cause
of action, that cause of action is settled, as if by a payment under a compromise. If
the defendant later becomes insolvent, the plaintiff is a secured creditor to the extent
of the money in court. The amount of payment into the court may subsequently
be increased but may not be withdrawn without the permission of the court. A
plaintiff facing a counter-claim may likewise make a payment into court for the same
purpose. Obviously, the fact that a payment into the court has been made should
not be disclosed to the court before all questions as to liability and the amount
of the debt or damages have been finally determined. In cases where the payment
into court is not accepted, the only consequences are in relation to the costs of the
litigation. The court, in exercising the discretion as to costs, has to take into account
any payment into court and its amount. If the plaintiff does not accept the payment
into court and, at the end of the trial, recovers a sum that is no more than the amount
paid, the plaintiff ’s costs after the date of payment into court may not be recoverable.
The gist of the scheme is that a plaintiff who continues an action after payment-in
runs the risk of ending up paying all the costs from the date that its acceptance of
the payment-in would have otherwise avoided. For this purpose, payment into court
should generally include interest that is regarded as part of the cause of action for
debt or damages.
(c) Settlement by Calderbank letter
20.130 Another device that is commonly engaged to facilitate settlement is the Calderbank
letter or a letter marked as ‘without prejudice save as to costs’.57 It, being a written
offer to settle the matter, operates much in the same way as a payment into court. As
with payment into court, the fact that such an offer has been made is not allowed to be
communicated to the court until the question of costs falls to be decided.
20.131 With the Civil Justice Reform, the offers or payments sanctioned by Order 22 the Rules
of High Court (Cap 4A) are conferred with legal costs consequences,58 for further
encouraging the parties to take positive settlement seriously and to avoid unproductive
and expensive prolongation of the litigation. The court continues to have its discretion
as to costs in relation to any offer of settlement which does not meet the requirement
to qualify as a sanctioned offer.59
20.132 The policy of the law should be to encourage settlement of actions wherever possible
and Calderbank offers and sanctioned offers or payments are now useful tools in
achieving such settlements because the recipient of the letter knows that it will be
at risk if it does not do better than the offer in the litigation, in the appropriate cases.
57
See Richful Engineering Ltd v Pine Year Development Ltd [2009] HKEC 483. See also Ming An Insurance Co
(HK) Ltd v Ritz-Carlton Ltd (No 2) (2009) 12 HKCFAR 745.
58
See rules 20 – 24 Order 22 of the Rules of High Court (Cap 4A) for costs and other consequences.
59
See rules 3 – 5 Order 22 of the Rules of High Court (Cap 4A) for requirements of sanctioned offer or sanctioned
payment.

SETTLEMENT AND COMPROMISE 563
(d) Open offer to settle
Certainly, an open offer to settle may also be given in the appropriate cases but it runs 20.133
the risks of adverse inference to be drawn from it when it is shown to the court.
(e) Mediation
With the Civil Justice Reform, mediation is positively encouraged by the court, and 20.134
parties in litigation unreasonably refusing to mediate may face costs consequences.
Practice Directions 31 set out a procedure for mediation notice and response and
requests legal representatives to file in court mediation certificates, requiring legal
representatives to explain to parties the requirements for considering mediation.
To assist parties in using mediation services, the Joint Mediation Helpline Office 20.135
is jointly founded by the Hong Kong Mediation Council, the Hong Kong Bar
Association, the Law Society of Hong Kong, the Chartered Institute of Arbitrators
(East Asia Branch), the Hong Kong Institute of Arbitrators, the Hong Kong Institute
of Architects, the Hong Kong Institute of Surveyors and the Hong Kong Mediation
Centre in 2010, as a non-profit-making organisation.60 It is located within the High
Court Building for the convenience of its users.
60
See http://www.jointmediationhelpline.org.hk/ for details.

1. TREND TOWARD ALTERNATIVE DISPUTE RESOLUTION
(a) Reasons for trend
The trend in resolution of construction disputes is moving away from litigation.1 21.001
The process by which construction projects are executed requires relationships
and organisation structures that are very different from those in other businesses.
Consequently, this has led the construction industry in each place to develop its own
particular culture, tradition, customs and language. Also, most construction disputes
are surrounded by a complicated factual matrix and frequently involve technical
and dedicated questions that are not readily within the experience of persons not
in daily encounter with the industry. Problems leading to construction disputes not
uncommonly concern interim payments, final accounts, release of retention payments
to suppliers and subcontractors, abandonment or termination of works, defects and
rectification works, valuation of variation works and delayed completion of works.
Moreover, due to the complex issues and heavy documentation involved, the costs of
resolving construction disputes by litigation can be prohibitive.

in the construction industry
It is due to a couple of these reasons that the construction industry has been using 21.002
ADR longer than most other industries. The field of ADR covers a broad range of
mechanisms and processes designed to assist parties in resolving disputes creatively
and effectively.2 Among such ADR mechanisms, the construction industry opted for
arbitration instead of litigation years ago by incorporating arbitration clauses in almost
all standard forms of contract in the industry. In recent years, the construction industry
has been in the frontline of the innovative development and novel use of ADR and has
pushed the application of ADR beyond traditional limits and boundaries. It is probably
one of the largest users of ADR services among all the business sectors. This means
that construction disputes are in the main resolved by construction ADR professionals
or neutrals rather than the court. Indeed, many of these neutrals come from within
the construction industry or are experienced construction litigators. Apart from
mediation and arbitration, the present ADR movement in the construction industry
places emphasis on prevention, control and earliest resolution of disputes as they arise,
therefore dealing with the disputes ‘upstream’ rather than down the pipeline. Devices,
such as dispute resolution advisers, dispute review boards and adjudication, are being
implemented in the contracts; and concepts, such as partnering and risk allocation, are
being pioneered in the management set-up. There is now a vast spectrum of private
1
See Guidelines on Dispute Resolution (2010), Hong Kong Construction Industry Council. In the Guidelines, the
need for immediate dispute resolution for the construction industry is further explored.
2
These commonly include adjudication, arbitration, dispute resolution advisors, expert determination and
mediation in Hong Kong. A new concept of independent expert certifier has also been introduced in Hong
Kong, by the Guidelines on Dispute Resolution (2010), Hong Kong Construction Industry Council, providing
for interim decisions reviewable by post-completion arbitration.

dispute avoidance and resolution possibilities available for choice. New techniques
are being invented each day by imaginative professionals and practitioners in the
field. This spectrum is best illustrated by a stair-step sequential model that begins
with prevention and ends with litigation. The rising of each step in the model reflects
escalation in hostility and costs to the participants.
(c) Advantages of ADR
21.003 For those who advocate the use of ADR, there are certain recurrent favourable features:
(i) Control
21.004 By using the ADR clause, the parties are able to manage how their disputes will be
resolved, knowing the procedures to be expected.
(ii) Speed
21.005 Most forms of ADR have the ability to resolve disputes months or years ahead of
traditional litigation, with a schedule agreed to or counted on.
(iii) Lower costs

21.006 If used properly, ADR may resolve disputes less expensively than litigation. Even
though in some cases, the actual arbitration proceeding may be identical in length to the
trial in courtroom litigation, parties may still save time and money as the preliminary
hearings can take place promptly and would not normally be constantly postponed.
(iv) Flexibility
21.007 Flexibility of outcome is arguably one of the most important, but often overlooked,
advantages of ADR. This is particularly of relevance for ADR with facilitative
processes or advisory processes.
(v) Confidentiality
21.008 Most forms of ADR are private. This may be increasingly important with the ease of
instant dissemination of information by electronic or other means nowadays.
(vi) Lower hostility

21.009 ADR operates in a less formal setting and atmosphere. Even with the most adversarial
form, ie arbitration, it still promotes a less stressful or damaging formal setting, with
fewer procedural blocks and more focus on the real issues between the parties, as
compared to litigation. This may help where the parties wish to preserve an existing
relationship.
(vii) Finality
21.010 A dispute ends when the parties agree to end it. In ADR, like mediation, it is more
likely that the parties will observe and comply with the terms to which they have
agreed. In arbitration, the award may be overturned only in very limited situations,
without default of the arbitrator or the process.

TREND TOWARD ALTERNATIVE DISPUTE RESOLUTION 571
(d) Goal of ADR
It is important to keep construction projects moving. When construction disputes 21.011

arise, the focal point today is on positively managing them through well-drafted
contract provisions and ADR mechanisms. This is to minimise any adverse impact on
the project and those involved in the project. Thus, the focus of current construction
ADR is first and foremost on preventing disputes where possible. While binding
arbitration is a widely accepted mechanism for ending a dispute that the parties cannot
otherwise resolve on their own, the construction industry now includes in contracts
ADR provisions that give the parties fast, inexpensive, informal and less adversarial
dispute resolution options. It is of course envisaged that construction disputes may be
inevitable, and this is the reason why the construction industry continues to lead the
way in the development of techniques to resolve them. It should be remembered that,
in construction, time is money. There are also many good reasons why, in construction
projects, there is a need for a rights-based approach that produces a binding decision.
This context may be of very different focus among those ADR techniques that favour
facilitation of a commercial resolution. Typical reasons for a decision include, for
example, uncertainty as to the contractual scope of works arising from doubt about the
specification, or arguments as to entitlement to the release of interim monies which
are vitally important to cashflow on the project. Hence, one goal of a comprehensive
disputes provision is to give the parties every opportunity to resolve a dispute promptly,
with the help of neutral assistance introduced at the earliest appropriate time to assist
the parties in resolving the dispute on their own terms.
(e) Evolution of ADR
Today, ADR in general, and ADR for construction disputes in particular, is evolving 21.012
and evolving fast. Attempts have been made to find tailor-made ADR for tackling the
features of the construction industry, which has long recognised that the most efficient
time to resolve a dispute is the moment that it first arises. Indeed, for more than
100 years, the construction industry has been using a two-step process for resolving
disputes on the site by first calling on the project engineer or architect to immediately
make an objective ruling on the issue whenever a problem arises. If that ruling cannot
solve the dispute, the parties can then refer the issue to a process of arbitration for a
binding decision. Such a system served the industry well until the past 30 years or so,
when it became less effective than it once was. This may partly be a result of changing
views as to the weight to be attached to decisions of engineers or architects.
With the work of the Hong Kong Construction Industry Council, the Hong Kong 21.013
construction industry is heading for change. In the 2001 report of the Construction
Industry Review Committee, “Construct for Excellence”, an integrated approach to
construction is advocated with a view to helping the inculcation of a more constructive
attitude among members of the construction team in handling problems arising during
the project delivery process. It is expected that the causes of dispute will be reduced
with clearer project definition, more equitable risk allocation between the employer
and the contractor, and improved procurement and tendering procedures. Yet, when
a dispute becomes unavoidable, the importance of managing the dispute actively and

positively to encourage early and effective settlement is stressed. It is expected that

the use of proactive and collaborative ADR procedures, such as mediation, dispute
resolution advisers and adjudication, will be necessary depending on the circumstances
and needs of a particular dispute. Following the recommendations made in the Civil
Justice Reform, more affirmative use of ADR in litigation is expected. For example,
litigants will be asked whether they have considered the use of mediation or other
forms of ADR and those who unreasonably fail to attempt such may be visited with
adverse costs consequences at the conclusion of the litigation. Viewed as such, the
construction industry in Hong Kong is not much different from that elsewhere in the
world in its journey upstream on the ADR path.
(f) Scope of ADR
21.014 There is no exact definition of the classification or scope of ADR, as ADR does
come in hybrid formats.3 With a wide definition, ADR refers to virtually any method
of resolving disputes other than by traditional litigation. A well-planned process
should incorporate any number of attributes to suit the needs of the parties. These
include having a relatively low cost compared to litigation; bringing disputes to
resolution in a relatively short time; utilising expert decision-makers, with necessary
assurance that they understand the issue in dispute; reducing formality as compared
to litigation; offering flexibility with adjustment for particular needs of the parties;
providing opportunities to address problems, while causing less damage to an ongoing
relationship among the parties; and vesting primary control in the parties themselves.
21.015 A scientific and more helpful classification of ADR processes involving third-party
intervention may be the one given by the Australia National Alternative Dispute
Resolution Advisory Council, which describes ADR processes as facilitative processes,
advisory processes and determinative processes.
(g) Facilitative processes
21.016 The role of the third party in facilitative ADR processes is to provide assistance in the
management of the dispute resolution process. The third party’s focus is to advise on
or determine the process whereby resolution is attempted. In contrast to other types
of ADR processes, there is no advisory or determinative role to play in relation to the
substance of the dispute or the product of its resolution. A classic model of this is
the typical process of mediation. Mediation involves the appointment of a third party
as mediator to assist disputing parties to reach a settlement of their difference. The
mediator is not given any power to impose a settlement. The mediator’s function is to
try to break any impasse and encourage the parties to reach an amicable settlement
themselves.
3
An example for this is the Dispute Resolution Advisor (DRA), where a neutral person is selected from a panel
of construction professionals and paid for jointly by the employer and the contractor, working with them as well
as the architect/engineer to encourage cooperation and joint problem solving and to encourage the resolution of
disagreements at the site level and if not successful, at the senior level, to ensure that disagreements are resolved
expeditiously and cost-effectively before they turn into formal disputes.

TREND TOWARD ALTERNATIVE DISPUTE RESOLUTION 573
(h) Advisory processes
Advisory processes involve those ADR processes where a third party is asked to 21.017
investigate the dispute and provide advice as to the facts of the dispute or, in some
cases, probable and desirable outcomes. Depending on the parties’ agreement, the
result of investigation may also be binding. An example of this form of process include
mini-trials, which are a process presided over by a judicial figure or neutral adviser,
who, after the abbreviated presentation of evidence by representatives of the parties
who have authority to settle the dispute, provides advice as to the facts of the dispute
or advice regarding the possible or probable outcomes of the dispute and the means
for achieving them.
(i) Determinative processes
The most well known form of the determinative processes in dispute resolution is 21.018
arbitration, apart from, of course, litigation. In general, during such a determinative
process, a neutral third party is appointed to investigate the dispute (which may include
the hearing of formal evidence from the parties) and make a determination, which
is potentially enforceable, as to its resolution. The outcome of such determinative
processes may further be directly enforceable as is the case in arbitration, which
is a process governed by statute and has a long-established relationship with the
courts, resulting in an award that is binding on the parties. Other examples of such
determinative processes with an enforceable outcome include adjudication, where the
parties present argument and evidence to the adjudicator who makes a determination
which is binding but can be subject to a review or appeal by way of rehearing with
arbitration or litigation, and expert determination which is a process in which the
parties to a dispute present argument and evidence to a neutral third party expert for
determination, chosen on the basis of her or his specialist qualifications or experience
in the subject matter of the dispute.
A determinative process may also be without enforceable effect, for example, in 21.019
neutral fact-finding, which is used in cases involving complex technical issues, where
a neutral expert investigates the facts of the case and produces a determination as to the
facts of the dispute, without at the same time making any finding or recommendations
as to the outcome for resolution.
The qualities and qualifications required by the third party, the nature of their 21.020
responsibilities to the parties in the dispute and the outcome to be expected from the
process will vary from one category to another. In some cases, several processes or
a hybrid of the processes may be employed in an attempt to resolve the same dispute.
An example of this is the device of dispute resolution adviser that has been in used
in Hong Kong or the dispute review board that is gaining popularity in the United
States.
Whichever process is adopted, the overall objectives of ADR are to resolve disputes 21.021
using a process that is considered by the parties to be fair, achieving acceptable
outcomes that are lasting and using resources effectively.

2. DISPUTE RESOLUTION ADVISER/DISPUTE

REVIEW BOARD
(a) Real-time dispute resolution
21.022 Dispute resolution advisers and dispute review boards and are often referred to as
‘real-time’ dispute resolution mechanisms that involve the parties working together to
negotiate a solution simultaneously with their identifying issues. In contrast with those
so-called ‘forensic’ dispute resolution mechanisms that look backward to scrutinise the
facts and issues of dispute after the project is completed, the focus of dispute review
boards and dispute resolution advisers is less on fault finding or allocating blame.
(b) Growth of dispute review boards
21.023 In the United States, the use of dispute review boards is growing. The first uses of
dispute review boards were on tunnelling projects. These projects, as with other
large-scale construction projects, often include disputes between the employer and
the contractor due to the nature and uncertainty of the work, its complexity and its
magnitude. The resolution of these disputes can be a costly and time-consuming distress
for both the employer and contractor. The use of dispute review boards then spread to
other geo-technical and civil engineering projects and, later to industrial projects, and
eventually to ordinary building projects. The widespread use of dispute review boards
in the United States contributed to the issue of guide specifications by the American
Society of Civil Engineers. The Dispute Resolution Board Foundation (http://www.
drb.org/) reports that, from 1988 through 2002, on over US$79.4 billion of contracts
using dispute review boards, 97.79 per cent of disputes were settled without litigation
and, for those disputes that advanced into the process of litigation, virtually all were
resolved shortly after litigation commenced. Thus, development in respect of dispute
review boards seems both interesting and attractive to the construction industry.
(c) Dispute review board process
21.024 The key concept in the operation of dispute review boards is the formation of a panel
of three experienced, respected, and impartial reviewers to attend site meetings on
a regular basis to review the status of the project and to discuss with the parties
potential disputes. When a dispute arises, the dispute review board provides a real-
time knowledgeable and independent assessment of the merits of the dispute as a non-
binding, intermediate step in the resolution process.
21.025 This panel or board of reviewers is organised before construction begins and the
reviewers meet with the parties on site periodically. To maintain fairness, the board is
usually formed by a member selected by the employer for approval by the contractor,
a member selected by the contractor for approval by the employer, and a third member
selected by the two chosen reviewers for approval by both parties. These three board
members then select one among themselves as the chair, with the approval of the
employer and contractor.

DISPUTE RESOLUTION ADVISER/DISPUTE REVIEW BOARD 575
Regularly, the board members meet together with the representatives of the employer 21.026
and the contractor during site visits and their aim is to encourage the resolution of
disputes at site level. To help achieve this, the board members are provided with the
contract documents and are kept abreast of site progress and developments. They are
also briefed with the project procedures and introduced to the participants. The target of
the dispute resolution process is to help the parties deal with the problems head-on, as
they arise on site, so as to stop them from escalating into major and damaging disputes.
When a dispute does arise, either the employer or the contractor may refer it to the dispute 21.027
review board for resolution. In reviewing it, a hearing may be held so that each party can
attend to explain its position and provide answers to questions. The board then arrives at a
recommendation, which is usually non-binding, taking into account the relevant contract
documents, correspondence, other documentation and the particular circumstances of
the dispute. This written, non-binding recommendation given by the board commonly
includes an explanation of the board’s evaluation of the facts, the contract provisions
and the reasoning that led to its conclusion. In theory, the parties are at liberty to reject
the recommendation but, with their confidence in the technical expertise, first-hand
understanding of the project conditions and practical judgement of the board, acceptance
of the recommendation is likely in light of the opportunity given to the parties to be heard.
Though the board’s recommendation is non-binding, some of the dispute resolution 21.028
board processes provide for the admissibility of the board recommendation into any
subsequent arbitration or legal proceeding. This is seen to be of added benefit in
enhancing the effectiveness of the dispute review board process overall.
(d) Elements essential for success
To be successful, there are certain essential elements in the dispute review board process, 21.029
according to the Construction Dispute Review Board Manual.4 All three members of
the board are neutral and subject to the approval of both parties. The board is to serve
both the employer and the contractor equally and fairly and be paid equal shares of its
fees and expenses by the employer and contractor. The board needs to be organised
when work begins, before there is any dispute, and be kept abreast of site developments
by means of relevant documentation and regular site visits. Both the employer and
the contractor have the same right to refer a dispute to the board, which deals with
the dispute by an informal but comprehensive hearing promptly convened. It is also
considered an essential element for the written recommendations of the board to be
non-binding on either party but admissible as evidence, to the extent permitted by law,
in case of later arbitration or litigation. Also, the board members should be absolved
from any personal or professional liability arising from their activities in the process.
(e) Advantages of dispute review board system
The key advantages of using a dispute review board in a construction dispute is the 21.030
quick settlement of disputes, thereby maintaining cashflow for the contractor and
4
Matyas, Mathews, Smith and Sperry, Construction Dispute Review Board Manual (McGraw-Hill, 1996).

allowing personnel to work on more productive projects. This significantly reduces the
time and money wasted by and tied-up in a dispute during and after the execution of
a project. Furthermore, with the respected standing and informed choice of members
of the dispute review board, the recommendations of the board are viewed as having
significant merit. More importantly, an atmosphere for cooperation can be created in
the problem solving from the beginning of a project.
(f) Drawbacks of the dispute review board system
21.031 On the other hand, the whole concept of dispute review boards is still quite new,
particularly in places outside the United States. This lack of understanding and training
overall in the industry can hamper the healthy growth of its use. Understanding is key
to making the process work. More importantly, from a cost-effectiveness point of view,
the potential for achieving savings in costs and time in dispute resolution through
avoidance may only be justified in large projects. This factor alone may restrain the
use of dispute review boards only to such large projects. For smaller projects, the cost
of supporting a three-member dispute resolution board may be prohibitive. Variation
to a one-person board may in such cases be an option where the same principles and
approach are adopted in choosing the board member. One further observation that may
be made is that dispute review boards are good at resolving technical issues, where
expertise and judgements can be supplied via the experience of the board members.
Yet, dispute review boards may not be as good, or less effective, in dealing with
difficult commercial and contractual disputes.
(g) Development of the dispute resolution adviser system
21.032 Similar to the approach of the dispute review board, a more structured system using
dispute resolution advisers has been in use in Hong Kong. The dispute resolution adviser
system was developed under the direction of the Architectural Services Department in
1991 and was first used in the Queen Mary Hospital extension and renovation project
and later in the Queen Elizabeth Hospital refurbishment project in 1993. Since being
introduced, the dispute resolution adviser system has been used on over 40 completed
projects involving the construction of hospitals, offices and residential buildings. Its
use has also been extended to projects of other government departments.
(h) Objectives of the dispute resolution adviser system
21.033 There are four basic objectives of the system: to encourage cooperation and joint
problem solving to prevent disputes from arising; to try to resolve disputes at site
level; to resolve any disputes not settled at site level as quickly and as cost-effectively
as possible; and to resolve all disputes during the life of the contract.
(i) Dispute resolution adviser process
21.034 The dispute resolution adviser is jointly chosen and appointed by the parties at the
contract’s commencement. The fees of the adviser are shared equally between the
parties. If the parties cannot agree on a suitable individual, the adviser is chosen by
a ranking system. If this also fails to secure the agreement, then the adviser may be

chosen by the Hong Kong International Arbitration Centre, which maintains panels of
mediators and arbitrators. The adviser is an individual, familiar with construction, which
possesses dispute resolution skills and preferably has some knowledge of arbitration.
As in the case of a dispute review board, the dispute resolution adviser conducts a series 21.035
of familiarisation meetings and becomes familiar with the project, the construction
programme and the participants, including representatives from the specialist
subcontractor’s and employer’s management. The adviser visits the site on a monthly basis
and assists the site level representatives to facilitate settlement of any disagreements or
disputes that have arisen during the previous month. This assistance can either be formal
or informal. The adviser operates on an informal level where there is disagreement but it
has not yet become a full-blown dispute. The appointment of the adviser ceases upon the
issue of a certificate of practical completion and may also be discharged anytime jointly
by the parties or, after the first six months, unilaterally by one of the parties.
The typical process of the dispute resolution adviser system5 can be summarised as 21.036
below:
Disagreement
Partnering and informal dispute resolution activities
Formal dispute
Good faith discussions by site personnel
Notice of dispute
Meeting of dispute resolution adviser and site personnel
Report by dispute resolution adviser
Senior staff officers meeting
Short form arbitration
Arbitration award
5
There are variations to the dispute resolution adviser system for projects by different authorities, such as the
Hong Kong Housing Authority and the Works Departments.

(j) Implementing real-time dispute resolution
21.037 To encourage ‘real-time’ dispute resolution, it is important that there is full cooperation
with the dispute resolution adviser and also full compliance with the stipulated time
limits by the employer and the contractor. Either of the parties have 28 days in which
to challenge any decision, certificate or evaluation made under the contract; failure
to do so renders the decision, certificate or evaluation final and binding. Preliminary
timeframes have been inserted into the contract for the making of certain decisions
and evaluations. If the decision, certificate or evaluation is challenged, the site level
representatives of the parties have 28 days in which to attempt to resolve the matter
by good faith negotiation. If desired, the dispute resolution adviser may assist the
representatives with their negotiation during one of the monthly visits. If the matter
has not been resolved before the expiry of the 28 days, then the aggrieved party is
required to give a formal written notice of dispute. If no notice is given, the right to
dispute is deemed waived. Thereafter, the dispute resolution adviser and the site level
representatives then have 14 days in which to attempt to resolve the dispute. This is the
formal stage of dispute resolution involving the adviser. The adviser is free to choose
the most appropriate ADR technique to help the parties resolve the dispute. This may
be formal mediation, mini-trial, expert fact-finding, expert opinion, etc. If there is to
be a formal mediation that is likely to be evaluative or involve specialist knowledge,
then the mediation will most likely be carried out by another neutral person rather then
the adviser. If necessary, the 14-day time period may be extended to accommodate the
availability of the chosen neutral person. The process ends if the dispute is resolved.
(k) If the dispute is unable to be resolved
21.038 If the dispute resolution adviser and the site level representatives have been unable to
settle the dispute, the adviser produces a report that contains an analysis of the dispute,
the key issues and the adviser’s perception as to the barriers of settlement. This report
is given to the senior staff members of the parties, in order that they may appreciate the
true nature of the dispute. If both senior staff members request it, the adviser’s report
will also contain either a non-binding recommendation for resolution or a non-binding
evaluation of the dispute. The senior staff members, who are the individuals in the day-
to-day management of the contract and are not involved in the decisions that are being
disputed, can bring a non-emotional, broader perspective to the dispute. Hopefully,
the senior staff members can meet and resolve the matter. If desired, the adviser will
attend these meetings with the senior staff members.
21.039 If the matter is still not resolved within 14 days of the report of the dispute resolution
adviser, then the adviser will convene a short-form arbitration, unless the parties have
accepted a recommendation from the adviser to resolve the matter by some other
means. The arbitration is governed by special rules, which are written into the contract
and will take place within 28 days of the date on which settlement efforts by the
senior staff officer were terminated. The arbitrator will be selected by the parties in
the dispute including, where appropriate, those subcontractors who may be required,
by the terms of their subcontracts, to participate in the arbitration. The arbitrator will
be appointed by an exchange of lists, but if this proves unsuccessful, will be selected

by the adviser and appointed by the parties. Such short-form arbitration usually deals
with one issue only in each hearing and the time for a hearing is limited to one day. The
arbitrator has seven days from the hearing to make an award, containing only a concise
reasoned decision with sufficient details. In such arbitration, the dispute resolution
adviser cannot be called as a witness.
(l) Advantages of the dispute resolution adviser system
Thus, the dispute resolution adviser system employs partnering techniques to 21.040
realign the parties’ thinking and encourages different forms of negotiation through
a multi-tiered dispute resolution process. It may be viewed as a hybrid ADR process
combining the elements of negotiation, mediation, expert determination, mini-trial,
dispute review board and arbitration. With this blended process, the dispute resolution
adviser system has the advantage of starting early and being expeditious, economical,
consensual, flexible and within the parties’ control.
(m) Elements essential to success
As with partnering, there are several factors that are critical to the successful and 21.041
beneficial use of the dispute resolution adviser system. Though it can be highly
flexible when put into application, to ensure optimal effect, several basics must be in
place. Among the critical success factors, one clearly important factor is the good faith
exchange of the parties, facilitated through the adviser.
Certainly, the roles and functions of the personnel involved differ at various stages of 21.042
the dispute resolution adviser process. Yet, adequately preparing and planning for the
process are crucial to success. For the parties, they need to come to the process with
three broad issues well prepared. First, a party must identify what it or its client seeks to
accomplish from the process of the dispute resolution adviser system and what options
are available to reach those goals. This naturally involves the determination of one’s
needs, interests and desires and requires a delicate balancing of all consequences –
economic, social and psychological – that may flow from there. Second, the party must
begin analysing information to determine what it believes to be the other side’s goals and
any perceived solution to meet those goals. This may involve asking questions on what
position the other side is likely to take; what its probable bottom line is; what the other
side is likely to want to achieve; and what it will likely see as appropriate ways to achieve
that goal. This is an equally important step in anticipating the other party’s bargaining
range, through formal or informal information available or to be made available. To the
extent that additional information is available from sources other than the other side,
preparation requires acquisition of this information. In doing so, it is necessary to bear in
mind that in the real world, there is no perfect information, and on this point, both parties
are on equal footing. Third, planning and preparing for the dispute resolution adviser
process will not be completed until and unless a party to it has formulated a blueprint
of the means for achieving the desired goals. This calls for a decision on how a party is
going to achieve its goals in the dispute resolution adviser process. This list of actions
can be quite long. The overriding question is however quite simple – how to maximise
one’s success in the dispute resolution adviser process. Before coming to the dispute

resolution adviser, each party needs a goal, a plan and a theme. A goal is an articulated
tentative settlement range or an analysis of the needs and resources associated with a
non-monetary solution or an integration of the two; a plan is an assignment of roles to
be played by the personnel of the parties; a theme is a distillation of the dispute into
one or more key strategic themes that will encapsulate the position of the party and the
thrust of the discussion. As for the dispute resolution adviser, he or she should possess
a basic understanding of construction, strong communication and listening skills, solid
organisational and people skills, demonstrated team-building skills and well-developed
problem-solving or conflict management skills. What the adviser seeks to do in the
facilitated exchanges is to assist the parties in focusing on common problems and goals;
create an atmosphere of openness and trust; build consensus and commitment on all
topics; establish credibility and trust; match the personality and style of the project
stakeholders; maintain flexibility; control the process; and generate participation.
(n) Conclusion
21.043 In brief, the philosophy is that coming together is a beginning, keeping together is progress
and working together is success. With a dispute review board or dispute resolution
adviser system in place, the parties will themselves make an effort to resolve potential
disputes and reduce matters in contention. Its very existence minimises the escalation of
disputes and fosters cooperation between the parties. This provides the momentum for
amicable settlements to be reached. Also, where disputes do arise, claims and defences
are more carefully prepared and more credible, so as not to appear imprudent or
unreasonable before the board or adviser. In a way, the parties are motivated to conduct
their own checking and analysis before facing the music. This promotes positive, rather
than adversarial, attitudes. When a dispute does arise, it is usually given early attention
and is addressed contemporaneously. By regular review of the progress of claims, the
board or adviser preserves opportunities to settle and prevents parties’ subjective wishes
from becoming expectations. Issues in dispute are each isolated and contained. With
the continuing knowledge and familiarity of the board or adviser over the project, facts
are better understood and the reconstruction of historical events is kept to a minimum.
3. CONSTRUCTION ADJUDICATION
(a) Definition and development
21.044 Adjudication may be defined as an accelerated and cost-effective form of dispute

resolution that, unlike other means of resolving disputes involving a third party
intermediary, the outcome is a decision by a third party which is binding on the
parties in dispute.6 Adjudication is a form of dispute resolution that meets a need for a
6
In the Guidelines on Dispute Resolution (2010) published by the Hong Kong Construction Industry Council,
adjudication is defined as where the adjudicator will allow the parties to present their case and deal with that
of the opponent whilst to a certain extent also using her or his own expertise to understand the issue and to
resolve the dispute within a short time frame. It thus provides an alternative if a final result by way of expert
determination is not preferred.

CONSTRUCTION ADJUDICATION 581
rapid, relatively inexpensive dispute resolution, which provides a decision that can be
implemented immediately.
While dispute review boards are developing in the United States, similar real-time 21.045
ADR has been implemented in the United Kingdom, using a standing neutral for the
project, whose decisions are binding on the parties temporarily and, thus, are subject
to review or appeal by arbitration or litigation after the completion of the project. This
process of adjudication was first introduced in the 1970s and was initially and mainly
used in subcontracts in the building sector of the construction industry. The prime
aim then was, and presently is, the early and interim resolution of payment disputes.
Subsequently, this device was expanded and extended to various forms to cover other
scales and varieties of construction disputes and projects.
(b) Statutory adjudication scheme
Responding to the endorsement by Sir Michael Latham of the use of adjudication in 21.046
his 1994 report, entitled “Constructing the Team, Final Report of the Government/
Industry Review of Procurement and Contractual Arrangements in UK Construction
Industry”, the Housing Grants, Construction and Regeneration Act 1996 was enacted
in England and Wales, mandating the use of statutory adjudication in all commercial
construction operations in England and Wales. This does not apply to projects in certain
industries such as those operations that are for the extraction of oil, gas or minerals, or
those that involve the food or drink industry. For all construction operations covered, a
statutory right is conferred to refer a dispute arising under the contract to adjudication
under a procedure complying with the minimum requirements, failing which similar
adjudication provisions of the Scheme for Construction Contract will apply. Such
minimum requirements are that:
• the contract has to allow a party to give notice of its intention to refer a
dispute to adjudication at any time;
• the contract has to provide a timetable with the object of securing the
appointment of an adjudicator and referral of the dispute to the adjudicator
within seven days of such notice;
• the contract has to require the adjudicator to reach a decision within 28 days
of referral or such longer period as is agreed by the parties after the dispute
has been referred;
• the contract has to allow the extension by the adjudicator of the 28-day period
by up to 14 days with the consent of the party who refers the dispute;
• the contract has to impose a duty on the adjudicator to act impartially;
• the contract has to allow the adjudicator to take the initiative in ascertaining
the facts and the law;
• the contract has to provide that the decision of the adjudicator is binding until
the dispute is finally determined by arbitration, litigation or agreement, as the
case may be; and

• the contract has to protect the adjudicator from liability for acts or omissions
done during the adjudication process, unless such act or omission is effected
in bad faith.
21.047 As remarked in Macob Civil Engineering Ltd v Morrison Construction Ltd,7 the first
occasion when the UK court was called upon to consider the statutory scheme, the
intention was to introduce a speedy mechanism for settling construction disputes on a
provisional interim basis and to require the decision of the adjudicator to be enforced
pending the final determination of disputes by arbitration, litigation or agreement. It
was also acknowledged that the very tight timetable might result in injustice but it was
very clear that such decisions were expected to be rendered binding and be complied
with until the dispute was finally resolved.
(c) Operation of adjudication in practice
21.048 As to the operation in practice, the adjudicator is usually empowered to take

the initiative in ascertaining the facts and the law, but he must do so fairly. The
adjudicator should not, for example, have telephone conversations with one party
without letting the other party know that he or she has done so, as well as revealing
the outcome of the discussion, as illustrated in Discain Project Services v Opecprime
Developments Ltd.8 Also, adjudicators should not prepare their own critical path
analyses and base their decisions on their methodology without giving the parties
an opportunity to make submissions on such methodology as illustrated in Balfour
Beatty Construction Ltd v The Mayor and Burgesses of the London Borough of
Lambeth,9 where His Honour Judge Lloyd emphasised the need to achieve a balance
between the inquisitorial approach and adherence to the rules of natural justice – to
treat the parties fairly.
21.049 The approach of the courts to contentions of breach of the rules of natural justice
raised in proceedings the for enforcement of adjudicators’ decisions is that they should
only be made in the plainest of cases where the adjudicator has gone about the task
in a manner which is obviously unfair. In Cantillon Ltd v Urvasco Ltd,10 Akenhead J
summarised the principles as follows:
“From this and other cases, I conclude as follows in relation to breaches of natural
justice in adjudication cases:
7
[1999] BLR 93. As Dyson J said in the judgment:
“… the timetable for adjudication is tight…. Many would say unreasonably tight and likely to result in
injustice. Parliament must be taken to have been aware of this.”
It follows that the procedure by which a party is given a full opportunity to deal with the other party’s case is
necessarily restricted. See also Levolux AT Ltd v Ferson Contractors Ltd [2003] BLR 118 and Balfour Beatty
Construction Ltd v The Mayor and Burgesses of the London Borough of Lambeth [2002] BLR 288.
8
[2000] BLR 402. See Multiplex Constructions (UK) Ltd v West India Quay Development Co (Eastern) Ltd (2006)
111 ConLR 33 and Amec Civil Engineering Ltd v Secretary of State for Transport [2005] BLR 227.
9
[2002] BLR 288. See Primus Build Ltd v Pompey Centre Ltd [2009] BLR 437 and Carillion Construction Ltd v
Devonport Royal Dockyard Ltd [2005] BLR 310.
10
[2008] BLR 250.

(a) It must first be established that the Adjudicator failed to apply the rules
of natural justice;
(b) Any breach of the rules must be more than peripheral; they must be
material breaches;
(c) Breaches of the rules will be material in cases where the adjudicator has
failed to bring to the attention of the parties a point or issue which they
ought to be given the opportunity to comment upon if it is one which is
either decisive or of considerable potential importance to the outcome
of the resolution of the dispute and is not peripheral or irrelevant.
(d) Whether the issue is decisive or of considerable potential importance
or is peripheral or irrelevant obviously involves a question of degree
which must be assessed by any judge in a case such as this.
(e) It is only if the adjudicator goes off on a frolic of his own, that is
wishing to decide a case upon a factual or legal basis which has not
been argued or put forward by either side, without giving the parties
an opportunity to comment or, where relevant put in further evidence,
that the type of breach of the rules of natural justice with which the
case of Balfour Beatty Construction Company Ltd -v- The Camden
Borough of Lambeth was concerned comes into play. It follows that,
if either party has argued a particular point and the other party does
not come back on the point, there is no breach of the rules of natural
justice in relation thereto.”
(d) International growth of adjudication
As a result of the Housing Grants, Construction and Regeneration Act 1996, there 21.050
has been a dramatic escalation in the use of adjudication in England and Wales and it
is observed that the percentage of decisions by adjudicators taken further for review
by arbitration or litigation is very insignificant. Many standard forms of construction
contract also incorporate the adjudication procedure as one tier in the dispute resolution
process. These include, for example, the New Engineering Contract of the Institution
of Civil Engineers and the 1999 edition of the FIDIC short form.
Similar movement and approach in legislation can also been seen in other places in 21.051
the world. For examples, there are the Building and Construction Industry Security of
Payment Act 1999 in New South Wales and the Construction Contracts Act 2002 in
New Zealand.
Each piece of legislation contains slight variations. There are differences, for instance, 21.052
as to what can be referred to adjudication, how the adjudication process should
proceed and conclude, and the enforcement and challenge procedures of a decision by
the adjudicator. In the UK, a party to a construction contract11 has the right to refer a
11
This is defined by reference to ‘construction operations’ as per s 104 of the UK Housing Grants, Construction and
Regeneration Act 1996.

dispute arising under the contract for adjudication.12 In New South Wales, Queensland,
Victoria and Western Australia, a party to a construction contract13 may commence
adjudication essentially when there is a difference between the scheduled amount
in a payment schedule14 and the amount claimed in the payment amount and such
amount claimed is not paid or paid in full.15 In Singapore, the provisions are similar
to those in Australia.16 In New Zealand, the scheme resembles that in UK,17 but the
meaning of construction contract is defined differently.18 As to the initiation of the
adjudication process, the UK and New Zealand schemes require the giving of a notice
of adjudication and the actual acceptance of the reference to adjudication;19 while
the Australia and Singapore schemes only call for an adjudication application to be
made.20 A time period is prescribed within which an adjudication application must be
made in Australia and Singapore, but not in the UK or New Zealand.
21.053 The provisions of the security of payment legislation of these jurisdictions also differ,
inter alia, in relation to the duration of the adjudication decision or determination21 or
the range of powers available to the adjudicator.22 In particular, there is a procedure for
a claimant party in New Zealand to seek the approval of the adjudicator for the issue
of a charging order in respect of a construction site owned by the respondent and,
if the land owner of the construction site is also an associate of the respondent, the
adjudicator may, upon request, also determine that that owner is jointly and severally
liable with the respondent and may approve the issue of a charging order over the
construction site owned by that owner.23 In New Zealand24 and Singapore,25 there is also
a review procedure for the decision or determination after the adjudication. In other
12
Section 108(1) of the UK Housing Grants, Construction and Regeneration Act 1996.
13
This is defined by reference to ‘construction work’ as per ss 4 and 6 of the New South Wales and Victoria Building
and Construction Industry Security of Payment Acts and the similar ss 2 and 9 and Sch 2 of the Queensland
Building and Construction Industry Security of Payment Act and s 3 of the Western Australia Construction
Contracts Act.
14
A payment schedule is required by the legislation to be served when there is served a claim of payment. See, for
example, s 14 of the New South Wales Building and Construction Industry Security of Payment Act.
15
See ss 6 and 25 of the Western Australia Construction Contracts Act.
16
See s 12 of the Singapore Building and Construction Industry Security of Payment Act.
17
See s 25 of the New Zealand Construction Contracts Act.
18
See ss 5 and 6 of the New Zealand Construction Contracts Act.
19
This is done by a ‘referral notice’ under para 7 of the UK Scheme for Construction Contracts (England and
Wales) Regulations 1998 and an ‘adjudication claim’ under s 36 of the New Zealand Construction Contracts Act.
20
See s 17, 18, 21 and 13 respectively of the New South Wales, Victoria, Queensland, and Singapore Building and
Construction Industry Security of Payment Acts and s 26 of the Western Australia Construction Contracts Act.
21
See para 19 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 in the UK; s 46
of the New Zealand Construction Contracts Act 2002; s 16 of the Singapore Building and Construction Industry
Security of Payment Act 2004; s 21 of the New South Wales Building and Construction Industry Security of
Payment Act 1999; s 22 of the Victoria Building and Construction Industry Security of Payment Act 2002; s 25
of the Queensland Building and Construction Industry Security of Payment Act 2004; and s 31 of the Western
Australia Construction Contracts Act 2004.
22
See para 13 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 in the UK; s 42
of the New Zealand Construction Contracts Act 2002; s 16 of the Singapore Building and Construction Industry
Security of Payment Act 2004; s 21 of the New South Wales Building and Construction Industry Security of
Payment Act 1999; s 22 of the Victoria Building and Construction Industry Security of Payment Act 2002; s 25
of the Queensland Building and Construction Industry Security of Payment Act 2004, and s 31 of the Western
Australia Construction Contracts Act 2004.
23
See ss 29, 30, 49 and 50 of the New Zealand Construction Contracts Act 2002.
24
See ss 52 to 55 of the New Zealand Construction Contracts Act 2002.
25
See ss 18 to 19 of the Singapore Building and Construction Industry Security of Payment Act 2004.

jurisdictions, the challenge of the decision is brought to court. The judicial sentiments
in various jurisdictions differ as to the extent of the need for strict compliance with
due process or rules.
It should be noted that almost all of such security of payment legislation is now under 21.054
review. These reviews however mainly aim at improving the operational efficiency of
the respective legislation by drawing on the experience after implementation.
(e) The Hong Kong position
In Hong Kong, there is yet no scheme for statutory adjudication or, indeed, noticeable 21.055
movement towards one. Adjudication, when adopted in the construction contracts, is
only available as one of the multi-tier processes of dispute resolution. For example,
during the early construction of the Hong Kong International Airport, the Government
of Hong Kong had taken up adjudication as the second line of dispute resolution
provided for. It was binding on the parties unless the case was either settled or taken to
arbitration. Each party submitted three names to be used for selecting the adjudicator,
and each party could then object to those put forward by the other side. The Hong
Kong International Arbitration Centre used a scoring system to determine which of
the nominees was to be an adjudicator; if none could be determined, the Hong Kong
International Arbitration Centre was provided with the power to appoint one. The
adjudicator had the widest discretion permitted by law to determine the procedure of
the adjudication, including the power to inspect and detain property in like manner to a
judge of the court, although the adjudicator could not do anything that the court could
not do. A written decision had to be given within 42 days and the adjudicator was also
invested with the power to award interest. As to costs, the parties each put up a deposit,
and the adjudicator could determine the proportion of costs to be borne by each party.
The adjudicator could not act as an arbitrator in subsequent proceedings, although all
materials in the adjudication were admissible as evidence in subsequent arbitration.
The Hong Kong International Arbitration Centre has also kept a panel of adjudicators 21.056
and published the HKIAC Adjudication Rules.26
(f) Evaluation of the adjudication process
As with other dispute resolution processes, there are certain good things and, 21.057
unavoidably, bad things about adjudication. It is certainly true that the adjudication
process can provide a speedy though temporary solution to the dispute. Yet, as
illustrated in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd,27 errors of procedure, fact or
law are not sufficient to prevent enforcement of an adjudicator’s decision by summary
judgement. That case was a striking example of where an adjudicator had made an
obvious and fundamental error, accepted by both sides to be such, which resulted in
a balance being owed to the contractor where as in truth it had been overpaid. Yet, the
26
See http://www.hkiac.org for details.
27
[2000] BLR 522. See Nickleby FM Ltd v Somerfield Stores Ltd (2010) 131 Con LR 203 and Pilon Ltd v Breyer
Group Plc [2010] BLR 452.

Court of Appeal held that the adjudicator had not exceeded his jurisdiction, he had
merely given a wrong answer to the question that was referred to him and that, if the
adjudicator answered the right question in the wrong way, his decision would still be
binding. It was only if he had answered the wrong question, his decision would then
be a nullity. Thus, provided the adjudicator acts within his jurisdiction and answers the
question put to him in the notice of adjudication, then right or wrong, his decision is
enforceable.
21.058 Indeed, the tight timeframe for adjudication leaves the parties little or no time to
negotiate before resorting to adjudication. Further, as the key focus of adjudication is
on progress payments, disputes relating to the final payment of the works have still to
be left for resolution in the usual manner.
21.059 In comparison with the system of the dispute review board or the dispute resolution
adviser, the scope of disputes in adjudication can be extended to all levels of
construction contracts, to cover even domestic subcontractors or sub-subcontractors.
In the dispute review board or dispute resolution adviser system, due to the higher
cost implications that come with the system, their application to lower tiers of
the subcontracting sectors may not be cost effective. Without the continuing
involvement of the adjudicator in the form of regular site visits and briefing on
contract particulars, he or she normally doesn’t know much about the project until
dispute has arisen and notice of adjudication has been given. Yet, the adjudicator
is still required to reach a decision on the matter in a similarly tight timeframe.
In rendering a decision, unlike the case with a dispute review board or a dispute
resolution adviser, the adjudicator is not required to supply rationale to back up the
written decision. Another key distinction is regarding the admissibility of the records
and materials generated during the process in subsequent arbitration or litigation. In
adjudication, all of these are admissible, while none of these are admissible in the
dispute review board or dispute resolution adviser system. The dispute review board
or dispute resolution adviser system has been successfully used in a wide variety of
disputes; in contrast, the principal uses of adjudication are in relation to payment
disputes during the progress of the works.
4. CONSTRUCTION MEDIATION
(a) Objective of mediation
21.060 Mediation is the process in which the parties to a dispute, assisted by a neutral third
party, ie the mediator, identify the issues, develop options, consider alternatives and
endeavour to reach an agreement to settle. Generally, in Hong Kong, it is not the
role of the mediator to provide advice or determination in relation to the substance
of the dispute or the outcome of its resolution. The mediator’s role is focused on
determining or advising on the conduct of the process of mediation in an attempt to
achieve resolution of the dispute. The objective of the third party neutral is to break
any deadlock and encourage the parties to reach an amicable settlement. To achieve
this, the mediator may aim at providing a channel for communication, filtering out the
emotional elements and allowing the parties to focus on the underlying objectives.

CONSTRUCTION MEDIATION 587
(b) Distinction between mediation and conciliation
The terms mediation and conciliation are sometimes used interchangeably in Hong Kong. 21.061
In theory, a conciliator, in contrast with a mediator, may have an advisory role on the
content of the dispute or the outcome of its resolution, but not a determinative role. The
conciliator may advise on or determine the process of conciliation whereby resolution is
attempted, and may make suggestions for terms of settlement, give expert advice on likely
settlement terms and may actively encourage the participants to reach an agreement.
(c) Types of mediation
Depending on the style or philosophy adopted in the process, the general terms of 21.062
mediation and conciliation may be further defined by the addition of one or more of the
descriptors, such as therapeutic, facilitative, advisory, determinative or transformative.
The therapeutic process focuses on assisting the parties to express their concerns so
they can understand themselves and the other party better. Facilitative mediation aims
at assisting the parties to properly conduct the chosen process for dispute resolution,
while advisory mediation allows advice by the mediator on the proper conduct and the
fair outcome of dispute resolution. Determinative mediation empowers and requires
the mediator to decide on the outcome, and transformative mediation helps the parties
in dispute change the quality of their conflict interaction from negative and destructive
to positive and constructive. Of course, when put into practice, the mediation may be
a hybrid of all these.
In relation to construction disputes, the general practice in Hong Kong is to resolve 21.063
them by way of facilitative mediation. In fact, there are particular reasons why
mediation works in disputes in the construction industry. Participants in the industry
always expect disputes to arise; yet, almost all parties involved want the project to be
finished. Also, frequently, the parties have a strong need to maintain a good working
relationship. Thus, mediation can better serve small participants who can take part
with less preparation and expense, and it accommodates the need to reach a resolution
quickly, so that construction can continue.
(d) Features particular to construction mediation
There are, however, some differences between construction mediation and mediation 21.064
in general:
• The mediator is likely to have substantial experience in the construction

industry.
• Because construction disputes are heavy with documentation, the mediator

will also facilitate the information exchange or early discovery.
• Shuttle diplomacy utilised may call for more time to reach outcomes as there
usually tends to be more than just the two parties involved who have interests.
• The mediator is often expected, or called upon, by one or both of the parties
to render a view or advisory opinion on the matter.

(e) Mediation in Hong Kong
21.065 Again, the construction industry is at the frontline of the introduction and use of
mediation in resolving disputes in Hong Kong. Mediation was first urged upon
the Hong Kong Government by the Hong Kong Construction Association in the
1980s. The Hong Kong Institution of Engineers was then called upon to administer
a mediation scheme for selected public works contracts in 1989. In the 1990 edition
of the Hong Kong Government Conditions of Contract, a provision was introduced
allowing for mediation to take place as a tier to the dispute resolution process
prior to arbitration, subject to the choice of the parties. Later on, the Hong Kong
International Arbitration Centre took over the administration of mediation and
issued its own set of mediation rules. In 1994, the Hong Kong Mediation Council
was set up as part of the Hong Kong International Arbitration Centre (HKIAC),
promoting the HKIAC Mediation Rules as the model code of procedures for
mediations. Mandatory mediation was installed in contracts for the Airport Core
Programme and other infrastructure works contracts, such as those for the KCRC
West Rail and the MTRC. New mediation rules, such as the Hong Kong Government
Construction Mediation Rules and the HKIAC Mediation Rules, were also published
for use in 1999.
21.066 At present, the Hong Kong Mediation Council has various published panels of
accredited mediators. The mediators on the general panel span a wide range of
professions and occupations, and claim expertise in a wide range of areas, including
engineers, quantity surveyors, architects, project managers, accountants, solicitors,
barristers, construction and shipping experts, loss adjusters and insurance experts,
bankers and academics. As on 31 December 2010, there are 351 mediators on the
general panel, 145 on the family panel and 38 as ‘family supervisors’. The Hong Kong
Mediation Council has published a general ethical code and established disciplinary
procedures for mediators. Apart from providing the service of appointment of
mediators at a fee, it also trains and accredits mediators under its published procedures.
In 2010, the Construction Dispute Mediation Scheme was launched by the Hong Kong
Mediation Council, following the pro bono mediation scheme for the construction
industry. The pro bono scheme was designed to encourage mediation in this area,
whereby mediation would be provided by an accredited mediator on a no-fee basis.
In addition, commissioned by the Royal Institution of Chartered Surveyors, the Hong
Kong International Arbitration Centre also launched the Surveying Dispute Mediation
and Arbitration Scheme in May 2010.28
21.067 Apart from the Hong Kong Mediation Council, there are also several bodies in Hong
Kong providing similar training, accreditation or appointment services in mediation.
These include the Academy of Experts and the Law Society of Hong Kong. In addition,
the Hong Kong Mediation Centre was set up in 1999 and has over 300 mediators. It
provides training and accreditation for mediators and works in conjunction with local
universities and other professional institutions. It also helps with the appointment of
mediators.
28
For details, please refer to the HKIAC-RICS Mediation and Arbitration Procedure for Surveying Disputes.

In 2010, the Joint Mediation Helpline Office (JMHO)29 was set up jointly in the 21.068
format of an umbrella body by the Hong Kong Mediation Council, the Hong Kong
Bar Association, the Law Society of Hong Kong, the Chartered Institute of Arbitrators
(East Asia Branch), the Hong Kong Institute of Arbitrators, the Hong Kong Institute
of Architects, the Hong Kong Institute of Surveyors and the Hong Kong Mediation
Centre. It was set up as a non-profit organization with a view to promoting the use
of mediation as a means of dispute resolution in Hong Kong. Mediation services
providers assisting in offering mediation services for the JMHO are all requested
to comply with the requirements of the JMHO and subscribe to the provision of a
standard practice procedure in dealing with requests for mediation. The mediation
services provided at the JMHO include explaining the basic principles of mediation,
answering general enquiries in relation to mediation, putting users in contact with
mediators of one of the participating service providers. The JMHO does not provide
mediators for family, community or building management disputes. It publishes a set
of rules and adopts a mediation fee schedule.
(f) What is mediation
It has been said: “Most of the time we don’t communicate, we just take turns talking.” 21.069
Perhaps, mediation deals with the former; arbitration deals with the latter.
Mediation is fundamentally different from arbitration or litigation. In mediation, 21.070
instead of a decision being imposed by the court or the arbitrator, parties reach an
agreement facilitated by the mediator. Yet, mediation is not the same as negotiation.
See Hyundai Engineering and Construction Co Ltd v Vigour Ltd.30 The distinction
between mediation and negotiation is highlighted by the role of the mediator. The
mediator’s ultimate goal is to facilitate an agreement between the parties. Mediation
is focused on achieving a settlement. In any dispute, an assessment of the risks and
costs involved determine whether or not a party will settle. In mediation, a vital aim
is to help and encourage the parties to take a realistic and objective look at such an
assessment. Thus, the style of party participation expected in arbitration or litigation
is out of place in mediation.
For mediation, it is a process in which a neutral third party assists the parties in 21.071
dispute to reach a voluntary settlement through an agreement that defines their future
behaviour. The mediator is not given any power to impose a settlement. The function
of the mediator is to try to break any impasse and encourage the parties to reach an
amicable settlement. In commercial disputes, an impasse most often arises from either
a lack of trust in the integrity of the other party or a genuine good faith difference of
29
For details, please refer to http://www.jointmediation helpline.org.hk.
30
[2004] 3 HKLRD 1. See also the judgment on appeal for Hyundai Engineering And Construction Co Ltd v
Vigour Ltd [2006] HKEC 306. In considering whether the court should exercise the discretion to stay the court
proceedings to enable the parties to adhere to the agreed method for settling disputes, the court must look at
each situation and ask whether it is possible to frame objective criteria against which a party’s compliance or
non-compliance with a particular obligation can be assessed. See Kenon Engineering Ltd v Nippon Kokan Koji
Kabushiki Kaisha [2004] HKEC 542. See also Cable & Wireless PLC v IBM United Kingdom Ltd [2003] BLR 89
and The Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334. Contrast Halifax Financial
Services Ltd v Intuitive Systems Ltd [1999] 1 All ER 303.

opinion on the facts underlying the dispute or on the probable outcome of the case
were it to go to court. The mediator may act as a shuttle diplomat, or as a channel
for communication – filtering out the emotional elements and allowing the parties
to focus on the underlying objectives. The mediator will encourage the parties to
reach an agreement themselves rather than having it imposed upon them. Mediation
has proven an outstandingly successful management tool for resolving difficult
disputes and should always be considered when negotiations fail, before proceeding
to arbitration or litigation. It is a means by which the parties can relearn a basis for
communication, which they can then use to resolve future disputes. This is particularly
important in family disputes where invariably there are ongoing issues to be resolved,
eg arrangements for children.
21.072 The essential ingredients of classical mediation are the voluntary nature of the process
and outcome, since a party can reject the process or its outcome without repercussions;
and the neutrality of the mediator so that there is a total lack of interest on the part of
the mediator in relation to the outcome.
(g) How mediation operates
21.073 In broad terms, classical mediation consists of eight stages.
1. Initiation – the usual path is that the parties submit a dispute for resolution by
mediation, pursuant to an agreement of the parties.
2. Preparation – the parties prepare for the mediation by becoming well informed
of the circumstances underlying the dispute and the needs and interests arising
out of it, the legal claims or defences of each side and their relative strengths
and weaknesses and the remedies being sought or to be sought. The mediator
prepares by becoming knowledgeable about the parties and the characteristics
of the dispute, including matters like balance of power, sources of pressure,
pressures motivating toward and hindering agreement, political or personal
conflicts and extent of settlement authority.
3. Introduction – this phase introduces the parties to the nature and format of
mediation and gains the parties’ acceptance of the mediator. The mediator
also establishes control of the process, determines the issues in dispute and
the positions of the parties and encourages the parties to continue direct
negotiations.
4. Problem statement – the parties begin to discuss their dispute by stating
their respective positions and discussing each issue as it is raised or by first
identifying the issues and reserving a detailed discussion of the positions until
they have identified all the issues. The mediator assists during this stage by
controlling the process and by asking questions to clarify.
5. Problem clarification – the mediator isolates the genuine underlying issues in
the dispute, ie the core issues, and also seeks to help the parties summarise
areas of agreement and disagreement, together with the subsequent grouping
and prioritising of issues and demands of the parties.

6. Generation and evaluation of alternatives – the mediator assists by helping the

parties to focus on workable solutions. The goal here is to get the parties to
decide on an outcome.
7. Agreement – before bringing the mediation to a close, the mediator summarises
and clarifies the terms of the agreement reached and obtains the assent of each
party to those terms and congratulates the parties on their reasonableness.
A typical mediation may follow this pattern. It starts with the parties preparing a short 21.074
summary and providing documents about the case to the mediator. The mediation
session then begins with introductions and the laying down of ground rules. A discussion
is then started in order to identify the dispute, and each side speaks. The mediator will
try to confirm that each side understands the other’s position. The parties then go
to separate rooms to meet privately with the mediator. This is a shuttle diplomacy
phase where the mediator may go back and forth between the parties, helping them
to examine and confirm their understanding of the other’s position. If settlement is
reached, a written agreement will be drawn up immediately for all parties to sign. If no
settlement occurs, another round of discussion will occur, where suggestions to help
the parties to reach a settlement may be discussed.
Being relatively unstructured and informal in procedure, rules may be of a more limited 21.075
function in mediation than in other processes, such as arbitration. However, a set of
mediation rules still serves some functions. These can be illustrated using the HKIAC
Mediation Rules. Rule 1 establishes clearly the non-binding and voluntary nature
of the procedure. Rule 5 defines the method for appointing the mediator. Rule 13
sets out the way in which the mediator’s fees and the parties’ costs will be paid. Rule 3
and rule 11 establish the way in which the mediation starts and ends. Rule 12 spells out
the extent of the protection on confidentiality for all involved.
(h) Role of the mediator
Mediation is sometimes referred to as ‘supercharged negotiation’. The mediator’s role 21.076

is to assist in extending the parties’ own negotiations for the purpose of reaching a
jointly satisfactory settlement. The mediator’s key role is to clarify the issues and to
help the parties narrow their differences while keeping the interaction focused and
orderly. All negotiation goes through stages. The gist of the mediation process is to
compress these stages of negotiation for costs saving. Most cases of mediation operate
within a definite timeframe. For example, most of the rules in construction mediation
expressly stipulate that the mediation process shall not continue for more than a couple
of weeks.
Many mediators commence the mediation by holding a joint meeting. At this 21.077
meeting, the mediator will first explain the nature and format of the process, with
appropriate reference given to its confidential and non-binding features. Each party
will then present its own case with a view to identifying and narrowing the issues
in dispute. Afterwards, the mediator works with each party to analyse its case and
develop options for settlement, by conducting a series of private, confidential meetings
with each party, called caucuses. This goes on until either settlement is reached or it

is apparent that settlement will not be reached. If no settlement is reached, there is

usually prior agreement that no statements made during the proceedings are intended
to be admissible as evidence in any subsequent arbitration or litigation.
21.078 Depending on personal style, the mediator may assume a variety of roles and functions
at various stages of a mediation:
• opener of communication channels;
• legitimiser of parties’ right in negotiations;
• process facilitator providing a procedure;
• trainer for the parties in the bargaining process;
• resource expander for providing and linking parties to outside experts or

resources;
• problem explorer enabling a problem to be examined from different angles;
• scapegoat for taking blame for an unpopular decision that the parties
nevertheless are willing to accept;
• agent of reality; and
• leader.
(i) Why mediation works
21.079 To ensure mediation is fruitful, it is necessary for those involved to understand the
psychology behind the scenes and to prepare themselves sufficiently in advance. There
are five main reasons why mediation may work when the parties have been unable to
settle the case themselves.
21.080 First, mediation provides a safe environment for negotiation between the parties or
their lawyers that may otherwise not take place at all. Parties are from time to time
advised that the making of any reasonable settlement offer will be taken as a sign of
weakness or will be abused as the starting point for the next round of negotiations. By
controlling and directing the communications, the mediator can avoid unproductive
discussions and ensure that proposals will be communicated only if there is a likely
prospect of settlement.
21.081 Second, the mediator can fill in the gaps in negotiation skills, which the parties
lack. This may assist the parties in avoiding the unnecessary use of hard-bargaining
tactics and emphasis on differences. Thus, it keeps the parties focused on productive
discussions that explore areas of common ground and options for settlement.
21.082 Third, mediation creates a unique atmosphere for the decision-makers of the parties
to meet, with the express purpose of a discussing settlement. Thus, it provides the
opportunity that may otherwise be unavailable for the decision-makers to really focus
their entire attention on reaching a settlement without any distraction from other
business.

Fourth, during the mediation session, each party can present its case undisrupted, in 21.083
the manner it feels is most favourable. This also allows the party to convey its feelings
and emotions on the issues and facts, thereby providing the other side the unfiltered
version of its case. In these circumstances, proposals for settlement can be more
realistically considered.
Fifth and foremost, the personal skills of the mediator enhance the flow of information, 21.084
resulting in a realistic communication of the parties’ cases and their respective
prospects of success in arbitration or litigation.
(j) Why mediation fails
Not all mediations are successful. Mediations that do not work out are often affected 21.085
by a blend of common pitfalls and obstacles, external to the dispute itself, that are
more related to the mentality and knowledge of the parties to the mediation rather than
to the issues in dispute. Experience indicates that the prime reasons that mediation will
not work are that, during the session, either or both of the parties are lacking in any of
a combination of the six characteristics set out below:
• authority to settle;
• preparation for understanding and assessing the merits of the case;
• knowledge of the nature and process of mediation;
• focus of undisrupted attention in presenting own case and listening to the

other’s case;
• realistic views on prospects of success of own case and/or other’s case;
• good faith.
It is crucial to the success of mediation that each party is represented by an individual 21.086
who has full and complete authority to resolve the case. It is unacceptable in a
mediation to have final authority reside in an individual at the head office who is not
present at the mediation. From time to time, mediation fails for want of authority, in
respect of one or both of the parties. Lack of authority is a popular negotiation tactic
and does not necessarily occur by accident in mediation. This tactic can take several
forms, and is indeed a simple tool for testing the depth of the other side’s water. To
facilitate fruitful outcome, every effort must be made to have the responsible person
with full authority present for the entire mediation.
Mediation sometimes fails as a result of lack of preparation. Parties or their 21.087
representatives must come adequately prepared and informed of their own case
so as to enable the meaningful consideration of settlement of the dispute. Lack of
preparation impedes meaningful evaluation at the conclusion of the mediation as to
whether to settle. Full and complete preparation in advance is thus an essential element
in achieving a fruitful outcome of mediation. Key documents must be gathered and
understood; important witnesses must be interviewed; and applicable law must be
researched and analysed.

21.088 Mediation can also fail because the parties are not acquainted with the nature and
processes of mediation. It is essential for the parties to know that time and effort on
their parts, together with planning in advance, are necessary to render the mediation
successful. Mediation is still a relatively new creature. There are important roles to
be played by representatives of parties throughout the mediation session. The perfect
representative will serve as an advocate, witness, solution generator and a source of
authority, accountability, empathy and credibility. The representatives must also be
aware of the power of a well-timed apology and of an acknowledgment of the other
side’s feelings, interests and views. During the mediation session, the representatives
will hear allegations and attacks that naturally aggravate hostilities. They should know
that part of the mediation process is understanding and dealing with the emotional
aspects of the controversy. This allows the parties to vent their feelings, emotions and
frustration.
(k) Achieving outcome in mediation
21.089 To achieve a fruitful outcome, it is necessary for the representatives to actively

participate and to exhibit the attributes of full settlement authority, accountability of
the interests of the businesses and absence of direct involvement in the matters leading
to the controversy.
21.090 Understanding the role of the mediator and distancing the facilitated negotiation
from a third-party decision is essential for formulating plans, strategies and interest
priorities beforehand. The attention of the parties in a mediation session should be
directed towards productive negotiation.
21.091 Also, it is a primary tenet of mediation that the parties enter it in good faith. Malicious,
bad faith litigation is fatal to the likelihood of successful mediation. As suggested
in the Australian case of Western Australia v Taylor,31 common indicators of lack
of good faith include unexplained delays in commencing and proceeding with the
negotiation, refusal in agreement on even trivial matters, rigid and non-negotiable
adopted positions, failure in responding to proposals and making counter proposals
and shifting positions just when agreement is in sight.
21.092 For mediation to work, the parties must, on the one hand, be willing and ready to
cooperate while also being ready to move competitively and, on the other hand, be well
prepared but remain flexible.
21.093 The four discrete aspects of preparation for effective mediation are: preparing the
case for mediation; preparing parties for mediation; preparing to attend the mediation
session; and preparing for after the mediation session.
(l) Preparing for effective mediation
21.094 The first two of the four aspects overlap with many of the same steps in systematically
planning for a negotiation: gathering and organising information; analysing timing
31
(1996) 134 FLR 211.

issues; identifying issues, goals and underlying interests; assessing strengths and
weaknesses; setting the opening position and bottom line; estimating the other
side’s bottom line and opening position; considering win-win outcomes and possible
concessions and trade-offs; planning appropriate strategies and tactics and determining
presentation format, agenda and communication issues.
In preparing for the case, it is crucial to review the case file. In a construction case, it is 21.095
of particular importance to make sure that the sequence of events and correspondence
is in the correct order. Lack of preparation is a not an uncommon cause of ineffective
mediation. It is also crucial to make sure that all needed information is there before
the mediation starts. Thus, when the case file is being reviewed, special care is needed
to note any information that is not in the file but may be helpful to all concerned
in the mediation session, balanced against the careful selection of documents for
presentation to the mediator.
It is necessary to have a goal, a plan and a theme during the preparation of the 21.096
case. A goal in mediation may fall into one of the (at least) six categories of goals:
aggressive, competitive, cooperative, self-centred or defensive goals or a combination.
In mediation, the plan should be a flexible one, tailored to fit the characteristics of the
typical mediation session, which assists in controlling pre-mediation nervousness and
apprehension. A theme in mediation is focused on points of disagreement between the
parties and helps foster concentration on presenting materials and arguments to the
mediator that go to the very essence of the dispute, thereby providing the mediator
with information that can be used to facilitate a realistic and reasonable settlement.
In preparing the personnel for mediation, parties’ representatives need to familiarise 21.097
themselves with the nature of the mediation process, the role of the mediator, the role
of the presenter/advocate and, most important of all, their own roles. It is vital that
each person involved knows and is comfortable with her or his role at the mediation
conference, particularly if legal advisers are involved. Each of them may take an active
verbal role, a limited verbal role or no verbal role whatsoever. The ground rules for
the parties’ participation should be drawn up at the outset. These, for example, may
include displaying no reaction to settlement offers; stating only facts, not opinions; or
not interrupting the other side’s statements.
The techniques of collaborative negotiation are at the heart of the mediation process. 21.098
The goal of mediation is to generate a discussion of issues and needs so the parties
can solve their problems by informed, joint, voluntary decisions. This calls for the
identification of points on which the parties differ, and communication to develop a
mutual understanding about the parties’ respective concerns and interests. It is essential
to effective mediation that the mediator has an understanding of the dynamics of
negotiation and has the ability to promote constructive negotiation behaviour between
the parties. Communication is followed by working out options for settlement and
exploring of the costs and benefits of each of these options.
The roles of the parties in mediation should always be remembered. It is the parties, 21.099
not the mediator, who own the process and they have to take and keep control of it. It
is the parties who are in negotiation with each other. They do so with the facilitation of
the mediator. To be effective, the parties must be proactive, rather than merely reactive,
particularly during caucuses.

5. CONSTRUCTION ARBITRATION
(a) Features of arbitration
21.100 Arbitration is not a new concept. Recourse to arbitration has been common practice
in England since the Middle Ages and was codified in 1698. Arbitration has been
defined as the reference of dispute or difference between not less than two parties for
determination, after hearing both sides in a judicial manner, by a person or persons
other than a court of competent jurisdiction.
21.101 The essential features of arbitration include: being consensual; party autonomy;
jurisdiction of arbitral tribunal primarily set out by terms of arbitration agreement
and submission to arbitration; judicial nature of the proceedings and judicial role
of arbitral tribunal; case management by arbitral tribunal; final and legally binding
process and limited intervention by courts.
(b) Arbitration and ADR
(i) Main difference to other forms of ADR

21.102 The major difference between arbitration and the other forms of alternative dispute
resolution, like mediation, is that arbitration imposes a binding decision upon the
parties. In arbitration, the binding decision as to the resolution of the dispute, in the
form of an award, is made by the arbitrator or the arbitral tribunal. This is similar to
the case of judgement being made by the court. Whereas in mediation, the parties
themselves are required to come to a resolution of the dispute, assisted by the mediator.
(ii) Advantages of arbitration

21.103 The International Chamber of Commerce has identified the following advantages of
arbitration, which is by far the most commonly used ADR internationally.
(iii) Final, binding decisions

21.104 While several mechanisms can help parties reach an amicable settlement all of
them depend, ultimately, on the goodwill and cooperation of the parties. A final and
enforceable decision can generally be obtained only by recourse to the courts or by
arbitration. Because arbitral awards are subject to limited challenge, they are much
more likely to be final than the judgements of courts of first instance.
(iv) International recognition of arbitral awards

21.105 Arbitral awards enjoy much greater international recognition than judgements of
national courts. Some 140 countries or places32 have adopted the 1958 United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known
as the New York Convention, which facilitates enforcement of awards in all contracting
states. There are several other multilateral and bilateral arbitration conventions that
may also help enforcement.
32
See http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html for the updated
status.

CONSTRUCTION ARBITRATION 597
(v) Neutrality
In arbitral proceedings, parties can place themselves on an equal footing in five key 21.106
respects: place of arbitration, language used, procedures or rules of law applied and
nationality.
(vi) Legal representation

Arbitration may take place in any country, in any language and with arbitrators of any 21.107
nationality. With this flexibility, it is generally possible to structure a neutral procedure
offering no undue advantage to any party.
(vii) Specialised competence of arbitrators

Judicial systems do not allow the parties to a dispute to choose their own judges. In 21.108
contrast, arbitration enables the parties to have their disputes resolved by people who
have specialised competence in the relevant field.
(viii) Speed and economy

Arbitration, properly used, is faster and less expensive than litigation in the courts. 21.109
Above all, it helps to ensure that the parties will not subsequently be entangled in a
prolonged and costly series of appeals. Furthermore, arbitration offers the parties the
flexibility to set up proceedings that can be conducted as quickly and economically as
the circumstances allow.
(ix) Confidentiality
Arbitration hearings are not public, and only the parties themselves receive copies of 21.110
the awards.
In arbitration and interest-based mediation (as opposed to right-based mediation), 21.111
fundamentally different approaches are in play. As for arbitration, it looks to the past;
focuses on facts; seeks to establish fault or liability; and adjudicates who wins or loses.
As for interest-based mediation, it looks to the future; focuses on relationships; seeks
to restructure relationships; and results in party-made resolution.
Arbitration, on its own, is a massive subject. Full reference may be made to other more 21.112
comprehensive text such as Arbitration in Hong Kong: A Practical Guide33 (Sweet &
Maxwell, 2003). The focus in the following paragraphs is on certain features salient in
construction arbitration in Hong Kong.
(c) Arbitration Framework in Hong Kong
(i) International and domestic arbitration agreements

In Hong Kong, the principal legislation governing arbitration is the Arbitration 21.113
Ordinance (Cap 609). Until it was amended in 2010, this has been modelled
closely on its counterparts in the United Kingdom. Yet, since April 1990, there
33
Geoffrey MA, (ed), Arbitration in Hong Kong: A Practical Guide (Sweet & Maxwell, 2003).

have been two separate regimes governing arbitration conducted in Hong Kong –
one for domestic arbitration and another for international arbitration. In the latest
amendments to the Arbitration Ordinance in 2010,34 a unitary regime has been
created for both domestic and international arbitration35 in Hong Kong, utilising the
UNCITRAL Model Law on International Commercial Arbitration, more commonly
known as the UNCITRAL Model Law or the Model Law.36 This is subject to the
transition arrangement under s 100 and s 101 of the Arbitration Ordinance (Cap
609) and the parties’ agreement under s 99 of the Arbitration Ordinance (Cap 609)
to continue to use certain provisions that only apply to domestic arbitration before
the amendments.
21.114 While the interpretation and implementation of the Arbitration Ordinance (Cap
609) are yet to be seen in operation, some features of it that are more relevant to the
construction industry in Hong Kong may be highlighted in the paragraphs below.
21.115 Section 99 of the Arbitration Ordinance (Cap 609) enables parties generally to opt-in
any or all of the sections in Sch 2 of the Arbitration Ordinance (Cap 609) by express
agreement.37
21.116 Section 100 of the Arbitration Ordinance (Cap 609) provides for these provisions
to be automatically applied if the arbitration agreement is a domestic arbitration
agreement entered into before or within six years from the commencement of this
Ordinance.38
34
In 1998, the Hong Kong Institute of Arbitrators in cooperation with the Hong Kong International Arbitration
Centre established a Committee on Hong Kong Arbitration Law on the reform of the arbitration law. The
Committee issued a report in 2003 recommending that the Ordinance be redrawn and a unitary regime with the
Model Law governing both domestic and international arbitrations be created. These were taken forward by the
Departmental Working Group of the Hong Kong Department of Justice. A Consultation Paper on Reform of the
Law of Arbitration in Hong Kong and a draft Arbitration Bill was published on 31 December 2007 to seek views
for implementing these. It was published in the relevant gazette on 12 November 2010 as Arbitration Ordinance
(Ord No 17 of 2010) (Cap 609).
35
Article 1 of the UNCITRAL Model Law deals with its scope of application and defines, in Art 1(3), an arbitration
as international where:
“(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of
business in different States; or one of the following places is situated outside the State in which the parties have
their places of business: (i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;
(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed
or the place with which the subject-matter of the dispute is most closely connected; or (c) the parties have
expressly agreed that the subject matter of the arbitration agreement relates to more than one country.”
As there is only a unitary regime under the new Arbitration Ordinance (Cap 609), classification of when an
arbitration is international may only have transitional importance under s 100 of the Arbitration Ordinance.
36
This also incorporates some of the 2006 amendments to the UNCITRAL Model Law on International Commercial
Arbitration. For details of the 2006 amendments, please refer to http://www.uncitral.org.
37
These include those provisions requiring the dispute to be referred to a sole arbitrator for arbitration; empowering
the court to order two or more arbitral proceedings to be consolidated or to be heard at the same time or one
immediately after another; enabling the court to decide any question of law arising in the course of arbitral
proceedings; allowing an arbitral award to be challenged on the grounds of serious irregularity affecting the
arbitral tribunal, the arbitral proceedings or the award; and providing for an appeal against an arbitral award on a
question of law.
38
This is a section of general application, as compared to s 101 of the Arbitration Ordinance (Cap 609) which
applies to Hong Kong construction subcontracting cases only.

For subcontracts involving construction operations,39 s 101 of the Arbitration 21.117

Ordinance (Cap 609) becomes material. This section provides that the opt-in provisions
which automatically apply under s 100 shall continue to apply, if the construction
operations forming the subject matters of the construction contracts40 concerned
have been subcontracted or further subcontracted, to the arbitration agreements of
the subcontractors or sub-subcontractors down the line except where they are foreign
entities or a substantial part of the subject matter is performed outside Hong Kong.
Yet, if the arbitration agreement of any subcontractor or sub-subcontractor refers to
domestic arbitration, that subcontractor or sub-subcontractor will not be excepted
from the automatic application of the opt-in provisions even if it is a foreign entity or
a substantial part of the subject matter of the contract concerned is performed outside
Hong Kong.
Section 102 of the Arbitration Ordinance (Cap 609) enables parties to ‘opt-out’ of the 21.118
otherwise applicable provisions in Sch 2.
For most arbitration concerning construction projects in Hong Kong, it is likely to 21.119
be arbitrated under the traditional domestic regime.41 For instance, in the Hong Kong
Government Conditions of Contract form, it expressly provides that the Hong Kong
International Arbitration Centre Domestic Arbitration Rules apply unless the parties
agree to the contrary.
39
For this purpose, ‘construction operations’ has been defined with the meaning given by the Sch 1 of the
Construction Industry Council Ordinance (Cap 587). This means operations of any of the following, namely
(a) building works as defined in s 2(1) of the Buildings Ordinance (Cap 123); (b) street works as defined in
s 2(1) of the Buildings Ordinance; (c) construction, alteration, repair, maintenance, extension, demolition or
dismantling of (i) any buildings, or other temporary or permanent structures forming, or to form, part of land;
(ii) any works forming, or to form, part of land; (iii) any industrial plant or any industrial installations for the
purposes of land drainage, coast protection, water supply or defence; or (iv) any power-lines, telecommunications
apparatus or pipelines, including walls, pylons, aircraft runways, docks and harbours, railways, inland waterways,
reservoirs, water-mains, wells and sewers; (d) supply and installation of fittings or equipment in any buildings, or
other structures forming part of land, including systems of heating, lighting, air-conditioning, ventilation, power
supply, drainage, sanitation, refuse collection, water supply, fire protection, security or communications, lift or
escalator and other extra low voltage works; (e) external or internal cleaning of any buildings, or other temporary
or permanent structures forming part of land, to the extent that it is carried out in the course of construction,
alteration, repair, maintenance, extension or restoration of such buildings or structures; (f) painting or decorating
any external or internal surfaces or parts of any buildings, or other temporary or permanent structures forming
part of land; (g) operations which form an integral part of, or are preparatory to, or are for rendering complete, any
of the operations described in paragraphs (a), (b), (c), (d), (e) and (f), including site clearance and investigation,
earthmoving, excavation, tunnelling and boring, laying of foundations, erection, maintenance or dismantling of
scaffolding, site restoration, landscaping and the provision of roadways and other access works. This does not
include operations of any of the following descriptions, namely (a) design, advice or consultation work, unless
such design, advice or consultation work is incidental to any operations described in the above; (b) manufacture
of plant or machinery at a site for delivery of such plant or machinery to another site where the sole or principal
activity at that other site is power generation; or the production, transmission, processing or bulk storage of
any materials or manufactured products, including chemicals, pharmaceuticals, oil, gas, steel, food or drink or
vehicles, which are intended for sale.
40
For this purpose, ‘construction contracts’ has been defined with the meaning given by the Construction Industry
Council Ordinance (Cap 587), which means a contract between an employer and a contractor under which the
contractor carries out construction operations but does not include a contract of employment.
41
The key features, as compared to the traditional international regime, are the provisions concerning sole
arbitrator in default of agreement, consolidation of arbitrations, decision of preliminary question of law by court
and challenging and appealing against arbitral awards. These are retained in Sch 2 of the Arbitration Ordinance
as opt-in provisions, in accordance with ss 99 – 102 of the Arbitration Ordinance (Cap 609).

(ii) Objective of Arbitration Ordinance (Cap 609)

21.120 The object and principles of the Arbitration Ordinance (Cap 609) is now set out in s
3 of the Arbitration Ordinance (Cap 609): to facilitate the fair and speedy resolution
of disputes by arbitration without unnecessary expense. The principles on which it
is based, as stated in s 3(2) of the Arbitration Ordinance (Cap 609), are firstly that,
subject to the observance of such safeguards as are necessary in the public interest,
the parties to a dispute should be free to agree how the dispute should be resolved, and
secondly, that the court should interfere in the arbitration of a dispute only as expressly
provided by the Arbitration Ordinance (Cap 609).
(iii) Application of legislation

21.121 By s 4 of the Arbitration Ordinance (Cap 609), the provisions of the UNCITRAL
Model Law that are expressly stated in the Arbitration Ordinance (Cap 609) as
having effect have the force of law in Hong Kong, subject to the modifications and
supplements as expressly provided for in the Ordinance.42
21.122 Part 1 of the Arbitration Ordinance (Cap 609) sets out the object and principles. Parts
2 to 9 of the Arbitration Ordinance follow the structure of the UNCITRAL Model Law
with modifications, while Part 10 concerns the recognition and enforcement of awards
and Part 11 enables parties to opt-in to provisions set out in Sch 2 of the Ordinance.43
21.123 The UNCITRAL Model Law on International Commercial Arbitration, known

generally as the UNCITRAL Model Law, signifies the internationally agreed principles
of best practice in international arbitration. The underlying theme of the UNCITRAL
Model Law is to promote party autonomy and finality in international arbitration by
maximising the powers of the arbitral tribunal and limiting the intervention of the
courts. In the Hong Kong Arbitration Ordinance (Cap 609), the UNCITRAL Model
Law is adopted for both domestic and international arbitration with minimum change.
(iv) Role of arbitral tribunal

21.124 In arbitration, the arbitral tribunal, similar to the court, makes a decision, which is called
an award instead of a judgement. In Hong Kong, the arbitral tribunal may adopt either
the adversarial or inquisitorial approaches to arbitration. By subsection 56(7) of the
Arbitration Ordinance (Cap 609), unless the parties otherwise agree, an arbitral tribunal
may, when conducting arbitral proceedings, decide whether and to what extent it should
itself take the initiative in ascertaining the facts and the law relevant to those arbitral
proceedings. Yet, even in such cases, the parties should not be taken by surprise by,
for example, having an issue dealt with in the award that is not raised by the parties
42
The UNCITRAL Model Law is the UNCITRAL Model Law on International Commercial Arbitration as adopted
by the Commission on 21 June 1985 and as amended by the Commission on 7 July 2006, the full text of which
is set out in Sch 1 of the Arbitration Ordinance (Cap 609).
43
These opt-in provisions allow users of arbitration to continue to use those provisions applicable only to
domestic arbitration before the introduction of the new Ordinance. Unless otherwise agreed, these provisions
are automatically applied to domestic arbitration agreements entered into before the commencement of the
amendments or entered into at any time within a period of six years after the commencement of the amendments.

or referred to them for comment, as illustrated in Fox v P G Wellfair Ltd.44 The key
difference between these two approaches lies in the way in which certain matters are dealt
with, such as those in respect of evidence gathering; appointment of expert witnesses;
examination of witnesses; oral hearing or document procedure; decision based on
parties’ evidence or inquiries of arbitral tribunal. The arbitral tribunal has an overriding
duty to select appropriate procedures for the dispute. Obviously, even in an adversarial
procedure, there is no requirement that the court-style procedure has to be adhered to,
so far as fairness can be maintained.45 This installs flexibility into the arbitration process
and generates quite a number of types of arbitration, ranging from court-style; short
form; document only; to chess-clock arbitration. In construction, for example, there may
be a more obvious need to balance considerations such as speed and economy in the
arbitration process, provided that there is no breach of consideration of fairness.
(v) Role of the court

The role of the court is limited in arbitration. The powers that the court may exercise 21.125
in arbitration may include supportive powers such as ordering interim measures of
protection46 or taking evidence;47 supervisory power over the proceedings such as
in removing the arbitral tribunal48 or making a final ruling on the jurisdiction of the
arbitral tribunal as a preliminary point;49 and supervisory power over the award, such
as in reviewing the awards50.
(d) Stay of proceedings
(i) Commencement of litigation where an

arbitration agreement exists
If a party to an arbitration agreement commences litigation, the other party may apply 21.126
to the court in which the legal proceedings have been brought for an order to stay
44
[1981] 2 Lloyd’s Rep 514. In the judgment, Dunn LJ said:
“… an expert arbitrator should not in effect give evidence to himself without disclosing the evidence on which
he relies to the parties … He should not act on his private opinion without disclosing it. It is undoubtedly true
that an expert arbitrator can use his own expert knowledge. But a distinction is made in the cases between
general expert knowledge and knowledge of special facts relevant to the particular case.”
See Kong Kee Brothers Construction Co Ltd v Attorney General [1986] HKLR 767 and Brunswick Bowling &
Billiards Corp v Shanghai Zhonglu Industrial Co Ltd [2009] HKEC 233.
45
For example, s 52 of the Arbitration Ordinance (Cap 609) applies Art 24 of the UNCITRAL Model Law, which
provides:
“Subject to any contrary agreement by the parties, the arbitral tribunal shall decide whether to hold oral
hearings for the presentation of evidence or for oral argument, or whether the proceedings shall be conducted
on the basis of documents and other materials. However, unless the parties have agreed that no hearings shall
be held, the arbitral tribunal shall hold such hearings at an appropriate stage of the proceedings, if so requested
by a party.”
46
See ss 35 – 40 of the Arbitration Ordinance (Cap 609), applying Arts 17 and 17A – 17E of the UNCITRAL
Model Law.
47
See s 55 of the Arbitration Ordinance (Cap 609), applying Art 27 of the UNCITRAL Model Law and s 60 of the
Arbitration Ordinance (Cap 609).
48
See ss 25 and 26 of the Arbitration Ordinance (Cap 609), applying respectively Arts 12 and 13 of the UNCITRAL
Model Law.
49
See ss 20 and 34 of the Arbitration Ordinance (Cap 609), applying respectively Articles 8 and 16 of the
UNCITRAL Model Law.
50
See s 81 of the Arbitration Ordinance (Cap 609), applying Art 34 of the UNCITRAL Model Law.

the legal proceedings, if the dispute is the subject matter to which the arbitration
agreement applies.
(ii) Arbitration agreement declared null and void

21.127 In Hong Kong, Art 8 of the UNCITRAL Model Law applies by virtue of s 20 of the
Arbitration Ordinance (Cap 609). This requires the court to grant a stay of proceedings
unless the court is satisfied that the arbitration agreement is null and void, inoperative
or incapable of being performed. As noted in Tai Hing Cotton Mill Ltd v Glencore
Grain Rotterdam BV,51 a dispute that is denied or not admitted is a dispute that has
to be referred to arbitration in accordance with Art 8 of the UNCITRAL Model Law.
Thus, it is not for the court to step into the shoes of the arbitral tribunal to investigate
whether such a dispute is indisputable or not. In Incorporated Owners of Go Wah
Mansion v Hong Kong Hardware Supplier Ltd,52 the defendant applied for a stay of all
further proceedings for arbitration under the arbitration clause in the deed of mutual
covenant of the mansion in relation to a building management dispute; the plaintiff
asked for summary judgment of the plaintiff’s claim against the defendant. The court
held that, in the absence of admissions as to both liability and quantum, a mere denial
of liability or of the quantum claimed, even in circumstances where no defence existed,
would be sufficient to found a dispute.53 In this case, the court found that there were
disputes for arbitration as to the existence of any agreement between the parties on
charges for the transformer room and as regards the amount of management fees or
renovation charges. The court hence granted a stay of proceedings for arbitration.
21.128 Instances in which the courts found an arbitration agreement to be null and void,
inoperative or incapable of being performed are not that common.54
21.129 It has been suggested that an arbitration agreement reached with one party not having
the legal capacity to do so may be an example of the agreement being null and void.
(iii) Allegations of fraud

21.130 As to inoperative arbitration agreements, these include those cases in which allegations
of fraud are involved. Where, in case of an arbitration agreement at foot between the
parties, a dispute so arises involving the question whether any such party has been
guilty of fraud, so far as may be necessary to enable that question to be determined
51
[1996] 1 HKC 363.
52
[2008] HKEC 1741.
53
In the judgment, the court observed:
“In any event, as Ma J (as he then was) held at paragraph 23.3 of his judgment in Gatwick Engineers: ‘The
existence or non-existence of a dispute or a difference as envisaged under the relevant arbitration agreement
between the parties is crucial to the granting of a stay. For this purpose, a dispute will exist unless there has
been a clear and unequivocal admission not only of liability but also quantum … In the absence of admissions
as to both these aspects, a mere denial of liability or of the quantum claimed, even in circumstances where
no defence exists, will be sufficient to found a dispute for the purposes of section 6 of the Ordinance (and
Article 8 of UNCITRAL Model Law). Thus, finding out whether a dispute (as defined in this way) exists is
the only exercise that the court carries out in a stay application (apart of course from construing the arbitration
agreement to discover its full ambit): it does not involve itself in evaluating the merits of the claim.’ ”
54
See, however, Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc [2008] HKEC 728. See E Bon Building
Materials Co Ltd v China State Construction Engineering Corp [2002] HKEC 412 and Aggressive Construction
Co Ltd v Data Form Engineering Ltd [2009] HKEC 1555.

by the court, the court previously had power, under the now repealed s 26 of the
Arbitration Ordinance (Cap 341) to order that the agreement shall cease to have effect,
rendering it inoperative.
Thus, in the past, when the court should exercise such a power has been considered 21.131
in Wan Chung Construction Co Ltd v Lingnan University.55 In that case, the court
was invited to stay the proceedings for arbitration in relation to the dispute over
claims suggesting fraudulent misrepresentation. In reviewing the approach that the
court should take in such a situation, Kwan J held that, to satisfy this requirement,
a concrete and specific issue of fraud had to be raised and there had to be sufficient
prima facie evidence of fraud with convincing evidence to support the allegations,
not a mere bandying about of allegations. Also, in her judgement, it was noted that
if the stay of proceedings to arbitration was opposed by the party charged with the
fraud, then almost as a matter of course the court would refuse a stay so that the
matter could proceed to trial. The rationale for this is a reflection of the view that
when an allegation of fraud is made against a person, he is entitled to have that issue
heard in public, so that her or his name may be cleared in public. It was where the
party making an allegation of fraud opposed a stay of proceedings to arbitration
and wished the action to proceed in the court that the court had discretion to refuse
or grant a stay of proceedings. In that situation, it was pointed out that whether the
court did so or not would depend on all the circumstances of the case, and the court’s
normal approach was to grant a stay of proceedings to arbitration when the sole
matter relied on was the charge of fraud. Indeed, even if there was a strong prima
facie case of fraud in specific respects made out, that was not by itself enough to
warrant refusing a stay.
Following the jurisprudence in international arbitration, that provision has not been 21.132
replicated in the new Arbitration Ordinance (Cap 609). Thus, these matters are now
decided by the arbitral tribunals in the usual course of the process.
(iv) Non-occurrence of condition precedent

Another not uncommon attempt against the stay is where an event that is a condition 21.133
precedent to arbitration has not yet taken place. It is now popular to have a multi-
tier resolution system requiring other pre-arbitration steps to be taken in construction
contracts, for example, where a dispute should be referred to a decision of the engineer
or architect, followed by mediation, before it can be submitted to arbitration. In Westco
Airconditioning Ltd v Sui Chong Construction Engineering Co Ltd,56 it was argued
that the arbitration was subject to a condition precedent, which was that the architect
had to decide the matter, or the time for him to make a decision had to have elapsed
before the matter might proceed to arbitration. Neither of which had happened then
and, hence, the arbitration agreement was inoperative. Such an agreement was not
accepted by the court, which was of the view that there was a clear agreement by the
parties to submit to arbitration their disputes and, in the circumstances, it mattered not
that the parties had not, firstly, taken some other step before this was done.
55
[2002] HKEC 6.
56
[1998] HKEC 32.

21.134 Thus, once the applicant demonstrates to the satisfaction of the court that an arbitration
agreement exists covering the subject matter of the dispute, the court must order a stay
and there is no residual discretion to do otherwise.
21.135 In order not to lose its right to apply for a stay, the applicant must apply no later than
the time when it submits its first statement on the substance of the dispute. It should be
remembered that, for the operation of Art 8 of the UNCITRAL Model Law, all that is
needed is a dispute that has not been admitted.
(e) Agreement to arbitrate
(i) Definition of agreement

21.136 An arbitration agreement may be a clause in the substantive contract to refer future disputes
to arbitration, or it may be an ad hoc one that refers existing disputes to arbitration. It
defines the scope of dispute that is referred and referable to arbitration. An arbitration
agreement, together with the submission to arbitration, is the principal instrument
affecting all subsequent aspects of the arbitration process and its outcome. These include
key areas, such as the appointment of the arbitral tribunal, the jurisdiction of the arbitral
tribunal, the conduct of the arbitration proceedings and the award and its enforcement.
21.137 Article 7(1) of the UNCITRAL Model Law57 defines an arbitration agreement to be
an agreement by the parties to submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a defined legal relationship,
whether contractual or not. An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate agreement.
(ii) Whether the agreement is in writing

21.138 Section 19 of the Arbitration Ordinance (Cap 609) provides, for the Ordinance to be
applicable, the arbitration agreement shall be in writing. An arbitration agreement is in
writing if its content is recorded in any form, whether or not the arbitration agreement or
the contract has been concluded orally, by conduct, or by other means. The requirement
that an arbitration agreement be in writing is met by an electronic communication
if the information contained therein is accessible so as to be useable for subsequent
reference; “electronic communication” means any communication that the parties
make by means of data messages; “data message” means information generated, sent,
received or stored by electronic, magnetic, optical or similar means, including, but
not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or
telecopy. Furthermore, an arbitration agreement is in writing if it is contained in an
exchange of statements of claim and defence in which the existence of an agreement
is alleged by one party and not denied by the other. The reference in a contract to
any document containing an arbitration clause constitutes an arbitration agreement in
writing, provided that the reference is such as to make that clause part of the contract.
21.139 Also, a reference in an agreement to a written form of arbitration clause or to a

document containing an arbitration clause can constitute an arbitration agreement if
57
See s 19 of the Arbitration Ordinance (Cap 609), applying Option I of Art 7 of the UNCITRAL Model Law.

such a reference is to make that clause part of the agreement. As held in H Smal Ltd
v Goldroyce Garment Ltd,58 a case where the plaintiff could not produce the copy of
the purchase order alleged to have been signed by the defendant which contained an
arbitration clause, and a former employee of the plaintiff maintained that he knew that
the defendant had signed it and had kept a copy, there was a threshold level of evidence
to be met in order to prove the existence of an arbitration agreement and there was no
basis for arguing that the arbitration agreement could be established by a course of
dealing or the conduct of the parties.
A party seeking to show the existence of an arbitration agreement must show a strongly 21.140
or reasonably arguable case that the Arbitration Ordinance does apply. In order to do
so, only prima facie evidence of compliance with the requirements needs be shown;
the onus being on the defendant to demonstrate that there is such case.
In Pacific Crown Engineering Ltd v Hyundai Engineering & Construction Co Ltd,59 21.141
the plaintiff and the defendant entered into a contract and a dispute subsequently arose
as to the correct version of the contract that bound them. According to the plaintiff, the
correct version of the contract was evidenced by a mixture of letters and a meeting,
in which case there would have been no arbitration agreement; the defendant, on the
other hand, contended that the letters and the meeting were merely negotiations, and
it had sent the plaintiff the full contract in the form of an amended standard form
contract which included an arbitration clause. The defendant contended that, though
that contract was not signed, the work proceeded on the basis of it and that future
conduct and correspondence showed it to have been accepted. The court, applied the
proper test to see if it was satisfied that there was a plainly arguable case to support
the proposition that there was an arbitration agreement that complied with Art 7 of the
UNCITRAL Model Law. The court found that there was a prima facie case that there
was an arbitration agreement in writing and that the defendant was a party to it. In
granting the application to stay the proceedings, the court also remarked that was the
case; and that the court should proceed to appoint the arbitrator in the full knowledge
that the defendant would not be precluded from raising the point before the arbitrator
and having the matter reconsidered by the court consequent upon that preliminary
ruling.
For the purposes of the Arbitration Ordinance (Cap 609), an arbitration agreement is 21.142
in writing if the agreement is in a document, whether or not the document is signed
by the parties to the agreement; or the agreement, although made otherwise than in
writing, is recorded by one of the parties to the agreement, or by a third party, with the
authority of each of the parties to the agreement.
(iii) Back-to-back agreements

A not uncommon situation in respect of incorporation of an arbitration clause concerns 21.143
the so-called ‘back-to-back’ agreements between contractors and subcontractors or
subcontractors and their subcontractors. This is illustrated in Astel-Peninger Joint
58
[1994] 2 HKC 526.
59
[2003] 3 HKLRD 440.

Venture v Argos Engineering & Heavy Industries Co Ltd.60 In that case, the subcontract
agreement was ‘totally back-to-back’ with the upper tier subcontract. In dealing with
an application to stay the proceedings for arbitration, the court held that the task before
the court in determining whether or not there had been incorporation by reference was
one of construction, namely, to ascertain the parties’ intentions when they entered
into the contract by reference to the words that they used. It was also remarked that
a document containing an arbitration clause could include a contract made between
one party and a third party, a contract between two strangers to the arbitration or an
unsigned standard form of contract.
(iv) Dispute over existence of an arbitration agreement

21.144 Also, if there is a dispute as to whether an arbitration agreement exists, the court will
normally leave detailed investigation of any question of jurisdiction to the arbitral
tribunal unless it is asked to exercise its power under s 34 of the Arbitration Ordinance
(Cap 609), applying Art 16 of the UNCITRAL Model Law.
21.145 The approach to be taken by the arbitral tribunal in such situation has been considered
by Kaplan J in Fung Sang Trading Ltd v Kai Sun Sea Products & Food Co Ltd,61
who stated that each case should be determined on its own facts. In particular, he
remarked that:
“In my judgement, an arbitrator faced with a challenge to his jurisdiction should

first see whether the parties wish to seek declaratory relief. If not, then he appears
to have three choices. Firstly, he may decide he has no jurisdiction and that is
the end of the matter unless a court subsequently takes a contrary view. Secondly,
he may issue an interim award on jurisdiction and see whether it is effectively
challenged before he goes on to consider the merits. Thirdly, he may decide
jurisdiction and the merits and render an award.
If the case is fairly simple, he may wish to take the third course if he is satisfied
that not too much expense will be incurred by deciding liability at the same time
as jurisdiction. If the case on the merits is difficult and likely to be costly then
60
[1994] 3 HKC 328. In the judgment, Kaplan J held:
“(1) On a proper construction of the final sentence of art 7(2) of the Uncitral Model Law, the meaning of
‘a document containing an arbitration clause’ was not limited to a document signed by the parties to the
arbitration but could include a contract made between one party and a third party, a contract between two
strangers to the arbitration or an unsigned standard form of contract. To restrict the meaning of these words to
a contract between the two parties to the arbitration would be unworkable in commercial practice. (2) In the
light of the interpretation given to art 7(2) of the Model Law, the decision of the House of Lords in Thomas
v Portsea Steamship Co Ltd [1912] AC 1 had no application to Hong Kong. The test for determining whether
there had been incorporation by reference was one of construction, viz to ascertain the intentions of the parties
when they entered into the contract by reference to the words they had used. (3) It was quite clear from the
actual words used in the sub-sub-contract that the parties intended to incorporate the arbitration clause in
the assembly sub-contract. The plaintiff had had ample opportunity to consider the terms of the assembly
sub-contract prior to making the sub-sub-contract but had taken no steps to object to the incorporation of the
arbitration clause. The necessity to reject or modify some of the provisions of the arbitration clause to make it
suitable for the purposes of the sub-sub-contract did not, of itself, displace the parties’ intention.”
See also Fai Tak Engineering Co Ltd v Sui Chong Construction & Engineering Co Ltd [2009] HKEC 1000.
61
[1992] 1 HKLR 40. See Kenon Engineering Ltd v Nippon Kokan Koji Kabushiki Kaisha [2004] HKEC 542 and
Incorporated Owners of Tak Tai Building v Leung Yau Building Ltd [2005] 2 HKLRD D2.

he may go for the second alternative, namely rendering an interim award on

jurisdiction. In both these ways Lord MacKay’s injunction as to wasted costs will
be adhered to.
Thus, each case will depend on its own particular facts. One thing, however, is
clear. Arbitrators should not pull down the shutters on the arbitral process as
soon as one party objects to the jurisdiction of the tribunal.”
(f) Appointment of arbitrators
(i) Methods of appointment

The setting up of the arbitral tribunal is governed primarily by the arbitration 21.146
agreement. In the absence of such an agreement or in case of non-compliance by a
party of the agreed procedure, in Hong Kong, the Hong Kong International Arbitration
Centre (HKIAC) will act as the appointing authority for arbitrators, as provided by
ss 23 and 24 of the Arbitration Ordinance (Cap 609), applying respectively Arts 10 and
11 of the UNCITRAL Model Law.
The methods for appointing arbitrators include nomination in the arbitration agreement; 21.147
agreement between parties as to the appointment after dispute has arisen; appointment
by an appointing authority, eg Hong Kong Institution of Engineers; or appointment in
default of agreement by HKIAC under the Arbitration Ordinance (Cap 609).
(ii) Challenge to arbitral appointment

Where there are circumstances giving rise to justifiable doubts as to the impartiality 21.148
or independence of the arbitral tribunal or that the arbitrator does not possess the
qualifications as agreed by the parties, a party may bring the challenge to the arbitral
tribunal if the other party does not agree to the challenge. If this challenge before the
arbitral tribunal fails, that party may still ask the court to determine the challenge.
Section 25 of the Arbitration Ordinance (Cap 609) provides for the grounds for
challenge, applying Art 12 of the UNCITRAL Model Law.
An instance of this is Weltime Hong Kong Ltd v Ken Forward Engineering Ltd.62 In this 21.149
case, the appointment of the arbitrator, and hence the jurisdiction over the arbitration,
was challenged. The arbitration clause in issue provided for disputes to be referred
to “arbitration and final decision” by a person to be appointed by “the President or
Vice-President for the time being of The Hong Kong Institute of Architects co-jointly
with the Chairman or Vice-Chairman for the time being of the Royal Institute of
Chartered Surveyors (Hong Kong Branch)”. The contract was entered into in about
November 1997 and the Hong Kong Branch of the Royal Institute of Chartered
Surveyors ceased to exist in 1997, its functions being taken over by the Hong Kong
Institution of Surveyors. An interim award was published by the arbitrator who was
appointed by HKIAC, dealing with the challenge to the appointment, finding that such
an appointment was valid. In refusing the application for leave to appeal against the
62
[2001] 1 HKC 458. See also Ken Forward Engineering Ltd v Weltime Hong Kong Ltd [2003] 1 HKLRD A1. See
Incorporated Owners of Tak Tai Building v Leung Yau Building Ltd [2005] 2 HKLRD D2.

interim award, the court remarked that the change from Royal Institute of Chartered
Surveyors (Hong Kong Branch) to Hong Kong Institution of Surveyors was not a
change in name only in the sense that the same body carried on albeit under a different
name. As such, the Hong Kong Institution of Surveyors was patently not the body that
the parties had agreed to approach in trying to appoint an arbitrator.
21.150 For most arbitration concerning construction works in Hong Kong, by s 23 of the
Arbitration Ordinance (Cap 609), unless the parties otherwise agree, the number of
arbitrators is to be either one or three, as decided by the HKIAC in the particular
case.63 This changes the normal practice in domestic arbitration.
(g) Consolidation of arbitration
(i) Circumstances where consolidation is appropriate

21.151 Where there are two or more arbitration proceedings, the court may in appropriate
cases ordered them to be consolidated on such terms as it thinks just. This is provided
for in s 2 of Sch 2 of the Arbitration Ordinance (Cap 609). Under that opt-in section,
consolidation is allowed where it appears that some common question of law or fact
arises in both or all of the arbitration proceedings; or that the rights to relief claimed
therein are in respect of or arise out of the same transaction or series of transactions;
or that it is otherwise desirable to order consolidation.
21.152 With the chain of the contractual matrix, consolidation of proceedings is a subject
of considerable impact to construction arbitration. In particular, it is often the case
that some common questions of law or fact arise in parallel arbitration proceedings
involving employer, contractor and subcontractors. The claims put forward by the
parties frequently arise out of the same or the same series of activities on the site.
For example, in the case of defective works, the arbitration between the employer and
the contractor and that between the contractor and the subcontractor is liable to be
consolidated.
21.153 The consolidation of parallel arbitration may normally save cost and time overall.
However, the effects on time and costs in the arbitration process can be very different
on each individual party, in comparison to the situation where there is no consolidation.
(h) Court decision-making process
21.154 In deciding whether to order consolidation of arbitration proceedings, it was held in

Hong Kong Institute of Education v Aoki Corporation64 that the court should approach
the matter in three stages. In the first stage, it should be explored whether there is
two or more arbitration proceedings in existence; in the second stage, it should be
investigated whether, in relation to those arbitration proceedings, any or several
of the factors specified in the now repealed s 6B(1) of the Arbitration Ordinance
63
This is, where applicable, subject to s 1 of Sch 2 of the Arbitration Ordinance (Cap 609), which provides for a
sole arbitrator for arbitration as an opt-in provision.
64
[2004] 2 HKLRD 760.

(Cap 341)65 would apply. Then, if the answers to these two questions is yes, the last
question is whether there are any other relevant considerations or factors that are in the
court’s discretion on whether or not to make the consolidation order.
In deciding whether to grant such an order, the court would balance the similarities 21.155
and common features of the matters to see whether it sufficiently merited the making
of the order. Factors to be taken into account include the respective stage the parallel
arbitrations have reached, the timing of the arbitrations, the standing of the arbitrators,
the amounts being claimed, the works involved, the issues to be determined, the cost
and inconvenience to the parties, factual witnesses, expert witnesses and arbitrators
and the loss of confidentiality in consolidation.
(i) Arbitration process
(i) Special features in construction arbitration processes

Due to the uniqueness of construction arbitration and the disputes involved, the process 21.156
in which construction disputes are arbitrated does demonstrate certain special features
to which attention should be paid.
(ii) Commencement of arbitration

In most, if not all, standard forms of construction contracts in Hong Kong, it is provided 21.157
that the notice to commence arbitration has to be given within the stipulated timeframe
but no steps shall be taken in reference to arbitration, other than the appointment of the
arbitrator, until after the certified or alleged completion of the works or termination of
the contract, unless with the written consent of the parties.
This prevents the proceedings by way of arbitration to resolve the dispute, even if it is 21.158
one arising at a very early stage of the contract.
In some standard forms for nominated subcontractors, whose works concern only a 21.159
part of the whole contract, a similar clause exists, which provides that no actual steps
towards arbitration can be allowed, as in the case of the main contract above, until the
completion of the main contract works or termination of the main contract.
Such provisions in practice result in claims and disputes left unresolved and prevent 21.160
their resolution by arbitration as soon as they arise. Though mediation is nowadays
also commonly installed into the contracts as a tier of the dispute resolution process,
it cannot be expected that mediation will work in all cases. Indeed, in relation to one-
sided bad faith disputes or claims, mediation will surely not be productive.
For example, in a case of non-payment or deduction from payment to a subcontractor 21.161
for works done, whether with or without justification, if the dispute cannot otherwise
be resolved, the subcontractor has to wait and have the dispute resolved by arbitration
after the main contract has been completed or terminated.
65
See s 2 of Sch 2 of the Arbitration Ordinance (Cap 609).

21.162 It should be noted that, once the dispute falls within the ambit of an arbitration
agreement, the parties cannot proceed the matter in court by way of litigation. Almost
certainly, a request for the stay of proceedings pending arbitration will be advanced
by the other party and, almost as a rule in general cases, the court will follow such a
request.
21.163 Thus, no immediate remedy can come to the rescue of the complaining party in such
circumstances. The practical result is that the cashflow is severely disrupted and it is
a plain fact that not every party, particularly the more vulnerable ones, can survive to
see the day when arbitration commences.
(iii) Appointing body

21.164 The usual practice in the Hong Kong construction industry is for the appointment of
the arbitrator to be made by a named appointing body. The appointing body may be an
organisation or a chairman or president of a professional institution. Examples include
the appointment of the arbitrator by the President of the Hong Kong Institution of
Engineers or the Hong Kong Institute of Arbitrators, the Chairman of the Hong Kong
Bar Association, the Chairman of the Chartered Institute of Arbitrators (East Asia
Branch), the President of the Hong Kong Institution of Architects and the Chairman of
the Royal Institution of Chartered Surveyors co-jointly, or simply by HKIAC.
21.165 Indeed, HKIAC is now the default appointing body under the Arbitration Ordinance
(Cap 609) and has the power to appoint, on application, arbitrators for arbitration in
Hong Kong if no agreement is reached or provided for by the parties.66 HKIAC may
also be asked to appoint arbitrators where the designated appointing authority fails
to carry out its function.67 Under the provisions of the Arbitration Ordinance (Cap
609), HKIAC has made rules of procedure to be followed when it is asked to carry
out these functions.68 Under these rules, HKIAC has an independent Appointment
Advisory Board to oversee the operation of the rules and to ensure transparency of the
process while maintaining the confidentiality expected by the parties. The set-up of an
Appointment Advisory Board consists of persons nominated by various professional
or other concerned bodies. In making suitable appointments, regard is given to a
number of criteria, such as the nature of the dispute; the availability of arbitrators;
the identity of the parties; the independence and impartiality of the arbitrator; any
stipulation in the relevant arbitration agreement; and any suggestions made by the
parties themselves.
(iv) Name-borrowing procedure

21.166 Between the main contractor and the nominated subcontractor, standard forms of
contract in Hong Kong not uncommonly include a ‘name-borrowing’ clause, enabling
the subcontractor to sue the employer by way of arbitration, having borrowed the name
of the main contractor.
66
This is governed by ss 13 and 24 of the Arbitration Ordinance (Cap 609), applying respectively Arts 6 and 11(3)
of the UNCITRAL Model Law with modifications.
67
See s 24 of the Arbitration Ordinance (Cap 609), applying Art 11(4) of the UNCITRAL Model Law.
68
Section 13(3) of the Arbitration Ordinance (Cap 609).

It creates a unique status of arbitration proceedings that may bring about unexpected 21.167
results and impact if used improperly. In such ‘name-borrowing’ arbitrations, the
subcontractor may be forced to face issues otherwise answerable between the main
contractor and the employer. Also, the right to enforce the award under the name-
borrowing arbitration falls on the contractor, not the subcontractor. All that is required
of the main contractor may be a duty to cooperate as held in Belgravia Property
Co Ltd v S&R (London) Ltd.69 Even so, who should be in charge of the name-
borrowing arbitration can give rise to tension between the main contractor and the
subcontractor, bearing in mind the need to provide indemnity or security of expenses
by the subcontractor. In those cases, the employer had agreed to a situation whereby,
in certain circumstances, the subcontractor would borrow the main (or managing)
contractor’s name and bring proceedings against the employer.
Such a clause has been considered in a different context by the Hong Kong court in Paul 21.168
Y – ITC Construction Ltd v Sundart Engineering Ltd.70 That case concerned an appeal
against an interim award on the preliminary issue, relating to a point of jurisdiction
unsuccessfully taken by the applicant. The applicant was the main contractor and the
respondent was a dry-wall nominated subcontractor in a development project. The
issue was whether the subcontract permitted the respondent subcontractor an option to
sue either the main contractor or the employer. The clause in issue, in relation to claims
for loss and expense incurred by the subcontractor that required the certification by the
architect, contained a proviso in the following form:
“If the Subcontractor shall feel aggrieved by the amount certified by the Architect
or by his failure to certify, then, subject to the Subcontractor giving to the Main
Contractor such indemnity and security as the Main Contract may reasonably
require, the Main Contract shall allow the Subcontractor to use the Main
Contractor’s name and if necessary will join with the Subcontractor as claimant
in any arbitration proceedings by the Subcontractor in respect of the said matters
complained of by the Subcontractor.”
The subcontractor commenced arbitration against the main contractor according to 21.169
the arbitration agreement in the subcontract. The arbitrator took the view that matters
covered under the name-borrowing procedure could not relate to matters which lie
only between the subcontractor and the main contractor since such matters would not
feature in any architect certificate and that for matters rightly covered by the name-
borrowing procedure, the subcontractor had an option, rather than duty, to follow the
name-borrowing procedure. Thus, if the subcontractor did not use the name-borrowing
procedure and pursued against the main contractor only, it would then be up to the main
69
[2001] BLR 424. See London and Regional (St George’s Court) Ltd v Ministry of Defence [2008] EWHC 526
(TCC). The settlement agreement was the sort of sensible commercial agreement reached between what was, in
effect, the main contractor and the subcontractor, so as to allow the subcontractor to pursue the claims which it
knew about, and in respect of which it had suffered loss, against the ultimate paymaster. It was not champertous.
70
[2000] HKCFI 1107. See Housing Authority v Sui Chong Construction & Engineering Co Ltd [2008] 1 HKLRD
84. See also Cooperative Wholesale Society Ltd (t/a CWS Engineering Group) v Birse Construction Ltd (formerly
Peter Birse Ltd) (1997) 84 BLR 58; Gordon Durham & Co Ltd v Haden Young Ltd (1991) 52 BLR 61; and Lorne
Stewart Ltd v William Sindall Plc (1987) 35 BLR 109.

contractor to elect bringing in the employer in separate arbitration proceedings. It was

submitted by the respondent that the subcontractor, in view of the name-borrowing
clause, could only sue the employer in the main contractor’s name for matters calling
for certification by the architect. The court, in rejecting such an argument, remarked
that, in support of such an argument, it was agreed that its claim was still against the
main contractor and only the main contractor and the architect could decide which part
of it was recoverable under the main contract.
(v) Hearing procedures

21.170 Construction arbitration can pose extraordinary challenges to all participants and
it can be the most complicated and inefficient proceeding. To safeguard against the
potential pitfalls, there are some key elements in place for simplifying and expediting
complex construction arbitration.
21.171 Above all, an experienced arbitral tribunal that is willing to take charge of the
arbitration in a proactive manner is of salient importance for case management. This
can be reflected in the early use of a preliminary meeting to plan and schedule the
process, followed by the necessary control via periodic directions and pre-hearing
review, as needed. A realistic assessment of the time at the outset may allow the fixing
of the hearing schedule and dates to suit the busy diaries of all participants.
21.172 Of course, early identification on and focus on the issues that need to be heard can always
be productive. In appropriate cases, consideration should also be given to splitting the
hearing into liability and damage issues. Early and open discovery of documents and
exchange of information can help narrow the issues. Where appropriate, the early use
of Scott Schedules with proper details can help. (This may also call for assistance from
the arbitral tribunal or the court in obtaining any necessary documents and evidence
from third parties.)
21.173 As to expert evidence, if allowed by the arbitration rules, using experts in joint
meetings helps bring together the experts instructed in a case for a full and frank
exchange, in the absence of both the parties and their legal representatives, which may
result in agreement as to all or most of the technical matters. When this is reverted
back to the parties, it may bring about early settlement of the case or at least narrow the
differences requiring hearing and determination. Obviously, there are advantages to
using tribunal-appointed experts, in addition to or instead of party-appointed experts,
which may also be considered.
21.174 Before the hearing, the exchange of written submissions is surely of benefit. In view
of the usually heavy documentation, preparing a core bundle of documents containing
the essential documents that will be referred to frequently at the hearing will save all
parties time. The use of summaries, graphs and other demonstrative evidence at the
hearing should be encouraged in suitable cases. These can be supplemented by the
current computer and information technology.
(vi) Special hearing procedures

21.175 The choice of special procedures at the hearing may also help. With the agreement
of the parties or if allowed by the arbitration rules, there is a wide range of flexible
possibilities. Examples of these include having the opposing experts testify jointly on

the same subject matter so that they can be asked the same questions simultaneously
or even using the technique of ‘witness conference’ which consists of the simultaneous
joint hearing, ‘team-versus-team’ rather than ‘witness-by-witness’, of all factual and
expert witnesses involved in the arbitration. This changes the order of proceedings to
an arrangement of testimony by issue or in such a manner that witnesses presented by
different parties be questioned at the same time and in confrontation with each other.
Certainly, the more widely used method in complex construction arbitration is the 21.176
so-called ‘chess-clock’ process. This is useful in controlling time and budget in the
arbitration, balanced with the need for fairness. Each party is allotted an equal share
of the overall hearing time and it is up to each side to decide how and on what to spend
such allotted time. A ‘chess clock’ is used to monitor the usage of time by each party.
Thus, careful consideration has to be given to strategy in order to make effective and
proper use of the allotted time by the representatives of each party, and not every
single or minute point in the evidence will be answered or dealt with. In practice, the
focus will be on how to align evidence with the party’s own case.
(j) Challenging against arbitration awards
(i) Passive or active remedies

An arbitration award is not the end of a dispute. There is a legal framework available to 21.177
an unsatisfied party for challenging arbitration awards in Hong Kong.
Remedies available to an unsatisfied party after the award is published can be passive 21.178
or active. If it does not take any initiative to attack an award, it may simply wait until
the other side comes to collect the fruit of the award by seeking its enforcement. It is
then when passive remedies can be invoked by the dissatisfied party, who relies on
the matter of complaint before the court as a ground for resisting enforcement of the
award. In Hong Kong, enforcement of arbitration awards is principally governed by
s 84 of the Arbitration Ordinance (Cap 609),71 which provides:
“(1) Subject to section 26(2), an award, whether made in or outside Hong

Kong, in arbitral proceedings by an arbitral tribunal is enforceable in the
same manner as a judgment of the Court that has the same effect, but only
with the leave of the Court.
(2) If leave is granted under subsection (1), the Court may enter judgment in
terms of the award.”
Section 61 of the Arbitration Ordinance (Cap 609) allows the enforcement of orders 21.179
and directions of the arbitral tribunal in a likewise manner, providing:
71
Grounds for refusing the enforcement of arbitral awards governed by the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards concluded in New York on 10 June 1958 or arbitral awards made in
Mainland China by a recognised Mainland arbitral authority in accordance with the Arbitration Law of the
People’s Republic of China are set out respectively in ss 87 – 91 and ss 92 – 98 of the Arbitration Ordinance
(Cap 609). By s 86 of the Arbitration Ordinance (Cap 609), the same grounds are basically repeated for regulating
the enforcement of awards generally under s 84 of the Arbitration Ordinance.

“An order or direction made, whether in or outside Hong Kong, in relation to

arbitral proceedings by an arbitral tribunal is enforceable in the same manner
as an order or direction of the Court that has the same effect, but only with the
leave of the Court.”
(ii) Court policy of minimal interference

21.180 Regarding awards of construction arbitration, which are essentially domestic awards
in Hong Kong, the court previously had powers to set aside or remit an award, by
the repealed s 23 of the Arbitration Ordinance (Cap 341) on a question of law and
by the repealed s 25 of the Arbitration Ordinance for misconduct of the arbitrator or
the proceedings and for an award being improperly procured. There is also a power
to remit the award to the reconsideration of the arbitrator under repealed s 24 of the
Ordinance. The repealed sections 23 to 25 are now replaced by s 81 and the opt-in
provisions, as ss 3 to 7 of Sch 2 of the Arbitration Ordinance (Cap 609).
21.181 Wherever these provisions are applicable, the court adopts a strict policy of minimal
interference. Firstly, misconduct must be proved to be of the most serious variety
to justify the setting aside of the award; secondly, misconduct of a technical nature
would normally justify the remission of the award rather than its setting aside; thirdly,
the courts will not countenance any attempt to remit or set aside an award under the
Arbitration Ordinance (Cap 609) as a means to bypass the restrictions on appeal
under s 5 of Sch 2 of the Arbitration Ordinance as laid down by the so-called Nema
guidelines, in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) (No 2),72 as applied
in Hong Kong in Lee Chang Yung Chemical Industry Corp v PT Dover Chemical Co.73
These need to be read subject to the judgment of Swire Properties Ltd & Others v
Secretary for Justice,74 where Bokhary PJ said:
“Where a question of law of general public importance or the construction of a

standard clause is involved, I think that our courts should normally grant leave
to appeal from an arbitral award when, but only when, there is at least a serious
doubt as to its correctness. …Where the construction of a ‘one-off’ clause is
involved, I think that our courts should normally grant leave to appeal from an
arbitral award when, but only when, the arbitral tribunal’s construction appears
to be obviously wrong. Then, but only then, would it normally be just and proper
to permit an appeal in a ‘one-off’ case … Of course none of the foregoing is to
deny that each case – whether it concerns a question of law of general public
importance, the construction of a standard clause or the construction of a ‘one-
off’ clause – will have its own particular features bearing upon the discretion to
grant or refuse leave to appeal from an arbitral award.”
72
[1982] AC 274.
73
[1991] 1 HKLR 71. See Golden Sand Marble Ltd v Hsin Chong Construction Co Ltd [2005] 1 HKLRD 598;
Swire Properties Ltd & Others v Secretary for Justice (2003) 6 HKCFAR 236; Incorporated Owners of Repulse
Bay Towers v Bolton Construction Ltd [2003] 3 HKLRD 823; and Chinney Construction Co Ltd v Po Kwong
Marble Factory Ltd [2003] HKEC 935.
74
(2003) 6 HKCFAR 236.

(iii) Example of the court’s approach

The approach of the courts to the operation of these sections can be illustrated by 21.182
reference to the following cases decided in relation to the repealed ss 23, 24 and 25 of
the Arbitration Ordinance (Cap 341).
The case of Kwan Lee Construction Co Ltd v Elevator Parts Engineering Co Ltd 75 21.183
arises out of a lift subcontractor’s claim for work performed for a contractor in respect
of a housing development. The contract contained the usual ‘pay-when-paid’ clause.
On 9 May 1994, the architect issued an interim payment certificate certifying that
the sum of HK$455,000 was payable in respect of the subcontractor works. The
contractors said that the employer had never paid. The subcontractor gave notice
referring the dispute to arbitration on 7 March 1995. Clearly expressing that the sum
was not yet due, the contractor paid the sum of HK$455,000 on 19 October 1995 on a
without prejudice basis. This was before the arbitrator made his award. There was no
offer to pay interest and costs. At a preliminary meeting held on 27 November 1995,
the submissions of the subcontractor were that:
• there was a dispute as to whether the contractor had received payment of the
HK$455,000 from the employer;
• even if, factually, the employer had not paid the contractor, recent
commonwealth authorities suggested that the ‘pay-when-paid’ clause did
not wholly exempt the contractor from liability to pay the subcontractor: the
authorities distinguished between a ‘pay-when-paid’ clause and a ‘pay-if-paid’
clause, and, in this regard, the fact that the contractor failed to pass on the
claim to the architect for two years was said to be relevant;
• the contractor had accepted liability by the payment of HK$455,000.
On 30 May 1996, the arbitrator made and published his award, finding in favour of 21.184
the subcontractor. The only finding capable of sustaining the award was that “[t]he
payment in the amount of HK$455,000 paid by [the contractor] to [the subcontractor]
on October 20, 1995 constitutes an admission of liability by [the contractor] that [the
subcontractor] was entitled to receive that money”.
Pursuant to the now repealed subsection 22A(1)(a) of the Arbitration Ordinance 21.185
(Cap 341), the arbitrator has jurisdiction to make an award of interest on any sum
that is the subject of the reference. Yet, there is no legal principle in Hong Kong to
the effect that the right to claim interest is freestanding, irrespective of an underlying
debt. There has to be, inter alia, an admission of liability by the contractor to pay the
HK$455,000 before liability to pay interest could be established.
In the Hong Kong Court of Appeal, the contractor asked for leave to appeal under the 21.186
now repealed s 23 of the Arbitration Ordinance (Cap 341). In his judgement, Litton VP
held that this was one of the rare instances where the award, ex facie, was bad in law
75
[1997] 1 HKC 97. See also Wong Pik Ling Kitty v Crowe Insurance Group (HK) Ltd [2001] 1 HKC 233 and Ken
Forward Engineering Ltd v Wel Time Hong Kong Ltd [2003] HKEC 676.

in that no person acting judicially and properly instructed as to the relevant law could
have come to this determination. More importantly, in respect of the approach of the
courts, he said the following:
“[T]he tide of judicial opinion has turned in favour of finality in arbitral

proceedings, at any rate in those cases which do not involve exposing arbitrators
to a temptation to depart from settled principles of law ... The requirements
of s 23(4) of the Arbitration Ordinance – limiting the power of the court to
intervene only where the question of law could substantially affect the rights of
the parties – are not to be lightly brushed aside. It is not as if the appeal, if it
should proceed, would determine a point of law of great and general importance:
such as the proper construction of cl 11(b) in the standard form of contract:
the “pay-when-paid’ clause. The appeal will, if it succeeds, only establish the
accuracy of legal reasoning in relation to a ‘one-off’ situation, involving no one
other than the immediate parties to this dispute: whether [the contractor], in
making payment on October 20, 1995, had admitted liability to pay … In these
circumstances, should finality prevail? It would be tempting to say yes. But what
then are the consequences? To do so would be to allow an award to be enforced
when it appears to have no legal basis whatever to sustain it. This would be to
debase the entire arbitral process and, in the long run, to shake parties’ confidence
in arbitration generally. The appeal itself will not involve much explanation of
underlying material. The point of law itself is self evident.”
21.187 In such circumstances, leave to appeal was allowed.
(iv) Appeal under s 5 of Sch 2 of the

Arbitration Ordinance (Cap 609)
21.188 For appeal under s 5 of sch 2 of the Arbitration Ordinance (Cap 609), a question
of law is needed before an appeal lies for the courts’ determination. The criteria
adopted by the courts for distinguishing between questions of law and questions
of fact have not been uniform. Yet, this usually covers those situations where the
arbitrator has misdirected himself in law or reached a decision that no reasonable
arbitrator could have reached. Kwan Lee is an example of the latter with a very
wide perspective on the significance of the question of law. In either case, the error
must be apparent to the courts from a mere perusal of the material incorporated into
the reasoned award itself.
21.189 Further, as illustrated, leave would not be granted unless the determination of the
question of law concerned could, in all the circumstances, substantially affect the
rights of one or more of the parties to the arbitration agreement. In considering this,
the court must bear in mind the Nema guidelines in weighing the rival merits of finality
and meticulous legal accuracy.
21.190 Thus, in effect and in practice, at the top of the scale or spectrum, the presumption of
finality is strongest in the one-off case or one-off event. Typically, this will concern
a specially drawn contract giving rise to no point of construction, with peculiar or
special facts, and a question of law in which the general market and the commercial
fraternity has no interest. It merely affects the rights of the particular parties. In these

circumstances, leave should be granted only if the arbitrator is so obviously wrong

as to preclude the possibility that he or she might be right. At the bottom end of the
scale, the presumption is weakest where the dispute, which arises between Hong Kong
parties out of a standard form of contract in regular use in Hong Kong, turns upon the
construction of that contract in the context of events which are commonplace or likely
to recur; and has given rise to a question of law decided by a non-legal arbitrator, eg
an architect or engineer. This is the classic standard case envisaged by Lord Diplock
in the Nema case.
Thus, if the decision of the question of construction in the circumstances of the 21.191
particular case would add significantly to the clarity and certainty of Hong Kong
commercial law it would still not be proper to give leave unless there is a strong prima
facie case that the decision of the arbitrator on the point is wrong. Public benefit here
relates to a particular class of the public, to those participating in the particular group
or trade that uses the common form of contract in question. In those circumstances,
both the parties and other participants in that trade may have both a present and a
future interest in the true construction and effect of the particular clause. As illustrated
in Kwan Lee, the balancing exercise is a very delicate one.
(v) Nema guidelines

For appealing against an award, the Nema guidelines, as refined by the cases of Aden 21.192
Refinery Co Ltd v Ugland Management Co Ltd 76 and Ipswich Borough Council v
Fisons Plc,77 are adopted in Hong Kong courts. Their operation can be summarised
as follows:
• no appeal may be made to the courts except on a question of law;
• leave to appeal would not be granted unless the courts consider that, having
regard to all the circumstances, the determination of the question raised
could substantially affect the rights of a party;
• in commercial cases the courts will not grant leave if the point of law is one-
off, unless the decision of the arbitrator is obviously wrong;
• even if the point of law is likely to arise in other cases, the courts will not
grant leave unless it is considered that there is a strong prima facie case that
the decision on the point is wrong.78
(vi) Challenge under s 4 of Sch 2 of the

An award may be further challenged under s 4 of Sch 2 of the Arbitration Ordinance 21.193
(Cap 609) with a view to remitting or setting aside the award. Section 4(1) of Sch 2
provides:
76
[1987] 1 QB 650.
77
[1990] 2 WLR 108.
78
See Swire Properties Ltd & Others v Secretary for Justice (2003) 6 HKCFAR 236.

“A party to arbitral proceedings may apply to the Court challenging an award

in the arbitral proceedings on the ground of serious irregularity79 affecting the
tribunal, the arbitral proceedings or the award.”
21.194 If there is shown to be serious irregularity affecting the arbitral tribunal, the arbitral
proceedings or the award, the Court may by order remit the award to the arbitral
tribunal, in whole or in part, for reconsideration; set aside the award, in whole or in
part; or declare the award to be of no effect, in whole or in part. Earlier cases can still
be of guideline purposes in this regard.
(vii) Carl International (HK) Ltd v Ernst Komrowski & Co

21.195 In Carl International (HK) Ltd v Ernst Komrowski & Co,80 there was a dispute over
the cause of damage to cargo. Two arbitrators were appointed to determine the dispute
and they duly made and published a ‘partial final’ award. One of the two arbitrators
had been selected because he was a steel expert. The trouble began when at a meeting
on 31 August 1990, the steel expert made a remark that alarmed those representing the
claimant. They had thought that their preparation and approaches to the issues of the
case were in order. In relation to an inspection report that had described the state of the
goods in question, the steel expert expressed an opinion as to the cause thereof and said:
“We need to know the date of manufacture, time, place and condition of transport,
transit between factories and storage place, etc. These are the general points we
are requiring. Maybe it is unlikely to be a manufacturing defect. It may also be a
form of corrosion to the coils. It is not correct to come to the conclusion that the
defects were contracted at the time of manufacturing unless all other possibilities
are rule (sic) out.”
21.196 The claimant took these remarks as meaning that he had decided against it in advance.
The claimant was so worried that in October 1991 they asked the expert to resign
and some attempts were taken towards applying for his removal. Having received
assurances from the steel expert that he intended to proceed impartially and to give
due weight to the reports that were to be put forward, the claimant accepted the
reassurances and abandoned any such plan. The arbitration continued in due course.
It is clear that when the eventual award proved adverse to the claimant, it formed the
view that its earlier fear had been justified and the assurances received had been false.
It then applied to have the award set aside on three grounds of misconduct.
21.197 The first ground was that, at some time before the arbitration, the steel expert was
instructed as an expert by the defendant. There was some evidence of an inquiry being
made of the steel expert by the defendant as to whether he would be prepared to accept
instructions as an expert. Leonard J, in his judgement at first instance, held that this
evidence fell far short of establishing prima facie any real danger of bias.
79
Serious irregularity, for this purpose, is defined in subsection 4(2) of Sch 2 of the Arbitration Ordinance (Cap
609).
80
[1996] 2 HKC 490.

Secondly, it was suggested that there was misconduct in that he gave a false assurance, 21.198
which convinced the claimant to proceed with the arbitration. The said assurance of
his impartiality was given when the steel expert met the claimant’s representatives,
to the knowledge of all parties concerned. It had not been suggested that the merits
of the case were discussed. The court held that the meeting was irregular but that it
took place with the knowledge and at least the implied consent of all parties. Further,
it was remarked that an award adverse to the claimant was no evidence of bias, and
the claimant could hardly complain about a harmless meeting in which it chose to
take part.
Also, the claimant complained that the award decided that the cause of dispute was 21.199
precisely the cause that the claimant believed was expressed by the steel expert at the
preliminary meeting. It was held that what he said could not reasonably be taken to
be an indication that he had made up his mind but, on the contrary, suggested that he
intended conscientiously to consider the issues and to make up his own mind without
assuming from the start that any defects resulted from the manufacturing process. The
application to set aside the award was therefore refused.
(viii) Attorney-General v Shimizu Corp

In another case, Attorney General v Shimizu Corp,81 the Hong Kong government and 21.200
the contractor applied to remit an interim award. The application arose out of the
arbitration of claims for delay and disruption in relation to works on a hospital project.
Although the dispute was a type that arose frequently out of construction contracts in
Hong Kong, the underlying contract in the present case was on a standard government
form that was no longer in use, though a number of works were ongoing under
contracts in that form. The government sought remission of the award to the arbitrator
on grounds involving alleged procedural mishap or technical misconduct. These were:
1. failure to give credit for a sum paid to the contractor under a draft final
account;
2. adoption by the arbitrator of the wrong figure in making a deduction in respect
of site overheads including already paid for variations, in order to avoid
double-counting;
3. award of the whole sum claimed in respect of plant, plant operators and
supervision costs, whereas payments therefor had already been made under
the contract as part of the preliminaries bill;
4. failure to disallow a claim for fluctuations on the cost of additional formwork
due to disruption to the tower block;
5. failure to adjudicate upon the claims for site cleaning and rubbish removal
expenses; and
6. inconsistency arising from inclusion in the award of a sum that should have
been excluded due to a sum awarded to another item.
81
[1996] 2 HKC 412.

21.201 The contractor sought remission on three grounds, which involved alleged technical
misconduct in respect of:
1. failure to apportion monies for additional formwork as between the podium

and the tower block, which were the subject of a global claim, where the
arbitrator made a finding as to liability;
2. failure to quantify the effect of disruption to the stair drums of the tower and
refusal to estimate a figure for such disruption;
3. disallowance of the claim for additional reinforcement, on the ground that the
claim was global for podium and tower.
21.202 In respect of the government’s application, remission under ground one was refused.
Leonard J in the judgement said:
“In a long and difficult arbitration, which was not made any easier by the
government’s constant shift of ground throughout the hearing, right up to the
final submissions, the arbitrator approached with care the task which he had
to perform. Prima facie, both parties are saddled with the arbitrator’s findings
of fact, whether they be right or wrong. A party cannot obtain an order for
remission simply by demonstrating an error on the part of the arbitrator
unless the circumstances are so exceptional as to override the principles of
finality. There are no such circumstances in relation to ground 1. No ground for
remission has been made out. I do not accept that the award is bad on the face
of it. There has been no misconduct demonstrated and there is no additional
evidence. The arbitrator in his letter has made it clear that he does not admit
any mistake. Nor do I consider that this is a case which falls into the new
category of procedural ‘mishap’.”
21.203 For the second ground, the arbitrator having admitted an oversight, the court held that
the award should be remitted to allow him to correct it. Yet, in rejecting the applications
for remissions on the third to sixth grounds, the court held that the finding of fact was
made with the assistance of a technical assessor and, even if he had made an error,
it was not such as to override the principle of finality. Further, it was noted that, the
award being an interim award, the arbitrator was at liberty to order the parties to make
further submissions on the outstanding issues.
21.204 As for the contractor’s application, it was held that the award would be remitted on all
three grounds because:
• there was evidence which would have enabled the arbitrator to apportion and
calculate quantum and it was technical misconduct for him not to have done
so;
• the arbitrator had failed in his duty to assess quantum, having determined
liability and, in the absence of calculations from the parties, he should have
found a figure from the material available or invited further assistance from
the parties; and

• having found that there had been disruption, the arbitrator was under a duty
to assess quantum and had failed to do so, despite the existence of material
upon which he could have made an assessment.
In respect of the now repealed ss 24 and 25 of the Arbitration Ordinance (Cap 341), the 21.205
main principles on which the court will remit or set aside an award were enunciated in
Dinn v Blake 82 and Montgomery, Jones & Co and Liebenthal & Co.83 Those grounds are:
1. that the award is bad on the face of it;

2. that there has been misconduct on the part of the arbitrator;
3. that there has been an admitted mistake, and the arbitrator asks that the matter
may be remitted; and
4. where additional evidence has been discovered after the making of the award.
(ix) Misconduct or misunderstanding

The existence in Hong Kong of a fifth ground – there being a mishap or misunderstanding 21.206
resulting in an aspect of the dispute not being considered or adjudicated as the parties
were entitled to expect, and it being inequitable to allow the award to take effect
without further consideration – has been confirmed. This checklist is however not
exhaustive.
Yet, an award will normally be set aside, rather than remitted, where there has been 21.207
a serious miscarriage of justice, as opposed to mere ‘technical’ misconduct. The
deciding factors are the nature of the misconduct and its surrounding circumstances.
One of the most helpful formulations for misconduct is “such a mishandling of the
arbitration as is likely to amount to some substantial miscarriage of justice”.
What constitutes misconduct is dependent upon all the circumstances of the case. 21.208
However, it is possible to formulate from previous cases that the following would be
construed as misconduct:
• failure to conduct the reference in the manner prescribed by the submission;
• behaving in a way regarded by the courts as contrary to public policy;
• behaving in a way which is, or gives the appearance of being, unfair in the
circumstances;
• failure to conduct the reference in a way that fulfils certain minimum

requirements on fairness, notably the hearing of both sides, and abstention
from receiving evidence or arguments in the absence of one party.
82
(1875) LR 10 CP 388. See Arnold v National Westminster Bank Plc (No 2) [1991] EG 44 and Fraser v Fraserville
[1917] AC 187.
83
(1898) 78 LT 406. See Harrison v Thompson [1989] 1 WLR 1325.

21.209 In Gingerbread Investments Ltd v Wing Hong Interior Contracting Ltd,84 an application
was made to remove the arbitrator, contending that the arbitrator had misconducted
himself in a contested discovery application in concluding that a parent company and
a subsidiary were agents of the respondent, by wrongly relying on undisclosed and
erroneous assumptions of fact and reversing the burden of proof. While noting that
a mere error of law did not constitute misconduct but relying on utterly irrelevant
evidence might provide evidence of misconduct, the court dismissed the application.
The court was of the view that, even if the arbitrator’s conclusion was wrong, the
‘error’ fell well short of being sufficiently serious as to warrant removal. The test for
removal of an arbitrator was stringent: there must be grounds from which a reasonable
person would think there was a real likelihood that the arbitrator could not, or, would
not, fairly determine the issue in question on the evidence or arguments to be adduced
before the arbitrator.85
21.210 In subsection 4(2) of Sch 2 of the Arbitration Ordinance (Cap 609), situations causing
substantial injustice are:
• failure by the arbitral tribunal in relation to equal treatment of parties;86

• the arbitral tribunal exceeding its powers (otherwise than by exceeding its
jurisdiction);
• failure by the arbitral tribunal to conduct the arbitral proceedings in
accordance with the procedure agreed by the parties;
• failure by the arbitral tribunal to deal with all the issues that were put to it;
• any arbitral or other institution or person vested by the parties with powers in
relation to the arbitral proceedings or the award exceeding its powers;
• failure by the arbitral tribunal to give an interpretation of the award, the effect
of which is uncertain or ambiguous;
• the award being obtained by fraud, or the award or the way in which it was
procured being contrary to public policy;
• failure to comply with the requirements as to the form of the award; or
• any irregularity in the conduct of the arbitral proceedings, or in the award
which is admitted by the arbitral tribunal or by any arbitral or other institution
or person vested by the parties with powers in relation to the arbitral
proceedings or the award.
21.211 By subsection 4(4) of Sch 2 of the Arbitration Ordinance (Cap 609), if the award is
remitted to the arbitral tribunal, in whole or in part, for reconsideration, the tribunal
84
[2008] 2 HKLRD 436.
85
See Asia Construction v Crown Pacific (1988) 44 BLR 135. See also Jung Science Information Technology Co
Ltd v ZTE Corp [2008] 4 HKLRD 776.
86
See s 46 of the Arbitration Ordinance (Cap 609), applying Art 18 of the UNCITRAL Model Law. A modification
has been made to Art 18 of the UNCITRAL Model Law by replacing “full opportunity to present their case” with
“reasonable opportunity to present their case”.

must make a fresh award in respect of the matters remitted within three months of the
date of the order for remission, if not otherwise directed by the court. Subsection 4(5)
of Sch 2 of the Arbitration Ordinance further provides expressly that the court must
not exercise its power to set aside an award or to declare an award to be of no effect, in
whole or in part, unless it is satisfied that it would be inappropriate to remit the matters
in question to the arbitral tribunal for reconsideration.
(x) Setting aside awards under s 81 of the

Section 81 of the Arbitration Ordinance (Cap 609) applies Art 34 of the UNCITRAL 21.212
Model Law which provides for application to set aside as the exclusive recourse
against arbitral awards.
Its operation can be illustrated by Brunswick Bowling & Billiards Corp v Shanghai 21.213
Zhonglu Industrial Co Ltd.87 In this case, the claimant and respondents had undergone
a 34-day international arbitration in Hong Kong in 2005 covering various commercial
disputes. An award was rendered in 2007 in relation to the claimant’s claim. No award
was made as regards the respondents’ counterclaim for the reason that these were
found to be not within the jurisdiction of the tribunal. The parties agreed to conduct
the arbitration with the chess-clock arrangement. During closing, the tribunal added
three days to the hearing, most of the time of which was allocated to the claimant.
The respondents applied to set aside the award, under Art 34(2)(a)(ii), (iii) and (iv)
of the UNCITRAL Model Law, in relation to different heads of claims. The award
required the respondents to pay to the claimant some US$89 million. In relation to
a claim under the bowling products distribution agreement, the tribunal construed
the agreement based on PRC law requirements on signature or sealing of contracts.
This had not been considered by the parties. There was no contention before the
tribunal of any requirement under the PRC law and the parties had not been invited
to address the tribunal on this. While the court was not satisfied, on the facts, that the
award dealt with a dispute not within or beyond the submission to arbitration, or the
arbitration was not in accordance with the agreement of the parties, the court held
that, in such circumstances, the tribunal should have canvassed with the parties the
particular provision in the PRC law on the topic and gave them an opportunity to
respond before making a decision on the same. Thus, it found that the failure of the
tribunal in this regard furnished the respondents a valid ground of complaint under
Art 34(2)(a)(ii) of the UNCITRAL Model Law. Adopting the approach in Apex Tech
Investment Ltd v Chuang’s Development (China) Limited,88 the court held that it had
a residual discretion if satisfied that the arbitral tribunal would not have reached a
different conclusion but for the matter complained. In exercising the discretion not
to set aside the award, the court found that the failure to afford the respondents an
opportunity to present their case on the tribunal’s undisclosed knowledge of PRC
contractual requirements was a matter that had no real impact on the result and, as
such, was satisfied that, even without such infraction, the tribunal would have reached
87
[2009] HKEC 233.
88
[1996] 2 HKLR 155.

the same conclusion. Also, the court did not find a breach of Art 34(2)(a)(ii) or (iv) of
the UNCITRAL Model Law, where the tribunal awarded damages based on loss and
revenue and set off, instead of loss of profit as advocated by claimant. In doing so, the
court distinguished this in that there was no dependence on any findings of primary
fact. On the allocation of time, the court held that the procedure to be adopted had to
satisfy both Arts 18 and 19 of the UNCITRAL Model Law. Thus, in a situation where
the tribunal discerned a potential problem with a party’s opportunity to present its case
fairly as a result of a procedure agreed by the parties, it was obliged to raise it with
the parties instead of following blindly what had been agreed and if, after hearing
submissions from the parties, the tribunal was of the view that the procedure agreed
by the parties would result in a breach of Art 18 of the UNCITRAL Model Law, the
tribunal should take steps to conduct the arbitration in such a manner that could redress
the problem instead of being constrained by an unworkable agreement of the parties.
On a claim for damages for conversion of 2,000 bowling balls bearing the claimant’s
trademarks, however, the court held that the respondent had likewise been deprived of
the opportunity to present its case on PRC law and that there was no basis to lead the
court to conclude that the same result would be reached but for such mistake. In the
circumstances, this part of the award was set aside successfully.

Construction Law and Practice in HK

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Construction Law and Practice in HK

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CHAPTER 1

THE HONG KONG CONSTRUCTION

2. Nature of Industry ..................................................................................................................... 1.004

3. Nature of Construction Work .................................................................................................... 1.009

4. Processes in Construction Projects ........................................................................................... 1.015

5. Trend and Development ............................................................................................................. 1.020

01-Construction-Law-Ch-01.indd 3 6/20/2011 5:24:06 PM

PARTIES INVOLVED IN THE

2. Project Initiators ........................................................................................................................ 2.005

3. Consultants ............................................................................................................................... 2.014

4. Buildings Department .............................................................................................................. 2.029

5. Contractors ............................................................................................................................... 2.032

6. Technically Competent Person ................................................................................................. 2.040

02-Construction-Law-Ch-02.indd 13 6/20/2011 5:24:20 PM

1. Introduction ............................................................................................................................... 3.001

2. Methods of Procurement ........................................................................................................... 3.005

3. Types of Contracts ..................................................................................................................... 3.019

4. Tendering Procedures ................................................................................................................ 3.025

03-Construction-Law-Ch-03.indd 25 6/20/2011 5:24:33 PM

1. Formation of Contract ............................................................................................................... 4.001

2. Essential Features ...................................................................................................................... 4.004

3. Offers and Acceptance .............................................................................................................. 4.014

4. Certainty of Terms ..................................................................................................................... 4.055

5. Capacity of Parties .................................................................................................................... 4.078

04-Construction-Law-Ch-04.indd 41 6/20/2011 5:24:49 PM

(f) Joint ventures .................................................................................................................... 4.088

6. Consideration ............................................................................................................................ 4.089

7. Contractual Intention ................................................................................................................ 4.103

8. Doctrine of Privity .................................................................................................................... 4.112

9. Breach of Contract .................................................................................................................... 4.117

10. Misrepresentation .................................................................................................................... 4.174

04-Construction-Law-Ch-04.indd 42 6/20/2011 5:24:49 PM

(iv) Representation ........................................................................................................ 4.177

11. Mistake and Rectification ....................................................................................................... 4.196

12. Duress and Undue Influence ................................................................................................... 4.221

13. Illegality .................................................................................................................................. 4.229

04-Construction-Law-Ch-04.indd 43 6/20/2011 5:24:49 PM

2. Express Terms .......................................................................................................................... 5.004

3. Implied Terms .......................................................................................................................... 5.078

05-Construction-Law-Ch-05.indd 109 6/20/2011 5:25:14 PM

2. Principles of Interpretation ...................................................................................................... 6.008

3. Parol Evidence Rule ................................................................................................................. 6.025

4. Factual Matrix and Business Sense .......................................................................................... 6.030

5. Contra Proferentem Rule ......................................................................................................... 6.039

6. Ejusdem Generis Rule .............................................................................................................. 6.044

7. Particular Principles ................................................................................................................. 6.049

06-Construction-Law-Ch-06.indd 151 6/20/2011 5:25:32 PM

1. Overview ................................................................................................................................... 7.001

2. Agreement Between Same Parties ............................................................................................ 7.005

3. Agreement With Third Party ..................................................................................................... 7.021

4. Collateral Warranty Regarding the Designer ............................................................................ 7.026

07-Construction-Law-Ch-07.indd 175 6/20/2011 5:25:48 PM

ESTOPPEL AND WAIVER

1. Estoppel and Waiver .................................................................................................................. 8.001

2. Estoppel by Conduct ................................................................................................................. 8.008

3. Promissory Estoppel ................................................................................................................. 8.018

4. Waiver ....................................................................................................................................... 8.025

08-Construction-Law-Ch-08.indd 187 6/20/2011 5:26:04 PM

2. Negligence ............................................................................................................................... 9.013

3. Occupiers’ Liability .................................................................................................................. 9.070

09-Construction-Law-Ch-09.indd 201 6/20/2011 5:26:19 PM

(c) Occupier ............................................................................................................................ 9.077

4. Nuisance and Ryland v Fletcher .............................................................................................. 9.093

5. Trespass to Land ....................................................................................................................... 9.105