In the recent case of Kim Hung Construction & Engineering Co Ltd v Standard Refrigeration & Engineering Co Ltd, Hong Kong’s Court of Appeal had to consider an appeal by a Sub-Contractor (Standard) against the setting aside by the Court below of an arbitration award it had obtained against the Main Contractor (Kim Hung). The Court of Appeal considered the meaning of “tentative dates”, a term commonly used in construction contracts. It held that the arbitrator had committed an error in law when he construed “tentative dates” (“tentative” meaning “provisional” or “uncertain”) in the contractual documents, as being the contractual dates which the Main Contractor was obliged to perform. The Court also had to consider whether payment for a delay claim under the contracts in question was to be on a “pay-when-paid” basis. It concluded that it was not.

Background

The Hospital Authority (Employer) had engaged Kim Hung as Main Contractor, to carry out construction works at eleven public hospitals. Kim Hung engaged Standard, as sub-contractor, to carry out some of the works.

The Main Contract between the Hospital Authority and Kim Hung was by way of the Hong Kong Standard Form of Building Contract, supplemented and amended by Specification Preliminaries which included, amongst others, section SP 6.02. The Sub-Contract between Kim Hung and Standard was based on the Hong Kong Construction Association’s Standard Form of Domestic Sub-Contract 1994 Edition, as supplemented by Standard’s letter and Kim Hung’s subsequent letter of acceptance, both dated 3 April 2006. The acceptance letter confirmed that all terms and conditions in the Main Contract would equally apply to the Sub-Contract on a back-to-back basis.

The arbitration proceedings

The arbitrator upheld Standard’s claim (Delay Claim) that there had been contractual delay on the Hospital Authority’s part in giving possession of the hospitals, so that Kim Hung was entitled to claim payment from the Hospital Authority and Standard had the equivalent right for payment from Kim Hung. The Court below set aside the arbitral award and Standard appealed to the Court of Appeal.

Question on Appeal

The fundamental question on appeal was what were the contractual dates for the giving of possession of the hospitals to Standard, which was, the Court of Appeal, said a matter of construction of the terms of the Main Contract and Sub-Contract.

The Court of Appeal said that the starting point must be Clause SP 6.02 of the Main Contract, which listed “tentative dates” for possession of the hospitals. The Court said that the arrangement under the Main Contract was that the tentative possession dates estimated by the Hospital Authority in preparation of its tender documents were indicated to Kim Hung for reference so that it could calculate the tender prices and make preparations for taking possession of the sites and commencement of the works. Nonetheless, the sites would only be delivered when the Hospital Authority was ready to do so, some time after the award of the Main Contract, and by then the architect would notify Kim Hung of the actual dates in writing. This was supported by other terms of the Main Contract, which provided that the dates for site possession were to be notified by the architect. 

Delay claim

The word “tentative”, the Court of Appeal said, means “provisional” or “uncertain”. Whilst the Court accepted that the ordinary or natural meaning of words does not provide the only key to contractual interpretation, in the context of this case, the word “tentative” was consistent with the context and purpose of SP 6.02. In view of the “back-to-back” nature’ of the Main Contract and Sub-Contract, the dates for possession and handover could only be a reference to the tentative nature of the possessions, the Court said. 

The Court of Appeal found that another important factor in the context or factual background was that when Kim Hung accepted Standard’s offer, postponement of the tentative dates for possession of all sites had already occurred. This meant that if Standard’s claim was valid, Kim Hung would have been in breach of the Sub-Contract at the very moment when it came into existence and this interpretation would lead to such an absurd result that it should be avoided.

Accordingly, the Court found that the arbitrator had clearly committed an error in law when he construed the tentative dates stated in the contractual documents as the contractual dates which Kim Hung was obliged to perform.

Pay-when-paid issue

Although the Court of Appeal held that the appeal could be dismissed on the Delay Claim issue alone, it went on to consider the “pay when paid” issue, which also arose in this case. We previously reported on the “pay-when-paid” issue in this case in our article dated 6 September 2013

The arbitrator had held that payment under the Sub-Contract was not on a pay-when-paid basis. The Court below disagreed and held that it was and so Kim Hung would only be contractually liable to pay Standard the additional expenditure in the Delay Claim upon receipt of payment of the same from the Hospital Authority. In arriving at that conclusion, the Court below had referred to SP15 in the Sub-Contract which provided that Kim Hung, as Main Contractor, was entitled to withhold or defer payment to the Sub-Contractor under certain circumstances and that amounts or quantities in any “valid statement” by the Sub-Contractor which had been included in the Main Contractor’s “statement of final account” to the Employer would only be due 7 days after receipt by the Main Contractor of payment which included a sum in respect of such amounts or quantities. The Court below held that construing all provisions as a whole, payment for the Delay Claim had not yet become due under the Sub-Contract and so Standard could not ask Kim Hung for payment under SP15. 

The Court of Appeal held that the Court below had been wrong to have had regard to SP15 since a “valid statement” under SP15 does not cover the Delay Claim. SP15 was therefore irrelevant to the issue of whether sufficiently clear wording had been used to provide for the Main Contractor to pay the Sub-Contractor additional expenses resulting from failure to give possession, only when the Employer was to make payment of such expenses to the Main Contractor. The Court of Appeal said that once SP15 was removed from consideration, none of the other provisions were sufficiently clear to support the construction that there was an agreement to pay such expenses only when paid by the Employer, although this did not change the overall outcome of the appeal.