HK_47120_1

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Common Causes and Resolutions of Disputes in the
Construction Industry Presentation to The Hong
Kong Institute of SurveyorsSteven Yip and Mary
ChanSolicitors21 July 2004
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Common Construction Disputes

• Variation
• Valuation of Variations
• Defects
• Extension of Time Claims
• Liquidated Damages

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Common Construction Disputes

• Claims under Common Law
• Claims for Loss and Expense
• Quantum Meruit Claims
• Demonstrating and Presenting Claims
• Termination

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Variation

• What is a Variation?
• Dictionary
• "Any change to the works as detailed or described
  in the contract documents."
• - Engineering Contract Dictionary
• "Alterations, additions or omissions in work,
  materials, working hours, work space, etc." -
  Building Contract Dictionary

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• A valid variation cannot change the scope or
  nature of the works to be executed
• Blue Circle Industries PLC v Holland Dredging
  Company (U.K.) Ltd. (1987) 37 BLR 40
• Held Construction of an island was not a valid
  variation to the works, it was wholly outside the
  scope of the original contract.

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• Sometimes, defined in the Contract itself
• Clause 11(2) of the HK Private Standard Form of
  Building Contract
• "The term variation as used in these conditions
  means 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
• Clause 1.1.74 of the MTRC Conditions of Contract
  for Civil Engineering and Building Works
  Construction (98 edition)
• "any changes in or modification to the works or
  any part thereof
• No equivalent definitions in either of the
  Government or KCRC General Conditions of Contract.

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• Conclusion
• no one definition
• depend on the express provisions of the contract
  in each case and the type of work being executed

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Valuing Variation Binding Contract Rates

• Are the parties bound by the rates where they are
  very high or very low?
• problem - where the rate is very high or very low
  or as a result of error.
• how should the quantity surveyor or engineer
  value the works?

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• Keating on Building Contracts, Seventh Edition,
  states at page 121
• "Effect of Pricing Errors - When the contractor
  has made an error in his pricing of the tender
  for a lump-sum contract and there are no grounds
  for rectification, and the contract provides for
  payment of variations at rates shown in the
  tender, a difficult question can arise when
  pricing variations and the error is apparent.
  Should any, and if any, what, adjustment be made
  in the rates shown in the tender to arrive at the
  new rate for pricing variations? The answer
  under clause 52 of the ICE Conditions is that
  rates entered by mistake cannot be opened up or
  disregarded on the basis of there being an error
  Henry Boot v Alston(2000). It is thought that
  this is likely to apply generally, in the absence
  of an express power to make an adjustment for
  pricing errors."

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• Dudley Corporation -v- Parsons and Morrin Ltd
  (1959) CA, 8 April
• Held (CA) in such circumstances the rate in the
  Bills of Quantities must be used, even if it is
  unrealistically low.

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• Henry Boot Construction Ltd v Alstom Combined
  Cycles Ltd 2000 BLR
• ICE Clause 52(1)(b) -
• "Where works is not of a similar character or is
  not executed under similar conditions the rates
  and prices in the bill of quantities shall be
  used as the basis of valuation so far as may be
  reasonable failing which a fair valuation shall
  be made." (similar to HK Government GCC Clause
  61(c))
• concerns reasonableness of using the rates and
  prices in the bills for the works in question,
  not the reasonableness of those prices or rates
  themselves.
• ICE Clause 55(2) -
• "Provided that there shall be no rectification
  of any error, omission or wrong estimate in any
  description of rate inserted by the Contractor in
  the Bills of Quantities." (similar to HK
  Government GCC Clause 59(3))
• effect make the rates immutable and not subject
  to correction and it bound both parties equally.

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• Aldi Stores Ltd v Galliford (2000)
• The Judge viewed that arbitrator had arrived at
  a 'fair valuation' of the additional work.
• The question was, whether the arbitrator had
  made findings of fact to support his approach.

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• Clause 3.7.3 provided
• "for work of a similar character to that set out
  in the priced document the valuation shall be
  consistent with the relevant values therein
  making due allowance for any change in the
  conditions under which the work is carried out
  and/or any significant change in the quantity of
  the work so set out
• Clause 3.7.4 provided
• "a fair valuation shall be made - where there is
  no work of a similar character set out in the
  priced document
• Held (CA) No finding that the circumstances and
  conditions under which additional work had been
  carried out had changed/that the BQ rate had been
  affected by any significant increase in
  quantities. Therefore no basis for arbitrator to
  depart from the contract rates.

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• Conclusion
• Where express provisions so provide, both parties
  are bound by the rates contained in their
  contract for the valuation of variations or
  re-measurable work regardless of whether those
  rates are 'unreasonably high' or 'unreasonably
  low' or even based on a mistake.

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"Fair" Valuations

• Common construction contracts used in Hong Kong
  provide for 3 valuation rules
• (i) apply BQ rate if work is of similar
  character and executed under similar
  conditions
• (ii) where not executed under similar
  conditions, apply a rate derived from work of
  similar character and
• (iii) when the first two valuation rules cannot
  apply, a fair valuation should be made.

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What is a fair valuation?

• Tinghamgrange Ltd v Dew Group and Others (1995)
  47 ConLR 105
• Claim costs of abortive works and loss of
  profit
• Clause 52(1)(b) of the ICE Conditions
• Held (CA) "The 'fair valuation' is intended to
  provide a fair compensation to the contractor for
  any adverse financial effect upon it resulting
  from the unilateral variation".

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• HK Private Form (Clause 11(6)), the Government
  form (Clause 63(a)) and KCRC form (Clause 54.8)
  contain a specific provision claiming additional
  payment incurred as a consequence of a variation
  instruction in addition to the 'direct value of
  the variation'.
• MTRC form contains specific 'abortive
  manufacture' provision (Clause 80.4)
• " where any such part of the Works affected the
  Variation has already been manufactured or is
  already in the course of manufacture a
  reasonable sum shall be allowed by the Engineer."

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• Weldon Plant Limited v The Commissioner for New
  Towns (2000) BLR.
• Question of Law to Appeal
• Whether on the facts found by the arbitrator,
  Clause 52(1)(b) of the ICE Conditions permits a
  fair valuation to be made which excludes profit
  and an allowance for overheads on the basis that
  the contractor has to establish that it either
  incurred additional overheads or that it was
  denied overhead recovery.

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• For Fair Valuation within the meaning of Clause
  52, contractor should be paid its profit on the
  costs of deploying its resources and obtain a
  contribution from the costs of the business it
  undertakes towards its fixed/running overheads.
• Unlike time-related overheads, it is not
  necessary to prove that they have actually
  incurred.
• Clause 52 is intended to secure that Contractor
  should not lose as a result of having to execute
  a variation.
• Held The contractor will be able to recover in
  a valuation of a variation, those elements
  included in the contract rates or prices for
  overheads and profit.

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• Conclusion
• Where unreasonably high or unreasonably low rates
  are incorporated into a construction contract,
  both parties are bound by those rates regardless
  as to whether such are the result of an error or
  mistake.
• In the absence of any other compensatory
  provisions, a fair valuation under a construction
  contact is intended to compensate the contractor
  for any adverse financial effect upon it
  resulting from the variation. This may include
  taking account of genuine claims from
  sub-contractors for which the main contractor is
  liable as a result of the variation. A fair
  valuation should include allowances for overheads
  and profit.

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Defects

• Design and Workmanship Issues
• types of defects that lead to dispute and
  litigation
• - poor design or improper execution
• - minor defects used as a reason (or excuse) to
  withhold payment
• - "latent" defects (beware the limitation
  periods, especially in the law of tort.)

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• Conclusion
• It is important to define each party's
  obligations clearly in contract documents in
  order to avoid unnecessary disputes relating to
  design/workmanship.

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• Cost of Remedial Works/Diminution in Value
• measure of damages is normally calculated by the
  costs of making them good (ie costs of
  reinstatement), unless this is disproportionate
  to the benefit to be obtained.
• Ruxley Electronics v Forsyth
• HL It would be unreasonable to award damages
  based on the cost of reinstatement of pool since
  it would be out of all proportion to the benefit
  to be obtained, there was no diminution in value,
  no damages for reinstatement costs is
  recoverable.
• Some damages (2,500, not 21,560) were awarded.

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Extension of Time Claims
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Risk Allocation

• Introduction and Concepts
• Three Main Concepts
• Time
• Cost
• Quality

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Extensions of Time

• Extension of Time
• Extension of time (EOT)
• Liquidated damages (LD)
• Common provisions in construction contracts
• Apportioning risk for delay

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Typical construction project showing the
relationship between EOT and LD
EOT
LD
Original completion date
Extended completion date
Actual completion date
DIAGRAM 1
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Extensions of Time

• Functions of EOT Provisions
• Contract administrator - assessing delay
• Length of extension to be granted
• EOT - Defence to a claim for LD for delay
• EOT to fulfill two purposes
• 1) protect the Contractor
• 2) more importantly, protect the Employer

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Extensions of Time

• On What Grounds are EOT Granted?
• EOT provisions only come into play where delayed
  work affects the critical path
• Two common approaches
• (1) an exhaustive list of events qualifying
  for extension of time
• 1986 standard private form
• (2) a cover all phrase, e.g reasons beyond
  the control of the Contractor
• Alternatively, a combination

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Extensions of Time

• Criteria for Successful EOT Claim under HKIA Form
  
• Written application
• By the Contractor
• To the Architect
• Whenever reasonably apparent
• Forthwith
• Completion of the works beyond the Date for
  Completion
• One or more of the specified event
• Which the Architect accepts

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Extensions of Time

• Architects Duty With EOT Claim under HKIA Form
• Shall so soon as he is able
• Estimate the length of the delay beyond the Date
  of Completion
• In writing
• Fair and reasonable EOT for completion of the
  works

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Extensions of Time
Criteria for Successful EOT Claim under
Government Form

• Written application
• By the Contractor
• To the Architect
• Whenever cause of delay has arisen
• As soon as practicable but in any event within 28
  days
• Completion of the works beyond the Date for
  Completion
• One or more of the specified event (so long as
  the cause of the delay is not a suspension or a
  shortage of plant or labour (clause 50(1)(c)))

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Extensions of Time
Criteria for Successful EOT Claim under
Government Form (contd)

• Which the Architect accepts
• The Contractor can request a subsequent review of
  the Architects findings
• The Contractor to submit full and detailed
  particulars of the cause and extent of the delay
• The Contractor to revise the programme if EOT is
  granted

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Extensions of Time
Architects Duty With EOT Claim under Government
Form

• Within a reasonable time
• Estimate the delay beyond the Date of Completion
• Notify the Contractor in writing
• Fair EOT for completion of the works
• Shall make a subsequent review if requested
• Consider EOT only on the information available

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Extensions of Time

• Useful Tips Relating to EOT Claim
• Contractor to comply strictly with the procedures
  to protect EOT entitlements
• Contractor to keep good records of events, e.g.
  written records, diaries, construction
  programmes, sub-files etc
• Claims for EOT be clearly set out, stating
• Introduction
• Basis of claim
• Details of claim
• Evaluation of claim (if necessary)
• Supporting documents (if necessary)

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Liquidated Damages

• Introduction to Liquidated Damages
• Contractual provisions to deal with losses
• Typical clause
• If the Contractor fails to complete by date
  stipulated in the contract, he shall allow the
  Employer to deduct liquidated damages at a rate
  of HK10,000 per day (or week) for the period
  during which the works are not completed.
• Replacing the Contractors normal liability to
  pay general damages

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Liquidated Damages

• Introduction to Liquidated Damages (contd)
• LD favourable to both Employer and Contractor
• Employer relieve from proving actual loss
• Precise indication of liability
• Both parties can be certain of the exact
  consequences of delay

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Liquidated Damages

• Possible Grounds of Defence against LD Claim
• Sum demanded is a penalty
• LD provision is uncertain
• Procedure leading up to deduction has not
• been complied with
• Time is set at large
• Concurrent delay (depending upon the
  particular circumstances)

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Liquidated Damages

• Is the Sum a Penalty?
• Genuine pre-estimate of loss
• Not to punish the Contractor
• Test whether the sum is an extravagant and
  unconscionable amount in comparison with the
  greatest loss that the Employer could conceivably
  be proved to have followed from the breach

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Liquidated Damages

• Will a LD Clause be Void for Uncertainty?
• LD run from a fixed or ascertainable date
• Court not award LD for breach of vague
  obligation, e.g. complete within a reasonable
  time
• Standard form

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Liquidated Damages

• Any Procedural Non-Compliance?
• Has the procedure set out in contract leading up
  to deduction of LD been followed ? e.g. issuance
  of certificate of completion, or certificate of
  non-compliance etc.
• Courts long adopt a restrictive approach in
  interpreting LD clauses

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Liquidated Damages

• Time at Large?
• If Employer commits an act of prevention (i.e.
  the Employer causes delay)
• And, no extension of time provisions to cover
  act or omission by the Employer
• Then, time at large
• Employer unable to deduct liquidated damages

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Typical construction project where act of
prevention is committed by employer
Delay caused by an act of prevention by the
Employer
Extended completion date
Original completion date
EOT
If act of prevention by Employer qualifies for an
EOT, time for completion is extended to the
extended completion date. If act of prevention
by Employer does not qualify for an EOT, time is
set at large and Contractor is only required to
complete within a reasonable time.
DIAGRAM 2
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Liquidated Damages

• Concurrent Delay?
• Critical delay for which the Employer is
  responsible
• And this delay overlaps with the Contractors
  delay for critical events
• Contractor is arguably entitled to an extension
  of time in such circumstances

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Liquidated Damages

• Whether Worthwhile to Challenge ?
• Even if the LD clause is unenforceable, the
  Employer can still recover general damages for
  breach of Contract
• Difference unlike LD, onus on the Employer to
  prove actual loss suffered

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Liquidated Damages

• Whether Worthwhile to Challenge (contd)?
• Actual Loss lt Liquidated Damages
• ? may be worthwhile to challenge
• Actual Loss gt Liquidated Damages
• ? may not be worthwhile to challenge

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Extensions of Time and Liquidated Damages

• General Conclusions
• Know your contract
• Know your EOT clause
• Follow procedures to claim all potential EOT
• LD claim, in certain situation, can be defended
• EOT and LD clauses under HKIA Form are more
  favourable to the Contractor than Government Form

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Claims under Common Law
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Claims for Common Law Damages

• Types of Commons Law Claims
• Breach of contract
• Express terms
• Implied terms
• Quantum Meruit
• Breach of duty under the law of tort - Negligence
• Misrepresentation false statement of fact made
  during pre-contractual negotiations and is the
  one inducing cause of the contract

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Claims for Common Law Damages

• Express Terms of Contract
• Terms and conditions in contract

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Claims for Common Law Damages

• Common Implied Terms of Contract Required of
  Employer
• The employer to do all that is necessary on his
  part to bring about completion of the contract
  eg
• give possession of site within reasonable time
• obtain planning permission or building regulation
  consent in sufficient time to enable the
  contractor to proceed without delay
• The employer would not hinder or prevent
  contractor from carrying out the contract works
  in a regular and orderly manner and in accordance
  with the terms of the contract
• Instructions should be given to the contractor at
  such time and in such manner so as not to hinder
  or prevent the contractor from performing his
  duties under the contract

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Claims for Loss and Expense
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Claims for Loss and Expense

• What is direct loss and expense?
• Damage that flows naturally from a breach without
  other intervening causes and independently of
  special circumstances

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Claims for Loss and Expense

• Government Form
• Clause 63
• If. the Surveyor is of the opinion that the
  Contractor has been or is likely to be involved
  in expenditure for which the Contractor would not
  be reimbursed by a payment under any other
  provision in the Contract by reason of the
  progress of Workshaving been materially
  affectedthen the Surveyor shall ascertain the
  Cost incurred.
• Definition of Cost under Government Form
• Expenditure reasonably incurred
• Include
• Site overheads
• Off-site overheads
• Depreciation of constructional plant
• Exclude Profit

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Claims for Loss and Expense

• HKIA Form
• Clause 24
• If. the Architect is of the opinion that the
  Main Contractor has been involved in direct loss
  and/or expense for which he would not be
  reimbursed by a payment under any other provision
  in the Contract by reason of the regular progress
  of Workshaving been materially affectedthen the
  Architect shall ascertain the amount of such
  direct loss and expense.

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Claims for Loss and Expense When can contractor
claim loss and expense/ expenditure under HKIA
and Government Forms?

• HKIA Form
• Architects late instructions
• Opening up for inspection any work covered up or
  testing of any work on materials
• Discrepancy in or divergence between contract
  drawing and/or contract bills

• Government Form
• Architects late instructions
• Variations ordered in accordance with Clause 60
• Opening up for inspection any work covered up or
  testing of any work, material or workmanship

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Claims for Loss and Expense When can contractor
claim loss and expense/ expenditure under HKIA
and Government Forms? (contd)

• HKIA Form
• Delay caused by artists tradesman or others
  engaged by the employer
• Architects instructions to postpone work

• Government Form
• Delay caused by person/ company engaged by the
  Employer in supplying materials or executing work
  directly connected with but not forming part of
  the Works
• Late delivery of materials, plant or equipment by
  the Employer

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Claims for Loss and Expense

• Criteria for Successful Monetary Claim under
  Government Form
• Written application
• By the Contractor
• To the Surveyor
• Within 28 days
• Progress of the works materially affected
• One or more of the specified event
• Involving expenditure for the Contractor
• Which the Contractor is not reimbursed for under
  contract
• Which the Surveyor accepts

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Prolongation Claims
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Prolongation Claims

• Typical Heads of Prolongation Claims
• Site overheads and preliminaries
• Costs claims from subcontractors
• Depreciation on assets/rental of plant
• Financing charges

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Prolongation Claims

• Ground for Prolongation Claims
• Delay on the critical path provided such delay is
  a matter which gives rise to additional payment
  under the contract

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Quantum Meruit Claim
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Quantum Meruit Claims

• What does quantum meruit mean?
• the amount he deserves
• what the job is worth
• i.e. claim for a reasonable sum

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Quantum Meruit Claims

• When does quantum meruit claim arise?
• Usually in circumstances where a benefit has been
  conferred which justice requires reimbursement to
  be made
• Usually does not arise if there is an existing
  contract between the parties to pay an agreed sum

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Quantum Meruit Claims

• Examples where quantum meruit claim arises
• An express agreement to pay a reasonable sum
• No price fixed under contract
• A quasi-contract
• A quasi-contract may occur where there are failed
  negotiations
• If work is carried out while negotiation as to
  the terms of the contract are proceeding by
  agreement is never reached upon essential terms,
  the contractor is entitled to be paid a
  reasonable sum for the work carried out

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Quantum Meruit Claims

• Examples where quantum meruit claim arises
  (contd)
• Work outside a contract
• Where there is contract for specified work but
  the contractor has carried out works outside the
  contract at the Employers request, the
  contractor is entitled to be paid a reasonable
  sum the works done on the basis of an implied
  contract
• Usually on a cost plus profit basis

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Quantum Meruit Claims

• Examples where quantum meruit claim arises
  (contd)
• Breach of contract giving rise to a discharge
• Where work has been carried out and there occurs
  a breach giving rise to a discharge of contract,
  the injured party may claim for payment on a
  quantum meruit basis on the work done as an
  alternative to a claim for loss of profit on
  uncompleted work

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Quantum Meruit Claims

• Evaluating Quantum Meruit Claim
• No hard and fast rules to evaluate quantum meruit
  claims
• Court will take into account all circumstances
• Some general principles/guidance from case laws

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Quantum Meruit Claims

• Evaluating Quantum Meruit Claim (contd)
• Costain Civil Engineering Ltd v Zanen Dredging
  and Contracting Co Ltd (1996)
• This case demonstrate how quantum meruit should
  be assessed for work carried out which falls
  outside the contract scope
• fair commercial rate for the work done
• not determined just by reference to the cost to
  the party
• may be determined by reference to the financial
  advantage to the party instructing the additional
  work

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Quantum Meruit Claims

• Evaluating Quantum Meruit Claim (contd)
• Brenner v First Artists Management (1993)
• A claim for quantum meruit presupposes that no
  contract exists
• Yardstick - what is a fair and reasonable
  remuneration or compensation for the benefit
  accepted, actually or constructively
• Agreed price for certain services may be given as
  evidence of the appropriate remuneration but is
  not itself conclusive
• In some case the Court may apply an hourly rate
  to the time involved in performing the services
  and may make a global assessment

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Demonstrating and Presenting Claims
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Demonstrating and Presenting Claims

• Any claim must show
• Amount of money (and time) claimed
• Contract clauses which provide for the payment of
  the additional sums sought
• Reasons for additional payment
• Important Maintain a systemic and organised
  filing system so that supporting documentation
  can be traced easily

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Demonstrating and Presenting Claims

• Presentation of a formal claim
• Introduction
• Should give sufficient information to familiarize
  the recipient with the claim and contract
  details
• General contract information
• History and relevant details
• Basis of claim
• Quantification
• Appendices

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Demonstrating and Presenting Claims

• History and details
• Full details of all matters forming part of the
  claim
• Relevant event should be described in sufficient
  detail to demonstrate the contractors
  entitlement and responsibility for the costs
• Each separate issue set out in logical format
  Causes and effects originating event, then
  what happenedNotices and particulars given

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Demonstrating and Presenting Claims

• Basis of claim
• Contract provisions relied upon
• Contractual analysis
• Explanation of basis of claim

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Demonstrating and Presenting Claims

• Quantification
• Summary of the amount
• Break-down of the individual areas of claim based
  on the history already given
• Each head of claim to be calculated with
  explanation as to methods and basis used

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Demonstrating and Presenting Claims

• Appendices
• Attach relevant documents referred to in the
  claims
• Programmes
• Diagrams
• Photographs
• Schedules
• Financial data
• Measurement sheets etc

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Demonstrating and Presenting Claims

• Conclusions
• In making a claim, one will need to
• identify the claim
• identify which head does the claim fall under
• consider whether remedies are available under the
  contract or common law
• if claim is made pursuant to the contract, then
  whether necessary steps have been undertaken
• consider necessary documentary evidence
  (correspondence) in substantiating the claim
• consider whether there is any documentation which
  may assist in the valuation of loss and/or damages

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Termination

• A contract may be lawfully terminated by in 2
  ways
• (1) by common law determination
• (2) by contractual determination

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• Common Law Determination
• Repudiation in General
• (1) Breach of Condition
• a question of construction.
• If the term is described as a 'condition' - a
  strong indication.
• (2) Fundamental Breach
• has the effect of depriving the other party of
  substantially the whole benefit.
• lead a reasonable person to conclude that a party
  no longer intended to be bound by the contract.
• The standard of proof is high. Need strong and
  cogent evidence.

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• Once there is a repudiatory breach, the innocent
  party has a choice of continuing the contract, or
  accepting repudiation and treat himself as
  discharged.
• Once the contract is terminated, the innocent
  party is released from further performance of
  primary obligations and can sue for damages for
  breach of contract.
• Repudiation by Contractor
• Refusal or abandonment
• Defects
• Other Breach of Contract

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• Repudiation by Employer
• Refusal
• Possession of Site
• Failure to pay instalments

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• Contractual Determination
• Advantages
• can define situations in which a right to
  terminate will arise.
• can also provide ancillary rights and remedies.

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• Determination by Employer (see clause 34 of draft
  JCC Standard Form of Building Contract)
• (1) Default by contractor
• eg. if the contractor does not proceed regularly
  and diligently with the works
• or if the contractor completely or substantially
  suspend the carrying out of the works without
  good cause
• (2) Insolvency of contractor
• The employer may give notice of determination if
  the contractor becomes bankrupt or a provisional
  liquidator or receiver has been appointed.

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• Determination by Contractor (see clause 35 of
  draft JCC Standard Form of Building Contract)
• (1) Default by employer
• eg if the employer fails to pay an amount
  certified due to the contractor within the
  prescribed period and he continues such default
  for 14 days after the receipt of the notice given
  by the contractor
• (2) Insolvency of the employer

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• Main differences between contractual
  determination and common law repudiation
• Contractual determination - no need to establish
  the breach or event is of the fundamental
  repudiatory character.
• Common Law Repudiation - provide remedies to
  rescinding party beyond those expressly conferred
  by the termination clause itself.
• Whether contractual determination and common law
  rights can exist side by side?

• There is a presumption that contractual
  determination clauses do not exclude common law
  remedies, and clear express words must be used in
  order to rebut this presumption.

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• Mansion Fire Engineering Co Ltd v Tridant
  Engineering Co Ltd 2000 HKCFI 721 (15 June
  2000)
• Termination of a sub-contract.
• City Top Engineering Ltd Anr v Lee Shing Yue
  Construction Co Ltd Anr 2001 HKEC 710
• Termination of a sub-contract after making time
  of the essence.

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• Conclusion
• A contractual termination should always be the
  first step, failing which a common law
  termination should be considered. In any event,
  each case would depend on its own set out of
  facts, and "reasonableness" seems to be the key
  and the test to a proper and effective
  termination.

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