THE HONG KONG INSTITUTION OF ENGINEERS

Transcription

1 THE HONG KONG INSTITUTION OF ENGINEERS CONSTRUCTION LAW SEMINAR PRESENTED BY HOLMAN FENWICK WILLAN 11 FEBRUARY 2017 Martin Downey/Nicholas Longley/Rosie Ng T: / +61(0) & / Martin.downey@hfw.com/Nick.longley@hfw.com/Rosie.ng@hfw.com

2 Lecture Presented by Holman Fenwick Willan to The Hong Kong Institution of Engineers 11 February 2017 AGENDA 1. Introduction Martin Downey 9:00 am 9:10 am 2. The law relating to extensions of time and liquidated damages 3. An update on the law relating to professional indemnity issues Nick Longley Rosie Ng 9:10 am 9:50 am 9:50 am 10:30 am Coffee Break 4. Proposed legislation concerning security of payment and adjudication Martin Downey 10:45 am 11:15 am 5. Update on dispute resolution Nick Longley 11:15 am 11:45 pm 6. Conclusion / Q&A 11:45 am 12:00 pm 2

3 Holman Fenwick Willan World Office Map 3

4 DELAY AND LIQUIDATED DAMAGES PRESENTATION TO THE HONG KONG INSTITUTION OF ENGINEERS CIVIL DIVISION 11 FEBRUARY 2017 Nicholas Longley, Partner Construction T: +61 (0) / Nick.Longley@hfw.com

5 Agenda Extension of time claims What is an extension of time? Concurrent delays Global Cost Claims Liquidated damages What are liquidated damages? What are penalty clauses? The New Law England v Australia Take home points 5

6 What is an Extension of Time Clause? A mechanism to extend the completion date where delay Clauses provide when and for what type of delay events allow an extension of the completion date Benefits for Principal: Able to retain fixed completion date Maintain right to claim liquidated damages Benefits for Contractor: Relived from paying liquidated damages for delay period 6

7 GCC for Civil Engineering, 1999 Edition GCC50 Extension of Time for Completion Notice provision Must be in writing Within 28 days after cause of any delay (1)(a)As soon as practicable but in any event within 28 days after the cause of any delay to the progress of the Works or any Section thereof has arisen, the Contractor shall give notice in writing to the Engineer of the cause and probable extent of delay. Provided that as soon as the Contractor can reasonably forsee that any order or instruction issued by the Engineer is likely to cause a delay to the progress of the Works or any Section thereof the Contractor shall forthwith give notice in writing to the Engineer and specify the probable effect and extent of such delay. Such notice shall not in any event be given later than 28 days after the Engineer has issued the relevant order or instruction. 7

8 GCC for Civil Engineering, 1999 Edition GCC50 Extension of Time for Completion (cont.) GCC50 lists causes of delay to be assessed by Engineer as follows: (b) If in the opinion of the Engineer the cause of the delay is: (i) inclement weather and/ or its consequences adversely affecting the progress of the works, or (ii) the hoisting of tropical cyclone warning signal No.8 or above, or (iii) a Black Rainstorm warning (iv) a variation ordered under Clause 60 (v) a substantial increase in the quantity of any item of work included in the Contract not resulting from a variation ordered under Clause 60 (vi) the Contractor not being given the possession of the Site or any Portion or part thereof in accordance with the Contract or is subsequently deprived of it by the Employer 8

9 GCC for Civil Engineering, 1999 Edition GCC50 Extension of Time for Completion (cont.) (vii) A disturbance to the progress of the Works for which the Employer or the Engineer or a Specialist Contractor is responsible including but not restricted to any matter referred to in Clause 63, or (viii) The Engineer suspending the Works in accordance with Clause 54 in so far as the suspension is not occasioned by the circumstances described in Clause 54(20(a) to (d) (ix) Any utility undertaking or other duly constituted authority failing to commence or to carry out in due time any work directly affecting the execution of the Works, provided that the Contractor has taken all practical steps to cause the utility undertaking or duly constituted authority to commence or to proceed with such work, or (x) Delay on the part of any Nominated sub contractor for any reason specified in subclauses (b)(i) to (ix) of this Clause and which the Contractor has taken reasonable steps to avoid or reduce, or (xi) Any special circumstance of any kind whatsoever Then the Engineer shall within a reasonable time consider whether the Contractor is fairly entitled to an extension of time for the completion of the Works or any Section thereof. 9

10 Key concepts of Extension of Time Claims Critical path The sequence of activities through a project network from start to finish, the sum of whose durations determines the duration of the Works 10

11 Key concepts of Extension of Time Claims Float The amount of time by which an activity or group of activities may be delayed without causing delay to the contract completion date. Project float and activity float Who owns float? 11

12 Key concepts of Extension of Time Claims Prevention Principle Principle of Common Law "when there is a stipulation for work to be done in a limited time, if one party by his conduct it may be quite legitimate conduct, such as ordering extra work renders it impossible or impracticable for the other party to do his work, within the stipulated time, then the one whose conduct caused the trouble can no longer insist upon strict adherence to the time stated Trollope & Colls v Northwest Metropolitan Regional Hospital Can be ordering variations (SMK Cabinets) 12

13 Key concepts of Extension of Time Claims Concurrency The expression "concurrent delay" is used to denote a period of project overrun which is caused by two or more effective causes of delay, which are of approximately equal causative potency" John Marrin QC (2002) Approved in Adyard Abu Dhabi v SD Marine Services 13

14 Presenting delay claims Basis of Claim for Extension of Time Validity of Delay claim primarily a question of fact Check Contract requirements for EOT claims and follow it Set out relevant clause re specified EOT entitlement not all delay events give EOT entitlement Set out what is the delay event, eg: Variation may need written direction Delayed access may need planned access date and actual access date 14

15 Concurrent Delays Definition a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative value. John Marrin QC in Concurrent Delay (2002) 15

16 Concurrent Delays - Approaches Dominant Cause Approach Establish Dominant or Proximate Cause Other causes not causative H Fairweather v LB of Wandsworth (1987) and Laing v John Doyle (2004) Apportionment Approach Contract provisions often require "fair and reasonable assessment" Arguably allows apportionment when two causes of delay on basis of Culpability; and Significance of factor as a cause of delay Malmaison Approach City Inn v Shepherd (2008) Contractor entitled to an EOT notwithstanding that the matter is not the dominant cause of the delay 16

17 Concurrent Delays Walter Lilly Co. Ltd v Mackay and DMW Developments JCT Standard Form of Contract 1998 Edition private without quantities Upon requisite notices and particulars being provided Engineer would carry out prospective exercise of delay analysis After PC Engineer will carry out final EOT exercise retrospective exercise of delay analysis Concurrent delay what needed to be considered was what critically delayed the works as they went along not merely retrospective exercise 17

18 Concurrent Delays Walter Lilly Co. Ltd v Mackay and DMW Developments Debate depended upon terms of the Contract in the contract the Architect had to grant an EOT which was fair and reasonable Relevant Events must be critical Where there is an extension of time clause and where delay is caused by two or more effective causes, one of which entitles the Contractor to a full extension of time as being a Relevant Event, the Contractor is entitled to a full extension of time. Part of the logic of this is that many of the Relevant Events would otherwise amout to acts of prevention. Confirmed Henry Boot v Malmaison Hotel position ie Contractor is entitled to a full extension of time for the delay caused by one of more events (provided one of them is a Relevant Event) 18

19 Concurrent Delays Saga Cruises BDF Ltd & Others v Fincantieri SPA [2016] Delays caused by both the yard in carrying out the works as well as by owners. Owners argued that the works were already delayed by the yard and therefore the yard was not entitled to an EOT. The yard argued entitled to an EOT notwithstanding the concurrent effect of other events, relying on the Malmaison approach adopted in Walter Lilly v Mackay [2012] EWHC 1773 (TCC) 143 Con LR 79. " A careful consideration of the authorities indicates that unless there is a concurrency actually affecting the completion date as then scheduled the contractor cannot claim the benefit of it. Causation in fact much be proved based on the situation at the time as regards delay. The Yard's approach is over broad " 19

20 Global Costs Claims Laing Management v John Doyle Construction (2004) The contractor must demonstrate that the whole of his loss and expense results from employer's delays That it is impossible to separate out the consequences of each event A global claim will fail if any material contribution to the causation of the global loss were made by a factor for which the defendant bears no legal liability It may be possible to apportion the loss between the causes for which the employer is responsible and other causes 20

21 Global Costs Claims Walter Lilly Co. Ltd v Mackay and DWW Developments No need for contractor to show that it was impossible to plead cause and effect in the normal way Claims by contractors for delay or disruption related loss and expense must be proved as a matter of fact ie the contractor had to prove that: Events occurred which entitled it to loss or expense Those events caused delay and disruption; Such delay or disruption caused it to incur loss and/or expense There was nothing wrong in principle with a global claim evidential difficulties to be overcome for contractors The fact that one or a series of events or factors unpleaded which are the risk or fault of the contractor caused or contributed to the global loss did not mean that the contractor's claim failed. 21

22 What are liquidated damages clauses? LD clauses are contractual clauses used to provide for a payment of a specified sum in the case of a specified breach of contract The purpose of liquidated damages is to provide a certain remedy to the Employer in the event of specified breaches of contract by the Contractor The sum is written into the contract LD clauses are regularly used to specify the amount of damages payable in the event of delay. For delay damages, it is common for claims to provide for payment of a set sum per day or alternatively a stated percentage of the contract sum. 22

23 Advantages of Liquidated Damages Clauses To the Employer: The Employer is not required to prove its actual loss for delay which may in practice be difficult. No need to wait to actually incur the loss before imposing liquidated damages. Not obliged to mitigate loss. To the Contractor: Greater certainty for the risk of delay A cap on liability (depending upon the wording of the liquidated damages provision) The Employer cannot claim general damages in addition to liquidated damages, if the clause is drafted so that the liquidated damages is the sole remedy Steria v Sigma Wireless Communications 23

24 Penalty Clauses What constitutes a penalty? "A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation." A penalty is contrary to public policy Legione v Hateley (1983) The rule against penalties is an exception to the usual rule of Contract Law which give parties the freedom to contract It provides a Court with power not to enforce such provisions that are considered penal in nature 24

25 Enforceability Old Law Old test: Dunlop Pneumatic Type Co v New Garage and Motor Co (1915) LD clauses must be a genuine pre-estimate of loss incurred as a result of the breach. New Test: Cavendish Square Holdings BV v Talal El Makdessi (2015) restated the law Genuine Pre-Estimate of Loss Test is now gone 25

26 Enforceability Old Law Old test: Dunlop Pneumatic Type Co v New Garage and Motor Co (1915) LD clauses must be a genuine pre-estimate of loss incurred as a result of the breach. Four "tests": (1) The sum must not be extravagant and unconscionable in comparison to the "greatest loss" (2) Likely to be penal if breach was for non payment and provision provided for greater sum to be paid (3) Single sum for serious and trivial breaches presumed penal (4) Not penal simply because impossible to estimate loss 26

27 Cavendish Square v Talai El Makdessi English Supreme Court Decision has restated the law Fundamental Re-examination of the law on penalties Genuine Pre-Estimate of Loss Test is now gone The Supreme Court has: 1. recognized that there is a legitimate interest in enforcing a contract which extends beyond the recovery of compensation for breach 2. Emphasized the need to concentrate on substance and not form 27

28 Cavendish Square v Talai El Makdessi The Facts - Two cases heard together First Dispute (Cavendish Square) Arose out of a share purchase agreement for a marketing company. Sale price was in four installments If seller was in breach of non compete clause he lost: The right to two installments of purchase price, which were deferred The right to sell option to sell shares at a defined price Instead a "call option" was triggered allowing purchaser to buy shares at a net asset value with no value for goodwill Court of First instance enforced the clause and the Court of Appeal refused to enforce the clause because it was a penalty 28

29 Cavendish Square v Talai El Makdessi Second Dispute (ParkingEye v Beavis) Arose out of a GBP 85 parking fine for overstaying a 2 hour free parking limit ParkingEye were the operators of the car park and not the owners ParkingEye's revenue from parking fines only Both Court of First Instance and Court of Appeal enforced the clause 29

30 Cavendish Square v Talai El Makdessi General Applies to secondary obligations only. Cf Australian law Andrews v CBA Makdessi Findings All of the provisions of the share purchase agreement were enforced although clause had no relationship with loss There was a legitimate interest in enforcement which extended beyond loss. The terms were harsh but not exorbitant ParkingEye v Beavis Findings ParkingEye conceded that GBP85 was not a genuine preestimate. In fact, no loss suffered GBP 85 not a penalty - not extravagant or unconscionable Legitimate Interest in charging the fee 30

31 Cavendish Square v Talai El Makdessi New Test: Whether the clause "is out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation" under the contract Per Lord Neuberger and Lord Sumption "Whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract." Two Issues Is there a legitimate business interest? Per Lord Hodge and Lord Toulson Is the remedy exorbitant, unconscionable or out of all proportion 31

32 Cavendish Square v Talai El Makdessi What has Changed? More flexible than old law. Less interference with liquidated damages provisions Previously primary purpose of LDs was to compensate for a breach of contract Deterrent effect - Now not relevant CMC Group v Michael Zhang Clarified: law on penalties applies to all types of penalties including transfer of assets However Courts had already moved away from the "Genuine Pre-estimate of Loss Test". Wider interests have always been considered 32

33 The Australian Approach Since 2012, the leading Australian case has been Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30 It considered whether fees charged by ANZ were unenforceable penalties. Held: penalties are not confined to breach of contract. They may apply to the agreed sums payable on events of all kinds. For example, performance bonuses and interest. A restriction to strike out penalty clauses in cases only involving breach of contract is not consistent with the law of equity. Unlike English law, in Australia a clause imposing an obligation to pay, even when not payable on breach, may constitute a penalty. 33

34 Paciocco v Australia and New Zealand Banking Group The Australian High Court in the recent decision of Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 The case again concerned bank fees. This time it was whether credit card late fees charged by ANZ are penalties or otherwise unfair or unconscionable. Held: late fees are not unfair or unconscionable. Found that late fees were not to punish but to protect banks legitimate interests in light of conceivable losses from non payment. Did not amount to penalty even though not represent genuine pre estimate of loss 34

35 Paciocco v Australia and New Zealand Banking Group (cont) The Court addressed said that the genuine pre estimate of loss test had been applied more rigidly then originally intended The reasoning of the majority was not unanimous but 2 of the 3 judgments in the majority found that the relevant question is whether the agreed sum is out of all proportion to the interests of the party seeking its payment. Penalty rule still applies even when no breach of contract but impact of Paciocco means that wide range of losses can be called upon to justify potentially penal provisions. 35

36 What has changed from Andrews to Paciocco? Parties can now enter into contracts with greater certainty that bargains will be upheld. Australian Courts now required to consider broader interests of party under the Contract before declaring a clause unenforceable such as portfolio of related agreements and losses that may flow from non compliance generally Allows parties to pre agree liquidated damages which cover conceivable losses that might not be recoverable at common law Penalty rule still applies even when no breach of contract but impact of Paciocco means that wide range of losses can be called upon to justify potentially penal provisions. 36

37 Summary and Take Home Points Delay claims are primarily a question of fact Courts now about to apply broader considerations when reviewing the enforceability of LD damages provisions. Will consider the business interests and likely to apply freedom of contract "In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach." Per Lord Neuberger and Lord Sumption Courts more likely err on the side of enforceability where the parties are two substantial and experienced companies, see: 37

38 PROFESSIONAL LIABILITY OF ENGINEERS PRESENTATION TO THE HONG KONG INSTITUTION OF ENGINEERS CIVIL DIVISION 11 FEBRUARY 2017 Rosie Ng, Consultant Insurance / Reinsurance T: rosie.ng@hfw.com

39 Introduction Engineer s duties: Common law duties tort of negligence Contractual duties Standard of care: reasonable care & skill ) - Bolam test ) - duty to warn ) - new techniques ) - fitness for purpose ) - certification ) - design issues Concurrent duties in tort & contract Limitation Professional indemnity insurance 39

40 Tort of Negligence Need to establish: 1. D owed duty of care to P 2. D breached that duty 3. D s breach of duty caused P to suffer recoverable loss 4. Loss was foreseeable Physical damage: Neighbour principle Economic Loss Assumption of responsibility Special relationship between parties Just and reasonable to impose duty 40

41 Standard of Care Bolam Test Standard of care & skill Where you get a situation which involves the use of some special skill or competence the test 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 41

42 What does reasonable care & skill mean in practice? Industry opinion is relevant Scott v EAR Sheppard Consulting (2016) EWHC 1949 Structural engineer failed to refer in his report to tilting walls and dangerous condition of property which required demolition Advised that defects could be remedied at a cost of 25,000 Advice outside the range which could be given by members of that profession exercising reasonable care & skill Cf. Greenwich Millenium Village v Essex Services Group PLC Mechanical services engineers were fully aware of the risk of water hammer & risk of flooding if certain measures not put in place Held: Negligent even though the profession generally was not aware of those specific measures 42

43 Reasonable Care & Skill Does this include duty to warn? Hale v Beltec t/a BCS Consulting (2015) EWHC 556 Duty to warn is an aspect of duty to act with reasonable care & skill Extent of duty depends on circumstances of each case Duty to warn will arise where obvious and significant danger to life, limb or property Not sufficient that there was a possibility in future of some danger 43

44 Duty to Warn Law is complex and fact dependent General proposition: there is no duty to warn (genuine bystander) BUT Liability can arise in tort or contract (but more likely from the latter) Stagecoach South Western Trains Ltd v Hind (2014) EWHC 1891 The duty to warn cases all arise in the context of a contractual relationship; there are no reported cases in which this kind of duty to warn is said to arise in tort 44

45 Duty to Warn Goldswain & Another v Beltec Ltd (2015) EWHC principles re: duty to warn: (1) Consider contractual duties/services and scope (2) Duty to warn is an aspect of a professional s duty to exercise reasonable care & skill (3) Extent of duty depends on facts/circumstance (4) Duty to warn arises where - obvious/significant danger to life or limb or to property - may arise where professional ought to know of such danger (5) where a professional ought to have known of the danger, the mere possibility that a contractor may not carry out the works properly is unlikely to create a duty to warn 45

46 Who has a duty to warn? A professional consultant may have a duty to warn re: how a building contractor/subcontractor carries out re works (Hart Investment Ltd v Fidler (2007) EWHC 1058 Professional consultant may be involved from the inception to completion of a project and during defects liability period at risk Skilled professional in an advisory role Professional indemnity insurance target for litigants 46

47 What is extent of duty to warn? Not clear Each case dependent on facts Hart Investment v Fidler (2007) EWHC 1058 Structural engineer held to have had a duty to warn the contractor and Employer of the absence of appropriate temporary propping to the temporary works Immediate danger to the permanent works 47

48 What is a sufficient warning? Nature of warning dependent on: Contractual terms Nature of danger Circumstances in which danger is identified Warning must be: Clear overwhelming and plainly effective Six Continents Retail Ltd v. Carford Catering Ltd. (2003) Warn those with whom they have a contractual relationship 48

49 Reasonable Care & Skill What is the standard if an engineer is involved in new techniques/new designs? Victoria University of Manchester v Wilson (1984) 2 Con LR43 Special considerations come into play Must proceed with caution and assess risks/merits Inform Employer/Client clearly of risks & safety of alternative design 49

50 Reasonable Care & Skill Special steps may be required to fulfil duty Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners (1974) 1 WLR 1261 Ds: Structural engineers required to design and build a warehouse for the storage of oil drums Specifically informed 1 st floor needed to withstand weight of trucks 1 st floor began to crack due to vibrations caused by trucks Held: Ds were negligent. In the circumstances, special steps were required to discharge duty and these had not been taken. 50

51 Contractual Duties Duties are imposed by terms of contract/retainer Implied terms reasonable care, skill & diligence to serve principal faithfully authority to bind (but not to exceed authority) If exceeds authority may be personally liable 51

52 Retainer/Terms of Engagement Contract governs scope of duties Courts are reluctant to imply a retainer No such thing as general retainer No general duty to keep repeating important advice But duty to remind client of deadlines (Littlewood v Radford (2009) EWCA Civ 1024) 52

53 Retainer/Terms of Engagement Agent of Employer No implied authority to bind Employer by acceptance of tender No implied authority to waive strict compliance with terms of construction contract John Liang Construction Ltd v County & District Properties (1982) No implied authority to vary works No implied authority to settle disputes with contractor on behalf of Employer 53

54 Reasonable Fitness of Design? Is there a warranty of reasonable fitness of a design of a structure? IBA v EMI & BICC (1980) 14 BLR 1HL There is no general duty implied by law Court looks at the parties agreement and/or intention of the parties George Hawkins v Chrysler (UK) (1986) 38 BLR 36 Engineers were engaged to design showers at a foundry Employee slipped and sued foundry owners who in turn sued the engineers Court held: (1) There was no basis for implying a warranty in law (2) There were no grounds upon which a warranty going beyond the engineer s normal obligation to exercise reasonable care and skill 54

55 Design Issues Engineer has duty to carry out designs with reasonable care & skill Out of date methods Non compliance with Employer s requirements Breach of regulations/legislation Design fails to fulfil its purpose Ronald Claud Hardwich v Spence Robinson (1975) Drainage system failed completely and could not cope with expected level of rainfall in Hong Kong Design consultant was negligent 55

56 Design Issues Design involves unsuitable materials Richard Roberts Holdings Ltd v Douglas Smith Stimson Partnership (1988) Owners of dyeworks engaged architect to design alteration of dyeworks Defendants designed effluent tank Used sub-standard lining Tank lining failed after installation Engineer s duty re: design is of a continuing nature Extends until completion 56

57 Contractual Duties Engineer owes no duty to give instructions as to the method of working and temporary works Exceptions: If contract expressly provides for this Contractor s methods of working are contrary to the specification Contractor s method is unsafe or compromises quality of permanent works 57

58 Contractual Duties Engineer is required to ensure that materials and workmanship comply with requirements of the contract Sutchiffe v Chippendale & Edmonson (1971) A higher degree of supervision may be required where inferior work by the contractor has been seen/reported 58

59 Is Certification Equivalent to a Warranty of Fitness? Payne v John Setchell Ltd (2002) PNLR 7 D engineer designed the foundations for cottages The foundations were not suitable for support of dwellings Certificates had been issued by D Court held: (1) D did not certify that the foundations were fit for their purpose (2) Certificate was expression of the opinion of D that as a result of inspections, D had reasonable grounds for believing that the foundation had been carried out to its design 59

60 Certification A certification expresses the judgment, opinion or skill of the person issuing it, usually but not always, in relation to a matter called for by a construction contract. It is not normally a warranty nor is it to be read as tantamount to a warranty, particularly if issued by a professional person, although it may amount to a warranty 60

61 Certification by an Engineer Employer does not warrant to a contractor that the certifier is skilful/confident Employer warrants that certifier is honest & independent Engineers owes duty to Employer to act fairly in certification Negligent certification is a breach of duty of skill & care Certifier owes no duty of care to contractor 61

62 24. Concurrent Liability Concurrent liabilities in contract & tort Different limitation periods 62

63 Professional indemnity insurance Focus: when claim is made against insured by 3 rd parties NOT When events which give rise to the claim occurred Notifications of claim and/or circumstances giving rise to claim Target for litigants deeper pockets 63

64 SECURITY OF PAYMENT AND ADJUDICATION PRESENTATION TO THE HONG KONG INSTITUTION OF ENGINEERS CIVIL DIVISION 11 FEBRUARY 2017 Martin Downey, Partner Head of Construction Law Group (Hong Kong) T:

65 Background to Security of Payment April 2016 Following a public consultation exercise, the Development Bureau published a Report on Public Consultation on Proposed Security of Payment Legislation for the Construction Industry. Payment delays, disputes and unfair contract terms adversely affect many in the construction industry as confirmed by a comprehensive survey undertaken by the Government in When industry participants are distracted or starved of funding by disputes or late payments, hardship can result and projects can suffer delays and falling standards. 65

66 Background to Security of Payment A number of other jurisdictions, with common law legal systems similar to Hong Kong, including the UK, Australia, New Zealand, Ireland, Singapore and Malaysia have enacted Security of Payment Legislation ( SOPL ) to address problems in their own construction industries. Security for payment recommended in Hong Kong as long ago as 2001 (see Tang Report) Legislation likely to be enacted in first half of 2018, possibly earlier. 66

67 Proposed Scope of Security of Payment All public sector contracts for the procurement of construction activities or related services, material or plant with Government/specified statutory and public bodies, irrespective of value. All private sector construction contracts etc for a new building (or new buildings ) as defined in the Buildings Ordinance (Cap 123) with an original contract value of over HK$5 million or HK$500,000 for professional services and supply only contracts. All lower tier sub-contracts for the above. Pay when paid clauses and provisions which have the same effect as pay when paid (i.e. pay when certified under another contract) will be unenforceable. A contractor s right to progress payments will be protected. 67

68 Payment Application Contracting parties are free to agree when and how frequently claims for progress payments are to be made (specific period/milestones) and how payments are calculated (rates, fixed prices, target cost, cost reimbursement etc.). Parties can claim progress payments (PPs) by statutory payment claims (SPCs) with necessary particulars (amount, relevant work and basis of calculation). Contractual conditions precedent will still apply. Parties are only free to agree a payment period up to 60 days for interim payments and 120 days for the final payment. Default provisions to apply if periods are not agreed. Only SPCs will entitle payees to adjudicate if the claim is unpaid. 68

69 Payment Response and other matters Payment Response (PR) within 30 days of Statutory Payment Claim if no Payment Response is issued this will not mean automatically liable to pay the amount claimed, but cannot raise set off Suspension or go-slow permitted in the event of non-payment if sum admitted as due in Payment Response or Adjudicator s decision is unpaid with rights to time and money. Potential risks with suspension, if Adjudicator s decision overturned in say arbitration. 69

70 Adjudication The current proposal introduces statutory adjudication as a form of dispute resolution to support the new security of payment regime. (1) Commencement: Within 28 calendar days of dispute arising (i.e. the Payment Response) (2) Appointment of Adjudicator: 5 working days (3) Claim Documents no later than (2) above. (4) Response: Within 20 working days (5) Adjudicator s Decision: Within 20 working days. Adjudicator may extend the date for delivery of his decision from 45 to 55 days, longer with the agreement of the parties. (6) An Adjudicator s decision will be binding unless overturned in subsequent litigation or arbitration proceedings. 70

71 Miscellaneous Matters (1) Appointing body? (2) Named adjudicator in contract? (3) Reasons (4) Resignation of adjudicator (5) Costs Anti-Ambush Provisions A feature of adjudication in some other jurisdictions has been the use of certain tactics aimed at inconveniencing or putting the other side under serious time constraints:- - timing of the Notice of Adjudication - additional documents evidence served late Proposed Legislation seeks to prevent some of this: working days - Adjudicator may disregard material which ought to have been provided/served earlier 71

72 Enforcement and Role of the Court The ability to enforce an award is obviously important. An Adjudicator s Decision may be registered as a judgment in Court and enforced in the usual way if the responding party does not comply. Important that the Courts play an effective role in supporting the Security of Payment/Adjudication process, as appropriate. Challenges to enforcement not uncommon but only on limited grounds:- - no contract - no construction contract - no dispute - exceeding jurisdiction - breach of natural justice Significant body of case-law in other jurisdictions which is likely to prove influential in Hong Kong. 72

73 Carillion v Devonport Royal Dockyard [2006] BLR 15 (CA) The task of an adjudicator is to find an interim solution which meets the needs of the case. Adjudication provides a means of meeting the legitimate cash flow requirements of contractors and their subcontractors. A need to have the right answer has been subordinated to the need to have an answer quickly. To seek to challenge the adjudicator s decision on the ground that he s exceeded his jurisdiction or breached rules of natural justice, save in the plainest cases, is likely to lead to a substantial waste of time and expense. In the overwhelming majority of cases, the proper course for the party who was unsuccessful in adjudication must be to pay the amount he s been ordered to pay by the adjudicator. If he does not accept the adjudicator s decision as correct, whether on the facts or law, he can take legal or arbitration proceedings in order to establish the true position. 73

74 Carillion v Devonport Royal Dockyard [2006] BLR 15 (CA) not whether the dispute is too complicated to refer to adjudication but whether the Adjudicator was able to reach a fair decision in the time limits. 74

75 Some Statistics UK - 58% of adjudications are for less than 100,000 (HK$1 million) - 85% less than 500,000 (HK$5 million) - only about 5% involve more than 1,000,000 (HK$10 million) - 69% of UK adjudications (April 2011 to April 2012) were decided on documents only - Approximately 15,000 adjudications of which some 300 reached the Courts 75

76 Conclusions? Rough Justice perhaps but a general acceptance that security of payment supported by statutory adjudication in other jurisdictions has helped improve cash flow in the industry and has led to a drop in the number of court/arbitral proceedings. 76

77 TO BE CONTINUED! 77

78 DISPUTE RESOLUTION UPDATE PRESENTATION TO THE HONG KONG INSTITUTION OF ENGINEERS CIVIL DIVISION 11 FEBRUARY 2017 Nicholas Longley, Partner Construction T: +61 (0) / Nick.Longley@hfw.com

79 Agenda Disputes Background Changes to Arbitration Emergency Arbitration Consolidation of Arbitrations Third Party Funding Legal Advice Privilege Take home points 79

80 Dispute Resolution New Trends (1) Emergency Arbitrations Overview Most major arbitration institutions have adopted emergency arbitration procedures (e.g., ICC, SIAC, HKIAC, LCIA, SCC, ICDR and KLRCA) The purpose of Emergency Arbitration is to allow parties to an arbitration agreement to seek interim measures without having to resort to the courts. 80

81 Dispute Resolution New Trends (1) Emergency Arbitrations HKIAC When can parties apply? Concurrently with or after filing a Notice of Arbitration, but prior to the constitution of the arbitral tribunal (HKIAC Rules 2013, Schedule 4, paragraph 1) SIAC has similar provisions (SIAC Rule Schedule 1, paragraph 1) In contrast, ICC and LCIA allow more flexibility. Parties can apply for an emergency arbitrator before filing the notice of arbitration, although in the case of ICC, the emergency arbitrator proceedings may be terminated if the Request for Arbitration is not submitted within 10 days of the Secretariat s receipt of the Application (ICC Rules 2012, Appendix V, Article 1, Subparagraph 6). 81

82 Dispute Resolution New Trends (1) Emergency Arbitrations HKIAC Procedures If HKIAC determines it should accept the Application, HKIAC shall seek to appoint an emergency arbitrator ( EA ) within 2 days of the application (Schedule 4, paragraph 5). The parties are allowed 3 days to challenge the EA (Schedule 4, paragraph 8). The EA has 15 days to render any decision / award / order (Schedule 4, paragraph 12). 82

83 Dispute Resolution New Trends (1) Emergency Arbitrations HKIAC Procedures The order may cease to be binding if (Schedule 4, Paragraph 19): The EA or the arbitral tribunal decides so. The Arbitral Tribunal makes a final award. The claim is withdrawn. The Arbitral Tribunal is not constituted within 90 days from the EA s order 83

84 Dispute Resolution New Trends (1) Emergency Arbitrations Uncertainty of Enforcement Interim relief by the EA is temporary in nature as it can be modified, suspended or terminated (Schedule 4, paragraph 18). Whether it could be enforced as a final and binding award can be questionable, especially if the relief is to be enforced in a different jurisdiction. Uncertainty as to whether relief granted by EA is an arbitral award for the purposes of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Considerable risk that Emergency Arbitrator s order may not be enforced. 84

85 Dispute Resolution New Trends (1) Emergency Arbitrations Uncertainty of Enforcement Hong Kong and Singapore have legislations dealing with the issue: Hong Kong Arbitration Ordinance Part 3A allows recognition and enforcement of any emergency relief granted, whether in or outside Hong Kong, by an emergency arbitration under the relevant arbitration rules (Section 22B (1)). Singapore has adopted a narrower approach, expanding the definition of arbitral tribunal under the Singapore International Arbitration Act to include an emergency arbitrator (Part II, 2(1)) 85

86 Dispute Resolution New Trends (1) Emergency Arbitrations Gerald Metals SA v Timis [2016] EWHC 2327 (Ch) Claimant applied to LCIA Court for an emergency arbitrator (as well as an expedited formation of the arbitral tribunal which is provided under LCIA rules) for an urgent interim freezing order. This was not accepted by LCIA and the claimants then applied to the High Court for the same relief. Held, the court could only provide the relief where powers of the emergency arbitrator or tribunal were inadequate, or where the practical ability is lacking to exercise those powers. 86

87 Dispute Resolution New Trends (1) Emergency Arbitrations Although the terms of the English Arbitration Act is different to that of the Arbitration Ordinance, LCIA Rules 9.12 (as with HKIAC Rules, Schedule 4, Paragraph 22) expressly provide that the emergency arbitrator provisions would not prejudice the party s right to apply to the court for interim measures. Considering uncertainties underlying enforcement of emergency arbitrators orders (at least outside of Hong Kong), parties may possibly consider whether opting out of the Emergency Arbitration provisions might also be an option depending on the individual circumstances. 87

88 Dispute Resolution New Trends (2) Consolidation of Arbitration Where there are multi-contracts and multi-parties involving same transaction - such as often is the case in construction projects - resolving disputes together in a consolidated proceeding may bring saving of time and costs. There will also be the benefit of consistent results between the different parties. Arbitration, however, is based on party autonomy and the agreement between parties so it has been difficult to force parties to agree a process which the parties had not agreed. Parties that do not wish to consolidate could easily use this to their advantage and insist on multiple proceedings and bring inefficiencies to the resolution of disputes. One way in which this problem has been tackled is for arbitration institutes to amend the arbitration rules in order to accommodate consolidated arbitration. 88

89 Dispute Resolution New Trends (2) Consolidation of Arbitration The HKIAC Administered Arbitration Rules 2013 are at the forefront of this approach. Article 28 of the rules provide that: HKIAC has the power, at the request of a party to consolidate two or more pending arbitrations where: the parties agree to consolidate; or all of the claims in the arbitrations are made under the same arbitration agreement; or the claims are made under more than one arbitration agreement, a common question of law or fact arises in both or all of the arbitrations, the rights to relief claimed are in respect of, or arise out of, the same transaction or series of transactions, and HKIAC finds the arbitration agreements to be compatible. 89

90 Dispute Resolution New Trends (2) Consolidation of Arbitration The rules also provide that HKIAC shall take into account the circumstances of the case when deciding whether to consolidate, including but not limited to: whether one or more arbitrators have been designated or confirmed in more than one of the arbitrations, and if so, whether the same or different arbitrators have been confirmed. HKIAC has further published a new Practice Note which came into force on 1 January This Practice Note provides practical guidance regarding the consolidation process in order to facilitate and improve efficiency. In contrast, ICC and LCIA Rules provide that consolidation require the parties to either be the same or be bound by a single arbitration agreement. 90

91 Dispute Resolution New Trends (2) Consolidation of Arbitration SIAC have also recently adopted consolidation in their 2016 Rules, which allows a party to file an application for consolidation where: A. all parties have agreed to the consolidation; B. all the claims in the arbitrations are made under the same arbitration agreement; or C. the arbitration agreements are compatible, and: (i) the disputes arise out of the same legal relationship(s); (ii) the disputes arise out of contracts consisting of a principal contract and its ancillary contract(s); or (iii) the disputes arise out of the same transaction or series of transactions. 91

92 Dispute Resolution New Trends (3) Third Party Funding Background Third party funding of litigation is not permitted in Hong Kong since the old common law principles of maintenance and champerty still apply. Uncertainty as to whether these principles applied in arbitrations as this was left undecided in the case of Unruh v Seeberger (2007) 10 HKCFAR

93 Dispute Resolution New Trends (3) Third Party Funding Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016 gazetted on 30 December Defines Arbitration widely to include proceedings before 1) an emergency arbitrator, 2) mediation as well as 3) court proceedings which are covered under the Arbitration Ordinance. Clarifies that maintenance, champerty and barratry do not apply to funding of arbitration and mediation. Will be applicable where place of arbitration is outside Hong Kong or there is no place of arbitration, but the costs and expenses are provided in Hong Kong. 93

94 Dispute Resolution New Trends (3) Third Party Funding Measures and Safeguards Excludes funding by lawyers or those providing legal services from the definition of third party funding of arbitration in order to avoid conflict of interest Requires third party funding and the funding party to be disclosed to the other party and the arbitration body Empowers Secretary of Justice to appoint advisory body and an authorized body to facilitate regulation of third party funding Authorized body may issue a Code of Practice setting out practices and standards with which third party funders are expected to carry out their activities. 94

95 Dispute Resolution New Trends (3) Third Party Funding Advantages Better access to justice for those who have meritorious claims, but do not have the financial resources. Benefit of assessment of claim merits by a third party. Party may reduce risk of litigation by sharing cost of litigation such as the legal costs. Keeps Hong Kong in line with other jurisdictions which already have third party funding in place. Disadvantages Third Party Funder is unlikely to pay the cost of the claim assessment itself which could be substantial in construction disputes. Third Party Funder is likely to expect a high return as litigation is a risky investment. 95

96 Dispute Resolution New Trends (4) Legal Advice Privilege Citic Pacific v Secretary for Justice [2015] CACV 7/2012 (CA) Various search warrants issued against Citic. Citic claimed legal advice privilege to various internal documents between the employees. The trial judge followed the English Court of Appeal decision in Three Rivers and held that the client of Citic s lawyers was the legal department and certain board members and that other employees within the company were third parties for the purpose of legal advice privilege. 96

97 Dispute Resolution New Trends (4) Legal Advice Privilege Citic Pacific v Secretary for Justice [2015] CACV 7/2012 (CA) The Hong Kong Court of Appeal disagreed and declined to follow the English decision. Such restrictive view of client was likely to impinge ability of company to gather information and obtain legal advice. Internal confidential document produced or brought into existence as part of the process of communication with the lawyer with the dominant purpose of getting legal advice was protected by legal advice privilege. 97

98 Dispute Resolution New Trends (4) Legal Advice Privilege Walter Lilly & Company Ltd v Mackay and ors [2012] EWHC 649 Walter was a contractor building a house for Mr. Mackay. There were delays and Walter raised EOT and prolongation claims. Mr. Mackay retained claims consultants, Knowles. The issue was whether the correspondence with Knowles were protected by legal advice privilege.. 98

99 Dispute Resolution New Trends (4) Legal Advice Privilege Walter Lilly & Company Ltd v Mackay and ors [2012] EWHC 649 Held: Legal advice privilege does not apply in relation to any profession other than qualified lawyers. Knowles did employ lawyers, but they were not retained as solicitors or barristers even if the main contacts were in fact barristers. The fact that Mr Mackay honestly understood he was dealing with barristers were not relevant as Knowles was not retained to provide legal services.. 99

100 Summary and Take Home Points The construction industry is becoming more litigious The trend is only likely to increase - Adjudication - Dispute Funding - Greater flexibility for disputes processes Necessary to properly prepare and ensure that you obtain proper legal advice 100

101 Any Questions? 101

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