Construction Bulletin Projects Procurement Construction Issue 7 July 2013 Welcome to the 7th Issue of our Bulletin. We start this issue with a focus on two perennial issues the back to back payment clause and the enforcement of PRC arbitral awards in. We then look at a recent English case on when a contract can be terminated if the other side does not perform. Finally, we bring you an update on NEC, looking at some recent cases and giving you our verdict on the April 2013 revisions to the NEC suite of contracts. Keeping faith with the back to back payment format In Asia Faith Engineering Ltd v Lai Yue Lam [2013] HKCU 541, the Hong Kong District Court was asked to consider the effect of a back to back payment clause. Asia Faith was a subcontractor to Chevalier for the redecoration of the High Wah Estate. They in turn subcontracted the works to the defendants. Clause 3 of the contract provided that the payment of contract sum is based on Back-to-Back format i.e. [Asia Faith] will pay [Lai Yue Lam] upon receipt of payment from Chevalier to [Asia Faith] and [Asia Faith] should release payment to [Lai Yue Lam] within 7 days from payment made by Chevalier. Asia Faith relied on Clause 3 to argue that its obligation was to pay when paid by Chevalier. In construing the clause, the judge found that Asia Faith had not taken on an independent obligation to pay Lai Yue Lam. Instead, the natural meaning of the clause was that Lai Yue Lam would only be paid when Asia Faith was paid. Parties often refer to payment being back-to-back without considering or making clear whether such arrangement is only about when the contractor must independently evaluate and pay a subcontractor or whether it means no payment has to be made until the contractor is paid. The current approach in is that when in doubt, courts will construe clauses so that they are only concerned with the former not the latter (Wo Hing Engineering Ltd v Pekko Engineers Ltd, HCA 5561 of 1996). The decision is another important reminder, as in Tim Lee Construction Engineering Co. (which we reported on in Issue 4 of the Construction Bulletin) that pay when paid type clauses are enforceable in if the wording is clear enough. As many readers will know, the Government is currently working towards the introduction of security of payment legislation which may in due course make such clauses unenforceable watch this space! For more information about this case and back to back payment clauses in general, please contact: Mohammed Talib Solicitor T: +852 2294 3453 E: mohammed.talib@pinsentmasons.com 1
Pro-enforcement approach to arbitral awards alive and kicking has always had a reputation for taking a pro-enforcement approach to arbitral awards. In December 2012, the High Court handed down its judgment in the case of Granton Natural Resources Co Ltd v Armco Metals International Ltd [2012] HKEC 1686, dismissing Armco s application to set aside an order to enforce an arbitral award in. The case concerned Armco s sale of iron ore to Granton which then onsold the iron ore to Poly Resources (Asia) Ltd. Poly alleged that the iron content of the iron ore was below standard and successfully claimed against Granton for its loss in a China International Economic and Trade Arbitration Commission (CIETAC) arbitration. Granton subsequently commenced a separate CIETAC arbitration against Armco to recover these losses and succeeded. When Granton sought to enforce the award in in February 2012, Armco applied to set aside enforcement of the award on public policy grounds. Specifically, Armco relied on two grounds of public policy: (a) the apparent bias of one of the arbitrators in the Poly Arbitration, Mr Wang; and (b) the implication that the Entry-Exit Inspection and Quarantine Certificate, which was the only evidence to prove the iron ores were substandard (CIQ Certificate), was issued by the head of a state authority who was convicted for corruption in China. When considering applications to set aside enforcement orders, the general principle is that the court is not to interfere with the parties dispute except as prescribed by the Arbitration Ordinance. The exercise of the court s residual discretion to refuse to enforce an award from mainland China is the exception, not the rule. The most interesting point made in this case concerned Armco s argument that, pursuant to Section 95(3)(b) of the Arbitration Ordinance, it would be contrary to public policy to enforce the award if justice was not seen to be done. Justice To referred to the case of Hebei Import & Export Corp v Polyteck Engineering Co Ltd (1999) 2 HKCFAR 111, where, in view of the principles of finality and comity, it was held that the discretion to refuse enforcement will not be exercised unless enforcement would violate the most basic notions of morality and justice. He held it was not enough for a party to show violation of some conceptions of morality and justice enjoyed in Hong Kong even if a mainland China award had been made by mistake, the court would not lightly set aside leave to enforce judgment. The violation has to go to the root of our fundamental conceptions of morality and justice. Justice To then turned to Armco s arguments. On (a), Armco could not establish apparent bias because there was insufficient evidence to prove that Mr Wang was employed at the relevant time by shareholders of CN Minerals (the ultimate buyer of the iron ore from Poly) or, even if he was, that the Granton case arbitrators blindly adopted the collective ruling in the Poly Arbitration. On (b) whilst instances of corruption, bribery or fraud may warrant setting aside an award, there was simply insufficient evidence to prove that the CIQ Certificate was obtained by corrupt means. Both of these grounds were swiftly dismissed. The court therefore rejected Armco s application to set aside the enforcement of the award and awarded indemnity costs for the application, permitting Granton to recover a higher proportion of its legal costs from Armco. This case affirms the pro-enforcement approach of the courts towards foreign arbitral awards. It also serves to caution parties intending to challenge arbitral awards in, as it is a costly and difficult process. For more information about the issues arising in this case, please contact: Jeremy Nunns Trainee Solicitor T: +852 2294 3341 E: jeremy.nunns@pinsentmasons.com 2 3355
It s all in the timing: The effect of delay on the right to terminate As Donald Rumsfeld once famously said, there are known knowns, known unknowns, and unknown unknowns. Yet it turns out that if you get your timing wrong, the unknown unknowns, the things you didn t know you needed to know, may affect your right to terminate a contract for repudiatory breach. Or so the English Court of Appeal held in Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2013] EWCA Civ 577 when it was asked to consider the validity of a decision to terminate a contract and the key fact that the court relied on to hold that there was no right to terminate was unknown to the innocent party. Under both English and law, a repudiatory breach of contract is a breach that the law regards as sufficiently serious to justify termination. Determining seriousness is a complex question on which the authorities are divided, with some cases requiring that the breach deprive the innocent party of a substantial part of the benefit of the contract. Other cases require the breach to deprive the innocent party of substantially the whole of the benefit of the contract. If there is a repudiatory breach, then the innocent party has a choice whether to continue with the contract by affirming it or to treat it as repudiated. The innocent party is not given an infinite amount of time to decide whether to affirm or not. Turning to the facts. In October 2008, the parties agreed that Telford Homes was to build four mixed use blocks on land it owned. Upon completion, Ampurius was to purchase a 999 year lease of the commercial portion of the blocks. The contract required Telford Homes to proceed with due diligence. Time was not of the essence in the contract. For two of the blocks, the target date for completion was 28 February 2011 but because of Telford Homes internal funding difficulties the works were suspended. Although Ampurius had complained bitterly about the suspension, Telford Homes continually assured Ampurius that it was committed to the project and that it would resume work. Unknown to Ampurius, Telford Homes resumed work on 4 October 2010. 18 days later, on 22 October 2010, Ampurius purported to terminate the contract on the basis that the suspension and the resulting delay was a repudiatory breach by Telford Homes. Ampurius commenced legal proceedings against Telford Homes. The English High Court held that Telford Homes breach of the contract was substantial enough to justify Ampurius acceptance of the repudiation of the contract. Telford Homes appealed to the English Court of Appeal. The English Court of Appeal found in favour of Telford Homes, holding that the contract had not been repudiated. The starting point was to consider what benefit the injured party intended to obtain from performance of the contract. The next consideration was the effect of the breach on the injured party, such as identifying whether any financial loss could be adequately compensated by damages. Finally, the relevant time to assess the facts was the date that the innocent party purported to terminate the contract. In ascertaining the facts two factors were important in the present case. Firstly, a breach of contract, although serious, may be capable of remedy. If it is remedied before the injured party purports to treat a contract as repudiated, then the fact that the breach has been remedied is an important factor to be taken into account. Secondly, if there is delay in performance of an ongoing obligation it may be possible for the delay to be made up by faster future performance. Applying the law to the facts of the case, the object of the contract was to obtain the 999 year lease of the commercial properties. The delay of a few months could not be said to deprive them of a substantial part of a 999 year lease. Furthermore, the delay in completing the blocks did not cause any loss to Ampurius that could not be compensated by damages or by way of set-off against the purchase price it would pay to Telford Homes for the lease. Ampurius conceded that it had suffered no loss as a result of the delay and that future losses had largely been mitigated by the actions of Telford Homes in delaying the completion of the lease. By the date that Ampurius attempted to terminate the contract, Telford Homes had already resumed working on the blocks even if this was not known to Ampurius. Ampurius lack of knowledge was not considered to be blameworthy since the court did not think that Ampurius should have inspected the site prior to terminating the contract. Furthermore, even during the suspension Telford Homes had made strenuous efforts to find the necessary funding it needed and had strongly indicated its commitment to carrying out the contract. Accordingly, when on 22 October 2010, Ampurius purported to accept the repudiatory breach of Telford Homes, there was no longer any repudiatory breach there to accept. This is an important decision for two reasons. Firstly, when deciding whether there has been a repudiatory breach of the contract, the focus must be on the object of the contract, and any failure is judged by how it impacts achieving that object. Secondly, the time to determine the breach of contract is at the point where the decision is taken by the innocent party to either affirm the contract or to terminate the contract. In general, an innocent party has a reasonable time to determine what course of action it can take (see the case of Unison Projects Co ltd v AHL Design Workshop Ltd which we reported on in Issue 4 of the Construction Bulletin) but any delay, and the resulting knowledge gap, is now at its own risk. It is easy to envisage that such knowledge gaps may occur when decisions have to be taken by head offices or regional offices that are far away from the site so that the latest information is not available when a decision is made. At the same time, facts may not be assessed in light of the big picture so that the necessary focus on the object of the contract may be lost. Parties will have to be careful that they base their decisions to affirm or treat a contract as repudiated on the best and most current information possible. For more information about this case and the issues arising from it contact: 3 Mohammed Talib Solicitor T: +852 2294 3453 E: mohammed.talib@pinsentmasons.com
NEC news We normally highlight an aspect of NEC for comment but in this issue of our Bulletin we will look at some recent developments. Firstly, case law involving NEC contracts. It is often said that there is very little case law on NEC although in truth the number of cases involving NEC contracts is creeping up all the time and there have been a few in recent months. Unfortunately the decided cases never seem to go to the heart of how NEC really operates or clarify any of the known uncertainties. We are still waiting for a landmark case! Two of the recent crop which are nonetheless worth a mention are RWE Renewables Ltd v J N Bentley Ltd [2013] EWHC 978 and Atkins Ltd v Secretary of State for Transport [2013] EWCH 139 (TCC). The RWE case concerned arguments over alleged ambiguities or discrepancies between the Contract Data and Works Information documents. Standard NEC famously has no hierarchy clause to assist the parties although in the RWE case an amendment had been made to include one. Suffice to say one of the parties was arguing that the meaning of the contract was clear and there was no ambiguity or discrepancy and the other was contending there was and that the hierarchy clause provided the answer. The judge decided that by reading the contract as a whole, and applying conventional common law principles of interpretation, the intention of the parties and the correct interpretation of the contract could be ascertained there was no need to resort to the hierarchy clause. The case was not really an NEC case but more concerned with contractual interpretation principles. However, it highlighted that only in the clearest cases of the Contract Data and Works Information being contradictory and irreconcilable will a hierarchy clause normally become relevant something which those considering amending NEC (or any contract) to introduce a hierarchy should bear in mind. The Atkins case was a little more racy in that it concerned interpretation of the NEC compensation event provisions. It is perhaps a case rather specific to its facts and it concerns the filling of potholes as part of Atkins obligations under a term contract to maintain certain UK roads. Atkins was paid lump sums for its maintenance obligations. Of course, in a contract of that type it is never going to be possible to predict in advance exactly how many potholes you are going to have to fill but Atkins considered it had encountered rather too many and more than a reasonable contractor would have allowed for. The contract was a modified NEC form and Atkins relied on a compensation event (similar to ECC 60.1(12)) relating to encountering defects which an experienced contractor or consultant would have judged at the Contract Date to have such a small chance of being present that it would have been unreasonable for him to have allowed for it. It was held that this provision did not relate to the quantity of potholes and it was noted that there was no basis to reduce payments if fewer potholes than expected were encountered. To apply the provision correctly each defect and its underlying cause would have to be looked at individually. For example, if a pothole was caused by exploding army ordinance it would not be reasonable to have allowed for it and so there would be a compensation event. If a pothole was caused by wear and tear then it would be reasonable to have allowed for it and no compensation event would arise. Whilst this case points to standard ECC clause 60.1(12) not applying to unexpected quantities of physical conditions it needs to be borne in mind that this case was decided in the context of a long term road maintenance contract. The same logic might not apply to a conventional civil engineering contract where the contractor encounters far greater quantities of underground obstructions, rock or boulders for example. The second item of NEC news as many readers will be aware is that NEC have issued an updated April 2013 edition of their contracts. Rather like the recent cases there is nothing headline grabbing. The existing contracts have been subject to some minor amendment and tidying including some welcome clarification of when the switch from actual to forecast costs should occur when assessing compensation events. There is also a new Professional Services Short form for low risk and more straightforward consultancy services. Where NEC have been busiest is in introducing a range of new guidance booklets covering writing of Works Information, Service Information and Scope for the main, term and professional services variants of the NEC contract. There is also an updated guide and series of proformas for communications such as compensation event notifications, instructions and so on. Finally, NEC breaks new ground by being the first standard form to issue guidance and provisions to enable the use of BIM (Building Information Modeling) something being actively encouraged by the public sector in the UK and assuming greater significance in. It is perhaps inevitable that given the success of NEC there would be no significant changes. Furthermore, given the NEC s emphasis on good management and communication it is perhaps no surprise that they have taken this opportunity to issue more guidance on how to use the contracts successfully. For more information on NEC, please contact: Peter Clayton Partner T: +852 2294 3395 M: +852 9878 7266 E: peter.clayton@pinsentmasons.com The material and information in this Bulletin is prepared for general information only. Independent professional advice should be sought and obtained before taking or refraining from any action based upon it. Whilst we endeavour to ensure the accuracy and completeness of the material and information herein, we accept no responsibility for loss occasioned as a result of reliance placed thereon. Distribution of articles not prepared by or on behalf of Pinsent Masons is subject to copyright limitations. 4
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