Maeda Corporation and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited1

Where a contract provision requires a party to state the contractual basis of its claim as a condition precedent to its entitlement to claim, the Hong Kong Court of Appeal (CA) has decided that the party cannot advance a different contractual basis of claim in a subsequent arbitration.

What Was the Case About?

Maeda v Bauer was a further appeal from the Court of First Instance, subsequent to that reported in our previous update: "Hong Kong Court of Appeal Decision Is Reminder to Review All Construction Contract Documents Carefully"2. This appeal concerned a decision of the arbitrator in an underlying arbitration regarding disputes arising from sub-contracts for the Hong Kong section of the Hong Kong to Guangzhou Express Rail Link (XRL), now known as the "High Speed Rail", which commenced operations in September 2018. The arbitrator had found that the sub-contractor had strictly complied with a condition precedent to notify the main contractor of the contractual basis of its claim for additional payment or loss and expense.

What Did the Claims Provision in the Sub-Contract Require?

The provision governing the sub-contractor's entitlement to claim additional payment or loss and expense (Claims Provision) required the sub-contractor to notify the main contractor of, among other things, the contractual basis of each claim within 28 days of its initial notice of intention to claim. The Claims Provision was stated to be a condition precedent to any entitlement to additional payment and strict compliance with the terms was expressly required.

What Was the Contractual Basis Notified by the Sub-Contractor in its Particulars of Claim?

The sub-contractor notified the main contractor of its claim for additional payment on the contractual basis that it was entitled to a variation for unforeseen ground conditions.

What Were the Contractual Bases Advanced by the Sub-Contractor in Subsequent Arbitration?

The sub-contractor advanced two contractual bases:

  1. variation (as notified in the particulars of claim); and
  2. a separate sub-contract clause allowing it to claim a portion of monies awarded to the main contractor in respect of a corresponding claim (which was not notified in the particulars of claim).

What Was the Legal Issue before the CA?

The issue in dispute was whether the sub-contractor was entitled to advance a claim in subsequent arbitration on a different contractual basis than the one that had been notified under the Claims Provision.

What Did the CA Find?

The CA held that the sub-contractor was not entitled to bring a claim in the arbitration on a different contractual basis than the one notified, for the following reasons:

  • There was no dispute that, in accordance with the terms of the sub-contract, the Claims Provision was a condition precedent that must be strictly complied with.
  • On the plain wording of the Claims Provision, the contractual basis of any claim had to be notified within 28 days of the initial notice of intention to claim.
  • The wording of the Claims Provision was clear and unambiguous, and therefore there was no basis for applying the contra proferentem rule or applying a narrow or strained interpretation to the Claims Provision.
  • The time-limit for stating the contractual basis for a claim was not unrealistically short, and it was open to the sub-contractor to state more than one contractual basis for its claim, or to serve multiple notices each stating a contractual basis.
  • The requirement to state a contractual basis for a claim served the following valid commercial purposes:
    • achieve finality by allowing the receiving party to investigate and resolve the claims when the facts are still fresh and to make a proper evaluation of the claims as presented; and
    • assist the receiving party in determining whether the claim would need to be passed up the line.
  • The arbitrator's interpretation of the Claims Provision, that the contractual basis notified did not have to be the contractual basis relied upon in arbitration, would negate the commercial purpose of achieving finality, as a claim could be advanced on a different contractual basis than that notified in an arbitration which may be years down the line.

What Are the Implications of This Case?

This judgment is favourable to employers or contractors who seek to resist claims down the line. While the sub-contractor in this case may deserve some sympathy (as it served the notice and particulars in time but failed to state all the contractual bases it would later seek to rely on), this case once again confirms that Hong Kong courts will not interpret a contract in a manner that re-writes the plain language of the provision agreed by the parties.  

Parties should read their contracts carefully, and seek legal advice if necessary, to ascertain whether notice and particulars provisions (if they exist) constitute a condition precedent to an entitlement to additional time or cost which must be strictly complied with. Where such provisions exist, the party making a claim should prepare the notice and particulars of claim properly upfront within the specified timeframes and should not assume that it can always rectify a non-compliance with the notice provisions at a later stage by advancing a different legal argument or contractual basis.

Parties should also consider, before entering into a contract, to what extent they want notice and particulars requirements in claims provisions to be conditions precedent. It is important to balance on the one hand the benefits of certainty and the possibility of resisting claims that are not properly notified or particularised in a later arbitration, against potentially higher tender bids (due to onerous provisions) and increased contract administration costs (due to voluminous claims submissions covering all possible contractual bases).

Footnotes

1 [2020] HKCA 830

2 1 June 2020 (link: https://www.mayerbrown.com/en/perspectives-events/publications/2020/06/hong-kong-court-of-appeal-decision-is-reminder-to-review-all-construction-contract-documents-carefully)

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