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Author: Cheung Kwok Kit
Service Area: Construction & Arbitration
Date: September 2013
Country: Hong Kong

 

Construction Newsletter
Issue 1 of 2013: September

Our new Construction Legal Update

Recent case considers "Pay When Paid" issue

English Supreme Court rules that Legal Advice Privilege should not be extended to legal advice given by someone other than a member of the legal profession

Is an architect's sub-contract certificate of non-completion a condition precedent to a main contractor's claim for delay against the sub-contractor?

Court of Appeal rules that Building Authority must reject building plans where developer does not own or have realistic prospect of controlling land forming site of proposed building

April 2013 NEC3 amendments- What has changed?

Construction Seminar Series draws strong client interest

Joseph Chung is appointed to the Panel of Arbitrators of The Kuala Lumpur Regional Centre for Arbitration

Proposed Legislation for Security for Payment

Our new Construction Legal Update

Previously, our construction updates have been included in our Construction & Arbitration Legal Updates. From now on, they will be contained in a Construction Legal Update, like this one, dedicated solely to construction matters. Updates about arbitration (unrelated to construction) will be contained in our Litigation and Dispute Resolution Newsletter. This has been done with a view to making it more user friendly for those clients only interested in construction matters. You will continue to receive our Litigation & Dispute Resolution Newsletter. If for any reason you do not receive it, please let us know.

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Recent case considers "Pay When Paid" issue

The "pay when paid" issue has troubled the construction industry for many years. It refers to payment terms contained in a sub-contract, which typically provide that the main contractor shall pay the sub-contractor a certain period of time after the main contractor has received payment from the employer. The controversy is whether the phrase should be construed as creating a condition precedent to the main contractor's liability to the sub-contractor. Sub-contractors will argue that "pay when paid" is different from "pay if paid" and that only the latter will create a condition precedent i.e. a "pay when paid" term only specifies the timing (not liability) for payment, so that even if the main contractor has not received payment from the employer after the lapse of reasonable time, the sub-contractor is entitled to be paid after completion of its sub-contract works.

Before Wo Hing Engineering Ltd v Pekko Engineers Ltd (1998) (we acted for Wo Hing in that case), the Hong Kong courts had no opportunity to decide on the true meaning of "pay when paid", after a full trial. All cases which had touched upon the issue were only in the context of applications for summary judgment and the courts in those cases did not give a final ruling on the issue. In the Wo Hing case, having considered various authorities from the US, Australia and New Zealand, the judge accepted that a typical "pay when paid" term does not create a condition precedent for payment to the sub-contractor.

Arguments on the true meaning of "pay when paid" have continued after the Wo Hing case. Some main contractors still try to distinguish Wo Hing by arguing that the payment term in that case was nothing like that in the standard nominated sub-contract commonly used in Hong Kong ("the Green Form"). They also argue that Wo Hing is a case involving domestic sub-contract payment terms and that it is not fair for the main contractor to undertake the risk of non-payment by the employer when the sub-contractor is nominated by the employer itself.

A recent Court of First Instance decision has touched on the "pay when paid" issue. In Kim Hung Construction & Engineering Co Limited v Standard Refrigeration & Engineering Co. Limited (HCCT 37/2012, judgment handed down on 21 June 2013), the sub-contractor claimed against the main contractor in an arbitration for delay in completion of a project, where the main contractor had not been paid by the employer. The arbitrator ruled that the main contractor was liable to pay the sub-contractor despite the fact that the main contractor had not been paid by the employer. The main contractor sought leave in the High Court to appeal against the arbitrator's ruling, under the old Arbitration Ordinance (Cap.341).

The deputy judge was asked to construe the payment terms in the Hong Kong Construction Association's Standard Form of Domestic Sub-Contract, 1994 Edition, which contains elaborate provisions governing the time for payment, together with a number of provisions in the letter of acceptance. Construing those provisions as a whole, the judge found that the payment for the delay claim had not yet become due under the sub-contract.

Whilst there is nothing unusual about the judge disagreeing with the arbitrator's finding, the following is of interest:-

  1. The deputy judge accepted that in order to grant leave to appeal, there must be at least serious doubt as to the correctness of the award (the Nema Guideline). Yet, the deputy judge only explained how he construed the payment terms in the sub-contract and it is not clear why there was at least serious doubt as to the correctness of the award.
  2. In the judgment, the deputy judge concluded that the agreed payment arrangement between the parties was one on a "pay when paid" basis. As explained earlier, we will usually describe payment by the employer to the main contractor as a condition precedent for payment to the sub-contractor as "pay if paid". Using "pay when paid" rather than "pay if paid" to describe the payment terms in question may cause confusion. It may now leave room for main contractors to argue that even if the payment term is "pay when paid" (as opposed to "pay if paid"), the sub-contractor is still not entitled to payment before the main contractor has received the corresponding payment from the employer.

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English Supreme Court rules that Legal Advice Privilege should not be extended to legal advice given by someone other than a member of the legal profession

In the English case of R (on the application of Prudential plc & Anor) v Special Commissioner of Income Tax & Anor, England's Supreme Court, by a majority of 5 to 2, decided that legal advice privilege ("LAP") may only be claimed by clients in respect of advice sought from legal professionals. The decision is of interest to the construction industry because it is very common for claims consultants, who are not legally qualified, to give opinions which may involve the application of legal principles to their client's case.

The Facts

Prudential had instructed PricewaterhouseCoopers ("PWC") to provide tax advice and PWC had advised them to adopt a tax avoidance scheme, the objective being to enable a tax deduction from a foreign subsidiary to be set off against Prudential's profits in the UK, thereby reducing its liability to corporation tax.

The Inspector of Taxes served statutory notices, requiring Prudential to disclose certain documentation for the purpose of its investigation of transactions carried out by Prudential to implement PWC's advice. Prudential refused to disclose some of the documents requested on the ground that they included legal advice from PWC and were therefore protected by LAP. The appeal concerned the breadth of LAP, namely the types of advisors with whom communications can attract LAP. The particular issue in this appeal was whether LAP should attach to communications passing between chartered accountants and their client in connection with expert tax advice given by the accountants to their client, in circumstances where there is no doubt that LAP would attach to those communications if the same advice was being given to the same client by a member of the legal profession.

The Supreme Court, upholding the decisions of the Court of First Instance and Court of Appeal, held that LAP should not be extended to communications in connection with advice given by professional people other than lawyers, even where that advice is legal advice which that professional person is qualified to give, for the following reasons:-

  1. If the Court were to allow the appeal, it would be considerably extending LAP beyond what was currently, and had been for a long time, understood to be it limits and it would follow from the Court accepting Prudential's argument that legal advice given by some other professional people would also be covered.
  2. The consequences of allowing Prudential's appeal were hard to assess and would be likely to lead to what is currently a clear and well understood principle becoming an unclear principle, involving uncertainty.
  3. The question of whether LAP should be extended to cases where legal advice is given by professional people who are not qualified lawyers raised questions of policy which should be left for Parliament. Parliament had enacted legislation relating to LAP, which suggested that it would be inappropriate for the court to extend the law on LAP.

In their dissenting judgments, Lords Clarke and Sumption, were in favour of extending LAP to advice given by professionals other than lawyers. Lord Clarke queried why if two individuals, A and B, had the same problem, the solution to which depended upon an application of the legal principles of taxation law to the facts and A sought advice from lawyers, and B from say, PWC, why the advice given by the lawyers should attract LAP and the advice of PWC not. Lord Sumption, in his dissenting judgment, said that although there were perfectly rational reasons why one might wish to see the scope of LAP limited, there were no rational reasons for addressing the issue by discriminating between different categories of legal advisors performing precisely the same function.

Those in the construction industry should note that legal advice, commonly provided by claims and other consultants will not be protected by LAP. In our August 2012 Construction & Arbitration Legal Update, we reported on the case of Walter Lilly & Co v Giles Mackay & DMW Developments Ltd, where the court found that Mr Mackay could not claim LAP in relation to advice given to him by a claims consultant.

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Is an architect's sub-contract certificate of non-completion a condition precedent to a main contractor's claim for delay against the sub-contractor?

In 2005, the Hong Kong Institute of Architects, the Hong Kong Institute of Construction Managers and the Hong Kong Institute of Surveyors published a new edition of the Standard Form of Building Contract. The previous edition was published in 1986, and was based on the English JCT standard building contract, 1963 edition. This article will discuss a vexed question arising out of the Standard Form of Nominated Sub-Contract (commonly known as "the Green Form") for use where the Sub-Contractor is nominated under the 1986 edition of the Standard Form of Building Contract. This edition is still in common use in Hong Kong private projects, despite the publication of the new edition 8 years ago.

When the completion of a project has been delayed, it is often difficult to ascertain which party is responsible. Clause 8(a) of the Green Form provides that if the nominated sub-contractor fails to complete the sub-contract works, it will be liable for the loss or damage suffered by the main contractor and caused by the failure of the nominated sub-contractor as aforesaid with the following proviso:-

"Provided that the Main Contractor shall not be entitled to claim any loss or damage under this clause unless the Architect shall have issued to the Main Contractor (with a duplicate copy to the Sub-Contractor) a certificate in writing stating that in his opinion the Sub-Contract Works or the relevant section thereof ought reasonably to have been completed within the specified period or within any extended period or periods as the case may be."

So, is the issue of a Sub-Contract Non-Completion Certificate a condition precedent to the entitlement of the main contractor to claim loss and damage for delay against the nominated sub-contractor? Main contractors will argue that although no such Certificate has been issued, they can still rely on their common law right to claim against nominated sub-contractors and in any event request the arbitrator in the sub-contract arbitration to regard that such Certificate had been issued if the nominated sub-contractor is found to have caused delay in completing the sub-contract works.

There are various authorities in both England and Hong Kong touching on this vexed question. Given the current judicial attitude, it is likely that the Court will answer the question in the affirmative. We will discuss the various arguments usually put forward by main contractors and nominated sub-contractors in a more detailed separate article and so readers interested in this topic should keep an eye out for this.

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Court of Appeal rules that Building Authority must reject building plans where developer does not own or have realistic prospect of controlling land forming site of proposed building

The main issue raised before the Court of Appeal in the case of Lai Siu-Kin Rembert v Building Authority, CACV 113/2012, 2 August 2013, was whether the Building Authority ("the BA") may disapprove general building plans submitted for approval under the Buildings Ordinance (Cap.123) ("the BO") on the basis that the person on whose behalf the plans are submitted is not the owner of the site shown on the plans or does not have a realistic prospect of controlling that site. The BA contended that it can and that it therefore follows that it can request particulars of the ownership or prospect of control of the site shown in such plans, whereas the appellant developer submitted that it cannot do so. Having been informed of a large number of appeals where this same issue arose, the BA referred this appeal to the Court of Appeal for determination, by way of case stated, under section 53C of the Buildings Ordinance.

The following are the four questions of law referred by the BA and the Court of Appeal's answers in respect of the same:-

  1. Does the BA, in exercise of its statutory powers (or in exercise of any principle of common law) have to reject building plans on the basis that a developer does not own or have a realistic prospect of controlling the land forming the site of the proposed buildings shown on those plans?

    Answer: Yes. The Court of Appeal held that it was bound by a previous Privy Council decision in this regard. The Court said that if the developer wished to contend that the relevant part of the Privy Council decision was wrong and should be overturned, that was an argument that could only be pursued in the Court of Final Appeal.

  2. Does the BA, in exercise of its statutory powers (or in exercise of any principle of common law) have the power to require in respect of any building plans submitted for approval, particulars of ownership or proof/substantiation of realistic prospect of control of the site of the proposed buildings shown on those plans?

    Answer: Yes.

  3. If the answers to questions 1 and 2 are in the affirmative, is the power of general application or limited to specific factual situations?

    Answer:
    Subject to ordinary public law requirements (as to fairness, rationality etc) and to the appeal process under Part 6 of the Buildings Ordinance, the relevant statutory powers may be exercised whenever the BA, in its judgment, considers that the developer has not shown ownership of or a realistic prospect of control over the land within the proposed site.

  4. If the answers to questions 1 and 2 are in the affirmative in determining the question of fact as to whether the developer has established such ownership or realistic prospect of control of the site, is the Appeal Tribunal limited to considering the position at the time of the rejection of the plans or can the Appeal Tribunal consider the position as at the date of the appeal hearing, thus taking into account any changes in the interim period?

    Answer:
    The Appeal Tribunal (Buildings) ("BAT") should be entitled to consider the position as at the date of the hearing of the appeal and thus taking into account any changes in the interim period. However, given the various ways in which a matter might come before the BAT, on appeal from the decision of the BA, the dispositive powers of the BAT may be different, depending on the nature of the decision appealed from.

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April 2013 NEC3 amendments- What has changed?

NEC is a name which is becoming more familiar in Hong Kong. Following the success of the first modest-sized pilot project, a HK$200 million community hospital at Tin Shui Wai, the Hong Kong Government has been actively promoting the adoption of NEC across all Government projects. In September 2012, the Drainage Services Department signed an agreement with the contractor for the major works of the Happy Valley Underground Stormwater Storage Scheme, worth HK$678 million. This major project is scheduled for completion in early 2018.

In April 2013, an updated version of the NEC3 suite of contracts was released. The April edition does not contain any major changes to the established NEC3 wording, but does include some amendments to take into account growing new industry practices, such as the use of BIM and some minor amendments to correct drafting inconsistencies.

Other more significant changes in the April edition include a requirement that for "Compensation Events", the Project Manager must now also notify the Contractor of compensation events arising from the Project Manager or Supervisor issuing a certificate or correcting an assumption (Core Clause 61.1 of the Engineering and Construction Contract). Further, the parties may now under Options C (target contract with activity schedule), E (cost reimbursable contract) and F (management contract) agree to use rates and lump sums to assess compensation events (see new Clause 63.14). This was previously only available to Options A (priced contract with activity schedule), B (priced contract with bill of quantities) and D (target contract with bill of quantities).

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Construction Seminar Series draws strong client interest

The Construction & Arbitration Practice Group's KK Cheung and Joseph Chung are hosting a series of bi-monthly client seminars throughout 2013. These seminars cover a wide range of topics and have so far attracted more than 130 clients from the construction industry.

The seminar series started on 31 January with KK Cheung, Joseph Chung and Chris Morgan, the Executive Director of The Contracts Group Limited, presenting on "Practical Tips on Variations", followed by a seminar on 21 March, giving an "Overview on NEC from a Legal and Practical Perspective", presented by KK Cheung, Joseph Chung and Robert Pegg, the Managing Director of Navigant. On 24 May KK Cheung and Joseph Chung gave a seminar on "Liquidated Damages & Extensions of Time". At the latest seminar, on 18 July, KK Cheung, Joseph Chung and Allen Lai, Senior Consultant of Charlton Martin, spoke on "Compensation Events in NEC and Practical Issues Arising from Managing NEC Projects".

The seminars have been very well-received, judging by the positive feedback and number of questions raised during the Q & A session. KK Cheung and Joseph Chung will be delivering further seminars on 30 September and 21 November on "Pay when Paid and Set-Off" and "Liability for Damages to Third Party Property".

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Joseph Chung is appointed to the Panel of Arbitrators of The Kuala Lumpur Regional Centre for Arbitration

We are delighted to announce that our Joseph Chung has been appointed to the Panel of Arbitrators of The Kuala Lumpur Regional Centre for Arbitration (KLRCA). The KLRCA was established in 1978, under the auspices of the Asian-African Legal Consultative Organisation (AALCO). The AALCO is currently made up of 47 member countries, encompassing almost all the major states in Asia and Africa. KLRCA is a non-profit, non-governmental, international arbitral institution and adopts the UNCITRAL Arbitration Rules, with modifications i.e. the Rules for Arbitration of The Kuala Lumpur Regional Centre for Arbitration. Malaysia has in recent years been developing itself into one of the key arbitration hubs in the Asia-Pacific Region. The appointment is a recognition of Joseph’s experience and standing in arbitration in the Region.

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Proposed Legislation for Security for Payment

Not getting paid by main contractors is a recurring problem for sub-contractors in Hong Kong. The report "Construct for Excellence", prepared by the Construction Industry Review Committee (commonly known as the Tang Report), identified the problem and said that there was "much room for improvement in the area of security for payment". The Construction Industry Council commissioned a survey on the problem and found that it is indeed serious in Hong Kong and the Government is preparing a consultation paper to be published this year on the legislation to introduce measures to assist sub-contractors to secure payment from main contractors. It is anticipated that the bill will be put to the Legislative Council in 2015 or 2016.

Whilst it is not clear what will be proposed by the Government, it is generally expected that the following measures will be put forward, judging by other jurisdictions, such as the UK, Australia, New Zealand, Singapore and Malaysia that have security for payment legislation in place:-

  1. prohibit "pay when paid" or "pay if paid" provisions in sub-contracts;
  2. give statutory rights to sub-contractors to suspend work for non-payment;
  3. require main contractors to give prior notice before withholding payment; and
  4. introduce statutory regime for adjudication of payment disputes.

"Pay when paid/pay if paid" provisions have been troubling the construction industry for many years, as we have reported in an article above. It is hoped that after the passing of the security for payment legislation, this question will go away or at least be alleviated and the energy of the parties can be better spent on completing their construction projects.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.