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Notices and Valuation of Variations in light of Maeda Corporation and China State Construction Engineering (Hong Kong) Ltd v Bauer Hong Kong Ltd

  • 22 November 2019 22 November 2019
  • Asia Pacific

  • Projects & Construction

A decision of the High Court in Hong Kong in 2019, in Maeda Corporation and China State Construction Engineering (Hong Kong) Ltd v Bauer Hong Kong Ltd, dealt with two issues that commonly arise in the construction industry: notice provisions and valuations of variations. The case arose out of an appeal against an interim arbitral award on matters of law in relation to a sub-contract between the contractor, a joint venture of Maeda and China State Construction, and Bauer, the sub-contractor.

Notice Provisions

Bauer had encountered unforeseen ground conditions and, as a result, additional excavation was required. Under the sub-contract, Bauer was contractually required to give notice “as a condition precedent to any entitlement” if it wished to pursue a claim. The sub-contract also set out that there would be no entitlement to any payments unless the notice provisions had been “strictly complied with”.

The particular clause under which Bauer was required to give notice referred to various grounds, which included variations, and separately, unforeseen ground conditions. Bauer gave notice pursuant to the clause, but only in respect of a variation in relation to additional excavation (for which no instruction was in fact issued). Bauer failed to raise a separate notice for unforeseen ground conditions at the time. The Arbitrator decided there was no variation but that a claim for unforeseen ground conditions was made out even though notice had not been given in relation to that claim. This was on the basis that “it was unrealistic to expect a party to finalize its legal case within a relatively short period of time and to be tied to that case through to the end of an arbitration” and that Bauer’s claim (at arbitration) based on the unforeseen ground conditions was not time barred as argued by Maeda.

Chan J overturned this decision, and held that the notice for a variation (which was not instructed), was not proper notice for a claim for unforeseen ground conditions and that Bauer’s claims were limited to the variation provisions only. The Judge said that Bauer “should have no right to the additional extra payment, loss and expense claimed”, concluding that “on proper construction of… the Sub-Contract, the Defendant had failed to give proper notice… and that the Arbitrator’s decision to allow the Defendant’s claim of “like rights” was wrong in law”.

Valuation of Variations

A separate question arose on appeal as to whether the Arbitrator had misdirected himself in law because, when valuing variations using a “fair and reasonable rate or price” as contractually required, he included sums in the calculation that Bauer had not actually incurred.

In essence, the issue was whether a ‘fair and reasonable rate or price’ should be assessed on the basis of the actual costs incurred by the sub-contractor or whether it was permissible to adopt a market rate analysis. The Arbitrator’s view was that a fair and reasonable price could be arrived at by reference to the market price, without Bauer establishing its actual costs.

The Judge, having reviewed a number of authorities, declined to overturn the Arbitrator’s decision. Chan J stated:

“I accept the submissions made on behalf of [Bauer], that the Arbitrator’s decision on the valuation of the Variation is a mixed question of law and fact. The Arbitrator received and considered evidence from the parties and their experts on the nature of the work involved, and the costs and value asserted by [Bauer] and examined by the Experts, and concluded on all the evidence available before him that the quantification of HKD 3,991,333 represents the “fair and reasonable rate” to be decided and allowed under Clause 19."

He stated at paragraph 684 of the Award:

“Whilst it seems that Bauer did not have to pay for the items of plant during the period, I am concerned with valuation of a variation and the issue of whether a party has or has not paid for a piece of plant does not determine the issue of the value of the piece of plant. I consider that in valuing the variation it is the “cost” in terms of what it would cost which is the relevant information and that the issue does not depend on questions of payment.”

On review of the authorities, it cannot be said that the Arbitrator had misdirected himself in law, or that his decision was outside the permissible range of solutions which were open to him.

In summary, this case is a salutary reminder to ensure that notice provisions should be fully complied with, in order to guarantee that claims do not inadvertently become time barred for want of proper notice and that, as far as the valuation of variations are concerned, a “fair and reasonable price” as a contractual term can be arrived at by reference to the market price without establishing proof of actual costs.

If you wish to discuss this article or any notice provisions or valuations of variations matters, please contact Christopher Short

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