Take Notice! Claims in Arbitration tied to Contractual Notices

Authors: Donovan Ferguson and Charlie Bruce

The Hong Kong Court of Appeal recently delivered judgement in the matter of Maeda Corporation and Another v Bauer Hong Kong^[1] considering an appeal on the question of contractual notices made under a construction contract as condition precedent to claims later being pursued in arbitration.

The Court of Appeal dismissed the appeal against the first instance decision of Madam Justice Mimmie Chan, who had held (on appeal from an arbitral award) that the subcontractor was prevented from pursing claims in arbitration where it had not raised the particular contractual basis of the claim in its earlier notices as required by the terms of the subcontract.

The Court, (Kwan VP, Yuen and Barma JJA) dismissed the appeal on the following basis:

1. The first instance judge correctly interpreted and applied the clear and unambiguous language of the relevant notice provisions; and
   
   
2. The interpretation of the notice provisions was a question of law, not a mixed question of fact and law, which was properly identified and approached by the first instance judge.

This decision has important ramifications for the approach arbitrators are to take when interpreting and applying contractual mechanisms agreed between parties, especially where clear and mandatory language is used to allocate risk and limit entitlement.

It looks like this is not the last we will hear about this case, with a leave application having been filed by the subcontractor with the Court of Final Appeal.

You can read more about this case and a consideration of the position in other jurisdictions below.

It is an obvious principle of contract and commercial dealings that parties must comply with the terms of their contract as governing their relationship and dealings. 

In a construction context, it would be fair for commercial parties to expect this standard to apply to their agreed procedures for the giving of timely and detailed notice in respect of claims for extensions of time, additional payment or related disputes.

However, courts have been reluctant to hold parties too strictly to the timing, form and content requirements for notifications set out in contracts, tending away from treating these requirements as 'conditions precedent' absent clear wording to this effect.^[2]  

Often, arbitrators have taken an even more lenient approach to a claimant's compliance with notice provisions.  The Court of Appeal's most recent decision on this issue is a statement that a bargain struck is not to be re-written by a court or tribunal.

The (Hong Kong) Court of First Instance Decision

In the first instance decision, Madam Justice Mimmie Chan considered an appeal by the main contractor against the decision of an arbitrator on two questions of law:

1. Whether there had been compliance with the conditions precedent to give notice under the subcontract ("Notice Issue"); and
   
   
2. The valuation of variation works under the Subcontract.

The underlying arbitration related to a subcontract entered between Maeda Kensetsu Kogyo Kabushiki Kaisha and China State Construction Engineering (Hong Kong) Limited ("Main Contractor") and Bauer Hong Kong Limited ("Subcontractor") in relation to excavation and diaphragm wall works on the tunnels for the Hong Kong to Guangzhou Express Rail Link ("Subcontract").

The Subcontractor's primary case in the arbitration was that unforeseen ground conditions gave rise to a variation of the Subcontract scope of works, so as to entitle them to additional payment under the variation provisions.  In the alternative, the Subcontractor made a "like rights" claim under the Subcontract.^[3]  This "like rights" claim had not been the subject of any notice during the project.

The Notification Requirements

The Subcontract contained provisions which were required to be complied with where the Subcontractor intends to claim any additional payment or loss and expense due to one or more of six identified events, including for breach of Subcontract, delay or prevention or for any variation (the "Notice Provisions").

Where the Subcontractor wished to maintain its right to pursue a claim for additional payment or loss and expense under one of these six events, the Notice Provisions required two notices to be issued as a condition precedent:

1. The first notice is a basic and general "notice of intention" to claim, which must be given within 14 days of the event, occurrence or matter giving rise to the claim.
   
   
2. The second notice was to be considerably more detailed, and given with 28 days of the first notice. The second notice must state:

• • "the contractual basis together with full and detailed particulars and the evaluation of the claim";
    
    
  • "details of the documents and any contemporary records that will be maintained to support such claim"; and
    
    
  • "details of the measures which the [Subcontractor] has adopted and proposes to adopt to avoid or reduce the effects of such event, occurrence or matter which gives rise to the claim."     

The final clause of the Notice Provisions stated clearly that the Subcontractor "shall have no right to any additional or extra payment, loss and expense… unless [the Notice Provisions] have been strictly complied with."^[4]   

The Court's Decision

The arbitrator dismissed the Subcontractor's primary variation claim on the basis that no instruction had been issued by the Main Contractor.  However, the arbitrator was persuaded by the "like rights" claim, and held that the construction of the Notice Provisions did not require the Subcontractor to identify the specific contractual basis on which it, in the end, succeeds in arbitration.  The arbitrator identified two practical considerations to support this approach:

On this basis, the arbitrator was satisfied that the Main Contractor had practically been placed on notice about the underlying nature of the claims through previous meetings with the Subcontractor and the two 'notices' which he considered were compliant with the Notice Provisions.

Her Ladyship disagreed with this approach and found that the arbitrator had failed to pay heed and give effect to the express wording and requirements of the Notice Provisions, which were to be "strictly complied with" as a condition precedent for any claim to additional payment or loss and expense.  Fundamentally, the 'notices' were deficient as they did not identify the "like rights" as a contractual basis for a claim at all.^[6]

Whereas the arbitrator had been sympathetic to the Subcontractor's claims on the basis of partial compliance with the Notice Provisions and the Main Contractor otherwise having general knowledge about the factual issues underlying the "like rights" claim, her Ladyship made the following observations in favour of strict compliance with the clear and unambiguous wording of the Notice Provisions:

In a win for a black-letter approach, her Ladyship concluded that on a proper construction of the Subcontract notice provisions, the Subcontractor had failed to give proper notice and that the arbitrator's decision to allow the Subcontractor's "like rights" claim was wrong at law. 

On the Notice Issue alone the appeal was granted.^[8]  This decision was subsequently appealed by the Subcontractor to the Hong Kong Court of Appeal.

The (Hong Kong) Court of Appeal Decision

The Subcontractor brought an appeal against the first instance decision to the Court of Appeal. 

The Subcontractor made submissions on and pursued a number of arguments on the appeal in seeking to justify the arbitrator's original determination. These centred on three key themes:^[9]

1. Interpretation of the language used in the Notice Provisions.
   
   
2. The ability for a party to amend or substitute the contractual basis of its claim.
   
   
3. The commercial and practical bases underlying the Notice Provisions.

Interpretation and Language

In respect of arguments made under the first theme, the Court of Appeal was not persuaded by alternate interpretations proposed which sought to sow ambiguity into the clear and plain wording of the Notice Provisions. 

This was particularly so where it was common ground between the parties that the "like rights" claim was a 'contractual basis' which had never been the subject of a notice to the Main Contractor at all.  In that sense, the practical arguments that the Main Contractor was aware of the factual matters underlying the "like rights" claim did not adequately address the strict condition precedent nature of the Notice Provisions.

Ability to Amend or Substitute

The ability to amend or substitute a contractual basis for a claim was also considered by the Court of Appeal through the prism of the Notice Provisions.  In the wording of that clause the Court identified that the substantive notice required to be given within 28 days was required to cover three things: (i) the contractual basis; (ii) full and detailed particulars; and (iii) the evaluation of the claim.^[10]

In respect of the latter two items, where an event had a continuing effect or could not be determined at the time, such that it was impractical to comply within the 28 days, the Notice Provisions made allowance for further submissions to be made at subsequent periods.  This clause recognised the developing understanding of the factual causes or events, but this only extended to the provision of full and detailed particulars and the evaluation of the claim and quite clearly not to the obligation to identify the contractual basis of the claim. 

The Court was unable to identify any justification for giving the Notice Provisions a narrower construction or strained interpretation in circumstances where the wording was clear and was to be fairly interpreted as it stood.

Commercial and Practical Reasons

The arbitrator had reasoned that the important factor from the point of view of the Main Contractor was to know the factual basis of the claims so that it can assess them and decide what to do.  This position was advocated by the Subcontractor on appeal to argue against an interpretation of the Notice Provisions that would limit amendments by a party to add additional contractual basis.  

The Subcontractor also argued against the Court of First Instance's reasoning that there is commercial sense in allocating risks and attaining finality by designating strict time limits for claims to be made and for the contractual basis of claims to be specified.   

The Court of Appeal dismissed these arguments.  The analysis provided by the Court of Appeal adopted a literal and plain reading approach to contractual interpretation, whilst also taking account of the commercial realities of tiered construction contracts. 

There were three commercial bases provided by the Court of Appeal in support of its position that the commercial parties had made their own bargain in respect of the requirement to identify the contractual basis of a claim, which was to be interpreted fairly on the words they had used.^[12] 

1. The strict timing of notices is an important commercial purpose to allow the Main Contractor to assess the validity of a claim at a time when the facts giving rise to such a claim are still fresh.
   
   
2. The finality provided by a party being tied to the contractual basis raised in its notice, rather than being able to advance a different basis in an arbitration which may occur years later, is a practical and commercial purpose which would be negated by the arbitrator's interpretation of the Notice Provisions.
   
   
3. If the Subcontractor had provided notice of the "like rights" claim, based on the same factual basis as its variation claim, then the Main Contractor could have made a claim up the line, such that its interim payment would have been dealt with differently as payment would be made on the basis of corresponding payment received from the employer.

Implications

The Court of Appeal's decision again echoes the commercial sentiment expressed in the Court of First Instance that it was not permissible for the Court to interpret a clause in such a manner as to re-write the plain language of the provision.^[13]

In essence, the Court of Appeal's decision is a reminder to legal professionals and arbitrators alike that we must take great care in relation to contractual provisions and especially conditions precedent.

Position around the Globe

It is important to consider this decision in the context of the broader trends across other common law jurisdictions. 

The courts of Australia^[14] and England^[15] have each made it clear that although reluctant to hold parties too strictly to the timing and form requirements for contractual notifications, where the clause is sufficiently clear in identifying itself to be a condition precedent then strict compliance with the terms of the clause is required, even where this may conflict with the 'merits' of a case.

*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".

[1] Maeda Kensetsu Kogyo Kabushiki Kaisha also known as Maeda Corporation and Another v Bauer Hong Kong Ltd [2020] HKCA 830.

[2] Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar [2014] EWHC 1028 (TCC) per Akenhead J at [312]; W. Hing Construction Ltd v Boost Investments Ltd [2009] HKCU 221 at [71].

[3] Maeda Kensetsu Kogyo Kabushiki Kaisha aka Maeda Corporation & Anor v Bauer Hong Kong Ltd [2019] HKCFI 916 at [7].

[4] Ibid at [19].

[5] Ibid at [14].

[6] Ibid at [26]-[31].

[7] Ibid at [31].

[8] Ibid at [33] and [51].

[9] Maeda Kensetsu Kogyo Kabushiki Kaisha also known as Maeda Corporation and Another v Bauer Hong Kong Ltd [2020] HKCA 830at [42]-[48].

[10] Ibid at [52].

[11] Ibid at [53].

[12] Ibid at [58]-[61].

[13] Ibid at [66].

[14] CMA Assets Pty Ltd v John Holland Pty Ltd [No.6] [2015] WASC 217.

[15] Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar [2014] EWHC 1028 (TCC) per Akenhead J at [312]; Education 4 Ayrshire Ltd v South Ayrshire Council [2009] C.S.O.H. 146; (2010) 26 Const. L.J. 327 at [17]-[21]; Towergate Financial (Group) Ltd v Hopkinson [2020] EWHC 984 (Comm) at [65].