Notices: a cautionary tale from Hong Kong

By Jeremy Glover, Partner, Fenwick Elliott

In Maeda Corporation & Anr v Bauer Hong Kong Ltd  [2020] HKCA 830, the Hong Kong Court of Appeal had to consider whether Bauer had complied with the condition precedents to give notice under clauses 21.1 and 21.2 of the subcontract. At first instance, the court had allowed the Maeda JV’s appeal against an arbitrator’s decision, holding that Bauer in submitting notices of claim which failed to set out the contractual basis for their claim which they ultimately succeeded on in the arbitration, had failed to comply with the notice provisions of their subcontract. 

The HKCA summarised the series of steps, notices, and submissions that Bauer had to make to comply with clause 21.1 in this way:

(i) The first notice was a notice of an intention to make a claim and was stated to be a “condition precedent to Bauer’s entitlement to any such claim” under this provision. This had to be given within 14 days “after the event, occurrence or matter giving rise to the claim became apparent or ought reasonably to have become apparent to the Sub-Contractor”.

(ii) The second notice, again stated to be a “condition precedent to any entitlement”, had to be given within 28 days after the first notice. This had to include details of the contractual basis of the claims, details of contemporary records that might support the claim and details of mitigation measures Bauer intended to adopt.

(iii) The clause also made provision for situations where an event had a continuing effect, providing for the submissions of 28-day updates. Again, this was expressly stated as “condition precedent to any entitlement”.

(iv) Bauer had no right to any additional or extra payment, loss and expense, under any clause of the subcontract or at common law, unless clauses 21.1 and 21.2 had been strictly complied with.

Bauer had been employed as a subcontractor to carry out diaphragm wall works on the Guangzhou Express Rail Link tunnel in Hong Kong. Following the discovery of unforeseen ground conditions, Bauer sent the following letters to Maeda:

(i) 1 August 2011:

“We confirm the issuance of said design information/founding levels are causing a substantial increase in the quantity and quality of rock we are required to excavate compared to what was allowed for in our Sub-Contract. Please be advised that these additional quantities and change in quality represent variations to our Sub-Contract Works under Clause 17.1 of our Sub-Contract Agreement which shall be valued under Clause 19 and for which we are entitled to and will claim an extension of time in accordance with Clause 14.3.3 and additional costs as provided for under Clause 21.1.6.” 

(ii) 2 August 2011:

“As notified in the above correspondence and meetings held with your goodselves the quantity and quality of rock excavation we have been instructed to excavate below rockhead level have increased substantially from those provided under the Sub-Contract and these amount to a variation of our Sub-Contract Works …

In accordance with the Sub-Contract Agreement we are entitled to claim additional costs under Clause 21.1.6 in respect of the instructed variations and resultant extension of time to our Sub-Contract Works which is a course we will follow …” 

However, the Arbitrator did not consider that Bauer was entitled to a Variation simply because there was a change in the conditions which could have been foreseen and that this had an effect on the work. An essential part of the variation mechanism was that there had to be an instruction by the Engineer and/or by the Employer. While, in carrying out the diaphragm wall work, Bauer had encountered unanticipated ground conditions, it was still obliged to carry out the same work in terms of the volume of material which had to be excavated and there was no change to the scope of the work. In the absence of an instruction, the changed ground conditions did not, in themselves, give rise to payment as a Variation or Sub-Contract Variation. However, the Arbitrator did consider that Bauer had established the right to claim for additional rock excavation caused by the inclination of the rock and by instructions to deepen founding levels.

As part of their claim in the arbitration, Bauer had included an alternative basis of claim, what was termed a “like rights” claim pursuant to clause by claiming that the unanticipated ground conditions also entitled the JV to additional payment and loss and expense under the Main Contract. The problem for Bauer was that the right to make such a claim arose under sub-clause 21.1.1 not 21.1.6. Having encountered difficulties with the ground conditions, Bauer did not obtain an instruction but proceeded with the extra work required. Strictly, no notice had been given. The Arbitrator said this:

“I consider that both as a matter of sympathy and as a matter of construction, the contractual basis of the claim stated in the Clause 21.2 notice does not have to be the contractual basis on which the party in the end succeeds in an arbitration. First, to expect a party to finalize its legal case within the relatively short period and be tied to that case through to the end of an arbitration is unrealistic. Secondly, what is important from the point of view of the Contractor is to know the factual basis for the claim so that it can assess it and decide what to do.”

At first instance, the Hon. Mimmie Chan J disagreed. Clause 21.2 expressly provided that “as a condition precedent to any entitlement”, if Bauer wanted to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, it  “shall” within 28 days after giving the first notice submit in writing: “the contractual basis together with full and detailed particulars and the evaluation of the claim”.. The Judge said that: 

“there can be no dispute, and no ambiguity, from the plain and clear language used in Clause 21, that the service of notices of claim in writing referred to in Clause 21.1 and 21.2 are conditions precedent, must be ‘strictly’ complied with, and failure to comply with these conditions will have the effect that the Defendant will have ‘no entitlement’ and ‘no right’ to any additional or extra payment, loss and expense.”

In their August letters Bauer had simply given notice of the ground conditions encountered at the site, and the additional quantities and quality of the rock that needed to be excavated. The subcontract referred to the submission not only of the detailed factual particulars, but “the contractual basis” together with the full detailed particulars. What was required was the basis upon which Bauer claimed to be entitled under the subcontract to maintain and pursue its claim. 

The Arbitrator had found there was compliance by Bauer with most of the requirements in clause 21 of its heads of claim based on rock excavation. The only outstanding requirement that had to be met as a condition precedent was to state “the contractual basis” of the claim within 28 days after giving of the first notice. At first instance, the Judge was clear that:

“however much sympathy the contractor may deserve, Clause 21 employs clear and mandatory language for the service and contents of the notices to be served, with no qualifying language such as ‘if practicable’, or ‘in so far as the sub-contractor is able’”.

Before the HKCA, Bauer said that this was not a case where Bauer had failed to state any contractual basis in the notices.  Bauer had submitted a timely notice stating the contractual basis, as well as full and detailed particulars and the evaluation of the claim.  The issue was whether the notice complied with the requirements of clause 21.2. Bauer said that the provision did not require Bauer to identify the contractual basis upon which its claim for additional payment or loss and expense ultimately succeeded in the arbitration. Had this been the intention, then it would have to have been expressed clearly to have that effect. Further, the provision did not expressly state that Bauer was prevented from amending or substituting a contractual basis or that the effect of doing so would nullify Bauer’s entitlement to additional payment. A party should not be prevented from advancing a claim after the expiry of a time bar merely because it placed a different legal label in the notice submitted when the factual substance was presented in time. The important commercial purpose of clause 21.2 was whether the receiving party was able to make a proper evaluation of the claim as presented, not whether all the relevant boxes had been ticked.

The HKCA disagreed:

“The wording of clause 21.2.1 is clear and unambiguous. Within the stipulated time, the Sub-Contractor is required to give notice of the contractual basis, not any possible contractual basis which may turn out not to be the correct basis.”

The HKCA held that there were three commercial purposes for identifying the contractual basis within the stipulated period:

(i) Providing the factual basis for the claim so that the Contractor can make timely investigations.

(ii) Achieving finality, which would not be achieved by allowing a Party the right to advance a claim on a different contractual basis in an arbitration which may be years down the line.

(iii) In a chain contract situation, a Contractor would wish to know whether the Subcontractor’s claim would need to be passed up the line.  This meant that the precise contractual basis did matter. The Arbitrator’s interpretation may have prejudicially affected this. 

In short:

“It is not permissible to interpret clause 21.2.1 in such a manner as to re-write the plain language of the provision.”

Conclusion

The effect of the HKCA’s decision certainly seems harsh, particularly as Bauer had continued to carry out the works when the unforeseen ground conditions were encountered. One might question whether or not Maeda would have acted any differently if the August letters had also made reference to sub-clause 21.1.6. However, the Judge noted that there was “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”. As such the case represents another example of the courts emphasising the importance of complying strictly with notice provisions.

Although the wording of the subcontract was similar in intent to the FIDIC Form, the clause here specified that it was a condition precedent and specified that it was to be “strictly” complied with, wording you do not find under the 1999 FIDIC Form. The key issue under consideration here concerned the requirement to specify the “contractual basis” of the claim. Whilst you do not find that requirement under the 1999 Form, under sub-clause 20.2.4(b) of the 2017 FIDIC Form, a claiming party must submit a statement of the contractual and/or other legal basis of the claim within a specified time limit. A failure to do so will mean that the original Notice of Claim shall be deemed to have lapsed. So as always, it is important to understand the language used in your contract when it comes to the service of notices. 

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