Hong Kong – Court Considers “Back To Back” Provisions In Construction Sub-Contract.

5 June, 2017

 

In the recent case of Chan Chi Lam trading as Hoi Fat Construction Company v Lam Woo & Co Ltd & Ors, HCCT 52/2014, Hong Kong’s Court of First Instance had to consider what should be the applicable rate of payment for works under work orders where no contractual rate had been agreed and also whether a “re-measurement clause” had been incorporated into the contract and, if so, how it should be interpreted.   

 

Background 

 

The Defendant, Joint Venture (JV), was the Main Contractor of the Water Supplies Department (WSD) for the replacement and rehabilitation of certain water mains. The Plaintiff, Chan, was one of the JV’s Subcontractors for water mains works. 

 

Claim and Counterclaim 

 

Chan claimed against the JV for HK$4.833 million, allegedly due to him for works carried out and included in a final account submitted to the JV. The JV claimed that Chan was liable to it for certain contra charges and that after deducting such and taking into account previous payments made to Chan, Chan had been overpaid by HK$6.195 million, which it sought to recover by way of counterclaim. 

 

The JV argued that for some of the works in question, no rates had been agreed and that such should therefore be assessed on a reasonable price or quantum meruit basis. The JV also argued that it was a term of the Contract between the JV and Chan that Chan’s work under all of the orders for mains work was subject to re-measurement, on a back-to-back basis, against what the WSD or its engineers assessed and certified on their re-measurement of the works under the Main Contract (WSD Re-measurement). The JV’s case was that the Contract between the JV and Chan incorporated price terms and conditions including a Re-measurement Clause which provided: “Method of Measurement: as per the Main Contract. All the BQ quantities are provisional and subject to re-measurement as based on back-to-back basic (sic) …” Chan, on the other hand argued that he had agreed with the JV that his work would be assessed “in accordance with the agreed rates of similar works items in other works orders” (Similar Work Rates Basis). He also claimed that the JV had been assessing and, under all of the JV’s interim payment certificates, paying, for his works in question on such a basis. As for the WSD Re-measurement Clause, Chan argued that on its proper construction, it simply meant that the method of measurement of the works was to follow that of the Main Contract between the JV and WSD, but that the WSD re-measured quantities were not binding upon Chan. 

 

Was the Re-measurement Clause incorporated into the Contract between Chan and the JV in respect of the work orders without agreed rates? 

 

The Court was satisfied that the Re-measurement Clause had been incorporated into the Contract between Chan and the JV by the course of dealings between them, to become part of the terms and conditions of the Contract and all work orders under it. The works under all work orders were similar in nature, the Court said, and it could not reasonably be envisaged that different terms would apply to the different work orders for the mains work, when these were accepted and worked upon at around the same time. No factors had been put forward by Chan as to why the work under the orders with no specific rates agreed should be measured differently to the other work he did under the Contract. 

 

How was the Re-measurement clause to be interpreted? 

 

The Court held that apart from specifying that the method of measurement under the Main Contract was to be adopted for the Contract, the Re-measurement Clause clearly stated that the quantities in the bills of quantities were “provisional”, and subject to re-measurement, on a back-to-back basis. Reading the re-measurement clause as a whole, the “back-to-back basis” must, the Court said, refer and apply to the re-measurement of the quantities, which were stated to be provisional only at the time of the Contract. The Contract was to be “back-to-back” to the Main Contract, such that the re-measurements made under the Main Contract were to apply to the Contract. 

 

The Court said that considering the context of the Contract and works carried out under it, it would not be unusual for the parties to agree that the work would be valued on a re-measurement basis. The Contract involved breaking up sections of the existing road surface, excavation to the required trench depth, laying replacement water pipes, reinstating the road surface, and then moving on to another section of the road to repeat the work sequence, until the newly laid replacement pipes reached the total length required. According to Chan, very limited documents were provided before work was commenced. Generally, calculation of the final price of work on the basis of “as built” (or “as worked”) quantities is applicable, the Court said, where the precise extent of the work is not known in advance, or where there are inherent or contingent elements of uncertainty or unpredictability as to quantities, as in cases where the unascertained levels of ground surfaces may affect the final excavation quantities, or where the extent of the particular work in question may be inherently unpredictable or provisional. In this case, much of the work was underground, and the full extent of the work may not have been known until after excavation, and until the utilities pipes underground were exposed. 

 

In the circumstances, the Court rejected Chan’s contention that the “back-to-back” reference in the Re-measurement Clause only meant the adoption of the method of measurement under the Main Contract. There was no uncertainty, it said, in either the English version of the clause or Chinese notes specifically agreed to and countersigned by Chan. If Chan did not understand what “re-measurement” of actual quantities meant, or what “provisional quantities” were, the Court said, he should have consulted experts before signing the Contract or the quotations. In construing the Contract and its provisions, Chan’s subjective declarations of his understanding of the Re-measurement Clause was neither admissible nor relevant, the Court said. Nor should the court consider any unfair consequences of a construction of the plain wording of a clause. 

 

What should be the rate for assessing payment to Chan for work orders without agreed rates? 

 

The JV’s case was that for those work orders without agreed rates, such rates should be assessed on a reasonable price basis. Chan’s case was that it had been agreed between himself and the JV that his works under the relevant work orders without agreed rates were to be assessed in accordance with the agreed rates of similar works items in other work orders. However, Chan had not pleaded for each relevant work order without agreed rates which “other order” contained “similar work items”, the agreed rates of which would by agreement apply. Further, no explanation or particulars were given by Chan in evidence as to which other work orders were relevant for considering the similar work or similar rates. 

 

The Court accepted the single joint expert’s Agreed Rates Schedule. The expert had arrived at standardized and reasonable agreed rates by discounting the agreed rates without further adjustment or discount factors, averaging the agreed rates to one standard rate for each of them, excluding unreasonably high or low rates, and fine-tuning the rates to make them consistent with each other. The Court also accepted the expert’s explanation that these rates could be used both as rates on quantum meruit or reasonable price basis, and as rates for the Similar Works Rate Basis where no rates were specifically agreed between Chan and the JV. 

 

Comments 

 

“Back to back” is a common term used in construction sub-contracts as a convenient way to pass the obligations of the main contractor under the main contract to the sub-contractor. Whilst we may have a general feeling as to what it means, the precise meaning of the term can only be ascertained after consideration of all circumstances of each case. If a dispute arises in relation to the term, the conclusion of the Court or arbitrator may surprise at least one of the parties. We therefore do not recommend using such term in properly drafted sub-contracts.