Contractors Beware - Strict Compliance with Notice Requirements Following Maeda v Bauer

David Hume

Shearman & Sterling, Abu Dhabi

David.Hume@Shearman.com

Rishabh Raheja

Shearman & Sterling, Hong Kong

Rishabh.Raheja@Shearman.com

Edward Taylor

Shearman & Sterling, Hong Kong

Edward.Taylor@Shearman.com  

Introduction

Whether or not a contractor or sub-contractor has complied with a contractual claim notification provision is often a highly contested issue in construction disputes, given its potential to be determinative of the parties’ claims. The Hong Kong Court of Appeal’s recent judgment in Maeda Corp v Bauer Hong Kong, which adopts arguably the strictest approach to claim notification provisions among common law jurisdictions, should therefore be of interest to contractors and sub-contractors operating under Hong Kong law and other common law governed construction contracts.[1] This article provides an overview of the dispute before considering its practical implications for contractual drafting and the performance of construction contracts.

The dispute

The dispute at issue in Maeda v Bauer concerned a project relating to the construction of railway tunnels. Maeda was employed as the main contractor for the tunnelling works and had sub-contracted certain aspects of that work to Bauer who, ultimately, encountered unanticipated ground conditions that, in its view, amounted to a variation of the scope of works under the sub-contract.

The sub-contract required Bauer to submit to Maeda, in relation to any claim for additional payment, a notice of the ‘contractual basis’ of the claim (the ‘Notice’), together with full and detailed particulars and its evaluation of the claim, within 28 days of an initial notification. The sub-contract further provided that strict compliance with these requirements was a condition precedent for any claim of additional payment.

In its Notice, Bauer specified that the contractual basis of its claim was as a ‘variation’ under the sub-contract. Bauer’s primary case for additional payment in the arbitration between the parties that followed was equally on the basis that there had been a ‘variation’.

During the course of the arbitration, however, Bauer advanced an alternative basis for its claim to the effect the sub-contract’s ‘like rights’ provision meant that, where Maeda was entitled to additional payment under the main contract due to the unforeseeable physical conditions, so too should Bauer have such an entitlement.

The award

In arbitration proceedings in Hong Kong, Sir Vivian Ramsey QC rejected Bauer’s primary claim that there had been a ‘variation’ under the sub-contract, but nevertheless found that Bauer did have entitlement under its alternative ‘like rights’ claim.

Ramsey then went on to consider whether Bauer’s Notice complied with the requirements under the sub-contract, since the contractual basis of the claim in the arbitration was different from the contractual basis specified in the Notice. Finding that Bauer’s Notice was compliant, he noted:

‘I consider that both as a matter of sympathy and as a matter of construction, the contractual basis of the claim stated in the [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 finalise 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’.

Schedule 2 of Hong Kong’s Arbitration Ordinance (Cap 609) provides for arbitral awards, in relation to certain domestic construction disputes, to be appealable on matters of law in certain circumstances. Maeda availed itself of this right to appeal the award to the Hong Kong Court of First Instance.

The Court of First Instance’s decision

The Court of First Instance overturned the Sole Arbitrator’s interpretation of the sub-contract’s notice provisions, finding that the language of the sub-contract was clear and unambiguous in requiring Bauer to strictly comply with its notice requirements.[2] It held that Bauer had failed to comply with the contractual notice requirements in advancing its ‘like rights’ claim, since its Notice had specified that the contractual basis of its claim for additional payment was a ‘variation’, not a ‘like rights’ claim.

The Court of Appeal’s decision

Bauer appealed the Court of First Instance’s decision to the Court of Appeal. The Court of Appeal upheld the decision of the Court of First Instance, finding the provisions of the sub-contract to be ‘clear and unambiguous’ such that there was no room for the ‘purposive’ interpretation that Bauer contended for and which Ramsey had applied. In particular, the Court of Appeal noted that:[3]

‘The reference to “the contractual basis” would not preclude identifying more than one basis in the alternative or stating more than one basis in the notice or serving more than one notice each stating a contractual basis. [The sub-contract] provides that the following rule of construction applies: “The singular includes the plural"’.

The Court of Appeal also made specific reference, as did the Court of First Instance, to the discussion in Keating on Construction Contracts on the interpretation of exclusion clauses (which the notification clause was held to be):

‘Ambiguity in an exclusion clause may be given a narrow construction because it cuts down or detracts from the ambit of an important obligation in a contract or a remedy conferred by the general law […] However, this approach is not now regarded as a presumption nor a special rule justifying the giving of a strained meaning to a provision merely because it is an exclusion clause. Instead, all the tools of linguistic, contextual, purposive and common-sense analysis should be deployed to establish the proper construction of the provision. Only if that approach still results in an ambiguity in the meaning of the exclusion clause may it have to be resolved by a preference for a narrower construction. In construction contracts, exemption clauses should be seen as part of the contractual apparatus for distributing risk and there should be no pre-determined mindset to cut them down’.

The Hong Kong Court of Appeal also recognised the practical value of the exclusion clause in this case, listing out three commercial reasons for strictly requiring the contractual basis of a claim to be notified at the very outset: (1) it would allow Maeda as contractor to investigate Bauer’s claim; (2) it would provide parties with finality, in ensuring new claims based on different contractual provisions are not advanced years down the line; and (3) it would allow Maeda to identify whether Bauer’s claim needed to be ‘passed up the line’ to Maeda’s ultimate employer.

While the Court of Appeal’s reasoning has merit, Bauer will no doubt feel hard done. From a practical perspective, knowing the precise contractual basis of a claim is rarely the point uppermost in the parties’ minds on a project. The key issue in an initial investigation of a construction claim is instead the factual basis of the claim and this is where parties expend their resources in investigating a claim (whether for adverse site conditions, variations, defects, or otherwise).

The Court of Appeal’s suggestion that having the contractual basis of a claim identified by Bauer as the sub-contractor early on would then allow Maeda to decide whether to pass the claim ‘up the line’ to its employer, could also be criticised on two grounds. Firstly, Maeda would need to evaluate independently whether it would have any corresponding claim against its employer under its contract, regardless of whatever Bauer claims. Secondly, in this case, Bauer was seeking to rely on a ‘like rights’ provision, meaning that any entitlement Bauer had was necessarily dependent on Maeda identifying its own entitlement under its contract with its employer; if Maeda had already advanced a claim against its employer because of the adverse site conditions, there could be no real prejudice to it in Bauer having also raised that as a basis of entitlement late in the piece.

Practical implications – prepare early and cover all bases in the claim notice

Maeda serves as a cautionary tale to contractors and sub-contractors of the perils of failing to comply with detailed notice provisions in contracts. This case demonstrates that Hong Kong Courts will take a strict approach to contractual notice provisions in the absence of any ambiguity, including provisions that require a party to state the ‘contractual basis’ of their claims for additional payment.

In that last regard, this decision will have wide-ranging implications, given the number of standard forms of construction contracts in Hong Kong, identified by the Court of Appeal, that require notification of the contractual basis of a claim, including the Hong Kong Government’s; the Hong Kong Institute of Surveyors/Hong Kong Institute of Architects; and the Hong Kong Airport Authority form contracts.

In light of Maeda, contractors and sub-contractors should consider the following matters when negotiating construction contracts:

1. pay close attention to notification provisions, including whether they are identified as condition precedents; and
2. if employers, contractors and sub-contractors wish to have finality regarding their construction claims, consider excluding any right of appeal to the courts under the applicable law (in this case Schedule 2 of the Hong Kong Arbitration Ordinance). Otherwise, no matter the nature of the notification provisions used and the quality of the arbitrator they select, the parties may still find themselves embroiled in legal proceedings long after their project has concluded.

With respect to the performance of construction contracts, parties should consider the following matters:

1. Ensure project managers are fully briefed on notification provisions for the duration of the project;
2. When first notifying claims, consider taking a broad approach to identifying the potential bases of a claim. Even if one source of contractual entitlement is identified as the primary basis of claim, consider presenting alternative bases. It may well be wise to seek legal advice, particularly for significant claims, whether from in-house or external lawyers, at the very inception of the claim, to assess all possible foundations for the claim and prepare notices that specify a wide range of legal and contractual bases for the claim;
3. When presenting a claim on alternative bases, there will likely be a need to update claim particulars and quantum periodically by reference to these alternative bases of claim, in addition to the primary basis of claim (given that the compensation entitlement may be different depending on the basis of the claim advanced); and 
4. Sub-contractors and their counsel should, from the outset, be alert to the possibility of making ‘like rights’ claims based on the main contract and, therefore, should pay close attention to the provisions of both the sub-contract and main contract before formulating a claim.