Review of Key Construction Law Cases in 2024 – Hong Kong Perspective
In this article, we will provide a year-in-review some of the key construction law cases in Hong Kong and abroad in 2024, which provided judicial guidance on statutory and contract interpretation, as well as important legal principles that are relevant to construction industry stakeholders in Hong Kong.
Adjudication
In our previous article1 , we have covered the Construction Industry Security of Payment Bill (the Bill) that was introduced in May 2024 and anticipated to become effective in early 2025. The Bill primarily sets out the forthcoming statutory adjudication regime largely following the same approach adopted by other common law jurisdictions (such as the United Kingdom and Australia) and included specific features from legislations of these jurisdictions, as acknowledged in the Legislative Council Brief of the Bill2 . It goes without saying that English and Australian court decisions dealing with adjudication issues may provide helpful guidance to the Hong Kong Courts (and adjudicators) should such issues arise.
On 9 July 2024, the English Supreme Court delivered the judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 which held that the collateral warranty in question is not a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the English Act), therefore not subject to the statutory adjudication regime. Overturning the Court of Appeal's majority decision, the Supreme Court found that where the contractor is merely warranting its performance of obligations owed to the employer under the building contract in a collateral warranty, it will not be an agreement for the carrying out of construction operations.
We note the definition of “construction contract“ under section 2 of the Bill adopted a slightly different wording: "construction contract (建造合約) – (a) means a legally enforceable agreement under which – (i) a party agrees to carry out construction work for another party…", whereby in the English Act, a construction contract is defined as "an agreement with a person for any of the following – (a) the carrying out of construction operations". Given the similarity in the definitions of “construction contract' in the Bill and the English Act, it will not come as a surprise if the Hong Kong Courts follow the English approach in finding most collateral warranties would not be construction contracts.
One day apart on 10 July 2024, the New South Wales Court of Appeal delivered an important judgment in EnerMech Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd [2024] NSWCA 162 which held that where a party to a construction contract has wrongfully drawn-down a bank guarantee, the other party can seek to recover the drawn-down amount through the statutory regime contained in the Building and Construction Industry Security of Payment Act 1999 (NSW) (the NSW Act). This appellant decision clarified that a payment claim under the NSW Act need not be "for construction work". By construing the relevant provisions in the NSW Act, the NSW Court of Appeal found that a payment claim is a claim for money owing on account of construction work (or related goods or services). The essential elements are whether there is a construction contract and whether there is amount payable under it.
We note that this decision may of little direct relevance to Hong Kong as it was based on an interpretation of the NSW Act and that “progress payment“ under the Bill is defined as "a payment for carrying out construction work, or supplying related goods and services for construction work, under a construction contract …". However it remains to be seen whether or not the forthcoming statutory adjudication regime in Hong Kong would allow claimants to submit broader progress payments including a claim for retention monies, which by nature, is a payment for carrying out construction work withheld as security for performance.
Conditions precedent
In May 2024, the English Technology and Construction Court delivered a multifaceted judgment3 in which the TCC was required to (amongst other things) assess whether the parties' entitlement to claim compensation for delay is subject to meeting certain conditions precedent.
The TCC summarised the English authorities relevant to the determination of whether a clause should be construed as a condition precedent, notably the requirements that the language of obligation in relation to procedure to be complied with (such as shall' and the requisite “conditionality“ which could be achieved in a number of different ways using different words and phrases (in this case, through the conditional phrasing of "If … then …). Then the TCC went on to find that the fact that the time period by which a Non-conformance Report (i.e. the condition precedent in question) has to be issued is expressed by the word “promptly“ rather than a specified number of days does not preclude the condition-precedent nature of compliance, as it is a question of fact and is sufficiently certain in meaning to be given effect to. Interestingly, the TCC also found that the requirement to submit a draft Exception Report within 5 Working Days after the initial notification had "fallen by the wayside" because there was a shared and communicated common assumption on which both parties were proceeding that there was no such requirement, giving rise to an estoppel by convention.
This case serves as a timely reminder of the importance for contracting parties to identify and comply with all conditions precedent to secure a right to claim entitlements under a contract, and for those insisting upon a condition precedent, appreciate the risk of an estoppel argument being made based the conduct and communications between the parties. When in doubt, one should err on the side of caution and reserve one's position when offering the other party an extension to comply with a contractual obligation.
Force majeure
In MUR Shipping BV v RTI Ltd [2024] UKSC 18, the English Supreme Court overturned a decision of the Court of Appeal and confirmed that a party's obligation to exercise reasonable endeavours to overcome a force majeure event does not require a party to accept non-contractual performance, absent clear wordings to such effect.
In this case, the definition of a force majeure event included a criterion that such an event "cannot be overcome by reasonable endeavours from the Party affected". When RTI became practically impossible to pay in US dollars due to sanctions imposed by the United States, it offered to make payments in Euros instead of US dollars (as required under the contract). RTI contended that MUR could not rely on the force majeure clause because the force majeure could have been overcome by MUR accepting RTI's offer of payments in Euros, a reasonable endeavour from MUR. RTI's contention was rejected by the Supreme Court as the clause in question does not require a party to accept non-contractual performance (i.e. payments in Euros) and MUR's non-acceptance of payments in Euros was not a failure to use reasonable endeavours to overcome the effect of force majeure event.
Relevantly, it is common for force majeure clauses in a construction contract to contain a similar requirement for the affected party (or both parties) to mitigate or overcome the adverse effect of a particular event. For example, clause 84(1) of the HKSAR Government General Conditions of Contract for Design and Build Contracts 1999 Edition provides that the Contractor is required to "use his best endeavours to complete the execution of the Works" notwithstanding the occurrence of any of the special risks (such as an outbreak of war, invasion of Hong Kong etc.), unless and until the Contract is terminated under the said clause. Following this Supreme Court judgment, it is unlikely that the Contractor will be compelled to accept non-contractual performance even though it is obliged to use his best endeavours to complete the execution of the Works notwithstanding the occurrence of any of the special risks. If the parties intend that an alternative means of performance is acceptable, it should be expressly agreed within the contract.
Retention monies
In our previous article4, we have covered Hip Hing Construction Company Limited v Hong Kong Airlines Limited [2024] HKCFI 370, which the Hon. Mimmie Chan J dismissed the application by the contractor for a declaration that the employer held retention monies on trust because there were no identifiable trust assets. Even though the contract stipulates that retention money is to be held upon trust by the employer for the contractor (subject to the employer’s right to have recourse), the retention monies had never, prior to the contractor’s application to the Court, been paid into any separate bank account of the employer, nor segregated from the rest of the employer’s funds. The Court therefore found that the purported trust assets are too vague and uncertain.
Unless and until there is a statutory obligation to establish retention money trust accounts (as seen in other jurisdictions such as in New South Wales, Australia), contractors (or sub-contractors) should ensure retention monies are preserved and secured at an early stage of the project (indeed, at all times), rather than wait till the employer (or main contractor) becomes insolvent. To mitigate this risk, contractors should press for the segregation of retention monies from the rest of the employer's funds, or proof of creation of trust over retention monies when negotiating contracts with employers.
Default and termination
Handed down in August 2024, Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962 concerned the contractor's right to terminate the contract for repeated late payments by the employer, under an amended 2016 JCT Design and Build Contract.
Turning to the facts of the case, firstly the employer failed to pay a certified sum on or before 15 December 2022. The next day, the contractor served a notice of specified default under clause 8.9.1 (the First Notice). On 29 December 2022, the employer paid the said certified sum in full so the default did not continue for 28 days, which would otherwise trigger the contractor's right to issue a further notice to terminate its employment under clause 8.9.3. Subsequently the employer was required to pay another certified sum on or before 17 May 2023 but failed to do so. The next day, the contractor issued a notice under clause 8.9.4 to terminate its employment. Clause 8.9.4 of the contract provides:
"8.9.4 If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but (whether previously repeated or not): .1 the Employer repeats a specified default; .2 … then, upon or within 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor's employment under this Contract."
The English Court of Appeal found on the basis of the express words of clause 8.9.4, it was not necessary that a right to terminate under clause 8.9.3 must have first accrued before the contractor could have the right to terminate its employment. In other words, once the employer had committed a specified default but the right to terminate had not arisen (because it was remedied within 28 days), the contractor has nonetheless acquired a right to immediately terminate its employment if the employer repeats the specified default in future.
A similar right to “immediate” termination by the contractor exists in clause 36.1(5) of the Agreement & Schedule of Conditions of Building Contract for use in Hong Kong Special Administrative Region, Private Edition – Without Quantities, 2006 Edition:
"(5) Where the Employer ends the default, or the Contractor does not give a notice of determination, the Contractor may still determine his own employment if:
- (a) the Employer continues the default or resumes it at any time; and
- (b) the notice of determination is given to the Employer upon or within a reasonable time after the continuation or resumption of the default except that in the case of clause 36.1(1)(d) the resumption of the default shall have lasted for a continuous period of at least 30 days."
Therefore, this English decision serves as a warning to employers of the risks of early termination (and the associated claim for costs, loss of profit and damages) by the contractor resulting from the employer's repeated or continual default of the contract.
Limitation Period
Lendlease Construction (Europe) Limited v AECOM Limited [2023] EWHC 2620 (TCC), was an important judgment providing a helpful guidance on limitation periods as the English TCC rejected the limitation defences advanced by AECOM. While this decision was handed down in late 2023, we think it is worthy to include this case in our review given the importance of limitation defence for designers.
The TCC acknowledged that limitation period for a claim in contract for defective design will accrue "when the design is handed over to the contractor for construction even if construction is not completed until substantially later", unless there were continuing responsibilities going beyond the provision of design such as a duty to warn or advise. This is contrasted against the accrual of cause of action for a claim in negligence based on defective design, which will be when "a drawing containing the relevant defective design was issued to the contractor for construction purposes and the contractor then builds in accordance with that drawing". The Court went on to find even if AECOM had a duty to review its design before the completion of the relevant construction, any cause of action for breach of the deed (i.e. with limitation period of 12 years) would have accrued by the end of August 2006 when the relevant construction was completed. It follows that such cause of action is statute-barred when these proceedings were commenced on 30 May 2019 (i.e. not within 12-year from the end of August 2006).
Limitation issue is often a powerful defence for consultants and their insurer to a claim of defective design. This decision underscores the importance of ascertaining both the applicable limitation period and the date of accrual of cause of action when contemplating a claim.
Arbitration
In our previous article5 , we have covered Employer v Contractor [2023] HKCFI 2911, which the Hon. Mimmie Chan J dismissed an application for leave to appeal pursuant to section 6(1) of Schedule 2 to the Arbitration Ordinance (Cap. 609) brought by the Employer (the Respondent in the Arbitration) on a question of law arising out of a partial award. This decision is based on her Ladyship's finding that the Employer's contention (in the application for leave to appeal) that the cables works should be valued on the bills of quantities rates pursuant to GCC 61(1)(b) was not supported by the Employer’s pleaded case (in the arbitration) and there were no submissions made by either party under GCC 61(1)(b) in the arbitration, and neither expert had in their evidence considered the application of GCC 61(1)(b) to the case.
The decision underscores the importance of ensuring the question of law that is made subject matter of an appeal must first have been submitted to the arbitral tribunal to decide.
In 2024, we saw a number of noteworthy decisions where the Hong Kong Court, in exercising its jurisdiction under the Arbitration Ordinance (Cap. 609), set aside arbitral awards or refused to enforce arbitral awards. Such curial intervention is uncommon and each case will turn on its own circumstances. In A v. B and Others [2024] HKCFI 751, the Court, in setting aside an enforcement order, held that the arbitrator's failure to explain why the respondents' arguments were rejected or considered to be irrelevant to her, were sufficiently serious to affect the structural integrity of the arbitral process and have undermined due process. Upon finding that under the relevant arbitration rules, the tribunal shall "state" the reasons upon which an award is based (unless the parties have agreed that no reasons need to be given), the Court further held that the award did not comply with the arbitration rules as no reasons were given.
A v. B and Others should be contrasted with X and YCo v ZCo [2024] HKCFI 695, where the Court dismissed the application to set aside the award and held that it was an attempt to "repackage" arguments which had not been made the focus of submissions to the tribunal and presenting them to the Court as key issues that had not been dealt with by the tribunal. It was further stated that the grounds for refusal of enforcement are to be construed narrowly. Only conduct “sufficiently serious or egregious” amounting to a denial of due process suffices. The case of X and YCo v ZCo reminds parties in dispute that the agreed list of issues for the tribunal should be prepared cautiously to ensure important issues for determination is included. The parties should clearly identify and refer to the tribunal the salient issues in dispute and bring these issues to the attention of the tribunal, rather than attempting to “slip in” new arguments in a challenge of the award.
Please contact May Ng (Partner) or Marcus Wong (Associate) if you have any questions or would like to discuss this article further. Contributors to this article include our Trainee Solicitors, Lily Choi, Christie Poon and Dillon Tsang.
