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Building Contract
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t Procedures
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in Hong Kong
Fourth Edition

1993

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I,.
~ Martyn J ames Hills
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,r MSc MCIOB
! Lecturer in Construction Management
Hong Kong Polytechnic

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HONG KONG POLYTECHNIC
LIBRARY ..._
 1/ .'
"

Copyright © Martyn James Hills 1993. All rights reserved. No part of this publication may be reproduced or
transmitted, in any form or by any means, electrical or mechanical, including photocopying, recording or any
information storage and retrieval system, without permission in writing from the author.

ISBN 962-367-013-3

First Edition 1989

Second Edition 1990
Third Edition 1991
Fourth Edition 1993

Published by

Department of Building and Rea! Estate

Hong Kong Polytechnic
Yuk Choi Road, Hnng Horn, Kowloon, Hong Kong

Printed by

Hong Kong Polytechnic Reprographic Unit

.-
~.
' ..'hod
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"

For my sister

Jenny
-~--

ACKNOWLEDGEMENTS

In the preparation of this edition, I wish to firstly acknowledge the Department of

Building and Real Estate (formerly the Department of Building and Surveyir:g), Hong Kong
Polytechnic, for providing excellent facilities, a good working environment, and perhaps most
important of all, adequate time.

A special debt of gratitude is due to Mr. John S. Ratcliffe, Head of the Department
of Building and Real Estate from September 1987 to July 1993. As a result of John's strong
backing for my study leave application, I was given the opportunity to pursue, and
successfully complete, a full-time Master of Science degree programme' in Construction,
Management at the University of Bath. The intellectual stimulus provided by that course of
study had a direct bearing on my decision to produce afourthedition.

Finally, my sincere thanks are extended to the many friends and colleagues who, over
the years, have provided the necessary moral and practical support that has made the
production of this book possible. In particular, 1 am very grateful to MaTian Wu, Peter
Smith, and David Peart for their invaluable contribution to the third edition, and Derek
Lane-Smith for his assistance in the production of both the third and fourth editions.

If I have inadvertently used material without permission or acknowledgement, I

sincerely apologise and hope that any oversight will be excused.

August 1993 M. J. Hills

v
 CONTENTS
Page

ACKNOWLEDGEMENTS v

INTRODUCTION Xl

CHAPTER 1 FORMATION OF A CONTRACT 1

1.1 DefInition of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Essential Requirements of a Contract . . . . . . . . . . . . . . . . . . . . . 2
1.3 Offer and Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Consideration and Contracts Under Seal ....' . . . . . . . . . . . . . . . 6
1.5 Contractual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.6 Genuiness of Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. 7 Form of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.8 Legality of Object . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

CHAPTER 2 TERMS OF A CONTRACT 15

2.1 Express Terms . . . . . . . . . . . . . . . . . . . . . . . . . : . . . . . . . . 15

2.2 ClassifIcation of Express Terms . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 Implied Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Exclusion and Limitation of Liability . . . . . . . . . . . . . . . . . . . . 18
2.5 Variation of Contract Terms ." . . . . . . . . . . . . . . . . . . . . . . . 19
2.6 Interpretation of Contract Terms . . . . . . . . . . . . . . . . . . . . . . 20

CHAPTER 3 DISCHARGE OF A CONTRACT 23

3.1 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3 Frustration . . . . . . . . . . . . . . . . ". . . . . . . . . . . . . . . . . . . . . . 26
3.4 Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

CHAPTER 4 REMEDIES FOR BREACH OF CONTRACT 29

4.1 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.2 SpecifIc Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.3 Injunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.4 Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.5 Quantum Meruit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.6 " Limitation of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

vii
 page

CHAPTER 5 STANDARD FORMS OF CONTRACT 35

5.1 Reasons for Use of a Standard Form . . . . . . . . . . . . . . . . . . . . 35

5.2 Standard Forms of Building Contract . . . . . . . . . . . . . . . . . . . . 36
5.3 Formalisation of a Standard Form Contract . . . . . . . . . . . . . . . 39
5.4 Amendments to a Standard Form . . . . . . . . . . . . . . . . . . . . . . 40
5.5 Precedence of Standard Form Contract Documents . . . . . . . . . . . 40
5.6 Discrepancies and Errors in Contract Documents . . . . . . . . . . . . 43

CHAPTER 6 CONTRACTUAL RELATIONSHIPS 45

6.1 Contractnal Parties to the Main Contract . . . . . . . . . . . . . . . . . 45

.6.2 SUb-Contractors and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . 48
6.3 Non-Contractual Parties to. the Main Contract . . . . . . . . . . . . . . 51

CHAPTER 7 CONTRACTUAL ARRANGEMENTS 57

7.1 Lump Sum Contracts .... . . . . . . . . . . . . . . . . . . . . . . . . . . 57

7.2 Measurement Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
7.3 Cost Reimbursement Contracts . . . . . . . . . . . . . . . . . . . . . . . . 61
7.4 Design Build and Turnkey Contracts ... . . . . . . . . . . . . . . . . . 64
7.5 Comparison of Risk .. . . . . . . . . . . . . . . . . . . . . . . . . . '.. . . 64

CHAPTER 8 TENDERING PROCEDURES 65

8.1 Open Competitive Tendering . . . . . . . . . . . . . . . . . . . . . . . • . 65

.8.2 Selective Competitive Tendering . . . . . . . . . . . . . . . . . . . . . . . 66
8.3 Negotiated Tendering . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . 67

CHAPTER 9 POSSESSION AND COMPLETION 71

9.1 Date for Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

9.2 Early Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
9.3 Sectional Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
9.4 Liquidated and Ascertained Damages . . . . . . . . . . . . . . . . . . . . 75

CHAPTER 10 INSURANCE AND SURETY BOND 77

10.1 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
10.2 Building Contract Insurances .......-. . . . . . . . . . . . . . . . . . 79
10.3 Indemnity and Insurance Clauses . . . . . . . . . . . . . . . . . . . . . . 82
10.4 Surety Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

VllI
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page

CHAPTER 11 INSTRUCTIONS AND VARIATIONS 95

11.1 Written Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

11.2 Oral Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
11.3 Clerk of Works Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
11.4 Clanses Which Empower Instructions . . . . . . . . . . . . . . . . . . . . 97
11.5 Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
11.6 Measurement and Valuation of Variations . . . . . . . . . . . . . . . . . 99
11.7 Pro-rata Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
11.8 Fair Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
11.9 Provisional and Prime Cost Sums . . . . . . . . . . . . . . . . . . . . . 103

CHAPTER 12 CERTIFICATES AND PAYMENTS 105

12.1 Interim Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

12.2 Interim Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
12.3 Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
12.4 Certificate of Practical Completion . . . . . . . . . . . . . . . . . . . . 109
12.5 Certificate of Making Good Defects . . . . . . . . . . . . . . . . . . .. 110
12.6 Final Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
12.7 Final Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

CHAPTER 13 CONTRACTOR'S CLAIMS 113

13.1 Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

13.2 Delay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
13.3 Extension of Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
13.4 Claims for Direct Loss and/or Expense... . . . . . . . . . . . . . . .. 119
13.5 Cross Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

CHAPTER 14 DETERMINATION OF EMPLOYMENT 125

14.1 Determination by Employer_ . . . . . . . . . . . . . . . . . . . . . . . .. 125

14.2 Determination by Main Contractor . . . . . . . . . . . . . . . . . . . . 128

CHAPTER 15 RESOLUTION OF DISPUTES 131

15.1 Arbitration ..... -. . . . . . . : . : .- ;- ..... : . . . . . . . . . . . . . 131-

15.2 Comparison Between Arbitration and Litigation . . . . . . . . . . .. 136
15.3 Alteruative Dispute Resolution (ADR) . . . . . . . . . . . . . . . . . .. 137
15.4 Strengths and Weaknesses of ADR . . . . . . . . . . . . . . . . . . . . 138
15.5 ADR Techniques Examined and Compared . . . . . . . . . . . . . .. 142

ix
 page

APPENDICES

Appendix 1 INTERIM CERTIFICATE . . . . . . . . . . . . . . . . . . . . . 154

Appendix 2 INTERIM VALUATION . . . . . . . . . . . . . . . . . . . . . . 155
Appendix 3 CERTIFICATE OF PRACTICAL COMPLETION. . . . .. 156
Appendix 4 CERTIFICATE OF MAKING GOOD DEFECTS . . . . . . 157
Appendix 5 FINAL ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Appendix 6 FINAL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . 159
Appendix 7 THE WAGE INDEX . . . . . . . . . . . . . . . . . . . . . . . . . 160
Appendix 8 FLUCTUATION CALCULATIONS . . . . . . . . . . . . . . . 161

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

x
-...,---

INTRODUCTION

Whenever there is an agreement between a building contractor and a building owner

involving work in return for reward, it is essential that a formal contract be entered into. - -
In this way, not only can obligations be clearly specified but, more importantly, the rights
of each party can also be safeguarded under the law. A working knowledge of procedures
involved in such a contract is an invaluable asset for all those employed, or aspiring to be
employed, at management or senior supervisory level in the building industry.

It is co=on practice in the building industry to use standard forms of contract. A standard
form is simply a document setting out the rights and duties of each party, which may be used
for any contract of a similar nature. For the purposes of clear explanation and consistent
analysis, one particular standard form of building contract has been chosen for reference
throughout this book. This is a standard form of contract widely used in the private sector
of Hong Kong's Building industry, and is termed throughout the book as the HK Standard
Form. The full title of this contract is:

Agreement and Schedule of Conditions of Building Contract (Standard Form

of Building Contract) for use in Hong "Kong, Private Edition (With
Quantities), Second Edition 1976 (May 1979 Revision)

This form, issued by The Hong Kong Institute of Architects, has traditionally been referred
to as the HKIA Form. The other edition of the same form - First RlCS (HK Branch) 1986
Edition - is issued by The Royal Institution of Chartered Surveyors (Hong Kong Branch).
Both Editions are issued under the sanction of The Hong Kong Institute of Architects, The'
Royal Institution of Chartered Surveyors (Hong Kong Branch), and The Society of Builders,
Hong Kong.

In order to appreciate the logic behind the structure of building contracts, it is necessary to
have in understanding of the principles -of contract law; the fIrst section 'of the book is
devoted to providing that understanding. The law of contract - a branch of civil law as
opposed to criminal law - imposes a liability based on a legally enforceable agreement
between the parties. Another branch of civil law is the law of tort, under which liability is
based on the concept of a legal duty of care not to injure persons or their property. Under
certain circumstances, particularly in cases of negligence, tort may interface with and even
overlap contract. Tort is therefore referred to at relevant points in the text, although
comprehensive coverage is beyond the scope of this book. However, for those who wish to
discover more, the bibliography provides an extensive guide to further reading.

Xl
t

Much of the law of contract, particularly concerning the formation of contracts, has been
derived from case law. Case law is the area of law that has evolved as a result of decisions
handed down by the courts over the years but it should be remembered that the establishment
of precedents is not purely historical, it is a continuing process~ These decisions are
subsequently adopted as the rules to be followed, in other words, they es~blished precedents.
Due to the special relationShip that exist between Hong Kong and the United Kingdom, Hong
Kong law closely follows that of the English system of law which is why decisions handed
down by courts in England, as well those in Hong Kong, often establish precedents which
are followed in Hong Kong. As court cases are referred to throughout this book, by way of
example or to show where precedents have been established, it is important to be aware of
terminology applied to tIie parties in a case. All court cases have a party bringing the action,
known as the plaintiff, and a party defending, known as the defendant. The ruune of the
plaintiff will always be given fIrst in a case. Appeal cases use the terms appellant and
respondent.

1.1 Definition of a Contract

A contract may be defIned as: An agreement between two or more parties/persons to

. do or not to do some act or acts. their intention being to create a legal relationship
which is enforceable by law. In the case of a building contract, this is an agreement
under which the builder, co=only referred to as the contractor, undertakes for
reward to carry out building works for the building owner, co=only referred to as
either the client or employer.

Note: The terms builder and contractor, and client and employer, may generally be used interchangeably.
However, throughout this book the terms emplayer and contractor (and where appropriate main contractor)
are used, to be consistent with the terms used in the HK Standard Form ...

1
ONE FORMATION OF A CO~'TRACT

1.2 Essential Requirements of a Contract

The essential requirements which must be present in a valid contract are as follows:

• Offer and acceptance - constitutes an agreement between the parties (See

1.3 for details) .

• Consideration - must be given by both parties except for contracts under seal
(See 1.4 for details)

• Contractual capacity - each party to the contract must have the legal capacity
to enter into a contract and in some cases this is limited (See 1.5 for details)

• Genuiness of consent - the parties must intend to enter into legal relations and
must do so of their own free will (See 1.6 for details)

• Form of a contract - certain types of contract are required to be made in a

particular form (See 1. 7 for details)

• Legality of object - the contract must not be for an illegal purpose (See 1.8
for details)

In the absence of one or more of these essentials, the contract may be void, voidable,
or unenforceable.

Void contracts are destitute of legal effect; that is they are not contracts, and
agreements of this kind do not confer legal rights on the parties .

. Voidqble contracts are those which may be made void' at the instance of one of the
parties. For example, a. contract which is induced by fraud, can be avoided by the
party deceived. - • -

Unenforceable contracts are those which are valid but are unenforceable at law
because of the absence of either evidence of the contract or the form required by law.
For example, some contracts which are not evidenced in writing are unenforceable I
at law.
i
1.3 Offer and Acceptance

Offer

Agreement takes the form of offer and acceptance. A contract is formed

when an express or implied offer is made by one party known as the offeror
and is accepted without qualification or amendment by the other party known
as the offeree. -

2
...i

ONE FORMATION OF A CONTRACT

Offer is an expression of willingness to enter into a contract on certain terms

and to be bound by it when accepted by the party to whom.it is addressed.
It may be oral, in writing or by conduct. For example, a bus drawing up at
a bus stop and offering to carry passengers to their destinations is an offer by
conduct. An offer may be made to one particular person or to the world at
large.

There is no requirement that the word offer must be used, and an offer is no
less an offer because some other word such as estimate, quotation or even
order is used, which are terms frequently used in the building industry.

An offer may come to an end, before acceptance js mark, in the following

ways:

III Lapse of time

If the offeror gives a time for acceptance it will end when that tiple
has passed without acceptance. If no time is specified it will lapse
when not accepted within a reasonable time. The court will decide
what is and what is not a reasonable time.

III Death of offeror or offeree

In the case of an offer made by one individual to another individual,

if either dit<s. before acceptance, the offer will immediately come to an
end.

III Rejection

This may be an outright rejection or refusal of an offer or it might take

the form of counter offer. An example of counter offer would be
where Mr. Wong offers to sell his flat to Mr. Ma for $800,000 and
Mr. Ma rejects but offers $750,000. Mr. Wong can than either accept
or reject the counter offer.

III Revocation

·Withdrawal or revocation of an offer must be commllnicated to the

offeree before acceptance. Revocation is of no effect until it is
actually brought to the notice of the offeree.

Invitation to Treat

An invitation to treat is an invitation to negotiate. It is an indication of the

lines along which an offer is to be made. The person making the invitation
to treat does not intend to be legally bound if the terms are accepted, 'so this
cannot be turned into a contract. An invitation to treat is not an offer; there
is a definite distinction.

3
ONE FORMATION OF A CONTRACT
-'
l
Examples of invitation to treat are as follows:

11 Display of goods for sale at a fixed price in a shop window or on a

shelf of a self service store

The customer by taking the goods from the shelf and presenting them
at the cash desk is making an offer. which the cashier may accept or
reject.

11 Advertisements, price lists, catalogues

These are normally invitations to treat because the law does not
consider there is an intention on the part of the advertiser to sell at the
price stated (unless the word offer is used). Generally •..adyertisements
-Dnly invite offers; price indicates the lines along which an offer may
be made.

11 Auctions

The auctioneer's request for a bid is merely an invitation to treat and

is not an offer which can be converted into a contract by the highest
bidder. It is an invitation to bid and it is the bid itself which is the
~. It is therefore up to the auctioneer to accept or reject the offer.

Tender

A tender is an offer. Companies often invite tenders, that is they ask oth~rs
. to submit details of prices at which goods or services may be bought. There
are two types of tender: where the tender is an offer to supply a specified or
definite quantity of goods or services known as a single tender; where the
. tender is an offer to supply goods or services as required over. a period of
time, knciwJ,1 as astandjng tender

11 Single tender is an offer made by the party submitting the tender

which may be accepted or rejected. On acceptance of a tender
(without qualification or amendment) a contract is formed.

11 StandIng tender is an offer to supply goods or services as required by

the buyer, over a specified period of time. A separate acceptance is
required each time an order is placed.

Acceptance

Just like offer, acceptance may be oral, in writing or by conduct. The offeree
must accept all the terms of the offer without any qualification or amendment.
Th~ptance must beco=unicated to the offeror •.. However, under some
circumstances conduct may be sufficient evidence of acceptance.

4
 ONE FORMATION OF A CONTRACT

'" For example, if a person owning a flat asks a builder to call around to the flat
I to carry out certain repairs, and the builder does so, there is a legally binding
contract; the builder having accepted the flat owner's offer by conduct.

Also, in major building projects, it is not unco=on for a main contractor or

sub-contractor to co=ence work when all the terms have been negotiated and
agreed but no formal acceptance has been recorded. In such a case both the
employer, by giving possession of the site to the contractor, and the
contractor, by carrying out the work, will by their conduct be evidencing
acceptance of the contract terms.

III Acceptance by post

This is an important exception to the general rule of acceptance. The

general rule is that the offeror is not bound until the acceptance is
actually co=unicated.

However, an acceptance by post is understood to have been

co=unicated to the offeror at the moment the letter of acceptance is
posted. Even if the letter of acceptance is lost or delayed in the post,
the offeror is bound by the acceptance if the fact of posting is proved.
The fact of posting can be proved by producing a receipt to show
when it was posted and to whom; such a receipt will only issued by
the postal authorities when an item is registered.

This exception to the general rule of acceptance, which relates only to

an acceptance by post (not to an offer by post), is applicable where the
circumstances are such that, according to the general usage of man,
both parties regard post as being a means of co=unicating the
acceptance of an offer. The offeror may avoid the consequences of the
rule, by expressly stipulating that he will not be bound until he actually
receives the letter of acceptance.

The reason for this exception is that the offeror, by either expressly or
implicitly authorising an acceptance by post, implies that the postal
authorities are acting as his agent for the purpose of receiving
acceptance. Legally, co=unication to the agent (in" this case the
postal authorities) is deemed.to be co=unication to the principal (in
this case the offeror). However, the postal authorities cannot be held
j responsible for the consequences of loss or delay of letters of
acceptance. Under the terms of their contract with customers, the
postal authorities exclude liability for loss or delay of any item.

I III Acceptance by telegram

The same exception to the general rule of acceptance which applies to

letters, also applies to the sending of a telegram. A telegram of
acceptance takes effect when it is handed in at a post office. Once
again the postal authorities are understood to be acting as an agent;
once again similar rules apply.

5
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ;! -
" L
ONE FORMATION OF A CONTRACT

• Acceptance by telephone, telex, fax

Firstly, the contract is only complete when the acceptance is received

by the offeror at his end of the line. Secondly, for the purpose of
determining in which country any subsequent legal action should take
place, the contract is formed where the acceptance is received. The
following case is an example of the legal situation when a contract is
formed by telephone:

Entores Ltd. v. Miles Far East Corporation (1955). The plaintiff in

London made an offer by telex to the defendant in Amsterdam. The
defendant accepted by telex message transmitted to London. Later, the
defendant was in breach of contract, and the plaintiff wished to
establish that the contract by telex was made in London where the
acceptance was received, in which case legal action could take place L _J

in England. It was held by the court that the contract had been made
in London, since the defendant's acceptance of the plaintiff's offer was
not complete until it was actually received by the plaintiff.

1.4 Consideration and Contracts Under Seal

Consideration

Consj\leration is essential to the. formation of all contracts not under seal and
has been defmed as: Some right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss or responsibility given, suffered
or .undertaken f7y the other.

Consideration is what a party contributes towards the contract; it is the price

which is paid for the other party's act or promise.

In the case of a building contract, the contractor constructs a building for the
employer who in turn pays the contractor an agreed sum of money. The
contractor has given consideration to the employer by constructing the
building 2nd the employer has given consideration by paying the contractor.
Over the years certain rules have evolved concerning consideration, these are
as follows:

• Consideration must not be past

The law does not recognise past consideration as this is treated as no

consideration at all. For example, a contractor may, in response to an
employer's request, build a house on the employer's land without a
price being agreed beforehand. After completion the employer may
promise to pay the contractor $500,000 but eventually pays only
$400,000.

6
.,.I .
I ONE FORMATION OF A CONTRACT

Under such circumstances, the contractor will not be able to enforce

the original promise to pay the $500,000. This is because the act was
performed (the house completed and therefore consideration given)
before the promise to pay was made. The contractor was not in a
position to provide consideration at the time the employer made the
promise; the contractor's consideration was past and therefore could
not be recognised as consideration for the purpose of supporting the
contract.

11 Consideration need not be adequate (fair) but it must be sufficient

(valuable)

The court will not inquire into the value of the consideration given to
the other party, providing it is valuable consideration, meaning that it
has some monetary value. For example, a contract will be binding if
a Rolls Royce is exchanged for a bicycle as both have value, even
though not equivalent.

11 To carry out a public duty does not provide consideration

If a person promises to do something which he is already legally

obliged to do, this is not valid consideration. A case illustrating public
duty is the case of Collins v. Godefoy (1831) where Collins was
obliged by law to give evidence for Godefoy, who in turn promised to
pay him money for his loss of time and expenses, but never did.
Collins sued, but it was held by the court that Collins could not
recover the money, as he had given no consideration by doing what he
was already under a public duty to do.

* ~ 0\. aml~ 121 To carry out an existing contractual obligation does not provide
consideration
~ To a;v..A~--t.2
i kl'- ~ l5V\ In the case of Stilk v. Myrick (1809), the plaintiff, Stilk, was a seaman
i· )(- '1-Pf )A.n& ~ who had contracted to work on a voyage for £5 a month. There were
I {~I \I\,~I
eleven men in the crew. During the voyage two seamen deserted. The
captain agreed to share the wages of the two deserters between the rest
I itT>ob~~ of the crew, providing they worked the ship back to London. Stilk
, 'vvt- ~v..o'v to'"M~ asked for his share of the extra money upon their return, but did not
~Cb Ifi7lII:s. (71'\. 1T1M.l1.. receive any, and so he sued the captain. It was held by the court that
Stilk was already under a contractual obligation to work on the ship
~d~~~
and was therefore not entitled to receive any extra money.
-to £1\. Ir-e. ~tW' ALL- \
tlJ",-c;- -\: ~ :..tk 0 ~la.v,-t
Only a person who has himself given consideration will be able to
t;lo. 'Mic ~ tW-. - enforce a contract
I w.,,(,o
" av:.., unt -"> ~
, S'V) The relationship which existS between the parties to a contract is
1 ' known as pn'vity of contract, since only the parties to the contract
provide consideration.
I
I
I _.

I~ 7
 1 r
ONE FORMATION OF A CONTRACT·

It follows therefore, that as a general rule, no stranger to the

consideration may enforce rights under the. contract. This particular
rule has an important bearing on building contracts.

If, during the course of construction, the main contractor employs a

sub-contractor to carry out work on the contract, and the work turns
.out to be defective, the employer cannot sue the sub-contractor for
breach of contract. The employer must sue the main contractor, who
would in turn sue the sub-contractor. This is because there is privity
of contract between the main contractor and sub-contractor, and.
between the employer and main contractor.

Contracts Under Seal (Deeds)

A simple contract may be made in writing, orally or by conduct and each

party must contribute something to the agreement (consideration) to make it
binding. The only exception to this principle is a contract under seal. Such
a contract is made by deed, that is to say· it must be in writing, signed,
witnessed, and delivered by the disposing party (these days, in practice, the
requirement of delivery is not always enforced). Prior to the U.K's Law of
Property (Miscellaneous Provisions) Act 1989, the affIxing of a seal was
required in order to make the deed valid. However, the Act referred to
abolished this requirement and replaced it by the simpler requirement for
signature in the presence of a witness. As deeds have a long history and have
traditionally been referred to as contracts under seal, reference to contracts
under seal will continue for some time. A contract by deed binds its maker
without need of any consideration.

A party may make a promise under seal which is enforceable, even though
there is no consideration. In other words, a party could carry out some act
. or promise, and providing the contract is under seal, would receive nothing
from the other party. This would be accepted by a court of law and is the
major difference between a contract under seal (a deed) and a simple contract,
which does require consideration.

Another important difference is that, under the Limitation Ordinance, for

siJ;nple contracts, once six years have. passed the right to sue in a court of law
is no longer possible. However, for a contract under seal, this right lasts for
twelv~ years. (See 4.6 Limitation of Action)

1.5 Contractual Capacity

Adult citizens have full capacity to enter into any kind of contract they wish, but a
few groups of persons do not have this power in full; they are said to be, under
incapacity. The groups concerned are minors, persons mentally disordered or under
thdnfluence of drugs, and companies.

8
 ONE FORMATION OF A CONTRACT

III Minors

In Hong Kong, a person under the age of eighteen is considered to be a

minor, and as such does not have the legal capacity to enter into contracts.
However, there are exceptions, such as contracts for necessities, and contracts
of service which are for the benefit of the minor, for example, contracts of
apprenticeship.

III Persons mentally disordered or influenced by drugs

Contracts made by a person of unsound mind or under the influence of drugs

'will be valid only if the person so affected, understands the nature of the
contract. Such contracts will be voidable at the option of the person affected,
if that person is able to prove in a court of law, that he was not in full
command of his senses at the time the contract was made, and that the other
person knew this.

III Companies

A company which has been properly formed, following the procedures laid
down in the Companies Ordinance, is a statutory corporation. It is recognised
by the law as having a legal personality of its own, quite separate to that of
its members, and has the same contractual powers as a person of full age and
capacity. The memorandum of association contains details of the company's.
business and defines the objects of the existence of the company. Any action
taken by the company which is either outside the provision of these objects or
not closely related to them is said to be beyond the power of the company
(ultra vires). It is through this doctrine that a company may lose its capacity
to enter a valid contract.

1.6 Genuiness of Consent

A contract may become void if there is no genuiness of consent between the two
parties. Consent may render the contract void by mistake, misrepresentation, or
duress and undue influence.

Mistake

Generally, mistake has no effect on a contract. If a party is dissatisfied with

the result of his bargain, if he fmds his obligation difficult or even impossible
to fulfil, he cannot avoid liability on the basis that he made a mistake.

9
 -;
-'
ONE FORMATION OF A CONTRACT

However, a mistake over a matter of fact may occur during the formation of
an agreement which at co=on law may make it void as a contract. This
does not apply to a mistake of law as we are all presumed to know the law.
A mistake of fact is confmed to four cases:

11 Mistake as to the nature of the obligation

This occurs where a person signs or executes. a document in the

mistaken belief that the document is of a totally different kin.d from
that which it is. For example, if a blind man signs a document which
he is told is a lease, whereas in fact, the document is a bill of
exchange, his mind does· not go with his act and his consent is
negated; therefore the contract is void.

11 Mistake as to the identity of the subject matter

If the parties are mistaken as to the identity of the subject matter of the
contract, the contract will be void. For example, if Mr. Leung owns
two plots of land, plot X and plot Y, and offers to sell plot X to Mr.
Poon, and Mr. Poon accepts in the belief that Mr. Leung is offering
him plot Y. The minds of the parties are not as one; there is a mistake
as to the identity of the subject matter.

11 Mistake as to the identity of the other party

If one party is mistaken as to the identity of the other, the contract will
be void. For example, Mr. Au, by mistake, makes an offer to Mr.
Yip believing him to be Mr. Tang, and Mr. Yip (who is aware of Au's
mistake), accepts. It is for .this reason that a forged signature will
make a contract void.

11 Mistake as to the basis of the agreement

This occurs where the parties agree, under a mistaken belief co=on
to both, as to the existence of a specific thing or state of facts which
forms the basis of the agreement. For example, if both parties are
under the mistaken belief that a property, which is the subject of the
contract, can be used for industrial development, when in fact it is for
residential development only, then the contract will be void.

Misrepresentation

In the negotiations leading up to a contract, many statements may be made.

Some of the statements will be incorporated into the fmal contract, so
becoming contractual terms. If astatement becomes a term in a contract and
then turns out to be untrue, the party who suffers by the untruth has a right
of action to terminate the contract.

10
...
ONE FORMATION OF A CONTRACT

A misrepresentation is an untrue statement made by one party to the other

which causes him to enter into the contract. Misrepresentation, which makes
a contract voidable, may be classified as either fraudulent, negligent, or
innocent. Details of each are as follows:

III Fraudulent misrepresentation

A statement is fraudulent if it is made knowingly without belief in its

truth, or recklessly and carelessly not knowing whether it be true or
false.

III Negligent misrepresentation

Through a lack of duty of care by a professional person. For

example, the architect and quan:tity surveyor in a building contract.

11 Innocent misrepresentation

If for example one party makes an untrue statement to the other party
believing it is wholly true, then it is up to the court to decide whether
the contract is void.

Duress and Undue Influence

Contracts effected by duress or undue influence may become void at the

option of the party influenced.

Duress is limited to actual violence or threats to the person while the contract
is being carried out.

Undue influence requires that the party seeking to stop the contract must
prove that he was-subject to influences which excluded free consent. For
example, in the case of blackmail, where one person threatens to divulge
damaging information about another if he does not enter into a contract.

1.7 Form of a Contract

In most cases, with regard to simple contracts, it does not matter which of the various
forms of simple contract is used, and a contract made orally or by conduct will
usually be just as effective as a written one. However, in some circumstances written
formalities are required.

11
 ,
ONE FORMATION OF A COr..'TRACT

Contracts 'Which Must be in Writing

The following are examples of simple contracts which are required by to be

in writing, in the fo= prescribed by law and signed, otherwise they are void:

• Bills of exchange and promissory notes

• Share transfers
,.
• Hire purchase contracts

Contracts Which Must be Evidenced in Writing

There is a defInite distinction between contracts which must be in writing and

those that must be evidenced in writing. For contracts that must be evidenced
. in writing, the written word is not essential to the fo=ation of the contract.
However, in the absence of written evidence the court will not be able to
enforce the agreement; the contract will be unenforceable. The written
evidence is known as a memorandum and may consist of a number of
documents, such as letters, provided that there is some indication, oral or
written connecting them, and that they contain the following important
info=ation:

• Names of the parties

• Subject matter of the contract
• Consideration agreed upon
• Signature of the defendant

Examples of contracts which are required by law to be evidenced in writing:

• Contracts of guarantee

• Contracts relating to the sale of land

• Contracts for the loan of money

Contracts Which Must be Under Seal

Examples of contracts which are required by law to be under seal:

• Leases exceeding three years

• Contracts without consideration

• Transfers to the title of land

12
...
ONE FORMATION OF A CONTRACT

Proof of Contract

A contract under seal must be proved in court by production of the deed

(contract document), properly signed, sealed and delivered. Because of the
requirement of having to be delivered, witnesses are usual to the execution of
a contract under seal, in order to provide proof of delivery. A contract in
writing is proved by the production of the written document, stamped if so
required (as in the case of contracts for the sale or lease of land). An oral
contract is proved by oral evidence.

1.8 Legality of Object

This has nothing to do with criminal law. There are some contracts which may be
void at civil law because such contracts are considered detrimental to society as a
whole; these are:

III Contracts contrary to a statute

For example, under the Gambling Ordinance a wagering contract (gambling)

is a void contract. This does not prevent a person from making a bet but the
court will not enforce payment.

III Contracts for an illegal purpose

An example of a contract for an illegal purpose is the case where a theatre

manager promised to pay a group of people to cause a disturbance during a
show to obtain pUblicity. The group of people did as the manager asked, but
he did not pay 4J,em. The court held that the contract was for an illegal
purpose, and therefore void.

III Contracts which are against public policy

Examples of this type of contract are: a contract involving trading with an

enemy, which would be against the interest of the· state; and a contract that
prevents justice taking place, such as a contrac(whereby one party agrees not
to take court action against the other.

13
·'

,;
i~
:

I
 Contracts consist of various statements, promises, and stipulations, written or oral, which are
grouped together under the word terms. It is the'ter-ms ,of a contract that specify the extent
of each party's duties, obligations, and rights. However, it should be noted that the phrase
terms and conditions is co=onIy used in contracts. This phrase is used in order to convey
that there are terms in the contract (conditions) which are considered to be more important
than others. ' ' ''

2.1 Express Terms

When it is clear that a valid contract has been formed, it is necessary to determine
precisely what it is the parties have undertaken to do. This is necessary in order to
be able to determine whether each has performed, or not performed, their part of the
agreement. Statements made by each of the parties (oral or written), which are
intended to be incorporated jnto the contract, are known as express terms.

Where the contract is wholly oral and the terms are in dispute, it will be a matter to
be decided by the court from evidence presented to it. However; problems may arise
where evidence is conflicting and difficult to substantiate. Therefore, in the case of
_building contracts, where there are generally many terms, it is essential to have
t -- everything in writing to prevent disputes of this nature arisin~

Where the contract is in writing it is usually obvious what the parties have written,
although there may be probJems of jnterpretation, arising from ambig]lity, which the
court has to resolve. Also, in most cases where the terms of a contract are in
writing, the court may refuse to allow oral evidence to be admitted if it has the effect
of adding to, varying, or contradicting the written agreement.

15
\
TWO TEIU.!S OF A CO:t-."TRACT

2.2 Classification of Express Terms

Not all of the terms created by a contract are of equal importance; consequently, the"
courts have adopted various approaches in assessing their relative importance. The
following terminology has been identified which may be used for the purpose of
classifying the" terms of a contract: condition, warranty, and intermediate term.

• Condition

This is the word used to denote a vital term; one that goes to the root of the
contract. A condition is so essential to the nature of the contract that its"
non-performance may fairly be considered by the other party as a substantial
failure to perform the contract at all.

So if certain cunditions are not carried o'qt in a contract, the injured party may
repudiate (refuse to accept the contract) and sue for damages. For example,
in the case of a building contract, if the employer refuses to pay the contractor
for work which has been properly executed (carried out), the contractor can
take the employer to a court of law, sue for damages and repudiate the
contract.

• Warranty

This is a term considered to be subsidiary to the main purpose of the contract,

an obligation which, although it must be performed, is not so vital as a
condition. A warranty may be defmed as a term, the breach of which may
give rise to a right to claim damages but not a right to reject the contract and
" treat it as repudiated.
i
For example, in the case of building contracts, the contractor may fail to II,
provide the clerk of works with a site hut. In such a case the employer cannot
break the contract, but will be entitled to recover the cost of providing a site
hut, from the contractor.

• Intermediate term

This is legally a term which lies somewhei:e between a condition and a

warranty. In the event of a dispute, it will be entirely up to the court to
decide whether the contract may be repudiated or not, if an intermediate term
is not fulfilled.""

Whether a term is considered to be a condition, warranty, or an intermediate term,

depends on the intentions of the parties. In the event of a dispute, it will be for a
court to decide the intentions of the parties at the time the contract was formed.

16
! ,
nvo TERMS OF A CONTRACT

2.3 Implied Terms.

In addition to express terms inserted by the parties a contract may be subject to

implied terms. Such terms originate from custom or statute, or may be implied by
the court where it is necessary to achieve the result which the parties obviously
intended the contract to have.

III . Customary implied terms

A contract may be subject to customary terms not specifically mentioned by

the parties. These terms may be implied by custom of a locality or a
particular trade. The custom, or usage as it is sometimes called, must be
certain, reasonable, and well-known to all affected by it, and must not offend
any statute.

III Statutory implied terms

Certain statutes may imply terms into particular types of contract. For
example, under the Sale of Goods Ordinance there is an implied term, that the
goods shall cooe5pond with the description, that the goods shall be reasonably
fit for the pumos~ for which they are required, and that they shall be of
merchantable quality.

III _ _ T""e",rms""""--",im"""p",li",e""d,--,b<JY,-",th",e"-",co,,,urts,,,,-,,"-o

In particular types of contract such as landlord and tenant, and hire of goods,
the courts have, over the years, had to imply terms, not on the presumed
intention of the parties but according to what is reasonable in the
circumstances.

Terms Implied into Building Contracts

Where a building contract makes no reference to such matters as time price etc., the
the terms outlined below will be implied.

Terms that the employer will: give possession of the site; supply all necessary pJans
and other details within a reasonable tjme; not obstruct the contractor in the
performance (If.the work; and pay a reasonable price for the work done.

r Terms that the contractor will: do the work in a workmanlike manner; proceed with
reasonable diligence; complete the work within a reasonable time; and supply
materials that are reasonably fit for the purpose for which they are to be used and are
of merchantable quality. Note: the warranties on materials may be excluded by
express provision or under the ruling in Young & Marten v. McManus Childs Ltd
(1968) which exc~ses the contractor for ·liability if the material· specified by the
k(it
17
roD TER.M:S OF A CONTRACT

employer proves to be unsuitable for the purpose. However, if, as happened in the
Young case (which centred on latent defects in roof tiles), the material used proves
to be defective, then whether the defect is immediately apparent or latent, the
contractor is liable for the cost of replacing the defective material.

2.4 Exclusion and Limitation of Liability I

A party to a contract may insert a term (clause) excluding or limiting their liability
under the contract. For example, airlines limit their liability for death or injury to
a specified amount of money as stated in the conditions written on the ticket. Car
parks usually exclude their liability for damage or loss of property, by placing a
notice to that effect at the entrance.

Although the courts accept the validity of exclusion and limitation of liability clauses,
they have evolved certain rules to be applied in order to determine whether they can
be enforced.

The rules that are applied by courts to determine the validity of exclusion and
limitation of liability clauses are as follows:

• An exclusion or limitation of liability clause must he commuuicated to the.

other party, otherwise it is not yaJid

In written contracts which are signed, the exclusion clause is binding whether
it is read or not. If the contract is not signed, then the test is whether the
exclusion clause was reasonably brought to the attention of the other party.

In the case of Thompmn v T, M S Railway (193Q), the plaintiff bought a

ticket on the back of which was printed faT conditions see timetable. An
exclusion clause in the timetable excluded liability for injuries to excursion
ticket holders. The plaintiff, who was illiterate (he could not read or write),
was injured during the journey and sued the company for damages. It was
held by the court that the exclusion clause was enforceable because its
. existence was reasonably. brought to the plaintiffs attention.

• An exclusion or limitation of liability clause must he commnnicated at the

time or before the contract is made

In the case 'of OiltO' Y. Milr/howugh Court lintel (19-~, Olley booked in at
the reception desk, and later found a notice in the hotel bedroom, containing
an exclusion clause, which read, no liability faT loss of belongings. When the
plaintiff (Olley) sued for the loss of a coat, that had been stolen from his
room, the defendant (Hotel) pleaded the exclusion clause as a defence. It was
held by the court that the exclusion clause was not enforceable as it had been
co=unicated after the contract had been made.

18
 1WO TERM:S OF A coNTRACT

III Only a party to the contract can enforce an exclusion or limitation of

liability clause

In the case of Adler v. Dickson (1955), the plaintiff fell from a faulty
gangplank into the harbour whilst boarding a ship. The plaintiff sued the
shipping' company, but an exclusion clause in the contract which read,
Passengers are carried at Passengers' risk, excluded the company from
liability. The plaintiff then sued the captain of the ship. It was held by the
court that as the captain was not a party to the contract he could not claim the
benefit of the exclusion clause.

This rule is particularly relevant to building contracts. A main contractor may

have a contract with an employer which includes a limitation of liability clause
in favour of the main contractor. However, if the actions of a sub-contractor
cause the employer a loss beyond the specified limit, the sub-contractor cannot
claim the benefit of the limitation clause. This is because the sub-contractor
is not a party to the main contract.

III Any ambiguities in an exclusion or limitation of liability clause will go

against the party iuserting the clause

The party inserting the exclusion or limitation of liability clause should make
it very clear as to what liability is being excluded or limited. If there is any
doubt, due to vague or ambiguous wording, then the court will rule against the
party who inserted the clause i.n thp, "ontract.

III The doctrine of fundamental breach

If the party inserting an exclusion or limitation of liability clause is in

fundamental breach of the contract, he cannot rely on that clause.
Fundamental breach means a breach of a condition which is essential to the
successful conclusion of the contract.

In the case of Harbutt's Plqsticine v. Wayne Tank & Pump (1970), the
defendant installed a plastic pipe-work hot water system in the plaintiff's
factory. ,When the system warmed up the pipes melted, the plastic material
caught fire, and burnt the factory to the ground. The plaintiffsued, and the
defendant pleaded a limitation of liability clause as a defence, which limited
liability to £2,300., ~ It was held by the court that the defendant was in
fundamental breach of the contract and could not rely on the limitation clause.

2.5 Variation of Contract Terms

A simple contract may be validly changed by the subsequent agreement of the parties
so long as there is consideration to support the variation agreement. A Contract
 .'
1WO TERMS OF A CONTRACT

under seal can be varied without the need for consideration, provided that both parties
agree to the variation. A simple written contract may be varied by a subsequent oral
agreement, just as a simple oral contract can equally be varied by a subsequent
written agreement. A simple contract can also be varied by a contract under seal, in
such a case there is, of course, no necessity for any consideration to support the
variation. The following is a detailed explanation of the situation when an employer
requires variations to the work required under the original contract.

• For simple contracts, if at the time the variation agreement is made,

obligations remain . partly unperformed .under the contract by both parties,
there will be consideration for the new agreement. However, if one party has
completed his part of the contract, and after, agrees to carry out extra work
as a variation there will be no consideration to support his agreement to do so;
the variation agreement will therefore be unenforceable. The extra work
would have to be carried out under a separate new contract agreed by both
parties. If there is a term in a building contract stating that the employer may
apply variations, then the employer may legitimately request variations to the
design, quality and quantity. The contractor, by signing the contract, will
have provided his agreement and the contract sum can be adjusted to take the
variation into account. This satisfies the consideration requirement, although
such a procedure can only take place while the contractor is performing his
part of the contract; that is, constructing the building. Once the building is
completed and a final contract sum agreed, signifying that the contractor has
completely fulfilled his contractual obligations, the employer cannot then
intr<lduce variations oecause it will not be possible to support them with
consideration. ..

• For contracts under seal, it is possible for the contractor to make an

enforceable agreement to carry out extra variation work under the contract,
even.if he has completely fulfilled his contractual obligations, as consideration
is not a requirement of contracts under seal. However, before agreeing to
carry out such work the contractor would negotiate an acceptable price.

Whether it is a simple contract or a contract under seal, a variation term in a building

contracts will always include a provision to pay the contractor for work required by
the employer which is not specified in the contract documents. To not have such a
provision would be unfair and unacceptable to the contractor, particularly for
contracts under seal.

2.6 Interpretation of Contract Terms

Having ascertained what the parties wrote or said, it is necessary to decide whether
such statements are representations or actual terms of the contract. Representations
induce (cause) the contract; terms are part of the contract itself and make up its
contents. Certain tests are applied by the courts in order to decide whether a
statement is a representation or a term of the contract.
 1WO TER1iS OF A CONTRACT

III A statement is not likely to be a term if the person making the statement
!! . asks the other party to check or verify it

For example, in a case where a vendor (the person selling) makes a statement
that the item he is selling is in good condition, but then goes on to advise the
buyer to have it checked. The statement will only be considered a
representation.

III A statement is likely to be a term if it is made with the intention of

preventing the other party from rmding any defects and succeeds in doing
this

For example, in a case where a buyer is in the process of examining an item

for sale, and the vendor intervenes with a statement to the effect that it is not
necessary to check because if there was anything wrong he would tell the
buyer. Such a statement would be taken as a term of the contract.

III A statement made during preliminary negotiations tends to be

pre-contractual

Where there is a clear interval of time between the making of the statement
and the concluding of the contract, the statement is most likely to be a
representation. In the event of a dispute, the court will rule on what is, or is
not; a clear interval of time; according to the circumstances.

III Where a contract is in the form of a written document, the court tends to
take the view that the written document is the whole contract

If the contract is written, any oral statement will be regarded as a

representation. However, the court will look at the intention of the parties to
see whether they originally intended the contract to be partly written and
part! y oral.

21
'., ~.';'.';'.'.'.'-'.'.'.' .. ~. ' ' ..

-'

L
 ,; - ,

Once each party's contractual obligations have been fulfIlled, the contract is considered to
be discharged; this is known as discharge by peifonnance. However, there are ways in
which a contract may be discharged without the parties fulfIlling their obligations; these are
by agreement, frustration, and breach of contract.

3.1 Performance

A contract may be discharged by performance, each party completely fulfIlling their

obligations under the contract so that nothing remains to be done. However, where
one party has done all that is required and the other has not, the contract is not
discharged.
-
In the case of Cutter v. Powell (1795), Cutter )'Ias promised £30 by Powel! if Cutter
continued to do his duty as fIrst mate on a ship sailing from Jamaica to Liverpool.
Cutter sailed on the ship for six weeks and died nineteen days short of Liverpool.
(:utter's wife sued for the money. The court held that Cutter had not fully performed
his obligations based on the strict working of the contract. His widow therefore
received nothing.

The case of l.1oore & Co. v. Landauer & Co. (1921), involved a contract for a
quantity of tinned fruit which contained thirty tins to a case. On delivery, half the
. cases only contained twenty-four tins, although the overall total was correct. Landauer
refused to accept delivery, and Moore sued for specific performance (a court order
forcing acceptance). The court held that Landauer was justified in rejecting the
delivery because Moore had not performed his exact obligation.

II 23
THREE DISCHARGE OF A CONTRACT

With regard to building contracts, if a supplier fails to provide the contractor with the
exact goods that have been ordered, the contractor may refuse to accept them and also
refuse to pay the supplier.

This is a very harsh rule which depends very much on interpretation. Certain
exceptions have therefore evolved; these are:

• Part performance

If one party accepts the part performance of the other, the law brings in a
promise to pay on a quantum meruit basis, meaning to be paid as much as is
deserved for the work completed. Once part performance is accepted, both
parties' liabilities are discharged and the original agreement cannot be
enforced. However, part performance must be willingly accepted as was
established in the following case:

In the case of Sumpter v. Hedges (1898), the plaintiff agreed to erect stables
and houses on the defendant's land for £565. Sumpter did part of the work
valued at £333 and then abandoned the contract. The defendant completed the
work himself. The plaintiff claimed on a quantum meruit basis for the amount
of work done, on the basis that the defendant had accepted part performance
by completing the work. The court held that the plaintiff could not recover
the £333 because the defendant had not willingly accepted the part
performance. The only reason Hedges had completed the buildings himself,
was that in their partly completed state they would have been a nuisance on
his land.

Therefore, if the contractor abandons the contract without the employer's

consent, the contractor is not entitled to payment for completed work.
~. .
/-
• Prevention of performance

If a party performs part of his obligation and is prevented from completing it

by the other party, then he can sue on a quantum meruit basis for the amount
of work completed.

In the case of De Bemardy v. Harding (1853), the defendant intended to erect

seats. to view the funeral procession of the Duke of Wellington. The plaintiff
had agreed to print and sell tickets for the seats, and to be paid on a
commission basis for the cost involved. The plaintiff spent money on printing
and advertising, after which Harding revoked (took back) the plaintiffs
authority to sell the tickets. The-court held that De Bernardy could recover
his expenses on a quantum meruit basis, that is he should be paid for the cost
of printing and advertising.

Therefore, the contractor is entitled to claim on a quantum meruit basis if the

employer prevents performance by, for example, not giving the contractor
possession of the site on the agreed date.

24
¥-..
.'
THREE DISCHARGE OF A CONTRACT

III Substantial performance

If a party substantially performs the contract, then he can sue for the contract
price and a sum will be deducted to cover the small defects in performance.

In the case of Hoenig v. Isaacs (1952), the plaintiff agreed to paint and
decorate a flat and provide certain items of furniture. He did all this but a
wardrobe door and a shelf did not fit properly. The defendant refused to pay
any money at all because the contract had not been properly performed. The
court held that the plaintiff had substantially performed the contract; therefore
he could recover the contract price less a sum to cover the defects.

With regard to building contracts, this is one of the reasons why retention
money is withheld by the employer. The employer can use this money to
compensate for any defective work that the contractor has failed to rectify.

III Time of performance

Time is very important in a contract, and therefore delivery at a later date

need not be accepted. This is particularly so if the parties stipulate a specific
date in a contract.

In the case of Rickards Ltd. v. Oppenheim (1950), the defendant ordered a

Rolls Royce to be delivered by a specified date. The car was delivered
_several months after the date for delivery specified and the defendant refused ..
to accept it. The plaintiff sued for specific performance, asking the court to
order the defendant to accept the car and therefore honour the contract.
However, the court held that the defendant had stressed the importance of
time and was therefore justified in refusing to accept the car.

3.2 ~greeD1ent

A contract is made by agreement and it is also possible to end it by subsequent

agreement, provided there is consideration. Where tb.e contract is a promise for a
promise and there has been no performance, the mutual agreement of the parties
provides consideration and is called bilateral discharge. Where the contract has been
partly or entirely performed by one party, then the other party must provide some
consideration; this method of discharge is called unilateral discharge.

Sometimes a contract makes provision for its own discharge. For example, contracts
of employment provide their own discharge by requiring a minimum notice to be
given by the employer or employee, usually one week or one month. Longer periods
can of course be provided for expressly in particular-contracts.

With regard to the form of discharge, a contract which is made in writing may be
discharged by oral or written agreement.

25
 11;
-' !L
THREE DISCHARGE OF A CONTRACT

3.3 Frustration

This applies where an agreement is possible to perform when made, but due to
unforeseeable circumstances, the fundamental purpose of the contract becomes
impossible to perform. The court will decide whether the circumstances responsible
for the frustration were foreseeable or unforeseeable at the time the contract was
entered into. Where such circumstances are determined by the court to be
unforeseeable, both parties may be discharged from their obligation of further
performance. Such circumstances may be: total or partial destruction of some object
necessary to the performance of the contract; change in the law which renders any
attempted performance illegal; where an event fundamental to the contract does not
occur.

In the case of Davis Contractors v. Fareham UDC (1956), the plaintiff agreed to
build seventy-eight houses for £92,000, all of which were to be completed within
eight months .. There was a shortage of materials and labour and the plaintiff took
twenty-two months and incurred an extra expenditure of £17,000. However, the
V.D.e. paid only the price according to the contract and refused to pay the extra
costs that Davis had incurred. The plaintiff claimed that the original contract was
frustrated by the shortages and that he was therefore entitled to be paid on a quantum
meruit basis for the extra £17,000. The court held that under the circumstances the
shortages were foreseeable, and the fact that performance of the contract had become
more onerous for the contractor, did ·not result in the contract being frustrated.

Contracts of employment

The death or illness of a person who has been employed under a contract to provide
a persona! service (such as an entertainer may provide), may frustrate the contract if
consequently the contract is impossible to perform,

A contract of employment may also be frustrated by imprisonment of the employee

or employer; contractual obligations undertaken at the time the contract was entered
into become impossible to perform.

The basic rules gQverning frustrated contracts are:

• All money paid before discharge must be returned.

• All ?loney which was due to be paid need not be paid.

Ii -- Recovery on a quantum meruit basis may be allowed for part performance

before frustration.

It should be noted that the doctrine of frustration will not apply if the contract
contains an absolute undertaking to be performed in any event.

26
"'f

THREE DISCHARGE OF A CONTRACT

3.4 Breach

A breach of contract may take one of two forms: either anticipatory breach - an
express declaration of intent not to perform, before time for performance arrives; or
executionary breach - failure to fulfIl obligations during the execution of the contract.

In both cases, the injured party may sue immediately the breach becomes apparent.
Even in the case of anticipatory breach, it is not necessary to wait until time for
performance has passed in order to take legal action. A claim for breach of contract
may be made for the whole contract, or of a part only.

Note: A breach of contract entitles the injured party to an action for damages,
amongst other remedies, and possibly the right to treat the contract as discharged.
I Whether the contract can be considered discharged depends on how serious the breach
is; whether it is a breach of condition or whether it is a breach of warranty. For a
breach of condition, the injured party may treat the contract as being discharged and
claim damages. Warranty is a less important term, a breach of which only gives rise
to a claim for damages; the contract may not be discharged.

27
 There are a number of remedies available to the injured party upon the occurrence of a
breach of contract. These remedies are: damages, specific peiformance, injunction,
rescission, and quantum meruit. Different remedies will be appropriate, depending upon the
circumstances of the breach and the requirements of the injured party.

4.1 Damages

III Liquidated damages (See 9.4 Liquidated and Ascertained Damages)

These are damages specified in a contract; an amount of money payable as

compensation should there be a breach. The word liquidmed means that the
principle to pay money as compensation for a breach has been established.
For example, in the majority of building contracts, there is a term to the effect
that should the contractor fail to complete the works during the specified
contract period, the employer is entitled to be paid an agreed sum of money
by the contractor as compensation. The employer need only prove that there
has been a breach in order to automatically claim the sum.

".;:

29
FOUR REMEDIES FOR BREACH OF CONTRACT

Liquidated damages are pre-determined by the parties themselves and should

be a genuine pre-estimate of possible loss. The court normally awards the
amount of liquidated damages so agreed. Sometimes, however, the amount
of damages payable on breach. is not merely an agreed and reasonable
compensation, but is more in the nature of a penalty. Where a minor breach
occurs and a heavy payment has to be made by way of compensation, there
is obviously injustice. Certain principles have been laid down in the giving
of relief, where the sum specified has been inserted in the contract as a'
frightener to ensure performance. The court hearing the appeal of the party
inbreach ~ill base its decision on the following principles:

• The sum agreed must be treated as a penalty; if it is extravagant and

unreasonable in amount, by comparison with the greatest loss that can
follow from a breach of the contract.

• . Where the payment of a smaller sum is secured by a larger sum, the

latter is a penalty. ... . ~
L
• When a single lump sum is payable by way of compensation, on the
occurrence of one or more, or all of several events, some of which
may cause serious and others not so serious damage, there is a
presumption that the sum inserted is a penalty.

The relief afforded by the court where a penalty is found to exist, is to excuse
payment of that amount. The court has t)J.e power to substitute its own award
of damages, computed on the basis of compensation for the loss sustained.
On the other hand, where an agreeg sum is in the nature of liquidated
damages, no greater sum will be awarded by the court, even if it is proved
that the consequences of breach have been more serious than foreseen.

• Unliquidated damages

These are damages not specified in a contract, and should there be a claim for
a breach, it will be up to the court to decide not only whether a breach has
occurred, but also on the assessment of damag~. The word unliquidated
means that there is no agreement in principle to pay compensation. The
plaintiff will have to first prove that a breach of contract has occurred, and
then provide evidence to support the value of the claim. .

.
4.2 Sp(;\cific Performance

Specific performance is an order made by the court to force the party in breach to (.
~~~ ~,~- --~----

perform their obligations under the contract. It will only be awarded if it is fair and
reasonable to <Io -;0, or if the court declcres that damages are inadequate. It is a
discretionary remedy and is not awarded as of right. It is usually used in contracts
for the sale of land, as each plot of land is uniquely situated.

30
 FOUR REMEDIES FOR BREACH: OF CONTRACf

4.3 Injunction

An injunction is an order made by the court to sto erson or doing a

Slfl
certain ilj!i et:
sIa l:B@2 It is granted only where it ~ Just. and ~quitable to 0 s ,
'taOlIfg tegar to all the Clfcumstances of the case and IS a dISCretionary remedy. It
is co=only used intorts, such as where the owner of property wishes to restrain
another fr6i:n.continual trespass, or to stop unreasonable noise.

Injunction may also be granted to enforce a negative stipulation in a contract, where

damages would not be an adequate remedy. For example, in a contract for personal
services, where A binds hinISelf not to work for any person other than B, this
negative stipulation-may be enforced by injunction.

4.4 Rescission

Rescission is a remedy which is generally used in cases where one of the parties to
, a contraCf has been misled, and so occurs mainly in cases of fraudulent or negligent
misrepresentation. ReSCISsion gives the misled party J;1;1e 9J)tipn of aygiding 9Fe
accepting the contract. The iJijured party may either obtain an order from the court
"for rescission, or he can rescind without assistance of the court, by informing the
other party that he is repudiating the contract. Normally re~cission. must be
co=unicated to the other party, but it will be sufficient if all reasonable steps are
taken to co=unicate rescission, even if this is not possible.

@ Rescission requires that the parties shall be restored to their original positions as
though there had been no contract, that is a giving back,and a. taking back. If this is
not possible, rescission will not be given. However, where exact restitution cannot
be made but it is possible to substantially restore the parties to their original position,
restitution can pe llladetogether witha.finahcial.adjustrnent. For example, where a
contract for the sale of property has been induced by fraud, the purchaser may wish
to rescind the contract, yet has carried out some minor improvement. Restitution can
be made by returning the property to the original owner, and returning the purchase
money to the purchaser, along with a financial adjustment to take account of the
improvement.

No ~ l' rrtTv" I H~, ~

4.5 Quantum Meruit lo-ft'J '(Nv\~ {/\ dM~ to ~~?l. ~~
~WI ..ftrr ~ - reaztwJ.(/·~ct-:1-
SeAUl~ ~.
The term quantum meruit is used in various senses. The proper meaning is when

th~e~r~e~~~~i~~~~~~~i'~biu~tin(quasi
j i:n.eaIDng as if it
the circumstances ofwere a cottract),
the case the law
igr the bsm;fit of services rendered.
is a contract.

31
 FOUR REMEDIES FOR BREACH OF CONTRACT

Assessment of a reasonable sum The courts have laid down no rules limiting the
way in which a reasonable sum is to be assessed. However, useful evidence in any
particular case May include:
j ,

• Negotiations as to price.

• Calculations based on the net cost of labour and materials used, plus
overheads and mpij,f.
a~for
I
i
• Measurement of work
iL
9PQf aqd matepi?l§ §uppIjIjl

• \,JP@9Psof qualified experts in the field of building, such as quantity

...
SurvV¥gfS, ~uj]djpg §l][yeygfS, apd estjmgtpp, .

Quantum meruit claims Claims for a reasonable sum may arise for the following
reasons:

• ' fiVliere n()· price is fixed t

If the conJractor does work under a contract, express or implied, and' no price
is flXed by the contract, he is .entitled to be paid a reasonable sum tor his
labour and materials supplied. If a contract or an express agreement to be
paid a reasonable sum is for the whole work, completion may be made a
condition before payment. However, in the absence of clear words, the
contractor is entitled from time to time to demand payment on account of the
value of work he has done.

• \FailedNegOtiations J
wor 0the terms of the contract are
proceed in e
c or IS entitled to be paid a reasonable sum for the work carried out.

l\'" •
I
Prevention of completion y employer
jJLP •
,L
~
~ (;(.I.N~:"-
If wrongful acts by the employer prevent completion, the. contractor can claim
k \fI15'C fj"(J,o. ~ a quantum meruit payment. For example, there is an implied duty upon the.
ctit\\ ~
t
..:->
""'"
~ ~s·
.\ ~
employer to give the contractor an opportUnity to remedy defects, breach of
.which amounts to prevention.

?
~~~~~~--------------
:JA \or"., Acceptance of part performance

If the contractor can prove, by inferred or implied agreement, a new contract

to pay for the workdone,hemay recover the money for the work he has
completed on the basis of that new contract.

32
,, - FOUR REMEDIES FOR BREACH OF CONTRACT

Such a contract may be inferred from acceptance by the employer of the work
done, with the full knowledge of the failure to complete. However, it is
,1 - difficult to prove willing acceptance, and th~onus of proof will be on the
i _ contractor. ?\-"-

III • JWaiver of a COnditiOn)

It is always open to a party to waive a condition, which is inserted for his

benefit. For example, even if entire performance was a condition of the
contract, thy ywplpyer bv Deployjng the building and USipg Gerlttip items pf
furpjDJI!r which he could avoid using, may well waive the entire performance
=condition. - -

Work outside the contract

Where there is a contract for specified work, but the contractor does work
. the contract at the em 10 ers est the contractor is entitled to be
paid a reasona e sum or e a rtional work. In the case of Parkinson v.
Commissioners of Works (1950), the contractor agreed under a varied contract
to carry out certain work to be ordered by the Co=issioners on a cost plus
-profit basis, subject to a limitation as to the total amount of profit. The
Commissioners ordered work to a total value of £6,600,000, but it was held
by the court that, based on the limttation of profit, the varied contract only
gave the Commissioners authority to order work to the value of £5,000,000.
The additional work had to be paid for on a quantum meruit basis, so that the
contractor could recover more than the total fixed profit.

4.6 Limitation of Action

It is a policy of the law that there should be an end to the right to litigation. The
reasons for this policy are as follows:

III Defendants should be protected against claims being made on them after a
long period during which they may have lost the evidence available to them
to rebut those clairps.

- III Defendants should be in a position to know that, after a given time, an

incident which might have led to a claim against them is finally closed. In
other words, if legal proceedmgs are too long delayed, -the- defendants should
be allowed to make reasonable conclusion that the plaintiffs have waived their
claims.

III Plaintiffs should be encouraged not to delay in asserting their legal rights, and
to institute proceedings as soon as possible.

33
-,---:----------------~-- -~--- .

FOUR REMEDIES FOR BREACH OF CONTRACT

Limitation Ordinance

Hong Kong's Limitation Ordinance provides that for Simple contracts (except in cases
of fraud), and tort (except in actions for personal injuries), no action can be bought
after the expiration of six years from the date on which the cause of qction accrued.
The Ordinance also provides that no action upon specialty contracts (a contract made
under seal) can be brought after the expiration of twelve years from the date on which
the cause of action accrued.

_There is no defInition of the term cause of action in the Limitation Ordinance.

However, it may be considered as the earliest time at which an action could be
bought, or as that which makes action possible. The general rule in contract is that
the cause of action accrues; .not when the damage is suffered, but when the breach
takes place. Consequently the limitation period begins to run from the time when the
contract is broken, and not from the time at which any damage resulting from the
breach is sustained by the plaintiff.

Building contracts

For building contracts (except in cases of fraud or concealment), the limitation period
in respect of defective work begins to run from the time when the contractor is in
breach of his express or implied obligation under the contract (normally on practical
completion), and not from the time when damage occurs or the defect is discovered.
However, there may be a cause of action in negligence, independent of the contract,
against the contractor in tort; and such cause of action will not accrue until loss or
damage is sustained.

Tort

Tort is a civil wrong independent of contract, it arises. from breach of legal duty owed
to persons generally. Most of the law of tort is to be found in co=on law (case
precedents), although the,e are some important statutes. The case which fIrmly
established the precedent of when a duty of care might arise in tort, is the caSe of
Donoghue v. Stevenson (1932). In this case a manufacture of ginger beer was held
to owe a duty of care to the ultimate consumer who suffered damage as a result of
froding a snail in the bottle from which he had been drinking.

I relation to building cases, the House of Lords decision in ~ Murphy v. Brentwood

District Council (1990) established as a general rule that, although a builder owes a
duty of care within the principle of Donoghue to persons likely to suffer injury
because of his negligence, losses are concerned only with damage in the form of
- physical injury to persons or other property (not the building itself which gave rise-
to the injury) caused by latent (undiscovered) defects - pure economic loss is not
recoverable. In the Murphy case, Mr Murphy discovered cracks caused by a faulty
foundation, which were attributable to the negligent passing of plans by the local
authority. Instead of carrying out repairs, he sold his defective house (at a price
lower than it would have sold for without the defects) and attempted to recover the
economic loss from the local authority; he was unsu=ssful.

34
1· .'

A building contract may be formed by oral or written agreement and the terms make up the
contract itself. While simple works of limited extent and cost may be undertaken with simple
documents, the possible areas of misunderstanding and dispute between the parties to a
building contract expand with every increase in extent, complexity, and cost. Therefore, for
the majority of building contracts, it is essential to set out all the details of the work in a
proper form of contract, and state each party's duties, obligations, and rights. Failure to do
this may cause difficulties and possibly lead to arbitration or court proceedings. For these
reasons, it is now common practice to use standard forms of contract in the building
industry.

5.1 Reasons for Use of a Standard Form

11 The parties to the contract become familiar with, and therefore gain a greater
understanding of the document, through the practice of using it for each
successive contract.

11 The parties to the contract are clearly made aware of their duties, obligations
and rights, as they are all written in one well referenced document. The
terms have been carefully worded so as to avoid any vaguen~s or ambiguity,
and are referred to by clause name and number.

11 Using a standard document avoids the waste of time that would result from
having to individually draft the many terms necessary for each new contract.

35
 -'
FIVE STANDARD FORMS OF CONTRACT

• In the event of disputes, standard forms of building contract provide a means

of settlement, without the need to refer the matter to a court of law. An
arbitration agreement clause in the document allows the parties to refer their
disputes to the decision of an arbitrator.

There are, on the other hand, some arguments against the use of a standard form of
building contract:

• Because the terms are written using legal jargon (meaning legal terminology
and phrasing) the parties to the contract might not understand the full
consequences of the various clauses, and their inter~relationship to each other.

• Standard forms do not cover every event which might lead to a dispute, for
the reason that they do not take into account all the peculiarities of each
individual contract.

• With particular reference to the HK Standard Form, it is argued that the

Architect is given too much power, especially in regards to variations.

5.2 Standard Forms of Building Contract

Standard Forms of Main Contract Used in Hong Kong's Building Industry

Private sector forms of main contract

• HKIAJRICS Standard Form This is the most widely used private

sector standard form of building contract. The full title of this form
is: Agreement and Schedule of Conditions of Building Contract
(Standard Form of Building Contrcct) fOT use in Hong Kong, Private
Edition (With Quantities or Without Quantities). The Hong Kong
Institute of Archltects' publication is the Second Edition 1976 (May
1979 Revision). The Royal Institution of Chartered Surveyors' (Hong
Kong Branch) publication is the 1986 Edition.

• FIDIC Contract This is the most widely used standard form of

contract for the purpose of construction work (both building and civil
engineering) where tenders are invited on an international basis. The
contract is prepared by the Federation 1ntemationale des Ingenieurs
Conseils. The full title of the contract is: Conditions of Contract for
Works of Civil Engineering Construction. Part 1 General Conditions

36
 FIVE STANDARD PORM:S OF CONTRACT

with Forms of Tender and Agreement. Part 11 Conditions of

Particular Application with Guidelines for Preparation of Part 11
Clauses. Fourth Edition 1987 (Reprinted 1988 with editorial
amendments) .
It should be noted that the General Conditions are linked with
the Conditions of Particular Application (which is the part of the
contract specially drafted to suit the peculiarities of the individual
contract) by corresponding clause numbers.
As these conditions are designed primarily for use on
international contracts, it is important to be aware that the English __
version is considered by FIDlC as the official and authentic text for
the purpose of translation.
. FIDlC is widely used in Hong Kong where many large
construction projects employ overseas contractors, particularly
Japanese, thereby making the contract international by nature.

III Exclusive standard forms Certain employers, such as the Hong

Kong and Kowloon Wharf Company, the Mass Transit Railway
Corporation, and the Housing Authority, each produce a standard form
of contract exclusively for use on their own projects.

Public sector forms of main contract

III Building Government of Hong Kong General Conditions of Contract

for Building Works, 1990 Edition.

III Civil engineering Government of Hong Kong General Conditions of

Contract for Civil Engineering Works, 1990 Edition.

III E & M Government of Hong Kong General Conditions of Contract

for Electrical and Mechanical Engineering Works, 1990 Edition.

III ACP Government of Hong Kong General Conditions of Contract for

the Airport Core Programme Civil Engineering Works, 1992 Edition.

Differences Between Private Sector and Public Sector Standard Forms of Main
Contract

The public sector and private sector standard forms used in Hong Kong's
building industry are very similar in nature and content. However, there are
a number of essential differences which should be appreciated, these are:

III Under the terms of the public sector standard forms payment
certificates are to be issued to the employer with a duplicate copy to
the main contractor. Payment required within fourteen days of issue.

37
FIVE STANDARD FORMS OF CONTRACT

11 The private sector standard forms require payment certificates to be

issued to the main contractor, who will in tum present them to the
employer. Payment must be made withinfourteen days of presentation
rather than of issue.

11 Afair wages clause is included in the public sector standard forms, to

reduce the possibility of the main contractor getting involved in trade
disputes.

11 The public sector standard forms omit the employer's obligation to

insure against fire, etc. for work on an existing bUilding.

11 As a way of combating possible comiption, there is a provision in the

public sector standard forms for the employer to end the main
contractor's employment, if the main contractor has offered or given,
any inducement or rewards, for doing or forbearing to do anything in
connection with the obtaining or execution of the contract.

11 A mediation provision in public sector contracts provides an optional

alternative to arbitration as a means of resolving disputes.

11 Bankruptcy of the employer as a reason for the ending of the main

contractor's employment (known as determination) is omitted in the
public sector standard forms of contract.

Differences Between the With Quantities and Without Quantities Editions of

Standard Forms of Main Contract .

Most standard forms of main contract used in Hong Kong's building industry,
whether it be public or private sector, will produce a with quantities edition
and a without quantities edition, . Where bills of quantities have not been
produced and it is the intention of the parties to use a specification and a
.schedule of rates in its place, the without quantities edition of the standard
form will be used.

The without quantities edition differs· from the with quantities edition in the
following respects:

11 In the without quantities edition, there is the provision for the

functions of the Quantity Surveyor to be exercised by other named
person.

11 The specification takes the place of the bills of quantities as a contract

document.

11 Provision is made in the without quantities edition for the main

contractor to give the architect a schedule of rates immediately after
the contract has been signed.

38
 ,
FIVE STANDARD PORM:S OF CONTRACT

Standard Forms of Sub-Contract

Most standard forms of main contract (private sector and public sector) will
have a sister document to be used when the main contractor is directed by the
employer to enter into a nominated sub-contractor agreement with a
sub-contractor chosen by the architect. When using the HK Standard Form,
this document is: Sub-Contract For use where the Sub-Contractor is nominated
under the Standard Form of Building Contract for Hong Kong 1968 Edition
(1986 Edition if issued by the RICS). Due to its colour it is popularly known
as the Green Form. Standard forms for domestic sub-contractors are also .
available, although their use is not mandatory.

Warranty Contract (See 6.2 Sub-Contractors and.Suppliers)

Standard forms of warranty contract are also available, where the employer
chooses to enter into a subsidiary agreement with a nominated sub-contractor.
It is an optional contract and is subsidiary (meaning secondary) to the contract
between the main contractor and nominated sub-contractor.

5.3 Formalisation of a Standard Form Contract

The tender submitted by a contractor constitutes an offer and if the tender is accepted
without any qualifications or amendments, then a legally binding contract will be
formed.

However, it is usual practice· to qualify the acceptance of a tender with the words
subject to contract, which has the effect of not binding either party legally, until the
standard form of contract document has been signed by both parties. Furthermore,
an employer may withdraw his invitation to tender at ilnytime, and if he does, the
contractors who have submitted tenders are not entitled to any payment for expenses.
A contractor may also withdraw his tender at anytime before it has been accepted.

When using the HK Standard Form, the signatures, together with name and address,
of both parties to the contract, the Employer and the Main Contractor, are recorded
in the Articles of Agreement. The names of both the Architect and the Quantity
Surveyor appointed by the Employer should also be recorded as must the amount that
the Employer has agreed to pay the Main Contractor, which is known as the Contract
Sum. If the contract is to be made under seal, it is desirable for purposes of proof,
but not essential, to have the signature of two witnesses, and a section of the Articles
of Agreement -is reserved for this· PUrpose:- -

Details peculiar to each individual contract are written in schedule format in the
appendix of the Standard Form. Therefore, it is necessary to complete the appendix
before signing, so that each party is fully aware of the terms relating to the individual
contract.

39
 ----:
-'
FIVE STANDARD FORMS OF CONTRACT

5.4 Amendments to a Standard Form

Although it is not advisable to amend a standard form of contract, each building

contract is different, and there may be peculiarities which dictate the necessity to
amend certain clauses to suit a particular contract. These amendments are known as
ad-hoc amendments, meaning for a special purpose. I
I :
! .

If a standard form is amended in any way, it could lead to problems which may give
rise to disputes for the following reasons:

• The party making the amendment may use wording that is vague and/or
ambiguous.

• The parties may not appreciate the full legal consequences of the amendment,
due to the interrelationship of the clauses.

• There may be disagreements over the amendment which may lead to one of
the parties refusing to sign the contract.

• The various copies of the standard form document used in one contract may
not correspond with each other.

For an amendment to be effective, contractors must fIrst be notifIed in the tendering

documents. The amendment should be made by altering the relevant clause or clauses
and producing a new typed copy. The parties should then sign or initial each
alteration to show they have read and understood each amendment. A short cut is
just to cross out and amend the original clause or clauses by hand. However, this
may give rise to greater uncertainties. It is also important to ensure that the
amendment is made in all the copies of the standard form document.

5.5 Precedence of Standard Form Contract Documents

A building contract incorporates all or· a combination of the following documents:

• Contract drawings

The contract drawings must be detailed enough, with adequate descriptions,

to give the main contractor an accurate picture of the proposed works.

• Contract bills (bills of quantities)

Once incorporated into the contract, the bills of quantities are referred to as
the contract bills; they are essentially the same document.

40
........•.••.• --------.. . ..._.. . ...... ............... .
 FIVE STANDARD FORMS OF CONTRACT

These bills provide a concise description of the works, standard of materials,

and workmanship. The measured work should be detailed enough to enable
the main contractor's estimator to form an accurate price for the works.

Contract bills therefore fulfIl the following functions:

• Give an exact measure of the work to be completed for the contract

sum in terms of both quantity and qUality.

• Provide a basis for the measurement and valuation of variations ..

• Provide a means of incorporating the necessary specification

information as part of a contract document.

III Standard form of contract

The HK Standard Form comprises of three basic parts, namely:

• Articles of Agreement - this is signed by both parties to make the

contract legally binding.

• Terms of the Contract - this sets out the rights and duties of the
parties in the form of numbered clauses.

• Appendix - this su=arises details peculiar to each individual contract

in scheduled form, giving information such as dates of possession and
completion, rate of liquidated damages, and the defects liability period.

III Standard method of measurement

The Standard method of measurement used in Hong Kong, both in the private
and public sectors is: Hong Kong Standard Method of Measurement of
Building Works, Third Edition Metric, February 1979.

Tender documents

These will include not only the standard documentation sent to each tenderer,
and subsequently submitted, but also any qualifying letters which may have
accompanied the successful tender.
- -

III Monthly statistical bulletins

These bulletins on which fluctuation payments are based, are published by the
Census and Statistics Department of the Government of Hong Kong.

41
 ·'
FIVE sTANDARD FORMS OF CONTRACT

It can be seen that there are quite a few documents that go to make up a building
contract. Ideally the information in each document should correspond with the other.
Unfortunately, due to the complexity of most contracts and human error, this is rarely
the case. The question is, therefore, if one document conflicts with another document
which one takes precedence over the other. In' cases where a specially written or
amended clause or document conflicts with a standard clause or document, then it is
a general principle of legal interpretation that the specially written or amended clause
or document will take precedence over the standard document.

However, in the HK Standard Form, Clause 12 states that the Conditions in the
Standard Form will take precedence over the Contract Bills. Therefore, special
conditions written in the preliminaries of the Contract Bills will have no effect if the
Standard Form is signed with Clause 12 intact.

• The significance of Clause 12

The significance of Clause 12 of the HK Standard Form is illustrated ay the

case of Gleeson v. London Borough of Hillingdon (1970) where the contract
used was the 1963 Edition of the JCT Standard Form. The provision and
wording of JCT's Clause 12 was exactly the same as Clause 12 of the HK
Standard Form.

Gleeson (the Main Contractor) agreed to build a number of

houses with phased completion dates written in the Contract
Bills. However, the only completion date written in the
Standard Form was the date for the final set of houses.
Gleeson was late completing the first set, and the Employer
brought an action for damages. Gleeson defended by citing
Clause 12 which stated that Conditions in the Standard Form
will take precedence over special conditions. The court held
that the phased completion dates written in the Contract Bills
had no effect; the only date to have any effect was the final
completion date written in the appendix of the Standard Form.

It is common practice in Hong Kong to delete Clause 12. This is to ensure

that details written in the contract bills will have Validity.

Most cases of interpreting the precedence of conflicting contract documents can be

resolved by the parties themselves. For example, where the contract drawings
conflict with the contract bills, it will be the drawings that take precedence. The
reason for this is that the drawings are produced first; the bills are prepared from the
drawings.

In situations where the parties cannot resolve an interpretation dispute between

themselves, they should refer the dispute to an arbitrator, or in the case of public
sector contracts, a mediator in the .frrst instance.

42
TI- -'
FIVE STANDARD FORMS OF CONTRACT

j
i=- 5.6 Discrepancies and Errors in Contract Documents
i·

I, III Discrepancies
i
i Discrepancies between contract documents may be discovered both before and
after the contract has been signed. The procedure to be followed is different
in each case.

Pre-contract period

If a contractor fInds any discrepancy between the drawings and the bills of
quantities before entering the contract (that is during the tendering period), he
should immediately inform the architect in writing. The architect should then
make the necessary amendment as soon as possible, and in writing, inform the
contractor concerned, together with the other tenderers, of the amendment.

Post-contract period

If the contractor fmds any discrepancy between the contract drawings and the
contract bills after the contract has been signed, he should immediately give
the architect written notice. The architect should then issue an instruction to
correct the discrepancy which would then be adjusted in the fInal account.

III Errors

Errors in the contract bills.are usually the fault of either the main contractor's
quantity surveyor or the employer's quantity surveyor.

Main contractor's quantity surveyor's errors:

• - An error in pricing an item in the bills of quantities.

• An arithmetical error.

If the error is discovered before the contract has been signed (where
a=ptance is subject to contract), then it may be corrected without affecting
the contract itself. However, if the correction has the effect of increasing the
contract sum to a level which is no longer a=ptable, the employer may reject
-the offer -and not proceed with the formalisation of the contract. . If the error
is not discovered until after the contract has been signed, then the error cannot
be corrected (unless with the consent of the employer) as to do so would have
the effect of changing the contract sum, which has already been agreed upon.

43
- - - - - - - - - - - _.. - - . -
FIVE STANDARD FORMS OF CONTRACT

Employer's quantity surveyor's errors:

• Omission of a complete item.

• Error in the description of an item.

• Error in quantity ..

• Description of an item not conforming with Standard Method of

Measurement requirements.

The procedure the main contractor should follow, if an error has been found
before the contract has been signed, is exactly the same as previously
discussed for discrepancies. However, the situation after the contract has been
signed is somewhat different. The main contractor should give written notice
of the error to the employer's quantity surveyor, who would then treat the
correction as a variation.

44
'T.:
,

When the HK Standard Form is used, the main contract is between the Employer and the
Main Contractor. However; various other contractual relationships are established in
addition to the one which exists between the parties to the main contract. Some of these will
be mandatory, as required under the conditions of the main contract, and others will be
optional. For example, mandatory contracts are entered into between the Main Contractor
and Nominated Sub-Contractors, and optional contracts 'may be entered into between the
Main Contractor and domestic sub-contractors.

The various contractual relationships are considered in detail, with specific reference to the
requirements of, and terminology used by, the HK Standard Form.

6.1 Contractual Parties to the Main Contract

The parties to the main contract, when using the HK Standard Form, are the
Employer and the Main Contractor. The obligations of both parties are clearly
specified and are su=arised below.

Main Contractor's obligations

IIiI Progress and complete the Works in accordance with the Contract
(Clause 1)

The Main Contractor is required to carry out and complete the Works, as
shown in the Contract Drawings and described by the Contract Bills, to the
reasonable satisfaction of the Architect.

45
 -- ~- -----~--- ----
SIX CONTRACTUALRELA..TIONSHIPS

All the work shown in the Contract Drawings and described by or referred to
in other Contract documents must be completed in every respect. Nothing
may be added or omitted except if issued on an Architect's instruction under
Clause 2(1). The Main Contractor's obligation only comes to an end on the
issue of the Certificate of Practical Completion produced under Clause 15.

• Provide the necessary indemnities (Clause 4, 7, & 18)

The Main Contractor is under an obligation to indemnify, that is to protect,

the Employer against:

• Fees and charges legally demandable by Government Ordinance,

regulation or byelaw of any statutory undertaker.

• Claims, proceedings, costs, damages and expenses arising from the

infringement of patent rights.

• Claims arising from injury to persons or property caused by or

connected with the Works.

• Provide necessary insurance (Clause 19 & 20)

The Main Contractor must insure in respect of:

• Damage to the Works itself.

• Damage to property owned by third parties such as adjoining

occupiers.

• Personal injury to workmen, neighbours or passers-by.

• Damage by fIre, storm, flooding, etc., if the proposed building is

entirely new work.

• Submit any claims to the Architect within a reasonable time (Clause 23)

• Keep a competent foreman-in-charge constantly upon the Works

(Clause 8)

• Allow the Architect and his representatives access to the site/workshops

at all reasonable times (Clause 9)

• Permit carrying out of inspection reports by the clerk of works if

appointed (Clause 10)

46
 SIX CONTRAcrDAL RELATIONSHIPS

Employer's obligations

&I Payment (Clause 30)

The Employer is under an obligation to pay the Main Contractor for work
carried out. This may come as one lump sum when the work is practically
complete, or as stage payments, or more frequently by monthly instalments.
It is generally the duty of the Quantity Surveyor to value completed work,
which is then certified by the Architect, which in turn lS paid by the
Employer.

&I Give possession of the site (Clause 21)

The Employer must give the Main Contractor possession of the site in order
that the Main Contractor may carry out the Works. Failure to do so will
make the contract impossibie to perform; it will, in effect, be prevention of
performance and may frustrate the Contract.

III State extent and time of possession (Clause 21)

The Employer should allow the Main Contractor a reasonable time in which
to complete the Works, specifying the start on site date (possession) and the
finish date (completion).

&I Appoint an architect and quantity surveyor (Articles of Agreement)

The Employer is under an obligation to appoint an architect to supervise and

direct the Main Contractor during the progress and completion of the
Contract. A quantity surveyor must also be appointed to advise on costs and
carry out valuations.

III Supply instructions (Clause 2)

The Employer ·must give the Main Contractor instructions concerning the
Works. This is usually carried out by the Architect, on the Employer's
behalf, in the form of Contract Drawings and Architect's instructions.

Must not interfere with progress (Clause 26)

The Employer must not interfere with the Works. If he requires any part of
the Works to be altered or amended, he must see the Architect. The Architect
would in turn follow the correct procedure by issuing an Architect's
instruction. If there is any financial implication, the Contract Sum should be
adjusted accordingly.

47
 ,
srr COh7RACTUALRELATIONSHWS

If the Main Contractor or the Employer fail to carry out their required duties, they
will be in breach of contract. If the Employer fundamentally breaches the contract
during performance, for example, non-payment, the Main Contractor may abandon
the Works and seek damages. However, if the breach is not fundamental to the
Contract, the Main Contractor must continue with the Works and then sue for
damages over and above the Contract Sum.

6.2 Sub-Contractors and Suppliers

Where the Employer or the Main Contractor employ others to carry out a part of the
Works, they are said to be sub-letting the Contract, that is, forming separate sub-
contracts to the main contract by engaging the services of sub-contractors and
suppliers.

Assignment or Sub-Letting

Under Clause 17 sub-clause (2), both the Employer and the Main Contractor
may sub-let part of the Works with the written consent of the other.
However, it should be noted that there is a difference between sub-letting and
assignment. Under sub-clause (1) neither the Employer or the Main
Contractor may assign the Contract - sign. over the entire Contract to the
benefit of another - without the written consent of the other.

Domestic Sub-Contractors and Suppliers

These are chosen by the Main Contractor, with the written consent of the
Architect, (not necessary for suppliers under the HK Standard Form), to carry
out a certain part of the Works or to-supply goods. The Architect may object
to the use of a particular domestic sub-contractor only if he has good reasons
for doing so. Apart from his right to object and otherwise to provide written
consent, the Architect has -nothing to do with a-domestic sub-contractor.

• Responsibilities

The Main Contractor is entirely responsible for the work carried out
by a domestic sub-contractor, or goods supplied by a domestic
supplier, as well as for supervision and payment. It should be
remembered that if the Main Contractor is responsible for sub-letting,
the Employer will still be entitled to have the Contract- completed
under the same terms of time and price. If the Main Contractor, when
tendering, bases his prices on those contained in sub-quotations, he
does so at his own risk. Any disputes which arise between the Main
Contractor and a domestic sub-contractor or supplier must be settled
between them. Neither the Employer or the Architect have any right
or obligation to interfere.

48
te:
.,
" ,I "
i SIX CONTRAcruALRELATIONSHIPS

, Nominated Sub-Contractors and Suppliers

These are chosen or nominated by the Architect, on behalf of the Employer,

I to carry out a certain part of the Works, usually of a specialist nature, or to
supply certain goods.
i 11 Sub-contract

The Main Contractor is required under the terms of the HK Standard

·Form to enter into a separate sub-contract with a sub-contractor
nominated by the Architect under Clause 27. Whilst a contract of sale
must be entered into with a nominated supplier under Clause 28.
However, the Main Contractor has the right to object to a particular
nominated sub-contractor or nominated supplier, provided that he has
good reasons for doing so. In such a case the Architect will consider
the nature of the objection and decide whether to seek an alternative.

11 Prime cost sums (See 11.9 Provisional and Prime Cost Sums)

These are included in most bills of quantities. Each sum is included

for the purpose of allowing the Architect to choose a sub-contractor or
supplier to carry out a specific part of the Works, or to supply
particular goods. This is provided for under Clause 11 (3), Clause 27
and Clause 28 of the HK Standard Form.

11 Nomination procedure

The Quantity Surveyor will estimate the cost of the work to be carried
out, or the goods to be supplied by each nominated sub-contractor or
nominated supplier, and insert this figure in the bills of quantities as
a prime cost sum. The relevant tender documents are then sent out to
the various sub-contractors· or suppliers wishing to tender for
nomination. When the tenders are received, the Architect will choose
a sub-contractor or supplier and, by using· an Architect's instruction
(Clause 2), will instruct the Main Contractor to enter into a standard
form of sub-contract with each nominated sub-contractor (Clause·27(a)
and a contract of sale with each nominated supplier (Clause 28(b).
Consequently, only the Main Contractor has a contractual relationship
with any Nominated Sub-Contractor or any Nominated Supplier, and
therefore all instructions and payments must be made through him.

III Payment of Nominated Sub-Contractors and Suppliers

The sirm·· representing" the estimated value of aJ;ly Nominated

Sub-Contractor's work, or any Nominated Supplier's goods, will be
included in interim valuations of the amount due under any certificate
issued under Clause 30. Payment will subsequently be made to the
Main Contractor by way of an Interim Certificate. Within fourteen
days of receiving payment from the Employer, the Main Contractor
must pay the Nominated Sub-Contractor or Nominated Supplier.

49
 -'
SlX CONTRACTUALRELATIONSH~S

Adjustments to the Contract Sum, for the payment of Nominated Sub-

Contractors and Nominated Suppliers, will be made in the fInal
account. This is done by deducting the value of the prime cost sums
concerned, and then adding the actual amounts paid.

• Responsibilities

The Employer is under an obligation, under the terms of the HK

Standard Form, to advise any Nominated Sub-Contractor or Nominated
Supplier of the amount included for their work or goods supplied in
Interim CertifIcates. It is the Architect's responsibility to issue
instructions and certify payments valued by the Quantity Surveyor.
The Main Contractor is only responsible for conveying relevant
information and payments due.

Warranty Contract

This is sometimes referred to as a warranty agreement. It is an optional

contract (not required under the HK Standard Form) often formed between the
employer and a nominated sub-contractor or a nominated supplier, in order to
create a contractual relationship between them that would otherwise not exist.
Both the employer and the nominated sub-contractor or nominated supplier
benefIt from such an optional contract, under which each of the parties agree
to the following terms:

Obligations undertaken by the employer under a warranty contract

• To provide the nominated sub-contractor or nominated supplier with

written notifIcation of the value of the work or goods supplied, as
shown in interim: certifIcates.

• To provide early fInal payment.

• To pay the -nominated sub-coritractor or nominated supplier direct, if

the main contractor does not honour payment.

Obligations undertaken by a nominated sub-contractor or nominated supplier

under a warranty contract

• To exercise reasonable care and skill.

• To proceed with the design work and ordering of materials.

• To supply information in accordance with the contract programme.

• To indemnify the employer for any direct loss and/or expenses

_ suffered, as a result of re-nomination.

50
T
SIX CONTRACTUAL RELATIONSHIPS

Re-Nomination

One particular point not made clear in the HK Standard Form is the position
of the Employer and Main Contractor, when a Nominated Sub-Contractor or
a Nominated Supplier fails to complete the work or to supply the goods as
required, and the question of re-nomination arises. Is it the duty of the
Architect or is it the duty of the Main Contractor to re-nominate a new
sub-contractor or supplier.

In the case of N. W. Metropolitan Hospital Board v. T.A.

Bickerton Ltd (1970), one of the Nominated Sub-Contractors
was unable to complete the contract due to liquidation. The
Main Contractor then requested the Architect to issue fresh
instructions, re-nominating a successor to complete the
outstanding work, the cost of which happened to be higher.
The Employer contended that the Main Contractor was
responsible for completing the work because the sub-contract
was with the Main Contractor, and any difference in cost was
the Main Contractor's responsibility. It was held by the court
that it is the Architect's duty to re-nominate a successor. The
Main Contractor must not find a successor; to do so would
infringe the Architect's right of nomination. Therefore, the
Employer was obliged to pay the additional cost of the new
Nominated Sub-Contractor.

6.3 Non-Contractual Parties to the Main Contract

It should be appreciated that the Architect, Quantity Surveyor and consultant

engineers involved in the design and supervision of the Works are not parties to the
main contract when using the HK Standard Form. Each has their own contract of
employment with the Employer, usually using' a standard form issued by the
appropriate professional institution. Often such conditions of engagement set out fee
scales. It should further be noted that the clerk of works and the foreman-in-charge,
act as representatives of the Employer and Main Contractor respectively.

As none of the aforementioned are parties to the main contract, they cannot alter, in
any way, the terms of the Contract itself. They do, however, have certain obligations.·
as discussed in the following.

Architect

The Architect is required by the Employer to design, advise, supervise

construction, and certify payments due to the Main Contractor. He, or she,
will act as an agent for the Employer under terms of engagement which, from
the legal viewpoint, 'constitute an independent sub-contractor contractual
relationship rather than one of master and servant.

51
SIX CONTRACTUAL RELATIONSHIPS

A person wishing to act as an architect must register with the Architects

Registration Council. The main duties of the Architect are as follows:

• Design - the Architect must exercise great care to give the best
possible advice, and to warn the Employer of potential risks.

• Drawings - the Architect is required to supply sufficient drawings and

information, within a reasonable time, for the execution of the Works.

• Cost - the Architect is required to ensure that the building can be

completed within the stipulated cost, or a reasonable increase.

• Supervision - the Architect must supervise and inspect sufficiently to

ensure that materials and workmanship conform with the contractual
requirements .

1&. . Payments - the Architect is required to certify payments to the Main

Contractor, without fraud and with complete impartiality, with regard
to the terms of the Contract. He owes a duty of care to the Employer
and may be liable for damages if negligent in issuing certificates.

Consultant Engineer

The role of a consultant engineer in a building contract based on the HK

Standard Form, is as a designer of certain specialist aspects of the building.
Usually there will be several consultant engineers employed on the same
building contract, each specialising in their own particular fields. The two
most co=only employed consultant engineers are the structural engineer and
the electrical and mechanical engineer.

A consultant engineer receives the proposed design drawings of the building

project from the Architect, and from them designS the aspect of the building
which he is concerned with. For example, if the building to be constructed
is in reinforced insitu concrete, the structural engineer would be required to
prepare detailed calculationS on the sizes, lengths and type of reinforcement
to be used, and compile reinforcement schedules. He would then add the
details to the Architect's drawings. _

A consultant engineer may be employed by either the Employer or the

Architect by a separate agreement, and is entirely responsible for the cost and
supervision of the part of the Works he has designed. He may value the
work, but the certification for payment is made by the Architect.

Note: In some cases a consultant may be employed to carry out the entire
design and supervision of a project on an employer's behalf. In such cases
the consultant engineer would assume the same duties as those of the Architect
under the HK Standard Form. However, this can only be done where there
is no stipulation in the contract that an architect must be employed; there is
such a stipulation in the HK Standard Form.

52
 SIX CONTRACTUAL RELATIONSHIPS

Quantity Surveyor (QS)

Like the Architect and consultant engineer, the Quantity Surveyor (working
for the Employer) is a member of the design team. Often referred to as the
professional quantity surveyor, to distinguish him from his counterpart
working for the Main Contractor, his skill in cost planning techniques has
made his contribution at the pre-contract stage invaluable. During the
execution of the Works, known as the post-contract stage, the Quantity
Surveyor should establish a very close relationship with the Main Contractor's
quantity surveyor, as they will need to agree on such things as monthly
valuations, variation accounts, and fluctuation payments.

Quantity Surveyor's pre-contract duties

11 Cost - advise the Employer of project costs.

III Contractual arrangements - advise on suitability.

III Tendering procedures - contractor selection advice.

11 Tender documents - prepare and send to contractors.

III Bills of quantities - prepare from drawings.

III Negotiate - on behalf of Employer with contractors.

III Tender report - advise on choice of contractor.

Quantity Surveyor's post-contract duties-

11 Prepare certificates of payment - this will involve measuring and

valuing the work properly executed to date.

III Prepare variation accounts - this will involve measuring, pricing and
agreeing the value with the Main Contractor's quantity surveyor.

III Calculate adjustments - this may involve adjustment to the Contract

Sum due to fluctuations.

Clerk of Works

The clerk of works is paid for by the Employer to provide constant

- - supervision, ill order to ensure that the quaJity of materials and workmanship
comply with the contract requirements. He is considered to act solely as an
inspector, and has no power to give directions to the Main Contractor.
However, under Clause 10 of the HK Standard Form, if directions given by
the clerk of works are confIrmed in writing by the Architect within two
working days of their being given, then such directions will be considered as
Architect's instructions. (See 11.3 Clerk of Works Directions)

53
SIX. CONTRAcruALRELATIONSlliPS

The clerk of works will also make regular reports to the Architect, and it is
important that he keep a diary throughout the project. Although on paper the
clerk of works has no authority, the Architect will back him on most
occasions. The Main Contractor will, therefore, usually bend to his wishes
and treat him as a senior member of the project team.

Foreman-in-Charge

A=rding to Clause 8 of the HK Standard Form, the Main Contractor is

required to constantly keep upon the Works a competent foreman-in-charge.
The reason for this requirement is so that he can receive instructions on behalf
of the Main Contractor conveyed by the Architect on site. However, the
Architect may give his instructions to the Main Contractor's head office if he
so wishes.

It should be noted that if the Architect so requires, the foreman-in-charge must

be English speaking or, an interpreter through whom the Architect may give
instructions must be employed constantly on the site of the Works.

Professional Negligence - Architect, Quantity Surveyor, Consultants

The Architect, the Quantity Surveyor and consultant engineers are professional
people, and as such owe a duty to the Employer to carry out their work with
proper care. They are liable for damages for negligence if the Employer
suffers a loss that is due to a lack of care or duty. Legal action may be taken
against them by the Employer based on the terms in their respective contracts
of employment. If the Main Contractor suffers a loss due to their negligence,
he can only take legal action, based on the contract, against the Employer; the
Employer would then in turn have the option of taking legal action against the
professional person concerned.

At one time, an architect, an employer's quantity surveyor and consultant

engineers, when acting in their roles under a building contract, were
considered to be acting in a quasi-arbitral capacity and were not liable for
negligence. This is no longer the situation due to a precedent established in
the following case:

In the case of Sutcliffe v. Thackrah (1974), the defendant had

been engaged as the Architect to the plaintiff, and had issued
an Interim Certificate which included the value of defective
work. Under normal circumstances this would not present a
problem, as an appropriate deduction (the value of the defective
work) could be made from the following months Interim
Certificate. However, the employment of the Main Contractor
was terminated soon after payment had been made, and he
became insolvent before the error was discovered. This meant
that the Employer was unable to recover his losses from the
_ Main Contractor.

54
re-
I SIX CONTRACfUALRELATIONSH!PS
i
I
I The Employer subsequently decided to take legal action against
1=
i ~ the Architect in an attempt to recover the amount that had been
I- over certified. The court held that although the Architect was
I- discharging a duty under the contract between the parties, there
was no dispute over the subject matter, it could therefore not
be contended that he was acting as an arbitrator .. The Architect
was thus liable to the Employer for negligence, on the grounds
that he failed to take due care or exercise proper skill; he was
ordered to compensate the Employer for his losses. The court
further ruled that an architect is in no different position
regarding actions for negligence than any other professional
person.

Note: In this case the employer's quantity surveyor had not been informed of
the defective work and could not therefore be held negligently responsible.
However, the case of Tyrer v. District Auditor for Monmothshire (1974) had
a similar outcome to Sutcliffe in respect of professional quantity surveyors.

"

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The frnancial arrangement of a contract together with the selection of a main contractor is
referred to as contract procurement. Several different procurement methods are used in
Hong Kong, including design build and turnkey contracts, both of which are considered at
the end of this chapter. However, the traditional, most widely used method, is where the
employer decides on the contractual arrangement, and then selects a contractor through a
process of tendering (see Chapter Eight - Tendering Procedures). Contractual arrangements
fall into three broad categories depending on the means of arriving at the contract sum, these
are: lump sum contracts, measurement contracts, and cost reimbursement contracts.

7.1 Lump Sum Contracts

In lump sum contracts, the contract Sllm is agreed in advance, subject to possible
"jncreases or decreases as a result of variations ordered by the architect in accordance
with the contract. The sum agreed upon may be frxed, or adjustments may be
allowed for fluctuation in the cost of labour and/or materials due to inflation during
the contract period.

Lump Sum on Plan and Specification

In lump sum contracts based on plan and" specification the contractor

undertakes to carry out the work described, or specified, to completion, for
an agreed lump sum. The documents required for this contractual
arrangement are the complete working drawings, together with a full
specifrcation. The tenderers may be required to provide some means of
valuing yarjatioD..5, such as daywork schedule£, schedule of rates, or tender
_price breakdown. which may be incorporated into the contract.

57
SEVEN CONTRACTUAL ARRANGEM'ENTS

Commentary
A(fo~"'''''
• There are substantial risks imposed on the tenderers under this
arrangement. A tenderer is responsible for any errors he makes in the
taking off from the drawings. He is also required to take up all
responsibilities for any costs incurred due to uncertainties or
:unforeseen difficulties when preparing the tender. In order to allow i
for these risks, the tenderers are likely to include high contingency I
factors in their prices.
\ i
• It is always a gamble as to whether the tenderer has overestimated or Ii:
underestimated the risks. In either case, the employer will be unaware
of the extent of the contingency and can exercise no control over its
.expenditure.

The employer will save a lot of work on quantities. However, the cost
to the tenderersof producing their .own qmn1ities will be reflected in
high tender prices. .

• Because there are substantial risks imposed upon the contractor due to
uncertainty over the extent and nature of the work required, this
contractual arrangement is only suitable for minor works where the
likelihood of variations is small and the amount of informJion to be
supplied during the progress of the~a1.

)5.N~TI>':lI'-.)\Y ...--j;? ~\ So •
LmripSmnonB~ofQlliilltiti~ I'
In lump sum contracts based on bills of quantities, the contractor undertakes
to carry out the work in accordance with the plans and as described in the
bills for a lUmp Slim This sum is derived from the total of the items in the.
hills of ~s. The documents required are the QQmplete working
drawings and the bills of QuantitieS. The ;Wecification mayor may not be
. included as one of the contract documents.

Commentary

• The employer's quantity surveyor prepares the bills of quantities from.

the drawings, ~h'ich gives the competing contractors a quantitative
analysis of the contract works. The results of this are:

• It redu= the contractor's estimating time, hence a shorter,

tender period is required.
- .. . -"""'"7t '
• It provides a fairer· oasis for competition.

• The ~~ of responsibility for incorrect quantities is removed

from the contractor.

58
 , '

1
; SEVEN CONTRAcrUALARRANGEMENTS
, --
i
i I

III The process of preparing the bills of quantities imposes a rigid

discipline on the employer and the design team. - In other words, they
have to finaljse the requirements as much as practicable before ?
co=itting themselves. As a result the employer and the contractor '
enter the contract with their co=itments clear.

III It gives the employer a good indication of the final cost of the work.
However, if a fluctuation clause is built into the contract and the
contract period is measured in years rather than months, the fmal cost
may be well above the original contract sum.,
, -
III The guantities and the unit rates of the measured items will serve as
the basis for assessing the cost of variations. It therefore gives the
.ernpluyer control over the amount the contractor can charge for extra
and varied work.

III The nature of this form of contract necessitates a fully comprehensive

design from the architect and requires that variations and additional
information be kept to a minimum. These requirements have restricted
the use of bills of quantities in projects where early start of work is
desired or where the extent of work is uncertain and substantial
variations are expected.

7.2 Measurement Contracts (~

In measurement contracts, the contract sum is ascertained- by measurement and

yaluation related to bills of approximate guantities or to a schedule of prices included
ill the contract.

. Q .. (price,{ ",,1: f\-.e

M easurement C ontract Base d on Bills 0f ApproXlIDate uantlties ~~ \V\ ~ bills
PH) ~ ,- at;. "'-!'l"rn-l<Im=
_ ~ t'\W~ In measurement contracts based on bills' of approximate quantities, the lL<.""'iI~
O:sA:>t~To contractor ca:
ries out. the work req~ired, which. ~ then ~easured and priced
: ~ at the rates m the bills of approXlIllate quantItIes. This type of contract
.. CN\ ~-t arrangement is used where the . . . e ts
i) d.es\1'" __ -,
-jn adyan~ or where thelurgent ture 0 the project does not allow adequate
c_ Si.. __ .~ ~ time for esign and firm quantIties to precede tendering.
~) 1t"I"A '1.UA"\.I\;n-~
;-';,', The ..approxjmate quantities included in the contract are subject to fmal
measUrement of completed work during the -p'rogress of the contract.
Nevertheless, they serve to provide a competitive base for the submission of
tenders, give a fair indication of the ultimate cost, and provide a basis for the
measurement of variations.

6F-
""'" \?>tl--l-S
t.-"", AFM::>XlKAf4
~n"ES
~ -.fiV';'':~ ~ \"'I\.€t'.Stk.1M I""""» frrc.e.A .
-) _ (Au~lm. 'To
;~ P.Af~ If..! '[l-t;t; 59
-"" ~Iu...'& t5f
t"-!'f>, &.)
 -'
SEVEN CONTRACTUAL ARRANGEM:ENTS

Although the quantities in the bills are approximate, there are certain
requirements :

• A total tender should be close to the estimate for the project.

There should be a fair balance in the weighting of each trade
or work section. ,J.f.

• The selection of individual items should be realistic, although

it should also be comprehensive to facilitate the valuation of
future variations."'* I
• The preljminarjes bill should be complete in every particular;
this is not an area for approximation.

• The employer's allowance for contingencies and provisional 'J

sums should be generous. \~J1-). . J

Commentary

11 Approximate bills permit the overlapping of design and construction

r
11
and this will save time before tendering.

Approximate bills avoid the great expense of preparing fIrm quantities,

I
in particular, where measurements necessitated by variations are
substantial. Moreover, the cost of re-measuring approximate quantities
is comparable with the cost of measuring variations in bills of fIrm
quantities.

11 Where the bills are too approximate, for example, where the
uncertainty as to the character of the work passes a particular point,
the usefulness of the bills will diminish.

. . .. \" ...~ V'\..-t1\.Q... ~ \V\. \

Measurement Contract Based on a Schedule of Prices ( <A. ~ of .prl'ce- /
In measurement contracts based on a schedule of [ices the contractor carries
out the work required, which is meas ed and priced at the rate in a schedule
of prices .. The schedule consi\;ts of a list of measured items with units of
measurement stated against each, but with' no quantities given. A set of
Weliminaries and preambles., .and a form of tender, will a1so ..be needed.
. .' I
!

Strictly, there is no defmed entity, meaning that the requirements of the

'employer have not been defmed at the time the contract is formed. The
X' contractor is required to .execllte work solely- on the instructions of the
\\ €mployer, knowin what the eventual outcome of the ro'eet'
, "intend t This type of contract arrangement is used where the employer
,~ ~ / c a n n o t determjne his requirement§ in advance, not even suffIciently for bills
'IP" • of approximate quantities tb be prepared.
,

60
T
I
i·
SEVEN CONTRACI'UALARRANGEMENTS

!
I
1
Commentary

III The schedule of prices comprise components of work without any

quantities. This leads to difficulty in Q.Jloting realistic prices, resulting
in greater rislUo both the employer aud the contractor. Tendering on
this basis is a gamble. ~~)~t

III A schedule of pricr;s may b~eCiallY prepared and only the items
relevant to the jQb. in question ill be written into the schedules; these
schedules are known as ad- QC schedules. They should contain as
many items as practicable so that the fIxing of rates on varied work
will be easier.
~/c-~
III A variant of the ad-hoc schedules of prices is a standard pre-priced
schedule prepared by the Property Services Agency. A schedule of this
type contains items of work which are comprehensive and not relating
to any j;!artjcular ~t. The tenderers are required to quote a
percentage on or off various sections of the schedule as a whole. Due
to the fact that the basis of the prices are not known to tenderers and
may not be completely appropriate in every instance, tenderers may
objeCttO the use of this schedule.

III Objections to the use of a pre-priced schedule may be lessened where

some indication of the extent of the requirements can be given,
perhaps by way of drawings. Also, there is the advantage of time
saved in preparing the tender documents.

7.3 Cost Reimbursement Contracts

In cost reimbursement contracts, the price to be paid is determined on the basis of the
acma! cost incllrred by the contractor in carrying out the work. plus an agreed amount
tQ cayer Qyerheads and profit. This is used where the requirements are only in A..-

general terms because of the nature of the work, such as repair of damage, and/or of
the acute shortage of time. There are a few variants.

Cost Plus Percentage

The contractor carries out the~ and is paid all costs plus a fee. calculated
. as. a percentage of whatever the total cost may be, for .overheads and profit.
It is used for building work of an unusual ilature, such as experimental work,
where Iequirernents cannot he ascertajned before the contract is Jet, and where
it is not possjble to make any estimate of the total final cost

61
 SEVEN CONTR.~crUAL ARRANG~"TS

There is no fInancial incentive to encourage the contractor to carry out the

work economically. The contractor may even be inclined to make the cost as
great as possible. This type of contract is therefore not reco=ended; tight
control must be implemented if it is used.

Commentary

• Once the basis of the contract is agreed the work can co=ence
immediately, thus avoiding the delay which is necessary if estimates
have. to be prepared.

• If the contractor is effIcient then the cost to the employer should

represent a fair price for the work undertaken.

• There is po incentive for the contractor to be effIcient in his use of,

labour, materials or plau1: as he will be paid for these costs, plus the
agreed percentage. "

• It is diffIcult to predict the fInal cost at the early stage of the work.

• Some form of control is necessary in order to ensure that the correct

costs are being charged by the contractor, and such a control system
may be difficult and costly.

Cost Plus Fixed Fee

This may be used where an accurate estimate of the maximum total fInal cost
can be made. Since the fee is fIxed and will not be affected by the costs, the
contractor may try to reduce the time, and thus the cost of the construction;
this will result in a saving to the employer.

Commentary

• The advantage of Slleed in co=encing the work is undermined, since

a fairly detailed scheme of work must be Ilfellared before a fee can be
agreed. "

• If there are any major yarjations, which caD. be diffIcult to avoid in this
type of work, then the fee must be re-negotiated to take account of
. such" variations.

Cost Plus Fluctuating Fee

In this arrangement the fee paid to the contractor fluctuates in inverse ratio
~.5?Q111"" '!.'}D acc:ording to whether:the total [mal cost is more or less than the agreed
_~~ ~~e~s~tllll~a7.t;e_o_f_c~O=st=.==~~~~~__________~
1j'4\\'I\~\=-g'naV'~f~'
):;;p. Is%
10 % --:l?- - - - -) - - - A;;f<j;'li-D "Ei5fTHAfo;. O'lf" =T
115;% ,.
62
 "t~
I:.'
f-
'"0"
SEVEN CONTRACI1JAL ARRANGEMENTS

I
I However, when it reaches a pre-determined minimum fee, it will remain
1:-:
.-
I :. JlDcbanged desPite further increases in the cost of the work, thus guaranteeing
a minimum profit and providing a financial incentive for the contractor.
Additional incentives may be achieved by Wding a profit-sharing clause or a
bonus clause.

Commentary

11 Cost plus fluctuating Jee gives the contractor more financial incentive
to reduce costs than in other types of cost reimbursement contract.

11 A profit-sharing claUSe allows the contractor to receive a share of any

saYing if the actual cost should be less than the original estimate.

11 A bonus clause allows the contractor to receive, in addition to his fee,

a fixed amount for each day on which the employer has full use of the
completed work before the originally estimated date of completion.

Target Price

Similar to the cost plus fluctuating fee, the employer's requirements must be
known in some detail, and it must be possible to prepare a reliable estimat"
of the probable cost. Under this arrangement, a target price is agreed for the
work. The contractor is reimbursed in the [lIst place on the basis of cost plus
percentage or fixed fee, and then further paymeyt will be made according W
the comparison of the actual cost and the target price.

Any savings that can be effected, compared with the target price, will accrue
to the contractor either by way of a share of the savings or an.increased fee.
Conversely, should the cost exceed the target, then either the contractor would
be paid no fee on the excess or possibly a substantially reduced fee. This
method provides an effective incentive for the contractor.

Commentary

11 The .ti3rget price must be fixed 'accurately" and the extent of work to be
carried out must be well defmed.

III Extensiye negotiations between the employ~r and the contractor should
take place in order to arrive at a realistic target price.
~
'.
i=",_
III The target prie,e. must be kept constantly under review tlrroughout the
-- progress of the contract and amended for the vaIu" of any variations
-
.~
:to required by the employer.

-
"-
I;:;
:-.:5.:
~
llE'i"
.~
63
::Er-
 ,
SEVEN CONTRACTUAL ARRANGEMENTS

7.4 Design Build and Turnkey Contracts

j'
j,
Design build contracts work on the principle that t1ie contractor offers a package deal IL
service; the contractor both designs and builds the building, hence the term design ;

build. The idea behind this arrangement is that the contractor can offer a better deal
when he is in control of all aspects of the project, and that the client does not have
to employ professional advisers. However, the idea does not seem to work in its
fullest sense, since clients still frod it necessary to employ a representative in order
to ensure that the contractor's work is of an acceptable standard and that he is not
over-charging. Such representatives may take the form of an architect to ensure the
quality of construction work and/or a quantity surveyor to advise on and monitor
costs. Alternatively, a management contracting company may be employed who will
provide a filII representative, supervisory, and advisory service throughout the
'*
duration of the contract.

lumkry contracts require the contractor not only to design and build but also to
furnish and fit out as well - he literally takes care of everything. All the client has
to do when he receives the keys to the completed building, is to turn the key in the
lock (hence turnkey), step in, and start using the building for its intended purpose.

7.5 Comparison of Risk

The degree of fmancial risk borne by the contractor and the employer under each of
the contractual arrangements discussed, may be su=arised as follows:

• Maiority or risk borne by the contractor -lump sum on plan and specification;
the contractor's risk is slightly reduced if based on bills of quantities.

• Rirk rbared equally between employer and contractor - measurement on bills

W]:lproxim,ate quantities; the contractor's risk is slightly reduced if based on
a schedule of prices.

• Majority of risk borne by the em~r - ~plus flucmating fe,"; the

employer's risk is considerably reduced when using the target price
contractual arrangement.

• AII the risk borne by the employer - cQS1..pius percentag," fee; the degree of
risk will be slightly reduced if it is on a flXed fee basis. Turnkey and, to a
lesser extent, design build; the risk to the employer of both may be reduced
by employing a management contracting company. .... ..

It is co=on practice in Hong Kong for the employer to transfer as much risk as
possible to the contractor. Therefore, the most widely used contractual arrangement
is the lump sum, fixed pric,", usually based on hills of quantities. Consequently,
tender prices generally tend to he higher than the¥ need be, as contractms allow higb.
contingency factors in their price.

64
When the contractual arrangement has been decided upon, attention turns to the selection of
the main contractor. The process of selecting a contractor is referred'to as the tendering
procedure. A large proportion of work obtained in the building industry is by way of
tendering, either on a competitive or a negotiated basis, or sometimes a combination of both.
The methods of tendering co=only used in Hong Kong are: Q,pen competitive tendertng,
selective competitive tendering, and negotiated tendering, ,

8.1 Open Competitive Tendering

Competition involves comparison with reference to certain standards or criteria.

Therefore, before setting up a competition, it is necessary to establish the criteria
required in order to compare contractors,

Some of these criteria can be easy to defme and measure, for example, price and time
of construction. Others are more difficult to measure, such as quality of
workmanship and organisation which depend partly on subjective judgment for their
assessment. The procedure for inviting tenders is simnly to advertise the reguirement
for tenders and permit any applicant to submit a tender.

.. Commentary , , ..

11 This tendering procedure enables new but ambitipus contractors to compete

with we.!l estabJ jshed companies on an equal basis,
~}~'
11 The procedure fulfJls the requirements of pubJjc aCCQllntabi1ity. Suspicion of
favouritism is removed, although scope for preference still exists.

65
EIGHT TENDER.ll'lG PROCEDURES

• It is difficult tQ determine which tenderer is giving the best Qffer. The criteria
fQr the a=ptance Qf a tender may be multifQld and the IQwest tender will nQt
always result in the mQst eCQnQmic project.
, 'i.'!;;p
~.,"a IQUS cQntractQrs w ill prob ably
• . .ill the CQmpetItIQn,
In Qr der tQ Will .. unscrupu
keep dQwn CQsts in bQth labQur and materials, at the expense Qf qUality. This
will nQt Qnly be unfair tQ the reputable firms, it will alSQ increase the running,
repair, and maintenance CQsts Qf the bUilding.

• Because Qf the heavy cQmpetitiQn, it is PQssible that the CQntract price may be
so Jaw that the CQntractQr may nQt cQnsider the rewards sufficient to warrant
.dili~.DLQJ efficj~l\LW_Qrkrnaoshi.p.. AI; a cQnsequence of this, late completion
may reslllt.

• As the tender price may fail to reflect the difficulty Qf carrying out the work,
~conomic design :vill be discour~ged. The architect may be ~cIined to*,)
'illcIude uneconomIC over-desIgn, ill order to compensate for PQssIble shbrt
..Q.l.ts that the successful contractor may take.

• If the employer does not know anything about the tenderers, the contract price
becomes the only criterion of competition. The contract may be awarded to
a technically unsuitable and/or fi:llancially unsound firm.

• Heavy competitiQn results in a lower contract r.rice,

,. The most often voiced criticism is the fast of tenderiog, which, in the long
run, ..must fall on the employer.'

8.2 Selective Competitive Tendering

Selective tendering is often dQne in two stages. The first stage limits the number of
competing contractQrs to a number decided in advance to be reasonable. The number
will usually aim at a comprom¥etween the need for rigorous competition and the
avoidance of excessive, aborti~ '~imating work by the unsuccessful tenderers. It
also depends on the size, nature and the resource requirements of the project. AI; a
rough guide, the number- of contractors invited tQ tender WQuld be between five and
eight;.the greater the value of the prQject. the greater the number.

First stage selection may be carried out by either advertising or by selection, in the
following ways:

• Advertise the job, inviting CQntractors to indicate their interest. Interested

, contractors would be required to supply particulars of their financial sihJatiOll,
technical capability, and work of a sjmjlar oabJre that they bad previousl?<
undertaken, A short list for the second stage would then be compiled from
the applicants.

66
TI EIGHT TENDER.rn"G PROCEDURES

• Select firms from an ad-hoc list of contractors of established skill, integrity,

I=- responsibility and proven competence for work of the character and size
contemplated, or from a standing list of approved firms who have been
investigated and whose capabilities are known. Public bodies have a standing
list of firms who satisfy the following criteria: standard or workmanship;
amount of plant carried; business record; length of time in business; frnancial
stability; capacity to do the work; history of labour relations.

Second stage will usually be. the final selection of one contractor on the criterion of
price. As the fIrms have been selected to tender, -there would appear to be no reason
""tOaCcept any but the lowest tender. Other criteria, however, may also be considered
at this stage, the most common being time and any qualification within the tenders.

Commentary

III In most cases the employer will allow the architect full control over which
firms wjll be invited to tender.

III Standard of work should be high, as the firms chosen will be reputable
contractors.

III .Contractors have more of a chance of being selected than with open tendering
because of less competition

III Some contractors feel obliged to tender if they are chosen, even if they do nut
really want to, for the fear of being black listed. This is why it should be
pointed out in the letter of invitation, that if the contractor does not wish to
tender, it will not prejudice any future chances.

III Prices tend to be higher when compared with open tendering because there is
less competition.

11 There is a chance of tender rings occurring where the group of selected

contractors get together, negotiate the price and take it in turn to submit the
lowest tender. It is good practice therefore to change firms regularly to
prevent such coJJusiQ.n. ~~

8.3 Negotiated Tendering

qj\"'~
-;s :¥z
Negotiation is the process of conferring with a view to finding terms of agreement.
~ 7- In the context of tendering, it may be conSidered that competition is a tool for
~
selecting a contractor, while .negotiations are conducted with a contractor already
selected. Negotiations between the employer and a contractor interested in securing
the contract, may be carried out with or without competition beforehand. The
procedures involved in each are examined in the following:

67
 ,
EIGHr TENDERJNG PROcP..J)URES

• Negotiations without competition beforehand

Negotiated tenders may be result in selection without competition. That is the

employer, for reasons of his own, may wish to place his business with a
particular fIrm, or that the contractor approached is the only fIrm capable of
handling the project.

The tenderer will usually be aware of the lack of competition and the
improbability of the employer selecting- another fIrm without at least serious
loss of time. Therefore, he will invariably offer an expensive tender.

It should be restricted to those cases where specialist technical ability prevents

or restricts competition or where the employer has some compelling reason to
employ a particular contractor. . sk ..
"J!;t,.

• Negotiation with competition beforehand .

Negotiation may occur following the selection of a contractor, concernju

correction of mistakes in tendering, or the a reement of an adden
reduction bill. Reasons for an employer choosing this tendering procedure
may include the desire to involve the contractor's expertise at the design stage,
or where the contract is for a building of a specialist nature. The procedure
is basically carried out in two stages.

Stage I Selection of a contractor and establishment of the price basis

for negotiation

These procedures would be similar to those for the fIrst stage of selective
tendering, on such matters as: selection of tenderers; preliminary inquiries;
tender documents (including an explanation of two stage procedure); time for,
tendering;-'lualificatiQ~_ errQTj; evaluation of tenders; acceptance: and
notifjgtiQlL9i results.' An essential feature of the selection process is the
establishment of the price basis for subsequent negotiation.' This can be
achieved by the contractor nominating a bill submitted for a past project of a
.similar nature, pricing an approximate bill, or submitting a schedule of prices.
All tenders are fIrst compared on a price basis. It should then be possible to
select the contractor for the second stage negotiations.

Stage 11 Negotiation of an acceptable tender

The second stage would be mainly concerned with developing the project
design, preparing bills of quantities to be priced on the basis of the fIrst stage
tender, and agreeing a fInal price for the work. As the design evolves, the
data contained in the price basis is used for cost control purposes. The bills
of quantities is prepared, and negotiation on prices proceed until the design is
complete and an acceptable total price is agreed. A tender can then be
submitted by the contractor, which should meet with automatic acceptance.

68
 EIGHT TENDERING PROCEDURES

Commentary

III There isc no contract between the employer and the contractor "'--
until a
tender has been accepted following the completion of the design and
t
the agreement on the total price.

11 It is co=on practice to exchange letters of intent which clearly defme

the extent of any fmancial obligations which exist in respect of
matters, such as design contributions by the contractor, cancellation of
the project, or failure to negotiate an acceptable tender.

III If a project were gnceUed before the second stage was completed, the
contractor could Fecover ilI!Y costs resulting from any contribution be
had made to the design. He would, however,.have to bear tendering.
_costs for stage one.

III Where it is desired to make an early start on site before the design
process is complete, the timing of the procedure must change, so that
a contract is entered into whilst design is still continuing. However,
the earlier the contract is let, the less scope there is for a firm tender
to be negotiated. There soon comes a point when a lump sum contract
ceases to be appropriate and a measurement contract, or even a cost
reimbursement contract, may become more suitable.

69
~.-.----

I
,
T
I
r
I
I

According to Clause 21 of the HK Standard Form, possession of the site is to be given to

the Main Contractor on the Date for Possession stated in the appendix. Failure by the
Employer to give the Main Contractor possession on the date specified is a breach of contract
for which the Main Contractor would be entitled to claim damages. The Date for Possession
should be a date which allows adequate time for the delivery of tenders, examination anq.
correction of priced bills, preparation of cOntract documents, and pre-contract preparation.
Once the Main Contractor has taken possession he must regularly and diligently proceed with
the execution of the Works and complete on or before the Date for Completion.

9.1 Date for Completion

The Date for Completion will either be agreed by both parties or alternatively decided
by the Architect on the Employer's behalf. The Date for Completion will be written
in the appendix of the Standard Form and will be subject to any extension of time
granted by the Architect, for delays which are not the fault of the Main Contractor.
When the Works are practically complete the Architect is obliged to issue a
Certificate of Practical Completion. This signifies that on the date shOwn on the
certificate, Practical Completion of the Works took place.

As no definition is ever given in standard forms of building contract, including the

HK Standard Form, it will be for the Architect to decide when the building is
practically complete. Therefore, when in the Architect's opinion, the building is fit
for the Employer to occupy and use for the purpose for which it is intended, the
Works will be considered as practically complete.

~l
.. --'l" 71
 I
NINE POSSESSION AND COMPLETION I(

9.2 Early Completion II~

To comply with the Code of Procedure fOT Selective Tendering, the period for·
completion of the contract must be stated in the tender documents. This will form
I
the period after which the Main Contractor will be in breach and have to pay
liquidated damages to the Employer. The period for completion decided upon by the
Employer may, from the Main Contractor's viewpoint, either be too short or too
long. The latter may mean early completion..

In certain cases the Employer may not wish to take early possession. In such cases
the building will be practically completed and the Architect must issue a Certificate
of Practical Completion of the Works to the Main Contractor or the Employer will
be in breach. The issue of this Certificate however, does not mean that the Main
Contractor can hand over the building before the agreed Date for Completion; this
can only happen with the Employer's consent.

9.3 Sectional Completion

Clause 16 of the HK Standard Form provides for the possibility of the Employer
taking possession of some section of the Works before practical completion of the
whole, by an agreement made with the Main Contractor during progress of the
Works, rather than forming part of the original contract. The intention is to ensure
a fair and reasonable position under the Contract when a part, or successive parts, of
the Works are taken possession of by the Employer, in advance of their total
completion. This is achieved by treating each part as it is taken over, for the
purposes of this clause, as if it were the whole Works. The procedures and
consequences of a sectional completion agreement made during progress of the Works
are as follows:

11 The Architect by issuing a certificate fixes ·an approximate total value for the
part !aken over. Clause 16(a)

11 Practical Completion of that part is deemed to have taken place, and the
Defects Liability Period in respect of it is deemed to have begun, on the date
of its taking over by the Employer. Clause 16(b)

11 A Certificate of Making Good Defects under Clause 15(4) is to be given

accordingly in respect of that part. Clause 16(c)

11 The -value insutedlinder Clause 20(A) (if applicable) is to·be reduced

proportionally and any risk to the part taken over becomes the liability of the
Employer. Clause 16(d)

11 The rate of damages for non-completion provided for by Clause 22 and the
appendix, is to be reduced proportionally within fourteen days of the taking
over of the part. Clause 16(e)

72
TI NINE POSSESSION AND COMPLETION

1-;-
III One moiety (one half) of such amount retained as is proportionately
I· appropriate to the certified approximate value for that part, is to be paid to the
Main Contractor within fourteen days of the taking over of the part. Clause
16(f) (i)

III The remaining moiety of such amount is to be paid to the Main Contractor
according to the provisions of Clause 30(4) (c) , but without the need for a
certificate. Clause 16(f)(ii)

Clause Amendments

Having regard to the provisions of Clause 12(1), which in essence allows the Standard
Form to take precedence over the Contract Bills, it is probably not sufficient merely
to note the sectional completion dates in the Contract Bills. All clauses affected
should be carefully considered and amended as follows:

Articles of Agreement

III Sections should be clearly defined when describing the Works in the Articles
of Agreement.

Clause 1 Main Contractor's Obligations

III A definition of Section should be given to tie in with the Articles of

Agreement.

III The Contract Drawings and Contract Bills should identify the sections which
comprise the whole Works. These sections should be serially numbered and
details of each section clearly given.

Clause 15 Practical Completion and Defects Liability

11 Provision should be made to have the effect that practical completion of each
section is deemed to have occurred for all the purposes of the Contract, as it
does for the whole Works under" the unamended clause. Hence, the Defects
Liability Period in respect of each section completed shall commence
accordingly. .

-~ :~.:::--
-- . Clause 16 Sectional Completion

11 The need for the Main Contractor's consent should be deleted from this
clause. The reason for this is to avoid any confusion; the contractor already
having agreed to the principal of sectional completion and the completion
dates of each section.

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NINE POSSESSION AND COMPLETION

Clause 20 Insurance oj the Works against Fire, etc.

• Provision should be made to indicate that any completed section be at the sole
risk of the Employer as regards any of the perils under Clause 20.
Consequently, the Main Contractor will be allowed to reduce his value
insured, according to the approximate value of the section completed.

Clause 21 Possession, Completion and Postponement

--- - ..
• The dates for completion of each section and the whole Works should be set
out in the appendix and Clause 21 amended accordingly.

Clause 22 Damages jor Non-completion

• Clause 22 should be amended to provide for liquidated damages in respect of

each section.

• If these amounts are not to be proportionate to the approximate section value

then Clause 16(e) should be amended accordingly.

Clause 30 Certificates and Payments

• The regular specified issue of Interim Cf<rtificates continues until the last
section has reached practical complf<tion. Only then may certificates of
payment be issued intermittently.

• Retention is released by virtue of the unamended Clause 30(4) in respect of

the sections individually, working from. their various Certificates of Practical
Completion and of Making Good Defects.

• The Period of Final Measurement and Valuation may also be timed from each
of these practical completions, if a special provision is agreed. In the absence
of such a provision it will start only after the last practical completion.

• Only one Final Certificate is to be issued, related to the timing of the last
practical completion amongst other things, which accords with the principle
that the Contract is still one despite its sections.

Clause 35 Arbitration

• It should be made clear that arbitration matters that are required under the
terms of the Contract to wait until after the issue of the Certificate of Practical '!
!
Completion, may co=ence after the issue of a Certificate of Practical
Completion of any section.

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 NINE POSSESSION AND COMPLETION

Sectional Completion Supplement

Where it has been determined, before awarding the Contract to the Main Contractor,
that the Works are to be completed by phased sections, on practical completion of
which the Employer takes possession, the arrangement may be incorporated into the
Contract, and the tenderers notified at the tender stage. This may be implemented
by amending the relevant clauses in the Standard Form, or by appending the Sectional
Completion Supplement to the Contract.

It should be appreciated that a Sectional Completion Supplement can only be used

where the tenderers are notified that the Employer requires the Works to be carried
out in sections, each of which the Employer will take possession of following
individual practical completion.

If the Works has not been divided into sections in the tender documents, the
Supplement cannot be used at a later date. If the Employer wishes to take possession
of a section of the Works after the Contract has commenced, he may only do so with
the consent of the Main Contractor as stated in Clause 16.

9.4 Liquidated and Ascertained Damages

Liquidated and Ascertained Damages is the full expression used in the HK Standard
Form, to describe the monetary compensation paid to the Employer by the Main
Contractor in the event of late completion. The word liquidated means that the
principle to pay monetary compensation for a breach has been established; the word
ascertained means that the amount to be paid has been decided. Although the full
expression is used in the Contact, it is common practice to use the abbreviated
. expression liquidated damages, or in many cases simply, L.D., both of which are
accepted as having the same meaning as the full expression.

Clause 22 - Damages for Non-completion, permits the Employer to deduct from

monies due to the Main Contractor, Liquidated and Ascertained Damages at the rate
stated in the appendix, if the Works are not completed by the Date for Completion
or within any extended period of time as granted by the Architect. The sum is
.entered in the appendix as a flat rate per day, which should be a genuine pre-estimate
of the loss which the Employer will suffer in the event of a delay in completion of
the Contract. .

~. Ascertainingtl1e Employer's Loss

=

Under the HK Standard Form, there is no specified or suggested method of arriving

at a sum of money per day that would reflect the Employer's loss, in the event of the
Main Contractor's failure to complete on time. However, a commonly used method
is to calculate the liquidated damages as the daily rentable value of the property, after
taking into account likely occupancy rates.

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]-lINE POSSESSION AND COMPLETION

i
When it is difficult to arrive at an actual assessment of loss, liquidated damages per
day may be calculated as 10% of the Contract Sum (as stated in the Articles of
Agreement) divided by the number of days originally estimated for completion.

The Government of Hong Kong uses a formula in order to arrive at a more accurate
assessment of loss. The Government's daily loss is calculated as: the daily rate at
which Government would have to amortise (payoff a debt by a sinking fund) the cost
of the project over the period of its probable life at a fixed rate of interest; plus daily
I
supervisory staff costs during the delay period; plus an assessment of the daily sum
payable to the Main Contractor in respect of the in,creased cost of labour and
materials used during the delay period.

Procedure for Deducting Liquidated Damages

I:
If the Main Contractor fails to complete the Wodes by the Date for Completion or
within any extended time fixed under Clause 23 or Clause 33(1)(c), then the
I
; 1

Architect, if 4e is to deduct damages, must certify in writing that, in his opinion, the
Works ought reasonably to have been completed, stating when completion should
have occurred after taking into account any extension of time awards.

Upon the issue of such a certificate (referred to as a certificate of non-completion),

payment for liquidated damages may be calculated by multiplying the period between
the date that the Architect specifies in the certificate as the date on which the building
ought to have been completed and the date of the issue of the Certificate of Practical
Completion, by the appropriate· rate of liquidated damages as specified in the
appendix.

Payment for liquidated damages can be made either progressively in each interim
valuation or by a final adjustment of the amount due under the Final Certificate. If
any liquidated damages due to the Employer are not paid, or otherwise allowed by
the Main Contractor prior to the issue of the Final Certificate, the Employer's right
to recover such amount from the Main Contractor is terminated by the issue of the
Final Certificate. .

Liquidated Damages in the Event of Partial Completion

In the case of Philips Hong Kong Ltd v. The Attorney General of Hong Kong (1991),
the Privy Council held that provisions for minimum liquidated damages can be valid
where the Employer .is able to show standing expenses, such as the cost of
maintaining resident site staff, which would occur in any event, even if only some
small part of the work is not completed.

In Philips, the Contractor attempted to have the liquidated damages proVISIOn

invalidated on the grounds that they could come up with certain hypothetical situations
in which the liquidated damages would exceed the Government's likely loss. The
Privy Council rejected this approach and said that the question was whether the sum
payable in the event of non-compliance was extravagant having regard to the likely
range of losses reasonably anticipated at the date of the contract.

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1=

An insurance contract is an agreement whereby one party, the insurer, in return for a
consideration, the premium, undertakes to pay to the other party, the insured, a sum of
money or its equivalent, upon the occurrence of a specified event which is against the
insured's financial interest. It is a contract of the utmost good faith as the insured is required
to provide details of the interest to be protected. Consequently there is an implied duty upon
the insured to disclose all known facts when applying for an insurance policy; in the event
of non-disclosure, the insurer may avoid liability.

A surety bond on the other hand, is a form of guarantee. It is an undertaking by a third

party, usually a bank or an insurance company, to pay an agreed sum of money by way of
compensation if a party to a contract fails to fulfll their obligations. The issue of a bond
does not rely so much on the disclosure of facts, as the purchasers ability to provide the
necessary collateral to cover the amount of the bond.

10.1 Insurance

It is essential that the main contractor should take out comprehensive insurance cover
relating to the contract works. Although the contract document may stipulate a
minimum limit of indemnity, it is the main contractor's responsibility to select a limit
adequate for his protection. It is therefore necessary to have an understanding of the
following terminology used by insurance companies.

III Cover

Cover is the extent of protection that insurance provides to the insured. The
term exceptions is used to describe this cover by stating .what is excluded.

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TEN INSURANCE AND SURETY BOND
-'
"It
• Limit of indemnity I
Indemnity means compensation for loss, so the limit of indemnity is the
I
maximum amount that may be paid in compensation for loss by the insured.

• Premium

Premium is the amount of money paid by the insured to the insurer as the
consideration to the insurer for undertaking the insurance policy. It is
calculated based on the sum insured, the limit of indemnity, cover, exceptions,
and any other conditions of the poilcy. For example, in the Contractors' All
Risks (C.A.R.) policy, the sum insured is the total of the value of the contract
works, plus professional fees, the escalation in costs, and the costs for
removing the debris. The premium shall be retrospectively adjusted on the
actual value of the contract sum when known.

• Excess

All claims under an insurance policy are subject to an excess. This is a

specified amount which is deducted from any claims payment made under the
policy. An excess is essential as a certain amount of inevitable loss or
damage can be anticipated in given circumstances. If insurers were to provide
indemnity in respect of these comparatively minor losses or damages, the
money that the insurance company has gained from premiums intended to pay
for major losses would be eroded. The cost of insurance would then have to
increase.

• Period of insurance

The Period of insurance is the period of time during which the insurance
policy is effective. Usually, a C.A.R. policy will cover the period from the
co=encement of the contract (date for possession) until two weeks after
practical completion of· the works. The third party and workmen's
compensation insurance should be extended to cover the defects liability
period and until no further work of any kind is being carried out.

• First party and third party insurance

First party insuranCe policies ·are those under which one voluntarily insures
one's own life, or property, against loss, injury or damage. Third party
insurance policies ·are those which insure against one's potential liability in
law to pay damages to another, and in some cases are compulsory, such as
third party car insurance.

It is essential to draw the employer's attention to the fact that some insurances
will become his liability on the issue of the certificate of practical completion
(or on any other date as required in the contract) and that he should arrange
his own cover in good time before the main contractor's policy terminates.

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TEN rnSURANCE AND SURETY BOND

III Joint insured

Some insurance policies will be issued in joint names. For example, in

addition to the employer (the principal), the main contractor and
sub-contractors may also be included if required. These parties are known as
a joint insured and being a joint insured, both parties are liable for the
statements in the proposal as well as for the premiums. ..

When there is more than one party insured under a policy, a cross liability
__ clause must be included in the policy. Cover then operates as though a
separate policy had been issued to each party making up the insured.
Although there may be more than one insured, the aggregate liability of the
insurer would not be increased beyond the limit of indemnity to which the
insurance policy is subject.

The HK Standard Form requires that .the Main Contractor shall maintain
insurances, as required under the Contract, in the joint names of the Employer
and the Main Contractor. In this way, the insurers (the insurance company)
will be unable to take legal proceedings against either party to recover money
payed out under the policy as a result of a claim for damage or injury caused
by the negligence of either of the parties. Also, as the Main Contractor will
be jointly liable with the Employer in any legal proceedings taken by a third
party, both parties (as joint insured) will be eligible to claim payment from the
insurance company for any damages that may be awarded against them.

10.2 Building Contract Insurances

Insurances used in building contracts may be considered under two broad

classifications: liability insurance and materials damage insurance.

Liability Insurance

These polices cover the insured's regal liability to third parties, that is,
liability to any person who is not a party to the insurance contract.

11· Employers' liability policy

This policy covers the liability of an employer (master) to his

employees (those persons under a contract of service or apprenticeship
with the employer) for bodily injury or disease arising out of and in
the course of their employment. -

<:- ~:; ••
11 Public liability policy
-', ,,?--
This policy provides an indemnity against personal injury claims by the
public (other than employees), and property damage claims.

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Material Damage Insurance

This category of insurance covers loss or damage to property in which the

insured has an insurable interest which may arise through ownership,
possession or contract. A material damage policy does not cover the insured's
legal liability for injury to persons or damage to third party property in which
he has no insurable interest.

Material damage insurance is taken out in respect of: the works; buildings and
contents of owned and occupiedpremises;_ and main contractor's plant &
equipment. These three are examined in more detail below.

• Insurance of the works

The two main types of policies under this section are the Contractors'
All Risks policy and the Fire and Special Perils policy.

• Contractors' All Risks policy

This indemnifies the insured for loss, damage or destruction of

any of the property specified in the schedule, whilst on the
contract site for which the insured is responsible, in accordance
with the terms of the contract arising from any cause
whatsoever, subject to certain exceptions. Policies are
normally insured in the joint names of the employer and the
main contractor and it is co=on practice to make the insured
responsible for an excess applicable to all perils.

This policy is a material damage policy and thus consequential

loss (such as fmancialloss through delay caused by damage to
the works) is not covered uuless it is expressly extended to
include consequential loss and risks. The C.A.R. can be
arranged on a contract by contract basis, or may be arranged
as a blanket policy to cover any work that the contractor may
undertake.

• Fire and Special Perils policy

This provides protection for loss and damage caused by fife

and other specified perils (such as lightening and flood) to the
works themselves. The policy covers only those risks listed in
Clause 20 of the HK Standard Form - Insurance of the Works
against Fire, etc. (see page 85), subject to the policy terms and
-exceptions. Although such a policy is very limited in the extent
of cover it provides, the amount of cover should nevertheless
be adequate to cover potential losses and damage to the Works
for the risks specified in the Contract.

The cover required for the insurance of the works depends upon the
requirements of the particular contract governing the works.

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 TEN INSURANCE A..ND SURETY BOND

For example, the HK Standard Form requires a Fire and Special Perils
policy. However, irrespective of the requirements of the particular
contract concerned, the wider cover provided by the Contractors' All
Risks policy. makes it a better form of cover. Major contractors
usually acquire a blanket C.A.R policy to cover all their contracts.

An important consideration the main contractor should be aware of, is

whether compensation for loss or damage is to be taken under the
policy on an indemnity basis or reinstatement basis. On the indemnity
basis, the compensation would be based on the cost of repair or
replacement less an allowance for depreciation. On the reinstatement
basis, the calculation of compensation would be on a new for old
basis, which means no· deduction is made for depreciation. The HK
Standard Form makes no specific requirement in this respect.

11 Insurance of buildings and contents of owned and occupied

premises

Insurance of the works described in (a) differs from the insurance of

buildings and contents of owned and occupied premises which covers
matters in and arising from existing premises where alteration or
extension work is involved.

The contract will usually specify whether it is the main contractor's

obligation to take up the insurance against loss to the existing premises
and the contents therein, or whether it is the employer's responsibility.
Under Clause 20[B] of the ·HK Standard Form, the Employer is
required to arrange this insurance when the Main Contractor is
carrying out alterations of, or extensions to, an existing building.
However, all other losses are still the responsibility of the Main
Contractor. It is therefore advisable for the Main Contractor to
request the Employer to arrange C.A.R. insurance rather than a Fire
and Special Perils policy.

A Fire and Special Perils policy covering the buildings and contents of
oWJied and occupied premises will provide an indemnity against loss
of capital in the event of damage or destruction by fire or other
insured peril. However, a fire of any magnitude1J1ay bring about a
serious interruption of the business. Although the premium will be
higher it is nevertheless prudent to arrange a policy that will cover
such consequential losses.
;:~ ~.
'FiO
~~
~.
11 Insurance of main contractor's plant and equipment
'":: ;;:.-
'1
A~ This applies to both the main contractor's own plant and that hired.
~:'.
~
,'c'
It may be arranged as an extension of a Contractors' All Risks policy,
F- or a Fire and Special Perils policy, it can also be provided for under
a separate Contractors' Plant policy. It should be noted that the HK
Standard Form, along with most of the common standard forms of
contract used in Hong Kong's building industry, do not require the

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main contractor to insure his own plant and equipment, or that hired.
Although it may not be mandatory to do so, it is nevertheless advisable
for the contractor to acquire insurance to cover his plant and
equipment, as if it is lost (stolen) or damaged, he could be faced with
a considerable fInancial loss. Most contractors will consider the
additional premium required to extend the C.A.R. or Fire and Special
Perils policy to cover such risks, or the purchase of a seperate
Contractors' Plant policy, a worthwhile investment.

10.3 Indemnity and Insurance Clauses - HK Standard Fonn

The HK Standard Form has one indemnity clause and two insurance clauses. The
indemnity .clause - Clause 18, specifIes the limit of the Main Contractor's indemnity,
makillg it clear exactly what h.e is to assume responsibility for. Clause 19 is the
liability insurance clause, and Clause 20 is the materials damage insurance clause.

Clause 18 - Injury to Persons and Property and Employer's Indemnity

• Clause 18(1) Personal injury or death (Indemnity clause)

This states that the Main Contractor shall assume liabilityJor, and indemnify
the Employer' against, any claim in respect of personal injury or death arising
out of the execution of the Works, except where the injury or death has been
due to any act or neglect of the Employer or of any person for whom the
Employer is responsible.

The liability assumed by the Main Contractor and the indemnity given to the
. Employer are very wide. . The words· any person whomsoever used in the
clause, will cover not orily the Maip. Contractor's employees and his sub-
contractors and their workmen, but also, subject to the exception at the end
of the sub-clause, the Employer himself, his servants and agents and any third
party who may, whether in the course of his business, or as a mere passer-by,
or on looker, come into contact with the Works.

There would be however, no liability to a trespasser unless the Main

Contractor or Employer was aware of his presence and recklessly disregarded
. him. Building operations are potentially dangerous, not only to those taking
part in them but also to the general public as well. Thus those responsible for
them, both the Employer and the Main Contractor, are likely to incur liability.

The exception at the end of the sub-clause, provides that the Main Contractor
shall not be liable if he is able to prove that the injury or death was due to the
act or neglect of the Employer, orof any person for whom the Employer is
responsible. The onus is on the Main Contractor, to prove in a court of law
the Employer's act or neglect in connection with any injury or death, if he is
to avoid liability.

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 TEN rnSURANCE AND SURETY BOND

Clause 18(2) Injury or damage to property (Indemnity clause)

There is an important difference between the extent of the liability assumed

by the Main Contractor for personal injury or death under Clause 18(1), and
the extent of the liability he assumes under this sub-clause for injury or
damage to property.

Under Clause 18(1) the Main Contractor assumes sole liability, and
indemnifies the Employer against liability for injury to persons, except in
cases where he can prove affIrmatively that the injury is due to the act or
neglect of the Employer or of a person for whom the Employer is responsible.
Under Clause .18(2), however, the Main Contractor assumes liability and
fudemnifies the Employer against liability for injury or damage to property
only where such injury or damage is due to any .negligence, omission or
default on the Main Contractor's part, on the part of his servants or agents,
or on the part of any sub-contractor.

The reason for this difference is not clear. It may have been thought to be in
the public's interest to minimise the possibilities of disputes over liability for
personal injuries as far as possible by placing the wider responsibility on the
Main Contractor. At the same time, it may have been considered that
substantial damage to neighbouring property is likely to be caused at least as
much by faulty planning and design as by the Main Contractor's negligent
execution of the Works, so that it would be unfair to place upon the Main
Contractor the onus of proving the Employer's act or negligence. .

In practice the difference is only significant when it comes to the question of

proving negligence: under Clause 18(1) the onus of proof is on the Main
Contractor, under Clause 18(2) it is on the Employer. In most cases the
results will no doubt be the same, though it is possible to envisage
circumstances where, in a single accident, the Main Contractor would be
liable for personal injury and the Employer would be liable for damage to the
property of the injured person.

For example, a subsidence might occur on a site, due to an old fault or

working whose existence was neither known nor suspected by either of the
parties, causing a visiting lorry to be damaged and its driver injured. Under
such circumstances, the Employer would be liable for the damage to the lorry
and the Main Contractor for the injury to the driver.

Clause 19 - Insurance against Injury to Persons and Property

. e- Clause 19(1) Personal injury or death (Insurance clause)

The Main Contractor is required to effect and cause any sub-contractor to

effect insurances necessary to cover his liability for personal injury or death,
and such insurances as may be specifically required by the Contract Bills in
respect of injury or damage to property caused by his negligence.
..
~'

". ~~
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TEN INSURANCE M'D SURETY BOND

The Main Contractor is free to choose any company through which to effect
these insurances. However, this freedom of choice does not deprive the
Employer of the right to satisfy himself that the Main Contractor has secured
adequate cover. The Main Contractor is obliged to. produce documentary
evidence that the required insurances are properly maintained, but subject to
1.
the right of the Employer to have produced for his inspection the actual
policies and premium receipts. If the main Contractor has not effected the
required irisurances, then under Clause 19(1)(c), the Employer is given the
right to effect cover himself and deduct the premium from any monies due to
the Main Contractor.

There are two important points to note in Clause 19(1). First there is the
obvious intention that the obligations undertaken by the Main Contractor in
respect of Clause 18(1) and 18(2) must be insured. Second is the clear
warning that the Main Contractor shall cause any sub-contractor to maintain
insurances, for failure to do so means that the Main Contractor himself
assumes the liability of an uninsured sub-contractor.

Usually, the Main Contractor would arrange public liability insurance (third
party insurance), and employers' liability insurance (workmens' compensation
insurance) to cover the liability under this clause; both taken out as joint
insured with the Employer.

• Public liability insurance would cover claims in respect of accidental

death of or bodily injury to third parties and accidental third party
property damage arising in cOl;mection with the performance of the
insured contract. However, the following liabilities are generally
excluded under public liability insurance:

• Accidents in connection with mechanically propelled vehicles

(other than those confrned to the site), as these have to be
compulsorily insured by law.

• Occupational accidents to workmen of the insured; covered by

workmen's compensation insurance.

• Damage to buildings and land caused by vibrations or

weakening or removal of support.

• War and nuclear risks.

• Employers' liability insurance is subject to a limit of indemnity

which is the maximum amount payable for all claims attributable to
one occurrence 'or a series of occurrences arising out of the one event.
Theoretically, the cover should be unlimited in the aggregate amount
for the period of insurance.

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Clause 19(2) Injury or damage to property (Insurance clause)

This provides for the inclusion of a provisional sum in the Contract Bills to
cover the insurance of risks not covered by the Main Contractor's indemnity
given under Clause 18. The Main Contractor is required to insure on behalf
of the Employer, with certain exceptions, against liability for damage to third
party property caused by collapse_subsidence, vibration, weakening or removal
of support or lowering of ground water arising in connection with the
Contract. There are three important points to note:

• The Main Contractor is required to maintain insurances in the joint

names of the Employer and himself.

• The indemnity has to be specified by way of provisional sum items in

the Contract Bills. This clearly removes responsibility for the
adequacy of cover from the Main Contractor and places it on the
Architect. It must be ensured that the amount extends to: ... any
expense, liability, loss, claim or proceedings which the Employer may
incur... The cover required is very wide and includes consequential
loss.

• The cover is basically for damage to third party's property from

weakening of support, where the Main Contractor and Architect have
not been negligent. Where they have been negligent, their own
professional indemnity policies would cover them.

Clause 20 - Insurance of the Works against Fire, etc.

This clause, which deals with the insurance of the Works against the accidents named,
that is, fire, lightning, explosion, etc., is divided into two parts [A] and [B], which
are alternatives; one of them is to be struck out as circumstances· may require.
Alternative [A] is applicable to the erection of a new building if the Main Contractor
is required to insure against loss or damage by fire, etc. Alternative [B] is applicable
to alterations of, or extensions to, an existing building.

Alternative [A] - New building

Clause 20[A] places an obligation upon the Main Contractor to insure the
Works, in the joint names of the Employer and the Main Contractor, against:
... loss or damage by fire, lightning, explosion, storm, typhoon, flood, bursting
or oveiflowing of water tanks, apparatus or pipes, earthquakes, aircraft and
other aerial devices or articles dropped therefrom, riot and civil commotion.

The perils set out in Clause 20 follow the wording currently used by insurance
companies. The Main Contractor is to take out policies of insurance in the
joint names of himself and the Employer or where he holds a Contractors' All
Risks policy covering the Works, have the Employer's interest endorsed
therein.

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TEN lliBURANCE AND SURETY BOND

The cover should be for the full value of the work executed, which will be an
increasing amount, and all materials and goods upon the site.

It is possible to insure these perils under a Fire and Special Perils policy.
However, a main contractor who attempts to save on insurance costs by
arranging only the minimum cover, carries the risk himself for perils such as
theft, and could therefore face substantial fInancial losses in the event of a
mqjor claim caused by an uninsured peril. The C.A.R. policy is designed to
protect the main contractor against such losses, and although the premium will
be ~igher, the extra protection offered is worthwhile.

The insurers are to be approved by the Architect .and the policies and premium
receipts are to be deposited with the Employer. The Main Contractor will be
discharged from his obligation to deposit the policies and premium receipts,
by producing for inspection by the Employer, documentary evidence that the
. policies are properly endorsed and maintained. However, the Employer
retains the right to have the policies and receipts produced for his inspection.
If the Main Contractor does not do so, the Employer is empowered to effect
the insurance himself and deduct the cost from the Main Contractor's account.

Upon the settlement of any claim, the Main Contractor must proceed with the
work of repairing or replacing whatever has been damaged or destroyed. In
respect of this work he is to obtain payment only from the monies received
under the policies of insurance, and is not entitled to anything in excess of
such amount. It is. essential, therefore, for the parties to see to it that the
policy monies will be adequate to meet the cost of reinstatement in a period
of rising prices.

• Alternative [B] - Existing building

Clause 20[B] requires the Employer to arrange inSurance against the perils
mentioned, when the Main Contractor is carrying out alterations of, or
extensions to, an existing building. The existing structure and contents are
also the Employer's responsibility but only for the perils specifIed in the
clause. All other losses are the responsibility of the Main Contractor and he
carries his own risk unless he or the Employer arranges C.A.R. insurance.

In some cases it may not be possible for the Employer to take out insurance
against certain of the risks mentioned in the clause. This matter should be
arranged between the parties at the tender stage and the clause amended
accordingly.

In' .theevent of loss or damage occurring, the Main Contractor is required to

restore the damaged work, which is then deemed to be a variation. The
Employer is required to pay the Main Contractor for all work done up till the
time of the damage.

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10.4 Surety Bond

In a building contract the employer endeavours to ensure that he is protected against

most eventualities. This is achieved by insuring against all manner of disaster or
accident, and by provisions in the contract allowing for retention and damages for late
completion. However, in the event of total default (failure to perform or complete),
these remedies will have little or no effect and the employer may be faced with a
substantial fInancial loss which may prove impossible to recover.

A co=on form of protection for the employer is to require the contractor to obtain
a guarantee - in the form of a surety bond - from a third party, such as a bank or an
insurance company, who, for a fee, agrees to accept fInancial responsibility for the
performance of the contractor's obligations. In the event of the contractor's default,
the third party pays an agreed amount of money to the employer as way of
compensation for his loss.

This appears to be a very simple legal obligation. However, as there are different
forms of bond and the terminology involved often confusing, the contractor may not
appreciate the full implications of purchasing such a bond.

Meaning of Surety Bond

A bond is a form of guarantee. It is an undertaking to be answerable for the

consequences if the obligation guaranteed is not performed. As a surety is
one who makes hlrnself responsible for another's obligations, a surety bond
is, therefore, an undertaking to act as guarantor by a third party - usually a
bank or an insurance company. In the case of a construction project this
would involve the surety or bondsman (the terrns given to the third party
guarantor) guaranteeing to pay the employer an agreed sum of money, should
the contractor not fulfJl his obligation to complete the contract; the surety
would in turn recover the money from the contractor.

Recovery of Bond Amount from Contractor

Before a surety - " bank or an insurance company - will issue a contractor.

with a bond they will require a means of securing their position. In other
words, the surety will require some form of collateral or indemnity agreement
from the contractor (in some cases an additional counter guarantee agreement
from a third party) so that if the guaranteed obligation is not performed, they
ean be sure of recovering the amount paid.

111 collateral may be required by the surety ip. the form of a cash deposit
covering the bond amount. Alternatively the surety may accept shares
quoted on the stock market or a mortgage to real estate. In some cases
a promissory note (for example, a personal cheque), may be accepted
although this involves great risk to the surety in the case of
ban.ki1lptcy; therefore, this is onIy regarded as pseudo-collateral.

87
 -'
TEN rnSURANCE AND SURETY BOND

• Indemnity agreement requires the contractor to sign a written

undertaking to pay back the surety for any amounts payed to the
employer (due to non-performance of the contractor's obligation) up
to the bond amount. However, this may prove of little use to the
surety if the contractor becomes insolvent and so a counter guarantee
is often required in addition.

• Counter guarantee is given by a third party for the contractor's

obligation to reimburse the surety. These third parties are often
directors or shareholders of the contractor's company, although private
individuals with a good fInancial standing may also provide such a
guarantee.

Conditional and First Demand (Unconditional) Bonds

The terms conditional and first demand refer to whether or not payment of the
bond amount will be paid with or without proof of the contractors default
(failure to perform the obligation guaranteed). A Conditional bond will only
be paid upon actual proof of default, such as an arbitration or court ruling,
and the payment will only cover the proven loss sustained by the employer up
to the bond amount.

On the other hand, a fIrst demand bond (often referred to as an unconditional

bond) requires no proof of default, and the employer will receive payment of
the full bond amount upon presentation of a written statement to the bondsman
stating that the contractor has .failed to perform. Both conditional and fIrst
demand bonds are offered by bond businesses in Hong Kong.

Types of Bond

There are several different types of bond. A bid tender bond is an

undertaking by a guarantor that the tender is reasonable. An advance payment
bond is an undertaking by a guarantor that any advance payments made by the
employer to the contractor will not be lost by default of the contractor. A
maintenance bond is an undertaking by a guarantor that the contractor will
. complete all his obligations during the period of maintenance.

However, the type of bond most commonly used in Hong Kong is a

peiformance bond. This type of bond involves an undertaking by a guarantor
to pay the employer a specifIed some of money (in addition to other forms of
compensation that the employer may claim under the contract, as discussed in
Chapter Four),. if the contractor- does not satisfactorily complete the contract
in accordance with all its terms and conditions. The remainder of this chapter
deals specifIcally with the requirements of a Performance bond.

88
 TEN ThlSURANCE AND SURETY BOND

Bond Contract (Contract of Suretyship)

The usual form of a surety bond is a three party guarantee contract between
the employer, the contractor and the surety, guaranteeing performance by
providing the employer with a stated maximum fInancial benefit in the event
of non-performance. Under Common Law, contracts of guarantee must be in
writing and like any other contract, must be supported by consideration. Due
to the absence of consideration between the surety and the employer, the bond
must be issued under seal if it is to be enforceable. Once issued it cannot be
cancelled other than by agreement with the employer.

The amount of surety bond is limited to a monetary amount which in Hong

Kong is usually no more than 5 % of the contract value for public sector
(government) contracts, and up to 10% of the contract value for private sector
contracts. Upon the contractor's failure to perform in full, the employer is
entitled to call on the surety to make good the proven loss if it is a conditional
bond, or pay the bond amount in full if it is a fIrst demand (unconditional)
bond.

In the case of a conditional bond, the employer will only be compensated by

the surety for the actual loss incurred. For example, contractor A has been
awarded the contract to build a factory for HK$lO,OOO,OOO. He asks the
surety to issue a bond for 10% of the contract value. After having completed
half of the building, contractor A becomes insolvent and cannot complete the
project. The employer now engages contractor B to complete the second half
of the building for the sum of HK$5,500,000, which is HK$500,000 more
than he would have paid had contraCtor A completed the contract. Therefore,
the actual loss that the employer suffers is HK$500, 000; this is the maximum
amount that he can claim from the surety, even though the bond is for
HK$l,OOO,OOO.

However, in the case of a first demand bond, the full amount of the bond will
be paid by the surety to the employer in the first instance, regardless of the
actual loss sustained. The contractor will then have to recover the balance
(between actual loss and the bond amount) from the employer through
arbitration or litigation.

Issue of Bond

Once a bond has been entered into it cannot be withdrawn. The surety as a
guarantor is responsible for costs incurred by the employer up to the amount
of the bond limit. The guarantor does not insure the contractor he only
guarantees him. As a condition of issuing the bond, the contractor will be
required to execute an indemnity in favour of the guarantor, thereby ensuring
that, if the bond is called, the guarantor is only likely to suffer financially if
the contractor goes into liquidation. The guarantor will normally require a
thorough knowledge of the contractor's financial situation, resources and
capability to execute the contract.

89
TEN INSURANCE AND SURETY BOND

Where a request for a bond is made to a co=ercial bank or an insurance

company, the institution approached will want to satisfy itself that the
contractor is suitable for a bond. As a result of the different obligations
undertaken by two types of institutions, the natUre, extent, and length of the
investigations are not identical.

• Commercial banks are usually prepared to issue fIrst demand bonds

on a secured basis. If the contractor can satisfy the bank that he is
operating effIciently, and at the same time provide some form of
collateral as security, this will be suffIcient for the bank to issue the
bond. The collateral that banks normally require, protects them
against loss in the event of the employer requesting payment of the
bond; even if the contractor goes into liquidation.

• Insurance companies however, usually only issue conditional bonds.

The main reason for this is that insurance companies are prepared to
issue surety bonds without requiring to hold collateral (it being much
more diffIcult for them to obtain it) thereby exposing themselves to a
much greater degree of risk. Also, because insurance companies do
not have such a close fInancial relationship with contractors as banks
do, they will usually carry out a detailed investigation into all aspects
of the contractor and the contract.. In practice,: an insurance company
will issue a conditional bond only if the contractor is willing to provide
both an indemnity and a counter guarantee, in addition to satisfying
certain criteria concerning company management and frnance.

Cost of Bond

Although the cost of obtaining a bond will eventually be· borne by the
employer through incorporation in the tender sum, it is nevertheless the
contractor's responsibility to purchase the bond in the frrst place. Insurance
companies usually charge 1 % of the value of the bond (bond amount) per
annum, which they refer to as the premium. Banks may sometimes charge
less provided that they hold collateral from the contractor for the full amount
of the bond; they refer to their charge as the commission.

Often the cost of obtaining a bond can be considerable. For example, a

private sector contract with a contract sum of HK$100,OOO,OOO may require
the contractor to obtain a bond to the value of HK$lO,OOO,OOO (that is, 10%
of the contract sum). This would mean the contractor having to pay a
premium of HK$l00,OOO per annum for the duration of the contract.

The cost will vary between contractors and contracts, according to the amount
to be guaranteed (bond amount), the form of the guarantee (conditional or frrst
1
demand), and the security provided by the contractor. Generally, a bank bond
is likely to be cheaper than an insurance company bond, although both may
prove expensIve.

90
 TEN INSURANCE AND SURETY BOND

If, therefore, the employer requires the comfort of reasonable protection

without the expense of a surety bond, he can ask for a cash deposit from the
contractor which is the cheapest form of protection. However, contractors are
usually reluctant to comply with such a request.

Bond Amount

Bond amount is the term given to the sum of money that the surety guarantees
to pay the employ.er wlien demanded.ll the prescribed manner (in the case of
a fIrst demand bond), or the maximum amount up to which the surety will
compensate the employer for proven losses as a result of the contractors
default. In the private sector it is usually 10 % of the contract sum, whilst for
government projects it may vary between 1 % and 5 % of the contract sum;
bonds required for Housing Authority projects, for example, will not exceed
$5 million. The reason for the relatively low bond required by government
is that only contractors who are on the government's approved list of
contractors are eligible to tender for government work. As a sound fInancial
background and reliability are criteria for inclusion on the list, the likelihood
of the contractor failing to complete the contract is remote.

Contractors' Financial liability

The contractor's only real fInancial liability is if the bond is called by the
employer. By calling the bond (requesting payment from the bondsman -
bank or insurance company) the employer is claiming that the contractor has
defaulted on his obligations and that he wishes to receive the fInancial
compensation guaranteed by the bond. Whatever amount the bondsman pays
the employer, will in turn be recovered from the contractor; hence the
contractor is the one who ultimately loses fInancially.

This sounds quite reasonable, provided that the contractor has indeed failed
to perform his obligations under the contract. It would seem just that the
employer should receive some frnancial compensation and that the contractor
should be the one who ultimately pays. - ..

If a conditional bond is called then the employer will have to prove the
contractor's default and will only receive payment for proven losses as a result
of the default. As the losses iJ;lcurred by the employer can only be ascertained
after completion of the contract, and because of the usual lengthy process of
either litigation or arbitration, it may be up to one or two years, in some
cases, before the contractor is required to reimburse the surety. Even then it
will only be an amount to cover the employer's actual loss as decided by the
due process of law.

However, what happens if a fIrst demand bond is called, but the contractor
does not agree that he is in default, or believes that he has a legitimate reason
for being so.

91
-' TEN INSURANCE AND SURETY BOND

The dispute remains unresolved and yet the employer is paid the bond amount
by the surety who in turn recovers it from the contractors collateral. Some
might consider this unfair as it could, in some cases, lead to the contractor
suffering a fInancial loss through no fault of his own.

If the contractor considers that a fIrst demand bond has been called unfairly
(without justifIcation), his only recourse is to make a claim against the
employer in order to try and recover the bond amount. To be successful in
his claim the contractor must prove, through arbitration or litigation, that the
employer had called the bond without justifIcation.

It should be noted that lio action may be taken by the contractor against the
surety. The position of the surety is clear and was set out by Lord Denning
in his judgment of the Edward Owen Engineering Ltd. v. BarcUrys Bank
International case in 1976:

A bank which gives a peljormance guarantee must honour that

guarantee according to its terms. It is not concerned in the
least with the relations between the supplier and the customer;
nor with the question whether the supplier has peljormed his
contracted obligation or not; nor with the question whether the
supplier is in default or not. The bank must pay according to
its guarantee, on demand if so stipulated, without proof or
conditions. The only exception is when there is clear fraud of
which the bank has notice.

The fInancial risks presented to the contractor when required to obtain an

unconditional performance bond are clearly tremendous. The only means
available to circumvent them satisfactorily, is to take out a suitable insurance
policy to cover capricious calling.

Contractors' Vulnerability

The following is an actual case which illustrates the vulnerability of the

contractor in a dispute situation, where the employer is holdiJi.g a fIrst demand
(unconditional) performance bond:

Under the terms of their contract, which was not a standard

form, the employer required the contractor to obtain a fIrst
demand (unconditional) performance bond equal to 10 % of the
contract sum, which the contractor then obtained from one of
the major Hong Kong banks. During progress of the work a
dispute arose over the provision of labour and the quality of the
work. This in turn lead to a delay in payment due to the
diffIculty in agreeing on fIgures. Consequently, the contractor
abandoned the work, claiming that the employer had repudiated
the contract by non-payment; the employer responded by
immediately calling in the bond.

92
 TEN IN"SURANCE Ah'D SURETY BOND

This was accomplished by simply sending a written statement

to the bank to the effect that the contractor had failed to
perform; the bank subsequently paid the full amount of the
bond to the employer.

The contractor, obviously unaware of the implications of an

unconditional bond, was shocked to discover that the bond
could be called in so easily a,r;d that the bank would pay
without inquiring into the justification of the demand. Without
the opportunity to protest or contest, the contractor had lost a
substantial amount of money, as the bank (who require
collateral to cover the bond amount before issuing an
unconditional bond) would have immediately deducted the bond
amount from the contractor's collateral.

Hong Kong Practice

The practice of requiring a surety bond or security, for the due performance
of the contract, is usual in Hong Kong, although the amount differs widely
from one per cent to ten per cent of the contract value. The provision of a
surety bond is a term included in most of the private and public sector
standard form contracts co=only used in Hong Kong's construction industry.

Private sector: Clause 31 - Surety Bond, of the HK Standard Form allows for
the provision of a guarantee of an insurance company or bank to be jointly
and severally bound with the Main Contractor to the Employer for the sum of
money as stated in the appendix of the Standard Form for the due performance
of the Contract. Release from the bond will occur on the issue of the
Certificate of Practical Completion.

Public sector: The Government of Hong Kong General Conditions of

Contract for Building Works; Government of Hong Kong General Conditions
of Contract for Civil Engineering Works; and Government of Hong Kong
General Conditions of Contract for Elec:trical and Mechanical Engineering
Works, all include a Sureties or Security clause which allows the same
provision for the obtaining of, and release from, a surety bond, as Clause 31
, , of the HK Standard Form. The only difference is ·that the amount of the
surety bond is stated in the form of tender rather than in the appendix of the
contract. In addition, as an alternative to a surety bond; the clause provides
that the main contractor may pay a cash deposit to the Government of Hong
Kong, which will be used as security.

" -'There is a trend towards employers favoUring fIrsfdemand'bonds rather than

conditional bonds. Since fIrst demand bonds provided by co=ercial banks
are without conditions, the full bond amount, when called, will be paid to the
I,· employer immediately without proof of the contractors default. On the other
hand, conditional bonds take time to resolve, usually tlrrough arbitration,
consequently payment from the surety will be delayed.

93
~... TEN lNSURANCE AND SURETY BOND

Commentary

Although employers may view a frrst demand bond as a convenient means of

transferring fmancial risk, and recovering .loss quickly, it is nevertheless suggested
that its use is unwise due to the great expense of obtaining such a bond. Employers
who have no intention of calling a bond irresponsibly may well fmd that tendering
contractors, influenced by adverse experience of the unwarranted calling of bonds
elsewhere, may increase their prices excessively to cover the contingency. Indeed the
mere requirement of such a bond may inevitably suggest to the contractor an
unwillingness by the employer to accept, in a potential future dispute, the decisions
of anar-bitrator -or reco=endations of a mediator. Therefore, the psychological
effect on pricing may be much more substantial than is realised.

94 HONG KONG POLYTECHNIC

LIBRARY ...... __ _
,'.

The Architect is expressly empowered under the Conditions of the HK Standard Form to
issue instructions to the Main Contractor. Clause 2(1) - Architect's Instructions states that:
The Main Contractor shall... comply forthwith with all instructions issued to him by the
Architect in regard to any matter in respect of which the Architect is expressly empowered
by these Conditions to issue instructions. However, if an instruction is not issued according
to the provision of these Conditions, the Main Contractor is not obliged to comply.

T4ere are three ways in which an Architect's instructions may be OffiCiallyt~d to the
Main Contractor: as written instructions direct from the Architect; as oral instructions direct
from the Architect; .or as oral directions given by the clerk of works on behalf of the
Architect.

11.1 Written Instructions

Clause 2(3) deals with the procedure for confrrmation of an instruction. The primary
effect of this clause is that all Architect's instructions must be confirmed in writing;
until they are, the Main Contractor need not comply.

Clause 2(1) provides that the Main Contractor must comply with Architect's written
instructions. which are issued under express authority.

If the Main Contractor does not comply with properly authorised written instructions
within seven working days. then the Employer can employ and pay other persons to
carry out the work necessary to give effect to the instruction. The cost of such work
shall be;recoverable from the Main Contractor by the Employer as.a debt or may be
.deducted from monies d.:ue to the Main Contractor under the Contract.

95
ELEVEN lNSTRUCI'IONS AND V ARlllTIONS r~

This avoids the Employer having to determine (end the employment of the Main le
Contractor, see Chapter Fourteen - Determination of Employment) under Clause 25
or having to treat the contract as repudiated at co=on law.

oRAl..
11.2 Oral mstruCtions A.]..· P41? ?~y [.IJ- 11-:1, -J
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Clause 2(3) allQws the Ar.chitect to give oral instructions if he so wishes. This will
in effect minimise delays in the time taken to write and deliver a written instruction.
The Main Contractor should however, get the instruction in writing, since if the
matter in question is allowed to remain unwritten for too long or is forgotten during
subsequent operations, the Main Contractor runs the risk of ~osing payment if the
Architect has no record or cannot recall items. Where instructions are requested on
s1te and given orally by the Architect these .should be written in a site record book
kept by the Main Contractor and..s.i gned by the Architect.

The normal procedure for confIrmation of an Architect's oral instruction is for the
Main Contractor to write to the Architect within seven days confirming the
<instruction. If the Architect does not dissent (disagree) in writing within seven days
of receiving the Main Contractor's confIrmation, then the instruction will take effect
as from the expiration of the latter seven days - Clause 2(3).

If the Architect confIrms an instruction in writing flfSt within seven days, then.the
Main Contractor does not have to confIrm his instruction - Clause 2(3)(a).

11.3 Clerk of Works Directions

The clerk of works acts only as an inspector on behalf of the Employer under the
direction of the Architect. As such he has no authority to give instructions to the
Main Contractor, however, he may give directions. According to Clause 10: If any
directions are given to the Main Contractor or his foreman upon the Works by the
clerk of works or the Architect's representative the same shall be of110 effect unle"
"given in regard to a matter in respect of which the Architect is exuressly empowered
by thesLConditions and unless ,confirmed in writing by the Architect within two
Jj!Qrking dClJl£ Qf,their being given. If any such directions are so giv.en" a'nd confirmed
then as from the date of confirmation they shall be deemed to be Architect's
instructionS .

In practice, this means" that directions given to the Main Contractor by the clerk of
works will usually be treated as Architect's instructions. The Main Contractor will
therefore comply with such directions, knowing that the Architect's written
confIrmation will invariably follow.

96
 .'
ELEVEN INSTRUCTIONS AND V ARIA..TIONS

11.4 Clauses Which Empower Instructions

The Architect is empowered to issue instructions to the Main Contractor under the
following clauses and provisions:

Clause No. Provision

1(2) Discrepancies are found between Contract Drawings and Contract

Bills.

4(1) Contract Drawings or Bills do not comply to byelaws or regulations.

5 Errors are discovered in the Main Contractor's setting out.

6(3) Opening up the Works for inspection.

6(4) Removal of materials or goods from the site which are not ill
accordance with the Contract.

6(5) Dismissal of persons employed on the Works.

11 (1) Ordering or conflIming variations.

11 (3) ExpendittJIe of provisional and pri?le cost sums.

,
15(3) Making good defects during Defects Liability Period.

20(2) Removal of any of the debris after storm, flood, flIe etc.

21(2) Postponement of work under the Contract.

27 Nomination of sub-contractors.

28 Nomination of suppliers.

32(2) Doing special work, for example, protecting the Works in the event of
an outbreak of war.

33(1) Removal of debris from site.

34 Antiquities are found on site.

Disputing an instruction

Clause 2(2) sets out that the Main Contractor is not required to comply with any
instruction which is not expressly empowered under the Contract, and may request
the Architect to specify the relevant clause number which empowers his instruction-
at the time of issue.

97
ELEVEN illSTRUCTIONS AND VARIATIONS

The standard form of Architect's instruction provides a space to enter the relevant
clause number. This practice not only provides the Main Contractor with immediate
confirmation, but also ensures that the Architect considers and identifies his authority
before issuing each instruction. This is intended tQ. protect the Main Contractor
against such things as the Architeds interference with the Main Contractor's site
organisation. If the Main Contractor is still not satisfied, his remedy is arbitration
which can proceed at once under clause 35(2) but will involve inevitable delay to the
Works.

11.5 Variations

Most building contracts are entire contracts. The significance of an entire contract
is that there is no obligation to carry out variations or to pay for variations; this is
known as the. doctrine of entirety. However, standard forms of building contract
co=only introduce a variations clause, under which the doctrine of entirety is
modified. This is to give the employer the right to require variations and provide
rules governing the adjustment of the contract sum.

A variation is defmed in Clause 11 (2) of the HK Standard Form as: ., .the alteration
or modification of the design, quality or quantity of the Works as shown upon the
Contract Drawings and described by or referred to in the Contract Bills, and includes
the addition, omission or substitution of any work, the alteration of the kind or
standard of any of the materials or go.ods to be used in the Works, and the removal
from the site of any work, materials or goods executed or brought thereon by the
Main Contractor for the purpose of the Works other than work, materials or goods
which are not in accordance with this Contract.

The Main Contractor may be ordered to carry out variations for the following
reasons:

• The Employer may ask for details to be changed.

• A discrepancy between Contract documents.

• A discrepancy between statutory requirements and the Contract documents.

• An error or omission in the Contract Bills.

• Expenditure of provisional and prime cost sums.

• Restoration of damaged work caused by perils.

• Protective work upon an outbreak of hostilities.

• Removal of debris as a result of war damage.

98
 ElEVEN rnSTRUCTIONS A..""lD VARIATIONS

The Architect's general authority to make variations is set out in Clause 2(1) -
Architect's Instructions, while specific authority is given in Clause .11 ~ Variations,
Provisional and Prime Cost Sums, and Clause 33 - War Damage. Variations may
only be ordered within the terms of the Contract and they must be written and signed
by the Architect.

Clause 11 (5) provides that both variations and the adjustment of provisional sums are
to be allowed for in Interim Certificates and are subject to retention. This clause also
authorises the adjustment of the Contract Sum to take into account the value of the
variation work carried out.

Clause 11 (6) deals with the situation where the Main Contractor might suffer some
direct loss and/or expense (for example, idle plant) while carrying out work ordered
by the Architect under Clause 11(1) or 11(3) for which he will not be reimbursed by
payment made in accordance with the valuation rules contained in Clause 11 (4). In
such a case the Main Contractor is required to submit a separate claim under Clause
11(6) which, subject to the Architect's approval, will be added to the Contract Sum
and included as payment in the next Interim Certificate.

11.6 Measurement and Valuation of Variations

It is the duty of the ,Quantity Surveyor to measure and value variations under Clause
11(1), 11(3), and 11(4). Variations will ultimately be presented as part of the final
account, and the Main Contractor is to be presented with a copy of the priced Bills
of Variation before the issue of the Final Certificate, as provided by Clause 30 (5)(a)
- Certificates and Payments. If the Main Contractor is dissatisfied with the Quantity
Surveyor's valuation, he can take the matter to the Architect who must review the
valuation.

Rules for valuing variations Clause 11(4)(a)-(e)

(a) Work of similar character in similar conditions, use prices in the Contract
Bills to determine proportionally valued rates (pro-rata rates).

(b) Work of dissimilar character or executed under dissimilar conditions, use

prices in the Contract Bills as far as reasonable (pro-rata rates) or make a fair
valuation.

(c) Work that cannot be properly measured or valued, use dayworks, which is
written evidence of time spent and materials used to cariy out the variation
work. The information is recorded on standard dayworks sheets, which are
signed by the clerk of works.

99
ELEVEN rnSTRUCTIONS AND VARIATIONS

Variation work carried out on a daywork basis must be in accordance with the \
following:

(i) Rates for labour must be those offered by the. Main Contractor in the
Contract Bills.

(ii) If the Main Contractor did not include daywork rates in the Contract
Bills then the rates will be those given in the current Standard Day
Labour Schedules, and current Plant Hire Schedules.
I
(iii) Materials provided specifically for the variation work will be valued
at its actual cost plus the cost of packing, carriage and delivery with
an addition of 15 % for overheads and profit.

(d) If omissions required by the Architect significantly vary the conditions of

carrying out the remainingiteIll$ of~ork, the prices for such remaining items
will be valued under rule (b).
r
(e) If required by the Architect, the Main Contractor shall within fourteen days
of the Architect's written request, submit a detailed estimate of the value of
the variation.
r
11. 7 Pro-Rata Rates

There are three main methods of assessing pro-rata rates (proportionally valued rates)
which are by derivation, analogy, and reconciliation of analysis.

Derivation

From two or more similar unit rates in the contract bills, for example:

Rates in contract bills:

20= th. C&S (1 :3) screed $40.00/sq.m

40= th. C&S (1:3) screed $50.00/sq.m

Pro-rata rate for 30= th. C&S (1:3) screed:

$50.00 - $40.00 = $10 and 40= - 20= - 20tnm

1= thickness: $10 20= = $0.50

Contract bills rate for 20= screed $40.oo/sq.m

Add additional thickness (10= @ $0.50) $ 5.oo/sq.m

Pro-rata rate for 30= screed $45.oo/sq.m

100
 ELEVEN INSTRUCTIONS AND VARlATIONS

Analogy

With a knowledge of pricing and building operations, it is sometimes possible

to discover items of different description, or even trades, which are equivalent
in labour, or labour and materials, to the items for which a price is sought.

For example, a rate might be required for screwing and pelleting hardwood
and only a rate for the same operation in softwood appears in the bills.
Provided the screws are of the same description (the pellets being
~. --- manufactured out of waste material have no value as such), it may be assumed
that the difference is virtually one of labour.

Rates in contract bills: 50xlOO= HW frame $IS.00/m

50xl00= SW frame $14.00/m
7SxlOO= SW frame $20.00/m

Pro-rata rate for 75xlOO= HW frame: SOxlOO HW $IS.00/m

SOxlOO SW $14.00/m

Difference in labour $ l.OO/m

-r• 7SxlOO= SW frame $20.00/m

Add additional labour $ l.OO/m

Rate for 75xl00 HW frame $2 l.OO/m

Reconciliation of Analysis

III When substituting labour cost - break up unit rate by:

• deducting overheads and profit;

• deducting labour cost - what is left is the material and plant

cost;

• adding the new labour cost;

• adding the overheads & profit.

III When substituting material cost - break up the unit rate by:

• deducting overheads and profit;

• deducting original material costs - what is left is the labour and

plant cost;

• adding the new invoice price;

• adding the overheads and profit.

101
 .'
ELEVEN IN"STRUCTlONS AND VARIATIONS

Example of substituting material cost:

Rate in contract bills: brick wall in type A fcg. bk. in'stretcher bond
in g.m. 1:1:6 ptg. wi. fl. jt. a. w.p. $65.00/sq.m

Required: Pro-rata rate for bk. wall in type B fcg. brick in substitution.

Cost of type A fcg. brick = $650.0011000

Cost of.type B fcg.brick = $759:0011000_.

Rate for type A fcg. brick: $65.00/sq.m

Less profit and overheads 15 % (15 -;- 115) = $ 8.48/sq.m

$56.52/sq.m
Less material cost for type A facing brick

Bks.lsq.m x % waste
=(60 x 1.075) x 650.00 1000 $41.93/sq.m

Labour content $14.59/sq.m

Add material cost for type B facing brick

Bks.lsq.m x % waste
= (60 x 1.075) x 750.00 1000 $48.38/sq.m

$62.97/sq.m
Add profit and overheads 15 % $ 9.45/sq.m

Rate for wall in type B fcg;. bk. = $72.42/sq.m

11.8 Fair Valuation

A fair valuqtion is simply an estimate of the cost of carrying out an item of work,
including overheads and profit, and may be used as an alternative to pro-rata rates.
Where a fair valuation is required, it may be valued by:

• Building up a unit rate from basic principles taking into account all factors
such as invoice cost of materials, waste allowance, transportation and handling
cost, standard labour constants, cost of plant, overheads and profits.
\ ;

• Obtaining prices from building price books, such as Spons, Laxtons, Griffiths,
and adjusting them to take into account the peculiarities of the contract
concerned. Such factors may be: location, size, quality and complexity of
work, fluctuations, overheads and profit.

102
 ELEVEN lNSTRUC!10NS AND VARIATIONS

III Extracting unit rates from bills of quantities used on jobs of a similar nature,
and adjusting for factors previously mentioned: location, size, quality,
complexity, fluctuations (meaning, that the prices would have to be higher if
the employer has not agreed to pay increases in costs, which may occur
= during progress of the works), overheads and profit.

11.9 Provisional and Prime Cost Sums

-
•i, Clause 11 (3) states that: The Architect shall issue instructions in regard to the
expenditure of prime cost and provisional sums included in the Contract Bills and of
prime cost sums which arise as a result of instructions issued in regard to the
expenditure ofprovisional sums. There is a footnote to this sub-clause stating that the
term prime cost may be indicated by the abreviation P. C. in any document relating
to the Contract.

III Provisional sums

A provisional sum is a sum of money provided in the Contract Bills for costs
which cannot be entirely foreseen, defined or detailed at the time the tendering
-documents are issued. This may include the value of measured work (which
. is the actual quantity of finished work whether valued by measurement or as
daywork), and any preliminary costs such as scaffolding and plant directly
related to the work in question. It may even, in some cases, include the cost
of other preliminary items such as special supervision. Adjustments would be
made by deducting the provisional sums from the Contract Sum and replacing
them with the value of actual expenditure.

III Prime cost sums

A.prime cost sum is a sum of money provided in the Contract Bills for
payment of Nominated Sub-Contractors and Nominated Suppliers and is to be
expended in favour of such persons as the Architect shall instruct. Normally,
prime cost sums are incorporated into the tender as cover for the cost of
nominated work. In so doing the Employer does not have to enter into a
series of special contracts. After the initial nomination these specialists
become sub-contractors and suppliers to the Main Contractor. In the
adjustments, the prime cost sums would be deducted from the Contract Sum
and substituted by the final accounts of the specialist sub-contractors and
suppliers so nominated.

103
-'

Payment certificates are binding statements, issued by the Architect under Clause 30 of the
HK Standard Form, which co=it the Employer to an obligation to pay the Main Contractor
the amount certified; the two types of payment certificate are Interim Certificates and the
Final Certificate. Other certificates issued by the Architect throughout the contract period
include, the Cel1ificate of Practical Completion and the Certificate of Making Good Defects.
Interim valuations and the final account are the responsibility of the" Quantity Surveyor.

12.1 Interim Certificates (See Appendix I)

Generally, payment on interim certificates may be calculated either by stage payments

made at agreed stages of completion (for example, 10 % of the contract sum "upon
completion of foundations, 20% upon completion of first floor etc.), or by
measurement of work done at agreed intervals throughout the contract. The latter
method is by far the most co=on and is adopted by most standard forms of building
contract in Hong Kong, including the HK Standard Form.

Clause 30 - Certificates and Payments, of the HK Standard Form, deals with all
certificates that regulate payments under the Contract. Interim Certificates certify the
value of the work completed to the time of the certificate and are an estimate of value
only. The _Employer is bound to pay the sum" stated on the certificate, but
adjustments can be made on future certificates. The procedure to be followed for the
issue of Interim Certificates is set out by Clause 30(1), while Clause 30(2) sets out
what may be included in the amount stated as due in an Interim Certificate. Both of
these clauses also apply to interim valuations. Interim valuations are for the purpose
of ascertaining the amount due in an Interim Certificate, and must be prepared
whenever the Architect considers them necessary.

105
 1
-'
11¥.E7.VE CERTIFICATES AND PAYMENTS

Clause 30(1) provides for the issue of Interim Certificates by the Architect both
before and after practical completion. Interim Certificates are issued periodically
before practical completion at intervals which are defined in the appendix, usually one
I
month. The Architect is under an obligation to issue Interim Certificates; if he does
not, the Employer will be in breach of contract. I
i

When an Interim Certificate has been presented to the Employer by the Main
Contractor, payment must be made within the Period for Honouring Cenificates
named in the appendix, fourteen days from presentation unless otherwise stated. If
the Employer does not pay within the time, then after giving notice the Main
Contractor may determine (end his own employment under the contract) in
accordance with Clause 26(1). If the Main Contractor feels that any Interim
Certificate was not properly prepared, he can give notice of arbitration.

12.2 Interim Valuatioas (See Appendix 2)

Before an Interim Certificate is issued an interim valuation is usually prepared by the

Quantity Surveyor and agreed by the Main Contractor's quantity surveyor. Once the
Architect has checked the interim valuation, and is satisfied that it is correct, he will
sign and issue the Interim Certificate by sending it to the Main Contractor. It is then
up to the Main Contractor to present it to the Employer for payment.

Clause 30(2) sets out what may be included in an Interim Certificate (and therefore
an interim valuation), which is the estimated value of the work properly executed, and
the total value of materials and goods delivered to or adjacent to the Works for use
thereon. Restrictions on the materials or goods to be included are. as follows:

11 . They must be delivered to or adjacent to the Works (delivery to the Main

Contractor's yard is not enough).

11 Delivery must have taken place up to and including a date seven days before
the date of the Certificate.

11 Materials or goods must not be brought onto or adjacent to the Works

prematurely.

11 Materials and goods must be adequately protected against weather and theft.
Under Clause 14(1), once these materials and goods are certified and paid for,
they become the Employers property, though the Main Contractor remains
responsible for loss or damage to them.

Clause 30(2)(A) deals with off site goods and materials. This clause gives the
Architect a discretionary power to include in the amount stated as due in an Interim
Certificate: ... the value of any materials or goods before delivery thereof to or
adjacent to the Works... This is on the proviso that such materials or goods conform
to certain requirements, such as: intended for inclusion in the Contract; in accordance
with the Contract; and insured against the perils set out in Clause 20 [A] or [B].

106
 TIY.ELv.E CERTIFICATES AND PAYMENTS

This sub-clause is intended to cover the increasing use of pre-fabricated materials off
site, and to enable the Main Contractor to be paid for them before their delivery to
site. This sub-clause will only be a part of the Contract if specifically stated to be
so in the Contract Bills.

From the total of work, materials and goods, retention due under Clause 30(3) is to
be deducted. All previous instalments (certificates) that have been paid by the
Employer must also be deducted from the total.

12.3 Retention

,
The object of retention is to secure the Main Contractor's obligation to complete the
Works and make good defects. The Employer holds retention money as a trustee for
the Main Contractor but without obligatidn to invest.

Clause 30(3) provides that the Employer may retain a percentage of the total value
of the work, materials and goods valued under Clause 30(2). This is referred to in
the appendix as Percentage of Certified Value Retained and should not normally
exceed 10%.

When the sum of the amount of retention money retained equals that shown in the
appendix as Limit of Retention Fund then no further amounts will be retained. The
limit referred to should not normally exceed 5 % of the Contract Sum.

Clause 30(4) sets out the nature and purpose of the retention fund and how it should
be paid over to the Main Contractor. The Employer is permitted under the Contract
to draw from the fund to reimburse himself for:

III Work executed by another party where the Main Contractor has not complied
with a valid instruction.

III Premiums paid for insurance when the Main Contractor has failed to insure.

III Payment of Liquidated and Ascertained Damages.

III Direct payments to Nominated Sub-Contractors.

After the Certificate of Practical Completion is issued, one moiety of the retention
fund
. is released with the other moiety being released after the issue.,of the Certificate
of Making Good p~fects.

Nominated Sub-Contractor's Proportion of the'ttetention Fund

The caSe of Hsin Clwng Construction Co. Ltd. v. Yaton Rea Co. Ltd 1986), raised
a question con e the HK Standar Form.

107
11laVE CERT1F1CATESAND PAYMENTS

The question raised was: whether or not Clause 30 creates in the hands of the
Employer, an effective retention fund in relation to the Nominated Sub-Contractor's
proportion of the fund.

The Main Contractor, as plaintiff, contended that in relation to these monies (the
Nominated Sub-Contractor's proportion of the fund), the retention fund is effective
in his hands only. The Employer must first accumulate the monies in a trust account.
Then when each moiety is released by certificate, the Employer must pay such moiety
to the Main Contractor without any deduction. The only party eD.titlkd IQ exercise
any rights of deduction or §fa Off awdI]~t an)! particular Nomin@ted SUb-Cpntractor,
r; the Mnin GpptraCi:Qr himself. ""'

The Employer, as defendant, contended on the other hand that Clause 30 creates a
single indivisible fund. The initial obligation to set aside and accumulate the trust
was not disputed. However, in the same way that moiety of the whole fund on
release becomes due and payable to the Main Contractor, so the Employer can
recover losses from the whole fund.

The basic facts of the !;lsin Chong v. ratap RealQ> case are as follows:

The contract, which related to a property in King's Road, was entered

into on 1st May, 1982. The contract date for completion was 22nd
June 1983. The Architect certified that the contract was in fact
practically completed on 11th June 1984 and under clause 22, that it
should have been completed on 21st August 1983. This certificate (the
Certificate of Practical Completion) left $7,740,000 payable in
liquidated damages by the Main Contractor to the Employer. The
Architect also issued a certificate under clause 27(c) entitling the
Employer to deduct from the Main Contractor, a direct payment to a
particular Nominated Sub-Contrator in the sum of $1 ,324, 123.38. The
total sum covered by these two certificates was $9,064,123.38. On the
19th June 1984, the total of the retention fund .held by the Employer
was $9,084,171.55.

The plaintiff gave notice of arbitration on 11th June 1984, and also
asked the Employer to place the total retention monies in a trust
account. The defendant only paid $20,048.17 into the account. This
amount was arrived at by deducting the total of the two certificates in
question ($9,064,123.38), from the total of tIie retention fund
($9,084,171.55). The crucial question which therefore arose, and
which the court was asked to rule on, was ~ether the defendant was
entitled to deduct from the portion of etention morues mat was due

-
to the Nowmat . _ u -

The court held that the

Form extends

upon a to under
- clauses 2(1), 19(1)(c), 22, or 27(c); all are equal! effective. '
\~.~

108
 THaVE CERTIFICATES AND PAYMENTS

Early Payment of Nominated Sub-Contractors

If there has been early final payment of a Nominated Sub-Contractor, for example,
a contractor engaged to complete piling, then half the retention fund should be
released for the value of the work carried out by that Nominated Sub-Contractor
under Clause 27 (e». Likewise, if there is sectional completion, that is the Employer,
with the Main Contractor's consent, takes over a part of the Works before they are
complete, then under Clause 161f), half the retention fund should be released for that
section of the Works completed. ~* .'
12.4 Certificate of Practical Completion (See Appendix 3)

It is the Main Contractor's obligation' to complete .the Works according to the

Contract Bills and Contract Drawings, while it is the Employer's obligation to pay
the Main Contractor the amount stated in the Interim Certificates issued by the
Architect. This procedure will carry on until, in the opinion of the Architect, the
Works are practically completed. When this state is reached by the Main Contractor,
the Architect will issue a Certificate of Practical Completion as required by the
Contract, set out in Clause 15(1).

As there is no definition in the HK Standard Form concerning the precise stage at

which Practical Completion of the Works has been reached, it will be for the
Architect to decide. Once the Certificate is issued, the Main Contractor is no longer
obliged to accept new instructions requiring extra work, even on modified terms; he
should hand over the building to the Employer and move off site.

Contractual proviSions that are dependent on the date of the issue of the Certificate
of Practical Completion are as follows:

11 Beginning of the Defects Liability Period. Clause 15(2)

11 Ending of the Main Contractor's liability for typhoon damage. Clause 15(5)

11 Ending of insurance of the Works by the Main Contractor. Clause 20

11 Ending of liability for liquidated damages. Clause 22

11 Ending of regular Interim Certificates. Clause 30(1)

- - - -- --
III Release of one moiety of the retention fund. Clause 30(4)(b)

III Beginning of the Period of Final Measurement and Valuation. Clause 30(5)

III Opening of arbitration matters. Clause 35(2)

109
1'm!Lv.E
-'
CERTIFICATES AND PA'Y.MENTS

12.5 Certificate of Making Good Defects (See Appendix 4)

The issue of the Certificate of Practical Completion marks the beginning of the
Defects Liability Period stated in the appendix; six: months unless otherwise stated.
For this period of time after the issue of the Certificate of Practical Completion, the
Main Contractor is required to maintain and repair the building in respect of damage·
occurring through his poor workmanship, such as plaster cracking, doors and
windows. not closing properly.

Clause 15(2) requires that the Architect must deliver a Schedule of Defects within
fourteen days from the expiry of the Defects Liability Period. If the Architect fails
to do this, the Schedule would become invalid and the Employer would have to resort
to a separate claim for damages against the Main Contractor for his failure to
properly complete the contract.

The Main Contractor is to make good defects within a reasonable time of receiving
the Schedule. Much depends on the nature and circumstance of a particular defect
as to what may be considered a reasonable time. All work will normally be at the
Main Contractor's expense.

Clause 15(3) overrides the provisions of Clause 15(2), allowing the Architect to issue
instructions covering urgent individual defects, for example a leaking roof.

When the Defects Liability Period has expired and on completion of the repairs the
Architect is required to issue a Certificate of Making Good Defects (Clause 15(4».
The Main Contractor is then relieved of any further contractual responsibility for the
maintenance and repair of the bUilding. One Certificate is issued covering all making
good defects.

The issue of the· Certificate of Making Good Defects has two effects as far as the
Contract is concerned; these are:

• Release of the residue of the retention fund. Clause 30(4)(c)

• Clearance for the issue of the Final Certificate. Clause 30(6)

The Certificate of Making Good Defects means that the Main Contractor himself is
no longer obliged to return and remedy defects, but it does not end the Main
Contractor's liability for the cost of remedying them. The Main Contractor remains
liable to the Employer, under the Limitation Ordinance, for any breach in complying
with Contract specifications (See 4.6 Limitation of Action). The period of the Main
Contractor's liability, is six years for ordinary (simple) contracts and twelve years for
contracts under seal.
I
1;

In the case of sectional completion, the same limitation of action rules apply, the only I
difference being that the Defects Liability Period applies only to that section of the
Works which has received a Certificate of Practical Completion. 1

110
 THRVE CERTIFICATES AND PAYMENTS

U.6 Final Account (See Appendix 5)

Before the Final Certificate can be issued, the fInal account has to be prepared by the
Quantity Surveyor, who is required to adjust the Contract Sum in the Contract Bills
to include all the monetary additions and omissions of the following items:

III Contingency sums

III Architect's instructions

III Provisional quantities

III Provisional and prime cost sums

III Fluctuations and agreed Main Contractor's claims

Under the HK Standard Form the Period of Final Measurement and Valuation should
begin with the issue of the CertifIcate of Practical Completion and be completed
within the time stated in the appendix; six months unless otherwise stated. All
adjustments made to the Contract Sum should be agreed by the Main Contractor's
quantity surveyor. When the fInal account has been agreed, a summary is prepared
setting out all the adjustments, which should be signed by the Main Contractor. The
agreed fmal account sum is the amount that the Employer should pay the Main
Contractor for executing the Works.

12.7 Final Certificate (See Appendix 6)

The Final CertifIcate is issued to certify that the Works have been entirely completed
to the Employer's satisfaction in accordance with the terms of the Contract between
the two parties.

Clause 30(6) provides that the Final CertifIcate must be issued as soon as is
practicable but before the expiration of three months from the end of the Defects
Liability Period, or from completion of making good defects under Clause 15, or
when the Main Contractor has completed his obligation to send all the necessary
documentation to the Architect so that the [mal a=unt can be completed; whichever
is the latest.

The Final Certificate will include the sum of all amounts .previously certifIed and the
Contract Sum adjusted as necessary in accordance with the Conditions of the
Contract. The difference (if any) between these two sums will be expressed as a
balance due to the Main Contractor from the Employer or to the Employer from the
~
Main Contractor as the case may be. This balance must be settled as from the
,
i>-
fourteenth day after the Main Contractor has presented the Final Certificate to the
~ Employer.

~,
I
~.
111
-' THELVE CERTIFICATES AND PAYMPJ..,"TS
r
Clause 30(7) deals with the effects that the Final Certificate has on the Contract.
These effects are that all materials and workmanship are to the reasonable satisfaction
of the Architect, and that all adjustments to the Contract Sum have been made.

Once the Final Certificate is issued, all adjustments made are indisputable by any
. accidental inclusion or exclusion. It is therefore extremely important that all
calculations are checked carefully while adjusting the Contract Sum. However, if
arb itration is going to take place, or is taking place when the Final Certificate is
issued, the Certificate will be subject to the arbitrator's main award.
(See 15.1 Awards)

112
,;'

When using the HK Standard Form, most claims submitted by the Main Contractor during
progress of the contract will be in the form of bona fide claims, such as claims for direct loss
and/or expense and claims for extension of time. Such claims if not submitted, will not be
paid or granted, as the case may be. However, in practice, the Main Contractor may also
have to submit claims for payments which should be made automatically by the Employer,
but which may be overlooked. Fluctuations falls into this category.

13.1 Fluctuations

Fluctuations may be defined as adjusting the contract sum for subsequent increases
or decreases in wage rates and/or materials during the contract period; depending on
the contract being used. The HK Standard Form allows for increases or decreases
in wage rates only, by the provisions of Clause 36 - Fluctuation in Wage Rates.

,
" Fluctuation in wage rates is based on the Index of Wage Rates for the Building
Industry (referred to in Clause 36(1) as the Wage Index), an edition of which is
published each month by the Census and Statistics Department of the Government of
Hong Kong. The Index for each of the eight selected trades listed under Clause
36(2), is taken from the Wage Index and averaged to give an Average Wage Index.

The edition of the Wage Index which will form the basis for comparing the Average
Wage Index of each subsequent month, is the edition issued in the same month in
which the Employer receives the tender from the Main Contractor. This month is
referred to as the base month. At monthly intervals the Architect is required to
review the Wage Index and calculate, as a percentage, any increase or decrease in the
Average Wage Index, when compared to the base month.

113
THlRIEEN CONTRACTOR'S CLAlMS

If the percentage increase or decrease is less than 10 %, no adjustment to the Contract

Sum is made - Clause 36(4)(a). If the percentage increase or decrease is greater than
10 %, the Contract Sum should be adjusted by the amount that the percentage exceeds
10% - Clause 36(4)(b). . .

The monetary amount by which the Contract Sum is· adjusted is calculated in the
following way:

• Ascertain from the appendix the Percentage Labour Content for the Contract.
This is expressed as a percentage of the Contract Sum; usually 25 %.

• Calculate the percentage increase or decrease in wage rates which exceeds

10%.

• Determine the gross value of work executed during the particular month
concerned after deducting the following items listed under Clause 36(5)(a)-(t):

(a) Nominated Suppliers and Main Contractor's profit on the work valued:

(b) Nominated Sub-Contractors' and Main Contractor's profit on the work

valued.

(c) Payments to third parties expended against provisional sums.

-
(d) UmIXed materials.

(e) Preliminarie$.

(t) Any variation valued using wage rates for labour, that were not based
on wages contained in the Wage Index.

These three figures are multiplied together to produce a figure which is the amount
by which the Contract Sum should be adjusted for increases or decreases in the cost
of labour. Fluctuation payments must be made to the Main Contractor (if it is an
increase) or allowed to the Employer (if it is a decrease) in Interim Certificates. -

It should be noted that the Fluctuation in Wage Rates clause.in the HK Standard
Form, will be deemed part of the Contract only if specifically so stated in the
Contract Bills. It is co=on practice in Hong Kong not to include the clause as part
of the contract. However, employers will rarely save costs by not including the
Fluctuation in Wage Rates clause, as contractors when tendering, will include an
allowance in their tender figure for possible increases in the cost of labour. Such an
allowance may well be much greater than the actual cost of eventual increases.

See Appendix 7 - THE WAGE INDEX

See Appendix 8 - FLUCTUATION CALCULATIONS

114
 THlRIEEN coNTRAcrOR'S CLAlMs

13.2 Delay

Delay in the completion of the Works is one of the most common causes of dispute
between the two parties, and of subsequent claims. Delays may be considered under
three headings:

Delays Caused by the Main Contractor

Delays caused by the Main Contractor are usually due to bad management in
executing the Works, such as insufficient labour on site, late ordering of
materials, insufficient or unsuitable plant.

It states in the HK Standard Form that the Main Contractor is to proceed

regularly and diligently with the Works. If the Main Contractor fails to
complete the Works by either the date of completion or any extended period
of time that has been granted, then the Main Contractor shall payor allow the
Employer Liquidated and Ascertained Damages. If delays caused by the Main
Contractor are of a serious nature, the Employer may determine the
employment of the Main Contractor under the Contract.

If the delay is caused by a domestic sub-contractor, then this is treated as a

delay caused by the Main Contractor. However, if the delay is caused by a
NolI!iJ1ated Sub-Contractor and the Main Contractor has done all he can to
prevent the delay, this is treated as a delay caused by neither party to the
Contract. Therefore, the Main Contractor will be entitled under Clause 23 (g)
to be granted an extension of time and the Employer cannot claim liquidated
I damages for the period of delay caused.

Delays Caused by the Employer

Delays caused by the Employer may be summarised as follows:

11 Issue of Architect's instructions'which: requires the Main Contractor

to complete substantial extra work; involves the Main Contractor
executing substantial amounts of work out of sequence; or is concerned
with a postponement of the Works.

I,"
11 Issue of drawings, instructions, details or levels which the Architect
has either failed to supply or is late in supplying, which the Main
Contractor has specificallY requ,ested in ~i!ing. "

Delay on the part of artists, tradesmen or others engaged by the

Employer to carry out work which delays the Main Contractor.

11 Delays caused by the Architect requiring completed work to be opened

up or materials tested, provided such work or materials are found to
- be in accordance with the Contract.

115
THIRTEEN CONTRACTOR'S CLA.Th{S
-'

Where delays of this nature occur, the Architect has an obligation to issue an
Architect's instruction awarding an extension of time.

Furthermore, if delays from these causes involve the Main Contractor in

direct loss and/or expense for which he would not otherwise be reimbursed,
he will be entitled to recover such direct loss andlor expense by submitting a
claim under Clause 24 - Loss and Expense caused by Disturbance of Regular
Progress of the Works.

Delays CaUSed by Neither Party to the Contract

There are occasions when delays arise due to circumstances over which
neither party to the Contract have any control. These may be su=arised as:
force majeure (something caused by nature totally unconnected with man, or
war, or epidemics, 'or legislative interference); inclement weather; insurance
matters (such as fire, lightning, explosion); strikes affecting the Works; delay
on the part of Nominated Sub-Contractors or Nominated Suppliers; and
unforeseeable shortages in materials and labour. For any of these matters the
Architect has an obligation to grant an extension of time to the Main
Contractor.

13.3 Extension of Time

If failure to complete the Works by the original date for completion is caused by a
delay which is outside the control of either party or a delay which is the Architect's
or Employer's fault then the Main Contractor may, under Clause 23 - Extension of
Time, apply for an extension of time. The original date for completion would then
be revised to take into account the delay, so relieving the Main Contractor from
liability for liquidated damages based on the original date for completion.

If the delay is the fault of neither party, the Main Contractor is entitled to an
extension of time, but is not entitled to-receive any payment for direct loss andlor
expense that he may have incurred due to the cause of the delay. However, if the
delay is the fault of the Employer or the Architect, the Main Contractor. is entitled to
submit a claim, under Clause 24, for direct loss and expense in connection with the
cause of the delay. (See 13.4 Claims for Direct Loss andlor Expense)

It should be noted, that under no circumstances will the contractor be entitled to

receive frnancial compensation from the Employer, for the delay itself. The only
entitlement for monetary compensation from the Employer is for direct loss andlor
expense suffered by the Main Contractor as a direct consequence of the cause.

The causes of delay for which the Main Contractor is entitled. to be granted an
extension of time by the Architect are listed under Clause 23 (a)-(k). The following
is a su=ary of the causes of delay (with sub-clause letter references) categorised as
either the fault of neither party, or the fault of the Employer or the Architect.

116
 THIRTEEN CONTRACTOR'S CLAIMS

Causes of Delay for Which the Main Contractor is Entitled to be Granted an

Extension of Time Under Clause 23 (a)-(k)

Causes of delay which are the fault of neither party:

(a) Force majeure - something completely beyond the control of either

party such as earthquake, or war.

(b) Inclement weather - if the weather is exceptionally bad, this means

20= of rain in 24 hours or typhoon signal No.S.

(c) Insurance - loss or damage for which the Main Contractor is insured
under Clause 20 [A] or [B] which is Insurance of the Works against
Fire, etc.

(d) Strikes, etc. - protects the Main Contractor from unions and protects
the Employer from increased costs.

(g) Delay of Nominated Sub-Contractors or Nominated Suppliers - the

Main Contractor can claim for extension of time if they are late with
their work.

G) Unforeseeable material and labour shortages - this sub-clause will

only be- a part of the Contract if specifically stated to' be so in the
Contract Bills:

(k) Antiquities - the Main Contractor can claim if a delay is caused due
to the discovery of antiquities.

Causes of delay which are the fault of the Employer or the Architect:

(e) Architect's instructions - may cause an extension of time if the Main

Contractor incurs extra work. -

(f) Lateness of drawings - the Architect must give the Main Contractor
the drawings within a reasonable time.

(h) Delay of artists or tradesmen - the Main Contractor can claim for
o
,- extension of time if they are late with their work.

(i) Inspection and testing of work - protects the Main Contractor against
unreasonable inspection and testing.

:r

! Note: Causes (a), (b), (c), (d), (g), 0), (le), do not entitle the Main Contractor to
submit a claim for direct loss and/or expense; causes (e), (f), (h), (i), do.

117
 ,
THIRIEEN CONTl<.AcrOR~S CLAJ}..{S

• Procedure for claiming an extension of time

The Main Contractor must take the initial action by giving notice of delay and
stating the cause of delay. He must be prompt, or the Architect may
justifiably refuse to consider the extension where notice is given long after the
delay in question was apparent; however, there is no stipulated time period
stated in the Contract. The Main Contractor may estimate the length of delay
although the Architect will make the [mal decision.

When the Architect'has received notice of delay from the Main Contractor,
he must decide whether the delay is caused by one of the matters for which
the Main Contractor is entitled to an extension of time under Clause 23 -
Extension of Time, and whether the delay, if valid, is going to result in late
completion.

The Architect is under an obligation to give an extension of time as soon as

he reasonably can, so that the Main Contractor is not left in doubt as to the
required completion date. Also, if the Architect fails to make a decision
concerning an extension of time before the contract completion date, the
Employer may lose his right to liquidated damages. However, in some cases
(such as strikes, inclement weather, force majeure) the Architect may not be
able to estimate the extension of time until after the original date for
completion and so Clause 23 recognises this with the phrase: .. .so soon as he
is able to estimate the length of delay.

• Estimating the length of delay

Fair and reasonable is the measure of the extension of time to be granted;

meaning that it should be fair and reasonable in relation to the cause. In order
to assist in his assessment of a claim for an extension of time, the Architect
should check theprogress of the Works compared with existing programmes,
and seek the opinion of the clerk of works. Although, in most cases, it is
very difficult to assess an exteruion of time, the Architect should nevertheless
endeavour to see that neither party suffers unnecessary loss as a result of his
assessment.

The Main Contractor is obliged to co-operate with the Architect to reduce the
effects of any delay which is not his fault, and for which he is claiming all
extension of time. It is the Main Contractor's responsibility to co-ordinate his
own work and that of sub-contractors, which will involve holding regular
meetings to review progress, and making changes to the master programme,
as necessary, to prevent likely delays.

However, the Main Contractor is not obliged under the Contract, to work
overtime or bring in extra plant or take other expensive steps to regain lost
time. If the Architect requests the Main Contractor to take special measures
to catch up the lost time, and the Main Contractor agrees, then the Employer
is required to pay for the cost of such measures.

118
 THIKIEEN COh"TRAC!OR'S CLAIMS

"Where the Architect decides that no extension of time is necessary, and the
Main contractor is dissatisfied with the decision, or where the Main
Contractor is dissatisfied with the period of time granted, the parties may refer
such dispute to the decision of an arbitrator.

As previously stated, under no circumstances does an extension of time allow

for additional payment to the Main Contractor as compensation for the extra
time involved. However, the cause of the delay may result in a separate claim
under Clause 24 - Loss and Expense Caused by Disturbance of Regular
Progress of the Works.

Causes of delay for which the Main Contractor may claim direct loss
and/or expense are listed under Clause 24(1) (a)-(e); these are:

(a) The Main Contractor not having received in time, instructions,

drawings, details or levels; or

(b) Opening up for inspection of work; or

(c) Discrepancy in or divergence between the Contract Drawings and/or

Contract Bills; or

(d) Delay on the part of artists, tradesmen or others engaged by the

Employer; or

(e) Architect's instructions issued in regard to postponement of any work.

13.4 Claims for Direct Loss and/or Expense

Loss may be defined as where the Main Contractor will not recover what he could
have expected to as a direct result of disruption (disturbance of regular progress),
variation, or the discovery of antiquities. Expense may be defl!led as where the Main
Contractor has had to increase his expected expenditure on an item of work to
produce the same result, also as a direct result of disruption, variation, or the
discovery of antiquities.

The Main Contractor may, under the HK Standard Form, make a separate claim for
direct loss and/or expense where the cause is either one of disruption, set out in
Clause 24(1) - Loss and Expense Caused by Disturbance of Regular Progress of the
Works; or variation, set out in Clause 11 (6) - Variations, Provisional and Prime Cost
Sums, or the diScovery of antiquities, set out in ClaUse 34(3)" - Antiquities.

It should be noted that the term direct loss and/or expense, is used in the text of each
of the clauses under which the Main Contractor is entitled to submit such claims.
The word direct is used in order to make it clear that such claims are directly related
to the cause, and are not incidental losses or expenses.

119
I1IlRTEEN CONTRACTOR'S CLAJMS

Submission and Payment of Direct Loss andJor Expense

• The Main Contractor must submit a written application within a

reasonable time of the loss and/or .expense becoming apparent. As
there is no defInition of a reasonable time, it will be for a court or
arbitrator to decide in the event of a dispute.

• The responsibility for producing evidence to support the claim is that

of the Main Contractor's staff who should keep records and reports
suchas weekly ,and variation reports, and dayworks records. From
this information a claim may be built up by the Main Contractor's
quantity surveyor.

• The claim will be assessed by the Quantity Surveyor who will

negotiate with the Main Contractor's quantity surveyor until an amount
acceptable to both is arrived at. B~fore approving the claim the
Architect must be of the opinion that .the direct loss and/or expense is
due to one of the following: disruption - causes listed under Clause
24(1)(a)-(e); variation - covered by Clause 11(6); or the discovery of
antiquities - Clause 34(2).

• Once approved by the Architect, the claim should be included in the

next Interim CertifIcate and not await fInal settlement. All payments
for loss and/or expense claims are subject to retention.

Evaluation o.f Direct Loss andJor Expense

The process of arriving at a monetary fIgure which will accurately reflect the
true direct loss and/or expense suffered by the Main Contractor is diffIcult,
as there are so many different factors involved. In order to facilitate the
process of evaluation, claims may be considered under the following headings:

• Materials L •

The co=on elements of a claim for the reimbursement of the extra

cost of materials are:

• Surplus materials due, for example, to a variation order

requiring a smaller quantity of a particular material.

• The extra cost of purchasing materials in small quantities due,

for example, to the issue of a variation order.

• Materials having to be replaced due to deterioration during the

prolongation of the Contract. This can only be considered if
the cause of the delay is the fault of the Employer or the
Architect.
"..

120
 THIRTEEN CONTRACTOR'S CLATh{S

III Labour disruption

In practice the ascertainment of claims is often left until the end of a

contract. Probably no area of a claim is more difficult to assess after
. a long delay, than the loss of output due to disruption of the re;gular
progress of the Works.

There are four approaches to assessing the disruption of labour:

'. An evaluation of the records of labour output specifically kept

for this purpose.

• A review of labour activity on site at tlie time.

• A review of the implications of any extensions of time that may

have been granted.

• The application of a general productivity formula.

III Attraction money and bonus payments

When preparing the tender, the Main Contractor will make allowances
for labour market conditions. Once the Contract is awarded and work
starts on site, a much more detailed appraisal of costs is made. These
detailed costs more accurately reflect the Main Contractor's direct
losses and/or expenses that will almost certainly be claimed.

III Preliminaries and supervision

The Preliminaries section to the bills of quantities can be described as

the project overheads to the Main Contractor and will only be for the
contract period.' ,Therefore, if a claim for direct loss and/or expense
in connection with an extension of time is payable under Clause 24 -
Loss and Expense Caused by Disturbance of Regular Progress of the
Worlcr, then such recurring costs, as the Main Contractor may have to
pay on a time basis, should be reimbursed.'

"
;;
III Inflation

Neither Clause 11 (6) - which allows claims for direct loss and/or
expense due to variation, nor Clause 24(1) - which allows claims for' , ..
direct loss and/or expense due to disturbance of regular progress of the
Works, gives the Main Contractor the right to challenge the adequacy
of a fluctuations clause; this is a risk which the Main Contractor
accepts once he has signed the Contract. It is only the increase in the
burden of that risk, due to an extended contract period, that is relevant
in relation to a claim for direct loss and/or expense.

121
TBIKI'EEN CONTRACTOR'S CLAIMS
-'-
)~
Care must be taken to ensure that any reimbursement under the
fluctuation clause is not duplicated when evaluating direct loss and/or L
i, '
expense.

• Head office overheads and profit

Head office overheads and profit are usually allowed for in a tender by
. means of a percentage on the value (or part value) of the Contract.
The payment of additjqnal money in respect of head office overheads
and profit is the subject of much debate.

• Finance charges

The cost of financing an individual project is usually included in the

head office overheads, therefore, any adjustment of the overheads will
automatically include finance charges. Occasionally, however, finance
charges are treated separately.

13.5 Cross Claims

The plaintiff will make the original claim and a cross claim then may be made by the
defendant. A cross claim may take the form of a set-off or the form of a counter
claim.

Set-off is where a defendant, whether it be the employer, main contractor,- or a

sub-contractor, makes a cross claim against the plaintiff and asks that it be used to
diminish the plaintiffs claim.

Contra charge is a term used exclusively where the employer is pleading a

set-off, which will have the effect of reducing the value of the plaintiffs claim
by the amount of the employer's contra charge.

Counter claim simply means that the defendant is making his own independent claim
against the plaintiff.

• Distinction between set-off and counter claim

.. A set-off is a defence and· as such can be used only as a shield, not as a

sword. Consequently a defendant must counterclaim if he hopes to obtain ~. ,
more on his cross claim than the plaintiff will obtain on his claim, or if the
defendant desires to be in a position to continue his cross claim in the same
proceedings, even though the plaintiffs claim is discontinued.

122
 THIRTEEN CONTRACTOR'S CLAIMS

A cross claim by a defendant can always be presented as a counter claim but

not necessarily a set-off. The court will decide on the acceptability of the
form of presentation. Whether a cross claim can be relied on as an equitable
set-off seems to depend on whether it is sufficiently closely connected with the
claim, although the parties by agreement may limit their right to set-off.
Subject to such an agreement, requests for claims to be set-off may be treated
as follows:

• Claim under another contract An employer cannot set-off a claim

arising under another contract with the same contractor, unless he has
been given express power by the contractor to do so, or iliere are
special circumstances connecting the two claims.

• Liquidated damages If they do not exceed the amount of the claim

and arise under the same contract, they may be set-off against the
claim.

• Defects Where there is a claim on a lump sum contract and the

defendant alleges that there are defects, he may either set-off his loss
1, to diminish the claim or he may counter claim for damages.

11 Costs

A set-off may reduce a plaintiffs claim to a sum which does not normally
carry costs; payable by the defendant if the plaintiff succeeds. This is the
main reason for a defendant asking that a cross claim be set-off. In the case
of a successful claim and counter claim, both plaintiff and defendant would be
ordered to pay costs.

123
-'
 -'

The action contemplated by Clause 25 of the HK Standard Form, under which the Employer
can determine, and by Clause 26, where it is the Main Contractor who can determine, is
referred to as: ... determine the employment of the Main Contractor under this Contract. This
is to be distinguished from determination of the Contract, when the Contract itself becomes
inoperative, leaving legal proceedings for breach as the only recourse. The two clauses on
determination in the HK Standard Form set out the procedures to be followed after
determination of the Main Contractor's employment, and the rights and duties of the parties,
until fInal. settlement. These two clauses determine only the employment of the Main
Contractor, while leaving the Contract itself in place, therefore, the clauses themselves
remain operative.

14.1 Determination by Employer

· 7 Clause 25 - Determination by Employer, provides for two types of determination by

the Employer. One provides the employer with the option to determine, the other is
automatic.

Optional Determination

Clause 25(1)(a)-(d) provides the option for the Employer to determine the
employment of the Main Contractor under the Contract for the following reasons:

(a) If the Main Contractor wholly suspends the Works without reasonable
cause. This means a complete cessation of work; partial suspension is not
enough. The stoppage must be without reasonable cause.

125
 -'
FOURTEEN DETERMrnATION OF EMPLOYMENT

(b) Failure to proceed regularly and diligently. This is very difficult for the
Employer to establish and does not merely mean failing to comply with the
programme. Also, the Main Contractor could argue, depending on the
circumstances, that he had reasonable cause for the alleged failure. For
example, if the Employer were persistently late in honouring certificates, this
could well be reasonable cause for slowing down so as to reduce cash flow
problems.

(c) Persistently refusing or neglecting to comply with a written notice from

the Architect, requiring removal of defective work or improper materials
or goods and thereby materially affecting the Works. This reason can only
be cited by the Employer before practical completion, as the Works
themselves must be materially affected by the Main Contractor's refusal or
neglect.

(d) Failure to comply with Clause 17 - Assignment or Sub-letting. The Main

Contractor must not assign or sub-let any part of the Works without
appropriate cousent from the Employer. However, the consent is not to be
unreasonably withheld. i
Detenhination procedure

The Employer must follow the determination procedure exactly; If he fails to do so,
the determination will be invalid. First the Architect must serve notice on the Main
Contractor by registered post or recorded delivery, specifying the default, so as to
provide on opportunity of remedying it. If the notice is in general terms, for
example, merely alleging that the Main Contractor is not proceeding regularly and
diligently, it will not be sufficiently explicit. On receipt of the notice the Main
Contractor has three courses of action open to him:

• If he believes the allegations to be groundless he can dispute the notice and

give notice of arbitration.

• He can accept that he is in default, put matters right immediately and inform
the Architect that the default specified in the notice has ceased. However, if
the Main Contractor repeats tI:ie specified default at anytime thereafter, the
Employer is entitled to determine his employment without further notice of
default from the ArchiteCt.- .

• The Main Contractor may ignore the notice of determination and risk the
consequences of the Employer· exercising - his option to determine his
employment under the Contract.

If the Main Contractor continues his default for fourteen days after receiving the
notice, then the Employer may, within ten days after such continuance or repetition,
determine the employment of the Main Contractor under the Contract by a registered
post or recorded delivery notice.

126
 POURIEEN DETERMlliATION OF EMPLOThffiNT

Should the Main Contractor cease his default within the ten day option period, the
Employer's option to determine does not end but will continue for a further ten days
from the date that the default ceases. The reason for this is to allow for the situation
where the Main Contractor makes only a token attempt to cease the default without
seriously intending to.

If the Employer does not notify the Main Contractor of his decision to determine
within the said ten day period, he will lose his option to determine the Main
Contractor's employment for the specified default. No matter what the Employer
chooses. it will be without prejudice to any other rights or remedies, meaning, for
example, that he may still sue for damages .
.

l
,
,
The Employer's notice of determination of the Main Contractor's employment must
not be given unreasonably or vexatiously as stated in Clause 25(1). It is difficult to
defIne exactly what is meant by the phrase unreasonably or vexatiously.
Unreasonably suggests that the Employer must not be taking advantage of the Main
Contractor in circumstances which, from a business point of view, are totally unfair.
Vexatiously suggests a situation where there are insufficient grounds and that the
notice has obviously been issued to cause annoyance.

Automatic Detennination

Bankruptcy of the Main Contractor. Automatic determination is provided

by Clause 25(2) in the event of Bankruptcy of the Main Contractor or in
certain 'specifIed circumstances arising in the context of insolvency. Although
determination is automatic, it is not irrevocable. The Main Contractor's
employment may be reinstated if the Employer and the Main Contractor (or
his trustee in bankruptcy, liquidator, receiver or manager) so agree.

Rights and duties upon determination by Employer

Clause 25(3)(a)-(d) deals with the respective rights and duties of the parties on
determination by the Employer whether optional or automatic. In summary, the
position is as follows:

(a) The Employer may employ others to complete the Works, who for this
purpose, may enter on them, use all temporary buildings, plants, tools,
equipment, goods and materials intended for them and placed on or adjacent
to them; and purchase all materials and goods required for completion.

(b) " "The Main Contractor shall (except where determination occurs by reason of
the Main Contractor's bankruptcy) if so required, assign to the Employer the
benefit of any agreement for the supply of materials or goods and/or the
execution of any work under the Contract.

127
FOURIEEN DETERM1NATION OF EMPLOYMENT

However, this shall be on the terms that a Nominated Sub-Contractor or

Nominated Supplier shall be entitled to make any reasonable objection to any
further assignment by the Employer. In addition, the Employer may pay any
Nominated Sub-Contractor or Nominated Supplier direct for services or goods
(whether supplied before or after the date of determination), in so far as the
price has not already been paid by the Main Contractor. Payments made
under this sub-clause may be deducted from any sum due or to become due
to the Main Contractor.

(c) The Main Contractor shall, when required in writing by the Architect to do
so (but not before), remove from the Works any temporary buildings, plant,
tools, equipment, materials and goods belonging to or hired by him. If within
a reasonable time after such a requirement, the Main Contractor has not
complied, then the Employer may (without being responsible for any loss or
damage) remove and sell any such property. The proceeds, less all costs
incurred, will be held by the Employer to the credit of the Main Contractor.

(d) The Employer is not bound to make any further payment to the Main
Contractor until the completion of the Works. Upon completion he may
deduct from sum due to the Main Contractor the amount of the direct loss
and/or damage caused by the determination. If, as a result, there is a balance
in favour of the Employer, that balance will be payable as a debt to him by
the Main Contractor. Conversely if the amount payable to the Main
Contractor is greater than the amount of the direct loss and/or damage caused
to the Employer, the difference shall be a debt payable by the Employer to the
Main ·Contractor.

14.2 Determination by Main Contractor

Clause 26 - Detennination by Main Contractor, comparable in many respects to the

preceding clause, specifies the events which may entitle the Main Contractor to
determine his own employment under the Contract, and sets out the rights and duties
of the parties on such a determination. Such determination by the Main Contractor
will not prejudice his rights to any other remedies which he may possess, such as a
claim for damages.

The events which may give rise to such a determination by the Main Contractor are
clearly set out in Clause 26(1)(a)-(d) and may be summarised as follows:

(a) Failure to honour certificates of payment. If the Employer does not pay
amounts properly due on certificates within the Period for Honouring
Certificates named in the appendix (fourteen days if none other is stated), the
Main Contractor may then exercise his right to determine his own employment
under the Contract.

128
 FOURTEEN DETERMINATION OF EMPLOYMENT

The Main Contractor may do this by sending a letter to the Employer (not the
Architect), by registered post or recorded delivery stating that if payment is
not made within seven days of receipt, notice of determination of employment
will be served. Should the Employer fail to pay within seven days of receipt
of the letter, the Main Contractor may determine his own employment
forthwith by a notice sent by registered post or recorded delivery to the
Employer or the Architect.

(b) Interference with or obstruction of the issue of any certificate. Such

interference by the Employer would include any attempt to prevent the
Architect issuing a certificate of any kind, or directing him as to any amount
to be included in any payment certificate.

(c) Suspension of the Works for a period stated in the appendix. This can be
due to any of the following causes as listed under Clause 26(1)(c):

(i) force majeure, or

(ii) loss or damage covered by insurance matters under Clause 20, or

(iii) Civil commotion, or

(iv) Architect's instructions involving discrepancies between documents,

variations or a postponement of the Works, or
t,
;
(v) delayed Architect's instructions, or

(vi) delay on the part of the Main Contractor or tradesmen engaged by

the Employer on work not forming part of the Contract, or

(vii) the inspection or testing of work or materials which proved to be in

accordance with the Contract.

I
fi.'. .·
,~ There is no need for the Main Contractor to serve a preliminary notice of
default in any of these cases. Once the period of suspension has elapsed the
Main Contractor may determine his own employment forthwith by serving
notice on the Employer or the Architect by registered post or recorded
delivery.

(d) Bankruptcy of the Employer. There must be sufficient evidence of the

Employer's insolvency, such as a letter from a liquidator or a bankruptcy
notice in a newspaper. It is important to note that determination of
employment by the Main Contractor for this reason is not automatic as it
would be in the case of the Main Contractor's bankruptcy. Notice must be
served by registered post or recorded delivery on the Employer or the
Architect. This notice determines the Main Contractor's employment under
the Contract forthwith.

129
---- .. ---.
.'
FOUKlEEN DETERMlNATION OF EMPLOYMENT

Rights and duties upon detennination by Main Contractor

These are su=arised under Clause 26(2)(a)&(b) as follows:

(a) The Main Contractor must forthwith remove all his temporary buildings,
plant, tools, equipment, materials and goods in such manner and with such
precautions as will prevent injury, etc.

(b) The Main Contractor is entitled to receivepay~ent from the Employer for the
following:

(i) The total value of work completed at the date of determination.

(ii) The total value of work begun and executed but not completed at the
date of determination, valued as if it were an authorised variation.

(iii) Any sum ascertained as direct loss and/or expense under Clause
11(6), 24, and 34(2), whether ascertained before or after
determination.

(iv) The cost of materials ordered for the Works for which the Main
Contractor has paid or is legally bound to pay.

(v) The cost of removal of temporary buildings, plant, etc.

(vi) Direct loss and/or damage caused to the Main Contractor by the
determination.

I
I

130
 The settlement of disputes arising from building contracts by methods other than litigation
is co=on practice. The main reason for this is, that where the substantial questions of the
dispute are matters of fact rather than of law, a fInal and conclusive decision can be obtained
in a manner which is quicker and cheaper than the formal legal process. Arbitration is the
most widely used method of settling building contract disputes. However, alternatives such
as mediation, conciliation and adjudication are rapidly gaining recognition; they are
collectively referred to as alternative dispute resolution, abbreviated to ADR.

15.1 Arbitration

,. Arbitration in the legal sense is a process, subject to statutory controls - the

Arbitration Ordinance - whereby formal disputes are settled by reference to a private
tribunal chosen by the parties themselves; the tribunal may comprise of one, two or
more persons specially nominated for the purpose. Arbitration is often adopted as
an alternative to bringing an action in a court of law which is termed litigation.
However, in some cases, arbitration is an exclusive remedy which may be enforced
by one of the parties even though there is a theoretical choice of tribunal. Another
important point that should be noted is that arbitration does not come under the
heading of ADR; this is considered as an alternative to both litigation and arbitration.

Tenninology: Arbitrator is the person to whom the dispute is referred for settlement.
Sometimes there are two in which case a third person, an umpire, is appointed to
settle the dispute between the parties should the arbitrators fail to concur; Award is
the term used for the decision of either an arbitrator or umpire; the Court means the
High Court.

131
FIFTEEN RESOLUTION OF DISPur:gs-'"

Arbitration Agreement

An arbitration agreement is a written agreement to refer present or future

differences to arbitration, whether an arbitrator is named or not. Such an
agreement will be subject to the provisions governing arbitration as set out in
the Arbitration Ordinance. Clause 35 of the HK Standard Form provides a
written arbitration agreement by stating that: .,. in case any dispute or
difference shall arise between the Employer or the Architect on his behalf and
the Main Contractor, then such dispute or difference shall be and is hereby
referred to the arbitration andfinal decision of a person to be agreed between
the parties.

Appointment of an AIbitrator

An arbitrator must be a disinterested person, independent of both parties. He

may be drawn from a particular section of society, but if the arbitration
agreement is silent on this point, the parties may appoint any person. There
is no restriction on age, gender, or qualification, but both parties must agree
on the appointment.

When drawing up the arbitration agreement the parties may either name the
arbitrator or arbitrators, leave their appointment.in the ·hands of some named
person, such as the president of one of the professional institutions, or leave
the matter open until a dispute occurs and then make the appointment
thelllSelves. If the arbitration agreement is silent as to whether there are to . I
be one or two arbitrators, then the reference shall be heard by a single I
arbitrator. If the parties cannot agree on the appointment of an arbitrator or 1
if an appointed arbitrator dies, refuses to act, or becomes incapable of acting I
and the parties cannot agree on his successor, the Court will appoint a new I.

arbitrator on application. l

Clause 35 - Arbitration, provides for the appointment of a single arbitrator to

be agreed between the parties. However, if they cannot agree on a person
withinfouneen days after either party has given to the other a written request
to concur in the appointment of an arbitrator, then the clause provides for a
person to be appointed by the President or Vice-President of the Hong Kong
Institute of Architects co-jointly with the Chairman or Vice-Chairman of the t
Royal Institution of Chartered Surveyors.

Assessor On application of a party, or of his own motion, the arbitrator may

at any time during the arbitration appoint a technical or legal assessor to assist
him in the conduct of the arbitration. The arbitrator will appoint an assessor
himself if the parties cannot agree on a suitably qualified person.-

Disqualification of an Arbitrator

The principal reasons for likely disqualification of an arbitrator are either

interest or bias.

132
 -'
FIFTEEN RESOLUTION OF DISPUTES

III Interest may indicate that the arbitrator has a direct interest in the subject
matter of the dispute or that he is indirectly interested by reasons of a
relationship to one of the parties. The latter point may arise in connection
with building contracts where the architect, although employed by the
building owner, is frequently nominated as arbitrator for the settlement of all
disputes arising out of the contract (note that this is not the case under the HK
Standard Form). Such a person is not barred from acting as arbitrator ifboth
parties agree and are fully aware of his position at the time of his
appointment. However, the Court may subsequently revoke the authority of
the arbitrator or grant an injunction to restrain the arbitrator from proceeding,
if on the application of one of the parties, it considers that by reason of his
position he is not a suitable person to hear the case. Also, the arbitrator
cannot act as a witness for either party; this would compromise his neutrality
in the reference.

III Bias indicates a state of mind on the part of the arbitrator which creates
a possibility that he will not arbitrate justly an fairly with respect to both
parties. For example, where the arbitrator is heavily indebted to one of the
parties without the knowledge of the other he can be restrained from acting
by the Court. Remarks made during the conduct of a case which clearly
show that the arbitrator is biased against one of the parties will probably lead
to his removal by the Court for misconduct. For example, in an arbitration
reference relating to a collision between two vessels of foreign nationality the
arbitrator remarked: .. .the Italians are all liars in these cases and will say
anything to suit themselves. On the other hand Nonvegians in my experience
are generally truthful people. In this case I accept the evidence of the
,, Captain of the Nonvegian ship. The Court removed the arbitrator for
misconduct.

Time at Which Arbitration May be Opened

Clause 35(2) states that an arbitration reference, except where specifically

provided: .. .shall not be opened until after Practical Completion or .alleged
Practical Completion of the Works or termination or alleged termination of
the Main Contractor's employment under this Contract, or abandonment of
the Works, unless with the written consent of the Employer or the Architect
on his behalf, and the Main Contractor.

Provision for arbitration during the progress of the Works is also made under
Clause 35 (2), in the following cases:

III In the event of a dispute arising in regard to the appointment of a new

Architect or Qti.aiJ.tity Surveyor under articles 3 or 4 of the Articles of
Agreement.
III In the event of a dispute as to the validity of an Architect's instruction.
III In the event of a dispute over whether a certificate has been improperly-
withheld or is not in accordance with the Conditions of the Contract.
III In the event of a dispute under Clause 32 - Outbreaks of Hostilities, and
. Clause 33 - War Damage.

133
FlFT£.EN RESOLUTION OF DISPUTES
-' ----, ' r~
...

Arbitration Procedure

In the event of any dispute arising under the HK Standard Form which either
party may desire to refer to arbitration, a written request to concur in the
r}'
appointment of an arbitrator shall be given by one party to the other. The i·'.·
matter will then automatically be referred to the arbitration of the person so Ji. '
r!
appointed, or in default of agreement, appointed by the President or the
Vice-President of the Royal Institute of British Architects co--jointly with the
Chairman or Vice-Chairman of the Royal Institution of Chartered Surveyors.
Once appointed, fuiI power is given to the arbitrator to act as.he may think
fit in order to decide the rights of the parties concerning the questions
submitted to him for his decision.

Preliminary meeting

A preliminary meeting with both parties will be held before the hearing itself
begins; there are several reasoJ.S for this. The arbitrator is able to introduce
himself and meet the parties informally. He will make clear his position as
arbitrator, including the important point that his decision is final and binding,
and is enforceable in the same way as the judgment of a court. Also, the
arbitrator will be able to explain to the parties the procedure at the hearing
and what is required of them. The parties will be told that they will need to.
produce details of their claims, in writing, sending copies both to the
arbitrator and the other party, and that they will be required to explain in
writing to the arbitrator how they intend to conduct their case, naming
witnesses and citing any evidence they wish to use. FinaiIy, a date, time, and
place for the hearing, which is convenient to both parties, can be arranged.

Procedure at the hearing

• The party .making the claim (claimant) will open the proceedings by I
stating his claim and producing any witnesses he requires to prove his points
of claim. Witnesses have to take an oath; to give false evidence on oath is
a crime known as perjure.
I
I

• Witnesses ·are cross-examined by the other party (respondent). If any

new matters arise during this cross examination, then the claimant may
re-examine on those points only.

• The respondent will open his defense to the claim, present his cross claim
I
and call his witnesses.

• The claimant may cross-examine the witnesses, and if any new points
arise, the respondent may re-examine on those points only.

• After evidence has been completed, both parties in turn may address the
arb itrator summarising their case and the points to which they wish to draw
the arbitrator's attention; these are known as the closing submissions. The
arbitrator may require that all or part of the closing submissions be reduced
to writing.

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 FlFIEEN RESOLUTION OF DISPUTES

11 At the end of the closing submissions the arbitrator will declare the
hearing ended. However, the arbitrator may, if he considers it necessary due
to exceptional circumstances, either upon his own motion or of the parties,
re-open the hearing before making his award.-

11 The arbitrator. may order the parties to make any property or thing
available for his inspection or investigation, and inspect or investigate it in
their presence.

Awards

The arbitrator will make two awards, the fIrst dealing with all matters in
dispute among the parties - the main award, the second dealing solely with
costs - the costs award. All awards must be in writing and signed by the
arbitrator who is also required to give reasons for every award except the
costs award. The main award should be made 'within sixty days of the
conclusion of the hearing. The costs award will not be made until at least
fourteen days after the main award, during which period of time the parties
will send their submissions on costs to the arbitrator. Subject to the
Arbitration Ordinance, all awards are legally binding on the parties, who must
carry out the terms of the awards without delay.

Appeal

Both parties have the right of appeal to the High Court, although such appeals
are very rarely successful. In most cases the Court will uphold the decision
of the arbitrator, unless there are real grounds for doubting the validity of the
award. Such grounds may be that the arbitrator had misconducted himself or
the proceedings, or that the award had been improperly brought about.
Under such circumstances, the Court may either set-aside the award, which
means they will make it unenforceable, or remit the award. If the Court
remits the award, they will ask the arbitrator to revise all or certain aspects
of the award. An appeal to set aside or remit the award must be made within
six weeks of the award being given.

Costs

The costs of the reference and the award will be at the discretion of the
arbitrator who may direct to, and by whom, and in what manner, those costs
or any part of the costs, must be paid. Such an order is known as the costs
--award. The term costs inClude:

11 Reasonable fees of the arbitrator (and assessor).

III Travel and other expenses incurred by the arbitrator (and assessor).
III The cost of providing facilities for the arbitration, including room hire,
transcription fees and similar services.
III Fees, travel and other expenses of witnesses allowed-by the arbitrator.

135
FIFTEEN RESOLUTION OF DISPUTES

11 The reasonable legal costs incurred by a party in the preparation and

presentation of his case.

Security for costs If, upon application of a party to the arbitration, after due
notice to the other party, it appears to the arbitrator that a claimant (or
respondent making a counter claim) may be unable to meet any order for
. costs made against them in the arbitration, the arbitrator may require that the
I
.!
party in question provide security for the costs of the other party. Such
security may, for example, be the guarantee of a bank or insurance company.

15.2 Comparison Between Arbitration and Litigation

Advantages of Arbitration

11 Disputes involving specialist and technical knowledge can be settled by a person

with such knowledge.

11 Technical procedural rules of a court of law are not rigidly applied, which greatly
simplifies and consequently expedites matters.

11 The time and place of the reference can be chosen to suit the convenience of the
parties. If litigation is used to resolve the dispute, the parties will be instrU(~ted when
and where to appear; they- have no say in the matter.

11 Arbitration is usually less costly, partly because often there are no legal fees
involved. Also, costs may be apportioned between the parties at the discretion of the
arbitrator. ~\.J>"

11 It can be made a condition of the arbitrators appointment that he should view the
property or sample the goods which are the subject of dispute.
I,
11 An arbitration reference is held in private and the decision is not published. This
means that neither party is at risk of suffering as a result of possible adverse
publicity.

Disadvantages of Arbitration

11 The arbitrator may be required to seek the decision of the courts on points of law
which may lead to delay. If there are a number of points of law referred to in a case
which require a court ruling, it may prove cheaper and quicker to refer the whole
matter to the courts in the fIrst instance.

11 There is no automatic right of appeal to a higher court as in litigation; the

decision of the arbitrator is fInal. However, an appeal can be made to the High
Court, as previously mentioned, but may only be su=ssful if the reference has been
misconducted.

136
 FIFTEEN RESOLUTION OF DISPUTES

III Only the parties to the arbitration agreement can be bound by the decision of an
arbitrator. Interests of third parties, such as sub-contractors, cannot be prejudiced
(affected).

III There is no precedent in arbitration as there is in court cases. This means that
no previous case decisions are taken as the rule; the award will be entirely at the
arbitrator's discretion. This is often classified as a disadvantage because there is no
basis on which to judge the likely outcome of a dispute. However, some may argue
that it is an advantage not to be bound by precedent; allowing each case to be judged
on the individual facts presented.

15,3 Alternative Dispute Resolution (ADR)

Alternatives to iitigation and arbitration as a means of settling disputes originated in

the United States in the mid-seventies and became known as alternative dispute
resolution or ADR. There had been increasing dissatisfaction with litigation as a
result of rapidly escalating legal costs and the inordinate delay in getting cases to
court. Even arbitration, the traditional alternative to litigation, had become
protracted, costly, and perceived by many as replacing one legally binding decision
making process with another. In addition, there was a growing desire by parties to
have more of a say in, and control over, the decision in their disputes. ADR
provides a simple and cost effective solution to co=ercial disputes without recourse
to the court system. It is a voluntary, without prejudice process, whereby the parties
in dispute are assisted in settling their differences by the intervention of a neutral
third party, without the need for a judge or an arbitrator.

Facing similar problems to those encountered in the USA - significant direct costs in
the form of legal fees, wasted management time .and indirect costs imposed by the
adversarial nature of the contract - construction contract policy makers in the United
Kingdom started to re-examine the contract administration process. As a result,
ADR provisions, in the form of adjudication and conciliation clauses, were
introduced into a number of standard form main and sub-contracts in the private
sector. However, the notable exception was the JCT 80 standard form 'of main
contract (the equivalent of the HK Standard Form and the most widely used private
standard form of building contract in the United Kingdom) which to this day does not
contain an ADR provision. The situation in Hong Kong is similar in as much as the
HK Standard Form, Hong Kong's most widely used private standard form of building
contract, has yet to introduce an ADR provision, despite having been given the lead
by government. The Government of Hong Kong introduced a provision for
mediatioll in the Settlemellt of Disputes. clause of the 1990 edition of their
Conditions of Contract; and the 1992 edition of the General Conditions of
Contract used for the Airport Core Programme includes provision for both
mediation and adjudicatioll, in addition to arbitration.

137
:.:. ;':--:':"':';;';':';':'~-;'-':-;."'-"'-"'-"'-'-"'-'-'-'"
.-.- -.-,-~ ..-.-.-.'...-.. ;._.,. ," -".' '.-, ...•.........•.•............•,.,...---:.... -.

~ ~OLUTIONOFDmp~ . t'.
--,1
I:
15.4 Strengths and Weaknesses of ADR I
11

Strengths of ADR
1
Cost savings Approximately 90 % of cases which are started through the i
courts or arbitration, settle just before the hearing. In view of this, a major
strength of ADR may be seen as the bringing forward of the traditionaI date
of settlement, from just before the court proceedings or arbitration hearing
I
(the phrase co=only used is, 'a settlement on-the-steps of the court), to a
much earlier stage in the procedure, thereby saving legal and executive costs.

Control Due to any number of reaso~erSOnaIity

problems that may have
developed during the project, differe~~e~ emphasis on needs and priorities,
difficulties in co=unication, or simply to stublwJ:nness on one side or both -
there may be difficulty in reaching an arnicabW'agreement over a dispute.
The result is a breakdown in negotiations despite some co=on ground and
it is at this stage that the dispute may be referred to a court or arbitration.
However, often the parties in dispute experience a feeling of helplessness
once the lawyers take over; they feel that they have lost control. The
inherent flexibility of the .ADR process allows the parties to directly control
the proceedings and decide upon a co=ercial solution rather than one
governed by the 'rnle of law' and inappropriate legal principles.

Consensus ADR procedure can be adopted only if both parties agree.

Indeed, often they will decide on' the format and structure. Usually the
process will not be binding so, ·should it fail, the parties will still be able to
go on to or continue with arbitration or litigation for the resolution.
Furthermore, little is lost by an unsuccessful attempt at ADR in that all the
prior preparation will be beneficial when the parties go on to or continue with
formal proceedings. On the other hand, if the parties succeed using an ADR
procedure, the. result can be reduced to a legally binding document. II
Continuity of business relations The parties, taking·a co=ercial view,
often will want to avoid upsetting potentially useful relationships and, as part
of a settlement, there my be some new business arrangement between them
created as part of the settlement process. Such an arrangement would not be
availabl~ in the adversarial and more restrictive arena of court proceedings or
arbitration hearin:gs; indeed such arenas for the resolution of disputes are
more likely to lead to a complete breakdown in relations between the parties.

Confidentiality Unlike court proceedings, but in co=on with arbitration

hearings, no publicity is attracted by ADR processes; publicity which could
affect public confidenCe in a company or allow trade 'secrets into the public
domain.

Multi-party All too often construction disputes involve the employer, the
main contractor, the sub-contractor and the consultants. All these contractual
I
arrangements are subject to different dispute resolution processes, which often
means that an employer is faced with the unsatisfactory prospect of having to

138
1I FIFTEEN RESOLUTION OF DISPUTES

resolve some of the disputes through the courts and some through arbitration.
i-• ADR allows all disputing parties to come together in a co=on forum
regardless of the requirements of the contract.
J
Weaknesses of.ADR

Non-binding nature of the settlement may be used as a delaying tactic The

principle weakness most often quoted is that ADR procedures are not binding
on the parties. This affords an opportunity to waste time, particularly if one
of the parties is in fInancial diffIculties. Delaying tactics, for example, may
be employed by a developer who contests a claim for no other reason than the
building has not been sold or let. There may be some validity" to this
complaint. However, since much of the preparatory work for the ADR
procedure will have to be carried out anyway (in the event of an eventual
court case or arbitration hearing), the costs and the relatively short period of
time spent in the preparation and conduct of the ADR procedure will have
little impact on the overall cost of the resolution of the dispute. A mediated
agreement through an ADR process is non-binding; it is only enforceable if
a contract is drawn up subsequent to settlement, covering the terms of the
settlement, and signed by both parties. If such a contract is not drawn up the
agreed settlement will remain non-binding.

Discovery and expert witnesses An important step in a litigious action is the

discovery and inspection of documents. This is th~ .disclosure by both sides
of all the documents which relate to the dispute. The rules of the Supreme
Court require a party to disclose all documents which are or have been in
their custody or power. In cases with a technical or scientifIc element it is
co=on for one or both sides to produce expert witnesses. These" are
persons usually unconnected with the case, who are called to give their
professional opinion on the matters in issue. Some suggest that it is not
possible to settle complex litigation before discovery and, as discovery is one
of the greatest expenses of litigation, once it has taken place, the parties are

I
too close to trial for alternatives to be of any value. On the other hand, with
ADR there is a risk of proceeding without proper discovery or disclosure of
evidence provided by expert witnesses. However, it is possible to minimise
11 this risk by the parties agreeing to disclose key documents and by giving an
" undertaking that they know of no other evidence which would affect the
position of either party signifIcantly. It is also possible to allow the parties
to present a statement of the evidence; in addition to the facts upon which
they rely, in order that the other 'party is not taken by surprise. Finally,
expert witness statements can be prepared at a very early stage and exchanged
for the purpose of the ADR process. The only material disadvantage is that
the production of statements at such an early "stage would effectively reveal
to the opponent the nature of the evidence to be relied upon.

Suggesting ADR may be seen as a weakness It is true that the initiation

phase in getting ADR off the ground can be diffIcult because business people
and their advisers are still unfamiliar with ADR. The party to whom the
suggestion is made sometimes mistakenly believes that it will be very risky -

139
 --,--1f'---'.
FIFTEEN RESOLUTION OF DISPUTES

and that by making such a suggestion the other party is, in effect, displaying
some degree of weakness. In fact, ADR is not a sign of weakness but a
rl i
suggestion of confidence in an ability to put the cards on the table and to
negotiate a positive outcome. Also, business clients often underestimate the
constructive impact that a third party will have on dispute negotiations. The
syndrome of 'suggesting ADR conveys a weakness' can easily be overcome
by incorporating an ADR clause in the original contract between the parties.
I
I
Most ADR organisations actively encourage the use of ADR clauses in
co=ercial contracts by providing sample clauses which may be adapted to
particular contracts.

Privilege of information and neutral as witness The question still remains

unanswered as to whether privilege attaches to records of, or documents
disclosed during, ADR procedures. Also untested is the problem as to
whether or not a neutral is a compellable witness in any subsequent litigation
or arbitration proceedings. The problem of privilege of information and of
the neutral as witness can be controlled by asking the neutral and the parties
to sign a confidentiality agreement. . This will ensure that the process is
treated as a without prejudice negotiation on a strictly confidential basis - the
neutral cannot be called afterwards to give evidence of what took place.
Control can also be exercised by the terms of any ADR clause that the parties
agree to in the original contract. An example of this is the Hong Kong
Government Mediation Rules which govern procedures conducted under the
/iettlement of Disputes clause in the Hong Kong Government's Conditions of
Contract. The rules clearly stipulate that the mediator may not be appointed
, as an arbitrator in any subsequent arbitration 'between the parties and that
neither party is entitled to call the mediator as a witness in any subsequent
arbitration or litigation arising out of the same contract.

Appropriateness of ADR

The advantages of ADR mean that it should be considered fIrst in most cases.
However, it is not always appropriate. The following are circumstances
under which ADR might be rejected as a fIrst approach:

• The other partyiparties have no genuine interest in settlement. i

• A legal precedent is required out of the case.,
• One of the parties requires the case to be heard in public, in which case
litigation is the only route.
• An injunction is required· quickly in order to preserve rights and or
property.
• Direct. negotiations can be handled with reasonable effIciency and
, effectiveness.
• Legal action needs to be initiated as a way of getting the other
partyiparties to the negotiating table.

140
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FIFTEEN RESOLUTION OF DISPUTES

Misconceptions Surrounding the Use of ADR

IIIPerhaps the most common of all misconceptions surrounding ADR is

that its very suggestion displays weakness and is a 'soft' option In fact,
ADR is a display of co=ercial acumen and far from being soft, it is a
continuous process of structured, condensed, guided and intense negotiation
requiring quickness of mind, flexibility and imaginative thinking.

11 Another common misconception is that ADR is not suitable in cases

where the public forum of a courtroom trial is required Whilst it is true that
ADR cannot provide a public forum, between 80-90% of civil cases settle
before trial, often driven by worries over risks and costs rather than because
,i,
, of good solutions or 'justice'. ADR can speed up this process and still
provide an opportunity to present the case to an independent third party rather
than settle on the basis of an endurance test.
r
III It is often thought that iUs necessary to choose between ADR and
I litigation or arbitration; this is not true, you can have both ADR techniques
are usually equivalent to 'without prejudice' settlement negotiations They can
be used at the same time as litigation or arbitration procedures or can replace
litigation. So it is possible to litigate or arbitrate to show serious intentions
but to negotiate with AD R to get a better result.

III Contrary to what some may believe, the risks of ADR are minimal
Because ADR is non-binding, settlement is not required at any time unless
there is an 'agreement that both parties can live with. Confidentiality is
assured by requiring the neutral and the parties to sign a confidentiality
agreement. The greatest risks run are (a) that there will be a greater
understanding by each party of the others side's case and (b) a settlement will
be reached; 80 % settlement rates are reported after mediation. If there is a
real worry about revealing information or positions, ADR is flexible enough
to work with separate meetings between the neutral and the parties (' shuttle
diplomacy'). In any case, it should be remembered that the other side will
also disclose their hand; joint disclosure assists settlement.
--
IIIIt is a common belief that managers and lawyers already practice ADR
in settlement discussions It is true that mangers are often practised in the
skills of direct negotiations and that lawyers do sometimes bring about a
settlement through negotiation. However, this is not genuine ADR in which
the powerful influence of a skilled third party neutral plays a very important
part. ADR ensures that settlement is truly managed rather than an endurance
process dependent on court timetables, legal uncertainty and costs based on
the taxi-metre billing system. ADR helps all parties and their advisors to
focus on the- problein with ilie benefit of an impartial overview of the case.

IIIIt is a misconception that if ADR fails, it is a waste of more time and

money Even where it fails, ADR has more benefits than risks. ADR can be
tried fast and at little extra cost. Parties are free to leave the process if it is
unproductive. At the same time, using ADR helps clarify the issues, helps
with preparation for trial or further negotiations and encourages a realistic

141
FIFTEEN RESOLUTION OF DISPUTES

assessment of the case more rapidly than the adversarial process. Many
disputes settle soon after a failed ADR process.

Litigation!Arbitration Procedures and ADR

Under certain circumstances - to demonstrate serious intentions, to encourage

serious negotiations or because part of the claim will eventually have to be set
before a judge or arbitrator - it may be necessary to initiate litigation or
invoke an agreement to arbitrate before ADR can be tried.

Litigation and ADR There can be an agreement to stay further legal action
during the ADR phase. However, it is possible to continue with both
litigation and ADR simultaneously. Again, the earlier ADR is used, the
greater the potential benefits. It is sometImes even useful to use ADR after
a trial or award; for example, the parties may have been left with
uncertainties on how to implement a judgement.

Arbitration and ADR As with litigation, this may be used subsequent to an

ADR process if the parties seek a legally binding award on the dispute or
some of the issues in dispute. Arbitration as a final option may give the
parties more control over procedure, timing, and the appointment of the
arbitrator. In some cases, with the agreement of both parties, a neutral in an
ADR procedure may convert to an arbitrator to deal with any remaining
issues in dispute; this is known as 'med-arb'.

Court-annexed ADR This is a growing area of litigation procedure. The

courts or arbitrator require the parties to attempt to reach an early settlement
or make available a process to assist in this. ADR in this form sometimes
involves. non-binding adjudication. Cost penalties of various kinds may be
attached to this process to encourage parties to seek.a settlement.

15.5 ADR Techniques Examined and Compared

• Mediation

• Conciliation

• Adjudication

• Executive Tribunal (Mini-Trial)

• Expert Appraisal

• FIDIC's 'Amicable Settlement' Clause

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 ,
FIFTEEN RESOLUTION OF DISPUTES

Mediation

Mediation describes a voluntary process (which either side may abandon at any time
without prejudice), whereby each side to a dispute is brought together before a
neutral mediator, whose function is to assist the paries to arrive at a co=on position
by joint open session and private caucus. During this process the mediator acts only
as a catalyst, not expressing his or her own opinion and not disclosing confidential
information imparted by one of the parties, to the other. Through this process the
parties move closer together until they reach a coriunon position when settlement is
reached. Because the mediation process itself is non-binding and entirely without
prejudice, it is necessary to record the agreement, in contract form, if it is to have
legal effect.
,~
i;
Although mediation is not a regulated process, some rules do exist and are published
by a few organisations, for example: The Construction Industry Mediation Rules
published by the National Arbitration Co=ittee in the United States, and the Hong
Kong Government Mediation Rules published by the Government of Hong Kong.

Mediation Procedure

III Agreement to mediate in the event of a dispute is either through terms of

the contract (such as a mediation clause), or by mutual consent when the
dispute arises. More co=only, one party approaches the mediation
company to get a mediation gping. A representative then contacts the other
side inviting them to cooperate in a mediation. Experience in the United
States shows that 80 % of mediations are started by one party and it is in fact
the mediator who approached the other side. If the parties agree to mediate,
the identity of the mediator, an appropriate venue (must have three rooms:
one for open session, two for private caucuses) and the fees (shared equally
i between the parties - no costs are awarded in mediation) are agreed at this
I stage. The aim will be to hold the mediation within about six weeks of fIrst
contact at a time convenient to all concerned.

III_A mediation session is conducted in extremely informal atmosphere but

each party must be represented by a person with authority to settle; the parties
may, if they so wish and if the terrlls of the mediation agreement do not
expressly forbid, be represented by a lawyer." The mediator will begin the
session by explaining the process to be used and each side is given the
opportunity to describe the nature of the dispute and their respective positions.
Reference call be made to what wituesses are likely to say, although the
witnesses themselves will not be present to give evidence: The object is to
give both sides the opportunity to fully understand the nature of the dispute
so "that theyare a
ill better position" to" analyse their respeCtive" strengths and
weaknesses. In an attempt to help the parties reach agreement, the mediator
will then discuss in private the possibility of settlement with each party.
Whether or not the mediator will attempt a joint meeting will depend on the
wishes of the participants.

143
 -'
FIFTEEN RESOLUTION OF DISPUTES

• The essential role of the mediator is to engage in shuttle diplomacy

between the parties, while at the same time not expressing a personal opinion
or revealing his assessment of each side's case. Generally speaking, the
mediator will meet each party in turn to assist them to examine to examine
and highlight the respective strengths and weaknesses of their case and, if he
is so authorised, carry offers from one side to' the other until the parties reach
a co=on position. At this point a settlement is usually agreed and, if the
parties so wish, a contract will be drawn up to make the terms of the
settlement legally binding.

• The whole mediation process, from the time the mediator first introduces
himself to the parties to the reaching of a settlement, takes, on average, no
more than four days.

Mediation in Practice - Hong Kong

The Government of Hong Kong introduced a provision for mediation in the

Settlement of Disputes clause of the Government of Hong Kong General
Conditions of Contract for Building Works/Civil Engineering
WorkslElectrical and Mechanical Engineering Works, 1990 Editions,
allowing parties the option of attempting to settle their disputes by referring
them to a single mediator in the first instance. Provision for mediation (as
well as adjudication and arbitration) are also included in the Government of
Hong Kong General Conditions of Contract for the Airport Core
Programme Civil Engineering Works, 1992 Edition. The Government of
Hong Kong have also produced a set of Mediation Rules, administered by the
Hong Kong International Arbitration Centre (HKIAC). These Rules are
intended to act as a guide during the mediation process. The Government's
policy is to implement mediation where it is likely that a dispute can be
resolved readily in accordance with the Rules. In an on.going contract this
should avoid unnecessary·· escalation of the dispute· or festering of the
a
relationship by providing cheaper, quicker, and more acceptable solution.
The private sector is adopting a wait-and-see attitude to the concept of
mediation. At present, none of the private sector standard forms used in
Hong Kong provide for mediation as a means of settling-disputes.

The mediator The role of the mediator, as a neutral and trained professional
chosen by the parties, is to: provide a framework for negotiation; act as an
impartial third P<ll1Y in the negotiation process; and make recommendations
as to how the dispute may be settled. A mediator is not given the authority
to make legally binding decisions. However, if the parties find the
reco=endations acceptable, they then have the option of making their
agreement legally binding. On the other hand, if they are dissatisfied with the
process, either party or the mediator may terminate the mediation at any time.
The claimants may then proceed to assert their legal rights through arbitration
or .litigation.

Appointment of a mediator Under the Hong Kong Government Mediation

Rules, if either party disagrees with a decision of the architect, of if the

144
 FIFTEEN RESOLUTION OF DISPUTES

architect fails to' give a decision as required, they may request the initiation
of mediation by delivering a written request for mediation to the other party
with copies to the architect and the HKlAC. Such a request for mediation
must contain a brief self explanatory statement of the nature of the dispute,
the relief or remedy sought, and the name of a nominated mediator thought
suitable. The party who receives a request for mediation must notify the
other party, the architect, and the HKIAC, within twenty-eight days after
receipt of the request, whether or not he is willing to participate in the
mediation, and if so, whether any mediator nominated is acceptable. In the
event that the nominated mediator is unacceptable, the parties must· within
fourteen days of the date of the acceptance of mediation attempt to agree on
a suitable mediator. Where the parties agree on a mediator and the proposed
mediator is willing to serve, they will notify the HKIAC. The mediation will
then proceed in accordance with the Hong Kong Government Mediation
Rules. If the parties fail to agree on the appointment of mediator within the
stipulated time, they will inform the HKIAC who will, on the advice of the
HKIAC Mediation Committee (comprising a balanced representation from
various professional bodies connected with the construction Industry), appoint
within fourteen days a single mediator who is prepared to serve and is not
disqualified under the disqualification rule.

Disqualification of a mediator Under the Hong Kong Government

Mediation Rules no person may act as a mediator in any dispute in which
that person has any financial or personal interest in the result of the
mediation; except by consent of the parties. Prior to accepting an
appointment, the proposed mediator must disclose to the HKIAC any
circumstances likely to create a presumption of bias or prevent a prompt
resolution of the dispute between the parties. Upon receipt of the
information, the HKIAC are required to communicate the information to the
parties for their comments. If any party makes an objection to the proposed
mediator within seven days, he will not be appointed.

Mediator may not subsequently act as arbitrator The mediator may not
be appointed as arbitrator in any subsequent arbitration between the parties,
whether arising out of the dispute or otherwise arising out of the same
contract, unless the parties agree in writing. Neither party is entitled to call
the mediator as a witness in any subsequent arbitration or litigation arising out
of the same contract.

Time constraints Under the Hong Kong Government Mediation Rules the
mediator is required to enter upon the mediation as soon as possible after his
appointment' and should endeavour to conclude the mediation (including any
report which may be required) within forty-two days of his appointment. His
appointment will not' extend' beyond' it period of three months without the
consent of both parties.

Conduct of the mediation The parties may be represented by whomever

they consider appropriate. The mediator should conduct the mediation in
such a manner as will permit full and expeditious presentation to him, by the
parties, of their views. The mediator may see the parties together or

145
FlFTEEJl RESOLUTION OF DISPUTES
-' Il!•
1
separately, for the purpose of informing himself of the nature and facts of the I
dispute. If the mediator considers it appropriate, or if he is requested by the !•
parties, he may express preliminary views orally or in writing on the matters i
in dispute during the mediation. The mediator may, and shall if requested by
the parties, seek legal or other advice from third parties not connected with I
the dispute. During the course of the mediation the mediator may attempt
various compromise solutions with the parties in an informal manner. Also,
the mediator has the option to abandon the mediation whenever in his
judgement further efforts at mediation would not lead to settlement of the
I
dispute. He must notify the parties in writing of such a decision.

If the mediator is unable to facilitate a satisfactory solution during the course

of the mediation he will submit to the parties a report setting out the facts as
I
he finds them, his opinion in relation to the matters in dispute, and proposing
terms of a settlement. Within twenty-eiglU days of receipt of the report the
parties will indicate, each to the other, whether the mediator's proposed terms
. of a settlement are acceptable. The mediation is regarded as being a private
and confidential matter between the parties to the contract and the procedures
of the mediation should be conducted as such. In the event that the mediation
is successful, the terms of the settlement will be recorded in a supplemental
agreement to the contract. The parties must inform the HKIAC of the
outcome, but not the terms, of the settlement. Nothing that transpires during
the course of the mediation is intended to, or in any way affect the rights or
prejudice the position of the parties to the dispute in any subsequent litigation
or arbitration. For example, the opinion and terms of settlement
recommended by the mediator may not be disclosed tci an arbitrator or court.

Costs Under the Hong Kong Government Mediation Rules the sum of I
$20,000 is to be deposited by each of the parties with the HKIAC before the
mediator enters upon the mediation, as a contribution to the cost and proper I
expenses of the mediation, including the costs of the HKIAC.The mediator
may at any time during the course of the mediation require the parties to
make a further deposit or deposits with .the HKIAC to cover anticipated
I
j
i
additional fees and expenses. Subject to any order the mediator may make,
after deducting the costs and expenses of the mediation, the HKIAC must I
return any surplus funds, in equal shares to the parties, at the'conclusion of I'
the mediation. If the mediator frods that the mediation has been initiated or
conducted frivolously or vexatiously.. then he has the power to order the. party
t•
2

who initiated or conducted the mediation in a frivolous or vexatious manner

to pay the fees of the mediator in fulL. or such share as he considers
appropriate, and to reimburse the other party in respect of its reasonable costs
of preparation and attendance.

Conciliation I
Conciliation is procedurally similar to mediation, and in practice the difference I
between a mediator and a conciliator is often more perceived than actual. It is often
the case that the terms mediation and-conciliation are used inter-changeable and that

146 ,
 "

FIFTEEN RESOLUTION OF DISPUTES

which raises doubts over the difference between the two. Indeed at a seminar held
by the British Academy of Experts, two leading experts in the' field expressed
diametrically opposite views on the interpretation of both methods. It would
therefore be prudent, if ADR were discussed seriously, to ensure that both parties
agree on the precise meaning of the proposed procedure.

The conciliator participates in the proceedings and actively contributes to the

discussion between the executives and expresses his own opinion on the merits or
otherwise of the respective cases. The conciliator does not meet the parties in private
session, therefore he does not engage in shuttle diplomacy as a mediator does. A
conciliator will draw up and propose a solution. This view is supported by the
Conciliation clause in the ICE Conditions of Contract, 6th edition which requires the
conciliator to draw up recommendationS. Conciliation is a more formal process than
mediation and there are a number of institutional rules for administering
conciliations: 11 ICC Conciliation Rules (1988) III The Chartered Institute of
Arbitrators Conciliation Rules (1981) III ICE Conciliation Procedure (1988).

Conciliation Procedure

The procedure of conciliation is similar to that of mediation in that in the

agreement to mediate in the event of a dispute is either through terms of the
contract (such as a conciliation clause), or by mutual consent when the dispute
- arises. As the definition of conciliation is rather nebulous and, there is no
consensus on the difference between it and mediation, the ICE Conciliation
Procedure is referred to for guidance. The following is a summary of the
ICE Conciliation Procedure which contains 15 rules:

III A request for conciliation must be made in writing accompanied by a

brief statement of the dispute and the remedy sought.

III If the parties cannot agree on the appointment of a conciliator, the

President of the ICE (or any Vice-President is requested to appoint on their
behalf.

III A copy of the conciliation request and the names of the parties
representative must be sent to the conciliator.

III The conciliator is to commence his work as soon as possible and to

,conclude within 2 months, unless otherwise agreed.

III Written submissions will be exchanged between the parties and copies
supplied.to the conciliator. Each party states their own version of the dispute
and attaches docUments relied Oll 'aiid any written statement of evidence: - ,

III Further written statements replying to points made in the original

submission may be allowed, at the conciliators discretion, within 14 days of
the original submission.

147
 -'
,
FIFTEEN RESOLUTION OF DISPUTES
I
• A formal meeting with both parties may be convened by the conciliator,
at seven days notice, for the purpose of taking evidence and hearing
I,
i
submissions . i

• Legal or other advice may, and if so required by all parties, be sought by I

~

the conciliator. . I
• The conciliator is required to prepare his recommendations within 21 days

I
of the formal meeting.

• On payment of the conciliator's fees and expenses, the recommendations

will be sent to' the parties. Fees and expenses are the joint and several !
liability of the parties.

• The conciliator is prevented by rule 14 from subsequently being appointed

as an arbitrator for the same case, save with the agreement of the parties.

Conciliation in Practice

The ICE Conditions of Contract, 6th edition (1991) contains a conciliation

clause. The essence of this clause, clause 66(5), is as follows: Any dispute
may be referred to conciliation where the Engineer has made a decision or
where the time for making a decision has past, and where no notice to refer
the dispute to arbitration has been given. Either party may give notice in I
II
writing requiring the dispute to be considered under the Institution of Civil
Engineer's Conciliation Procedure (1988). The recommendation of the
conciliator is deemed to have been a=pted in settlement of the dispute unless
a written notice to refer to arbitration is served within one calendar month of
its receipt.
~

i
Adjudication I
Adjudication differs from mediation [and conciliation] in that, to a greater or lesser I
extent, the outcome is binding on the parties and therefore its efficacy is not
dependent on the co-operation of both parties. It differs from arbitration in that the .
I,•
process is summary and may to some extent be inquisitorial, and the decision is !
ordinarily only an interim one. It should be made clear that the 'outcome' is the
adjudicator's finding which may stand as a permanent binding decision if the parties
so agree; or be used as the basis for further negotiations between the parties; or
accepted as a temporary binding decision until a certain time has passed (e.g.
contract completion) at which time the parties will be free to seek if legal or irrbitral
award to revoke the earlier decision.

Usually an adjudicator is an individual, although there is no reason why it could not

1I
be an organisation (Corporate Adjudication) or a panel of adjudicators (Contract
Management Adjudication). Both Corporate Adjudication and Contract Management
Adjudication provide for the resolution of disputes by the appointed organisation or .

148
 FIFTEEN RESOLUTION OF DISPUTES

panel, who are retained for the duration of the project under a separate contract; the
parties share the costs equally. .

Adjudication Procedure

Usually adjudication is stipulated in a contract rather than chosen as a

preferred means of ADR. Procedures vary from contract to contract,
depending on the wording of the clause. A su=ary of the variants is as
follows: In each instance the adjudicator represents a system of third party
intervention normally expected to be invoked by a party that would otherwise
have either no remedy in the short term, or face seeking relief from the courts
unassisted by the machinery of the contract. Each variant contemplates
interim binding decisions reviewable de novo (anew) through arbitration or
litigation. Broadly speaking, this process is to litigation and arbitration what
the function of police powers, pre-trial detention and bail are to criminal
proceedings. The main development in this process away from the traditional
use of the architect or engineer heading the project team, is the introduction
of a neutral third party to make decisions over matters in dispute. This
creates a greater degree of actual or ostensible independence on the part of
the interim decision maker.

Adjudication in Practice

Adjudication is in use on Hong Kong's Airport Core Programme. The

contract produced by the government for use on contracts in connection with
the development of the new airport and associated work is: Government of
Hong Kong General Conditions of Contract for the Airport Core
Programme Civil Engineering Works, 1992 Edition. Mediation has been
made compulsory for New Airport Coordination Office contracts; if one party
wants it, the other is obliged to at least cooperate. The next possibility, if
things are really difficult, is the appointment of an adjudicator, who will make
a decision designed to last until the job is completed. In this' case, the
adjudicator is an independent third party appointed by agreement of the
parties, or if they cannot agree by the HKIAC, to make a decision on the
dispute that is binding until the completion of the works.

Adjudication is in use in many contracts in the UK, for example: III ACA
Form of Building Agreement (second edition 1984) allows for the resolution
of disputes using an adjudicator although the clause is optional. The
adjudicator must be named in the docnment if the option is to be exercised.
The adjudicator's powers extend to matters concerned with extension of time
and adjustments to the contract sum.. The adjudicator's decision is fInal and .
binding untiI completion of the works after which either party may then refer
the matter to arbitration. III JCT with Contractor's Design (CD 81)
provides an optional supplement for Resolution of Disputes by Adjudication.
The matters which may be referred to the adjudicator under this clause are
not dissimilar to those under the ACA Form.

149
 -'
FJFIEEN RESOLUTION OF DISPUTES

However, unlike the ACA Form the decision of the adjudicator becomes a
provision of the contract and fInal and binding unless either party disputes the
decision within 14 days of receipt. In any event arbitration over the matter
1
i,
•
cannot take place until after practical completion. 11 ICE New Engineering
Contract and Sub-Contract (1991), it's principle features are that the I
;
adjudicator is named from the outset; the right to proceed to adjudication I
arises on either party disagreeing with an action of the Project Manager or
Supervisor, or considering it to be outside their authority; a party dissatisfIed
with the decision of the adjudicator has eight weeks in which to refer the
matter to arbitration, the clause does not otherwise address the status of
binding effect of the decision; the fees of the adjudicator are shared equally. I
,

Executive Tribunal (Mini-Trial)

The mini-trial procedure was developed by the Zurich Chamber of Co=erce to

meet the demand for alternative methods of dispute resolution to the traditionally
accepted methods of litigation and arbitration. At approximately the same time a
similar procedure was developed in the United States when in 1984, the US Army
corps of Engineers developed a pilot programme designed to expedite the settlement
of claims pending before the Board of Contract Appeals. The term coined to
designate this pilot programme was 'mini-trial' since, although it is essentially an
arbitration technique, it incorporated some characteristics of the judicial process. . !
Mini-Trial Procedure

11 An independent and impartial adviser is appointed to take control of the

proceedings, act as advisor to the parties in dispute, to ask questions of
witnesses, to provide co=ents if the parties so request, to enforce time
limits and to act as chairman to two assistants who may be selected from
I
among the senior corporate offIcers of both parties and who are expected to
i1
•
make independent assessment of the issues in dispute.

11 The mini-trial panel is expected to hear the parties and then to propose
I
or to facilitate a settlement. If no settlement is reached or proposed within a
reasonable time, then the panel should submit a reco=endation either
unanimously or by the chairman.
Ii
11 The proced.ure is brief with only a few weeks allowed for the parties to
prepare their- case followed by a 'trial' of a few days' duration.

11 Lawy~rs are permitted to represent the parties at the trial.

11 A memorandum is exchanged between the parties and copied to the

adviser two weeks prior to the trial, in which each party outlines its position
I
on the disputes in question as well as all documentary evidence to be 1_
presented at the trial. •

150
 FIFIEEN RESOLUTION OF DISPUTES

III Presentations are informal with rules of evidence not strictly adhered to.
Cross-examination of witnesses is allowed but severely limited in duration.

III The proceedings are confidential and no transcript or recording is

allowed. None of the material generated by the trial may be used as evidence
in pending or future proceedings. The advisor is disqualified as a witness,
consultant or expert for either party in later proceedings should there be any.

Mini-Trial in Practice

Mini-trial clauses are not to be found in any of the standard form contracts
used in Hong Kong or the UK. However, it is an alternative form of dispute
resolution offered by many ADR organisations including International Dispute
Resolution Europe (IDR Europe). If the mini-trial is chosen, the parties may
adopt one of the following two frameworks available at present: III Rules of
the Centre for Public Resources (CP.R), New York; or 11 Rules of Zurich
Chamber of Co=erce.

Expert Appraisal

This technique offers the parties in dispute a technical expert's assessment of their
case to assist negotiations. In some cases, parties may wish to seek such appraisal
individually rather than jointly. There is very little in the way of co=entary on this
technique of ADR, although the Centre for Dispute Resolution (CEDR) in the UK
list expert apprclisaZ as an ADR technique available through their organisation.
Expert appraisal may be viewed as a tribunal of a lay nature, where the parties chose
an expert to provide a valuation for them but not to make a decision in a dispute.
As such the tribunal is not governed by or subject to the UK's Arbitration Acts 1950, .
1975 and 1979, or to Hong Kong's Arbitration Ordinance.

FIDIC's Amicable Settlement Clause

Under the FIDIC Conditions of Contract for Civil Engineering Work, 4th edition'
(1987), there is an obligation on both the employer and the contractor to attempt to
resolve disputes through amicable settlement under the provisions of sub-clause 67.2, .
before proceeding to arbitration. The essence of this sub-clause is that when an
intention to co=ence arbitration over a dispute has been given (in accordance with
Sub-Clause 67.1 Engineers Decision), arbitration of the dispute may not co=ence
unless an attempt has first been made by the parties to settle the dispute amicably.
However (unless the parties otherwise agree) arbitration may co=ence on or after
the fifty-sixth day on which notice of intention to co=ence arbitration of the dispute
was given, whether or not any attempt at" amicable settlement has been made. Under
these provisions, it would appear that any ADR technique may be chosen by the
parties as a means of arriving at an amicable settlement.

151
, I
...

II,
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 ---- - - ------ - - . - - - - - ----
-'

APPENDICES

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 11
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Appendix 1 i
I

Architect's
INTERIM CERTIFICATE

Serial No.:
I
i
•

I
name and address:
Valuation date:
. Employer's name
and address: Instalment date:

Main Contractor's name Job reference:

and address:
Issue date:

IIWe certify that in accordance with Clause 30 of the Agreement and Schedule of Conditions
of Building Cont:I:act for use in Hong Kong; Second Edition 1976 (May 1979 Revision),
I
Under the Contract

dated: .......................................... .

for the Works: ............................... .

situated at: .................................... .

mterim payment as detailed below is due from the

Employer to the Main Contractor $

Total value ................................................ . 57,257,348.00

includes the value of works by Nominated
Sub-Contractors as detailed on direction
form no ............ dated ................... . fi
Less retention.............................................. . 2,812,030.00
i
after deducting any retentions released
Ii
previously or herewitb
,
!

Balance (cumulative total amount certified for i

payment) ................................................... . 54,445,318.00 I
i
Less cumulative total amount previously
certified for payment. .................................... . 47,694,618.00 tI
Amount due for payment on this certificate .......... . 6,750,700.00
!
(in words) SIX MILLION, SEVEN HUNDRED AND FIFTY THOUSAND, AND SEVEN
HUNDRED DOLLARS ONLY. I
I
Signed ..........................: ........ Architect

154
 Appendix 2
INTERIM VALUATION

Contract Information Date: Interim Valuation No.14

Architect: Valuation of work in progress

$
Employer: Main
Contractor's Work 43,602,000.00
Main Contractor:
Materials on Site 4,381,000.00
Contract No.:
Profit & Attendance
Contract Sum $102,541,379.91 on P.C. Items 192,000.00
Sub-total 48.175.000.00
Contingencies $4,000,000.00
Nominated Sub- 9,082,348.00
Limit of Retention $ NIA Contractors as
statement
Date of Possession:
Nominated Supp!.
Date for Completion: as statement
Sub-total 9,082.348.00

Notes Gross Valuation 57,257,348.00

1. It is assumed that the Total Retention 2,812,030.00

Architect will make any
adjustment in respect of Net Valuation 54,445,318.00
work which he considers
improperly executed or of Cert. Nos 1-13 47,694,618.00
unsuitable standard. Amount Due 6.750.700.00

2. The Nominated Suppliers Statement of Retention

and Sub-Contractors have
been informed of amounts Gross Retention 2,408,750.00
recommended to them. held (5%)

i 3. This Valuation includes Partial release

f
~
the sum of $9,082.348.00 of Retention on
r gross in respect of bldg. Practical Comp!.
f
services in accordance Net Retention 2,408,750.00
!I with statements received
,
t from Consultants. Retention held 403,280.00
f,
from N.S.C.s

!
4. Unless stated, liquidated
damages have not been deducted. Total Retention as Valuation 2,812,030.00

155
 Appendix 3
CERTIFICATE OF PRACTICAL COMPLETION

Architect's name Job title and no:

and address:
Serial no.:
To Main Contractor:

In accordance with the Agreement and Schedule of Condition of Building Contract for use
in Hong Kong, Second Edition 1976 (May 1979 Revision), IfWe certify that subject to the -
completion of any outstanding items, and/or making good of any defects, shrinkages and
other faults which appear during the defects liability period,

[delete (a) or (b) as necessary]

(a) the Works were in my/our opinion practically completed as described in Clause 15(1)
on:

and that the said Defects Liability Period will end on:

(b) a part of the Works, namely:

the approximate value of which I1we estimate for the purposes of Clause 16 (but for
I
I,

I
no other) to be:

!
i
was taken into possession under Clause 16 on:

I•
-;

and that in relation to the said part of the Works, the said Defects Liability Peiiod
will for the purpose specified in Clause 16(b) end on: i

IfWe declare that a certificate for one moiety of the retention moneys deducted under
-previous certificates in respect of the said Works or part thereof is to be issued in accordance
with the Conditions of Contract.
I-i
Signature: ...................... Architect Date: ............... :: .... .
I
i
Original to: Main Contractor
Copies to: Architect's fIle . Quantity Surveyor. Clerk of works. Consultant -engineers

156
 ·'

Appendix 4
CERTIFICATE OF MAKING GOOD DEFECTS

Architect's name Our Reference:

and address:

Date:

Works:

Situated at:

To Main Contractor:

In accordance with the Contract, we certify that all outstanding items and all defects, and
other· faults which appeared during the Defects Liability Period were in our opinion
completed and made good.

We declare that a certificate for the residue of the retention monies deducted under previous
certificates in respect of the said Works is to be issued in accordance with the Conditions of
Contract.

Signed .......................... Architect

Original to: Main Contractor

Copies to: Architect's fIle Quantity Surveyor
Clerk of works Consultant engineers

157
 Appendix 5
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FINAL ACCOUNT
i!
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Contract No.: Architect's name
and address:
Employer's name
and address:

SUMMARY

Omissions Additions
$ $

CONTRACT SUM 2,000,000.00

Deduct contingency sum 50,000.00

ADJUSTMENTS:

Architect's instructions 23,456.20 20,145.40

Provisional quantities 1,090.00 1,210.60

Prime cost sums (including

profit and attendance)

Provisional sums
421,220.00

5,000.00
410,181.65

4,681.35
I
•
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Agreed Contractor's claims 2,310.50 iI
Fluctuations 55,000.00
I
500,775.20 2,493,530.50
i
500,775.20
I
TOTAL FINAL ACCOUNT $1,992,775.30
=========

. ·IfWe agree to accept the sum of $1,992,775.30 (in words) ONE MILLION, NINE
HUNDRED AND NINETY TWO THOUSAND, SEVEN HUNDRED AND SEVENTY
FIVE DOLLARS AND THIRTY CENTS ONLY, as full, final and sufficient payment for
work carried out under the above Contract.

Signed .................... for and on behalf of Main Contractor Date ............... .

158
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Appendix 6'
FINAL CERTIFICATE

Architect's name Serial No.:

and address:
Issue date:

Employer's name Job reference:

and address:

Main Contractor's name

and address:

In accordance with Clause 30(6) of the Agreement and Schedule of Conditions of Building
Contract for use in Hong Kong, Second Edition, 1976 (May 1979 Revision), *IfWe certify
under the Contract

dated: .......................................... .

for the Works: ................................................................ : ......................... ..

situated at:.: .............................................................................................. .

that 1. The Contract Sum adjusted as necessary in accordance with the terms of the
above mentioned Conditions is:

$ ................................................... .

and 2. The sum of the amount paid to the Main Contractor under Interim Certificates
and of any payments not included in that amount made in respect of the
amount named as the Limit of Retention Fund is: I *The sum of the amounts
already paid to the Main Contractor under Interim Certificates and certificates-
...., issued under sub clause (4)(b) and (4)(e) of the above mentioned Conditions
15:

$ ................................. , .. : .... : ............ .

.,.
F10.

!, and that $ ......................................... .

~-
(in words) .................................................. ~ .......... : .................. .
!
1 is a balance due fromlto* the Employer to/from* the Main Contractor and

I, subject to any deductions authorised by the Contract Conditions shall be a debt

payable from the fourteenth day after the presentation of this certificate.
I,. Signed ............. : ................ :Architect- Notes: * Delete as appropriate

159
 Appendix 7 1
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i ~
THE WAGE INDEX
I,
i
Wages in February 1993 i'
Occupation

!I
HK$ Index

per day (100 points =$20. 00)

Labourer (unskilled) (male) 372.2 1861

Excavator (male) 372.2 1861
Concretor's labourer
Bricklayer's labourer
Plasterer's labourer
(male)
(male)
(male) .
372.2
372.2
372.2
1861
1861
1861 I
Labourer (unskilled)
Excavator
Concretor's labourer
(female)
(female)
(female)
305.7
305.7
305.7
1529
1529
1529
i
Bricklayer's labourer
Plasterer's labourer
Concretor
(female)
(female)
305.7
305.7
543.8
1529
1529
2719
i
Bricklayer 543.8 2719
Drainlayer 543.8 2719
Rubble mason 568.3 2842
Splitting mason 568.3 2842
Ashlar mason 568.3 2842
Steelbender 762.0 3810
Blacksmith 521.7 2609
Carpenter and joiner 547.3 2737
Plumber 512.3 2562
I
Fitter 473.2 2366 i
Plasterer 560.3 2802
t
TerraZzo and granolithic worker 611.6 3058
Glazier 467.3 2337
Painter 486.6 2433
Electrician (Wireman) 451.8 2259
Plant operator (excavator
driver, bulldozer driver, etc.) 449.6 2248
Truck driver (trucks operated
as plant) 398.3 1992
Heavy load coolie 482.3 2412
Pneumatic driller 516.8 2584
Bariiboo worker and scaffolder 630.4 3152
Structural steel erector 523.2 2616
Diver 867.6 4338
Diver's linesman 344.9 1725
Information extracted from the Averag~ Daily Wages ofWarl:er.r Engaged in. Govem1Tlal.l Bta1ding and Construdion Projects, mpplied by Ihe Wages and
lAhOJlr Cos!.! Suuisrics &crion. Ca!sus and Starisrics DepanTneltl, Hong Kong.

160
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FLUCTUATION CALCULATIONS

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; . OCCUPATION INDEXED DAILY WAGES OF WORKERS

SEP 1991 OCT 1992 FEB 1993

Labourer (Male) 1641 1782 1861

Concretor, Bricklayer, Drainlayer 2410 2664 2719
Steelbender 3189 3782 3810
Blacksmith 2321 2484 2609
Carpenter and joiner 2366 2608 2737
Plasterer 2437 2507 2802
Glazier 2147 2244 2337
Painter 2107 2298 2433

CONTRACT INFORMATION

Tender date: September 1991 (base month) Labour content: 25 %

Gross value of work executed during February 1993: $950,800

[excluding iteIllS under clause 36(5)(a)-(f)]

REQUIRED

11 Average wage index for SEP 1991 (base month) given the above information in
accordance with Clause 36(2)

I III Average wage index and average percentage increase for aCT 1992 given the above
information in accordance with Clause 36(2) and 36(4)(a)

Ir
11 Average wage index, average percentage increase, and the amount that the Contract
Sum should be adjusted by for fluctuation in wage rates for FEB 1993 given the
above information in accordance with clause-36(2) and 36(4)(b)

SOLUTION

11 . Average wage index for SEP 1991 (base month)

Labourer (Male) 1641

Concretor, Bricklayer, Drainlayer 2410
Steelbender 3189
Blacksmith 2321
Carpenter and joiner 2366
Plasterer 2437
Glazier 2147
i Painter 2107

i 81 18618 = 2327.25

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Appendix 8 I

i
• Average wage index for OCT 1992

Labourer (Male)
Concretor, Bricklayer, Drainlayer
1782
2664
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Steel Bender 3782
Blacksmith 2484
Carpenter and joiner· 2608
Plasterer 2507
Glazier 2244
Painter 2298
8/20369 = 2546.13

Average percentage increase for OCT 1992

2546.13 - 2327.25 (base month) x 100 = 9.41%

2327.25

AB the percentage increase does not exceed 10% no adjustment to the Contract Sum
will be made for fluctuation in wage rates for OCT 1992

• Average wage index for FEB 1993

Labourer (Male) 1861

Concretor, Bricklayer, Drainlayer 2719
Steel Bender 3810
Blacksmith
Carpenter and joiner
2609
2737
I
Plasterer
Glazier
Painter
2802
2337
2433
8/21308 - 2663.50
II
,

Average percentage increase for FEB 1993

t
2663.50 - 2327.25 (base month} x 100
2327.25
= 14.45%
I
The anwunt l7y which the Contract Sum should be adjusted for fluctuation in wage
rates for FEB 1993

. $950;800 x 25% x"(14.45% - 10%)

$237,700 x 4.45% = $10,577.65 added to the next interim certificate for wage I'
rate increases in FEB 1993

162
 GLOSSARY

J .
i
 -'

l ,J
GLOSSARY I
;

Abo initio from the beginning

Accord and satisfaction an agreement to discharge a right pf action for some consideration

Accrue to become a present and enforceable right or demand

Action a civil proceeding instituted by one party against the another

I
Actionable giving cause for a legal action

Adjourn to put off the hearing of a case or matter to a latter date

Adjudicate to determine an issue or dispute in a judicial manner

Adult a person who has attained 18 years of age

Affidavit a written statement sworn on oath which may be used in cenain cases as evidence

Affirmation of contract election not to terminate a contract which has been breached

Aggravated damages damages awarded when the conduct of the defendant or of the I
I
surrounding circumstances increase the injury to the plaintiff by subjecting him to
humiliation, distress, or embarrassment, panicularly in such tons as assault, false
imprisonment, and defamation

Agent a person with authority to act for another, the principal

A!iegation a mere assenion made without proof

Annul to make void

I
Anticipatory breach of contract the declaration by a contractual party of his intention not
to perform his .obligation under the contract before performance falls due i
Appeal an application to a higher coun to review the decision of a lower coun

Appellant the party who brings an appeal to a higher coun-

I
I

II
Appearance ackrwwledgement, by the defendant in a civil action, of the writ or sunmwns
I!
Apprentice a person who is under an agreement to serve for a number of years, usually for
low wages, in order to learn the skills of panicular trade

164
,- -'
r
i
t
•
t
GLOSSARY

i
A priori from cause to effect.
r
• Arbitration proceedings before a private tribunal to which the parties agree to submit

II
disputes

Articles of association of a company a document dealing with the internal management of

a company

Assets property which is available for paying debts

Assignment the transmission by agreement of a right or interest to another person

Attestation. authentication of a document by the signatures of witnesses

Auction a public sale at which goods are sold to the highest bidder

A ward the decision given by an arbitrator

Bailment delivery of goods into the possession of a person who is not their owner

Bankrupt a -person who cannot pay his debts and who is adjudicated a bankrupt

Bar the profession of barristers from which practically all judges are recruited

II
Barrister a lawyer whose main function is to act as an advocate in court

Bill the draft of a proposed statute presented to a legislative body

Bill of exchange· an unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on
demand, or at afixed future time, a sum of money to or to the order of a specified person
or to the bearer

Bill of sale a document by which a person transfers the ownership of goods to another
•
I' Body corporate a company

! Bona fide in good faith; honestly

f; Breach non-fulfilment.of some contractual or other obligation

,I Capacity ability to perform legally binding transactions

:
!
1 Cartel agreements agreements entered into l7y business organisations to "regulate the prices
~
, and standards of goods that they produce or services which they offer
j
Case Law the law as established by the oUtcome offormer cases rather than l7y legislation

165
 I
GLOSSARY I
i
f
•
!
Case stated a statement of facts prepared by a court or arbitrator for the decision ofa !
higher court on a point of law i
Cause of action the. circumstances giving rise to a right to bring a legal action i
Cestui que trust the beneficiary of a trust

Caveat emptor let the buyer beware; a maxim indicating that any risk is upon the buyer
and not the seller

Chancery one of the three divisions of the High Court

Charge an interest, usually over land, given as security

Chattels personal property

Claimant the party who initiates arbitration proceedings

Civil law law regulating ordinary private matters

Codification bringing together the existing case law and statute law on the same subject
under one statute

Collaterai contract an independent agreement, additional but not subordinate to the main
agreement on the same matter

Commercial court a special court in the Queen's Bench division for dealing with
commercial actions

Commit to send to a higher court for trial

Common l!lw law embodied in case precedent as opposed to statute law or equity

Company a legal entity which is brought about by the registration procedure laid down by
company legislation

Condition an important term· of a contract

Consideration the bargain or inducement provided by a party to a contract; a thing of value

in the eyes of the law giv~n in return for something else

Consolidation joining of two separate actions so that they may be tried together

Contract an agreement which is binding in law

Contract under seal a contract which is signed, sealed, and delivered; it is enforceable
I
without consideration

166
1
i
i
I GLOSSARY

fI• Contingent dependent upon some uncertain even(

Contra proferentum rule the ·doctrine that the least favourable construction should be
i
adopted against the party who prepared and seeks to rely a the document

Conveyance a written instrument which transfers property, especially land, from one person
to another

Corporation a legal entity, endowed with perpetual succession, a common seal, the ability
to own property, and ·the capacity to sue and be sued

Counterclaim a cross action brought by the defendant against the plaintiff, or by the
respondent against the claimant

Counsel a barrister or barristers

Court of Appeal the court which hears appeals from, inter alia, the High Court and county
courts in the UK

Covenant an undertaking contained in a document, especially in a deed or lease

Crown Court the branch of the Supreme Court which deals with criminal trials and also
some "civil cases

Custom a rule peculiar to a particular locality, trade or profession

Damages the money award made to a successful party in a civil action

I Decision ofthe court a decision of the court consists offindings offacts, the legal principle
applicable to the legal problems disclosed by the material facts, and the judgment

l..
J
Deed a written instrument, signed, sealed and delivered

De facto in fact

Defamation liability in tort for untrue statements which attack a person's character or
reputation

Default failure to do something required by law

T)efence a pleading from the defendant in answer to the statement of claim

Defendant the person sued in an ordinary civil action

De nova anew

Determine to bring to an end; to decide

167
 I
I
GLOSSARY I
1,
i
Detinue an action in tort for recovery of a specific chattel j
!
j
Dictum an authoritative pronouncement; judicial assertion; maxim •
Disclaim to give up a claim or right

Discovery disclosure of all the documents relating to a case, before the trial
I
Domicile the country or state with which a person or company is most closely connected

Drawee one on whom a bill of exchange is drawn

I
Drawer one who draws a bill of exchange

Duress coercion or compulsion, especially imprisonment, threats, or violence, illegally used

to force a person to act against his will

Easement a right enjoyed over land belonging to another person

Enact to pass a bill into law

Equity law based upon discretion and conscience, derived from the old Court of Chancery

Estate general term for an interest in land

EstoppeJ the prevention of a party from asserting a fact or a claim inconsistent with a
position he previously took, either by conduct or words, especially where a representation I
has been relied or acted upon by others

Execution methods of enforcement of a judgment in an action

Exemption, exclusion, or exceptions clanse a clause in a contract by means of which a

party seeks to exclude or limit his liability

-Ex gratia as a matter of favour. i

Exhibit a document used in evidence,_ especially when annexed to an affidavit

Ex parte by one side only, for example, an application ex parte for an injunction

Ex post facto iifter the event

Fi fa abbreviation offieri facias; execution of a judgment by seizing and selling the debtor's I
- goods
I
Firm. persons who have entered into partnership with one another are called collectively a
firm

168
1I GLOSSARY
f•
i
Force majeure irresistible compulsion; especially such as to cause breach of contract, such
t as war or act of God
i Foreclosure the process whereby a nwrtgagee becomes the owner of the nwrtgaged property

Forfeiture a provision, especially in a contract or lease, enabling one party to strip the
other of his whole interest in certain .events; for example, determ~nation of a building
contract

Fraud at comnwn law, fraud refers to the advantage gained by unfair means, such as by
afalse representation offact made with knowledge of its falsity, or without belief in its truth,
or recklessly, not caring whether it is true or false. In equity, it refers to the violation,
intentional or otherwise, of the rules of fair dealing

Fraudulent misrepresentation a false statement offact made with knowledge of its falsity,
or without belief in its truth, or recklessly, not caring whether it is true or false

Freehold a legal estate held in fee simple absolute in possession. For practical purposes,
it is equivalent to absolute ownership

Frustration determination of a contract by some intervening event, such as destruction of

the subject matter

Fundamental breach a breach of a condition

General damages unascertained damages, to be assessed by the judge

I General damages and special damages general damages are damages given for a loss
which cannot be precisely quantified in nwney terms, such as pain and suffering or loss or
reputation, and the court is free to assess the anwunt and to award substantial damages.
Special damages· are damages given for losses such as expenses for medical treatment and

I
. I
loss of earnings, which are exactly calculable and must be specially set out in the pleadings

General indorsement a brief description of the plaintiff's claim indorsed on the writ; a full
statement of claim must then be served separately
-j
Hearsay testinwny by a witness as to a matter not within his personal knowledge
I

If High Court the principal court in which civil actions are heard at first instance

- -House o{Lords the highest court of En.gland and Scotland

It Incorporeal rights and interests which are intangible are said to be incorporeal, such as
debts or shares in a company

~ Indorsement something written on the back of a document, such as the claim indorsed on

I
a writ

169
"

GLOSSARY

Injunction an order of the coun which commands a person to do or refrain from doing
some act

Innocent misrepresentation a misrepresentation which is not fraudulent

In re in the matter of

Instrument a formal legal document creating or recording some legal right or liability

Intention to create legal relations the readiness of each party to accept the legal
consequences if he does not peiform his obligations under the contract

Inter alia among others

Interim provisional, until funher direction, for example, an interim order

Interlocutory a matter dealt with before the trial of an action; such as an interlocutory
injunction

I
Interrogatories questions formally put in writing by one party to another, before the trial
of a civil action

Inter se among or between themselves

Invitation to treat an invitation to another to make an offer

Joint where two or more persons share some right or obligation such that their interest is
not severed, each having an interest in the whole, for example, a joint tenancy or account

. Joint obligation an obligation by which two or more undenake to be made liable jointly,
with the consequence that proceedings in respect of the obligation mUst be taken against both
I
or all of them together

Joint and several obligation an obligation by which two or more persons undenake to be
made liable jointly or severally, with the consequence that proceedings in respect of the
whole obligation may be taken against all, or more than one, jointly, or against only one of
them

Judgment the order given by a coun after hearing a case

Jurisdiction authority of a coun or arbitrator to hear and determine cases

Laches a doctrine providing the defendant with an equitable defence where there is neglect
and unreasonable delay on the pan of the plaintiff in enforcing an equitable right

170
il
I•
I
I GLOSSARY
f!
i• ,
Lapse of an offer the termination of an offer as a result of the passage of time, death, or
the unfulfillment of a condition
i Latent that which exists but is as yet concealed Of unrevealed

Law Reports authenticated reports of decided cases in the superior courts

Law Society the governing body of English solicitors

Lease a contract for the use and possesssion of lands, buildings, property, etc. for a
specified time and for fixed payments.

Leasehold the holding of land under a lease

Legal aid a system for providing free or assisted legal advice or representation, for persons
of slender means

Legislation the process of making laws; a law or body of laws thus made

Lessee one to whom a lease is granted

Lessor one who grants a lease

Licence an authority, especially to enter land without having exclusive possession

I,i Lien a right to retain possession of some article until a claim by the holder is satisfied
,
~ Limitation statutory periods within which actions must be commenced
!
~ Limitation of actions the law which prescribes the period within which legal proceedings
i
to enforce a right must be taken or the right of action will be barred
i
~ LiIDited company a company limited by shares
l
•
,i
.'i Liquidated damages ascertained pr calculated monetary loss claimed in an action. Also
a sum provided by a contract as payable in the event of breach, which is not deemed to be
f, a penalty
il
Liquidation winding up of a company
I; Locus sigilli the place for the seal

f Lord Justice of Appeal title of a judge of the Court of Appeal

f
l' Lord of appeal in ordinary title of a judge in the House of Lords or Privy Council;
i commonly called a Law Lord

I 171
GLOSSARY
r,
I
Marine insurance a fonn of insurance in which the insurer undertakes to indemnify the
insured against loss of the ship, the cargo, or any sums paid in freight occurring during a
I
sea voyage

Master an official of the High Court who decides many interlocutory matters

Memorandum of association a document essential for the registration of a company,

containing such details as the company's name, the extent of its members' liability, and a
statement of its objects. The memorandum and the articles of association together comprise
the company's constitution

Merchantable quality goods of any kind are of merchantable quality if they are as fit for
the purpose or purposes for which goods of that kind are commonly bought as it is
reasonable to expect having regard to any description applied to the price and all other
relevant circumstances

Minor a person below 18 years of age

Misrepresentation afalse statement offact, past or present, which one party to the contract
makes in the course of negotiations with a view to inducing the other to enter into the
contract

Mitigation something told to a court in mitigation makes a wrong doing easier to understand
and excuse, usually in the hope that the court will be less severe in their punishment of the
person responsible

Mortgage a conveyance, assignment or lease of property as security for a loan

Mutatis mutandis with the necessary changes

Mutual mistake a situation where the parties are at cross-purposes in contract formation
-
Negligence conduct falling short of the duty of care owed to persons generally

Negligent misrepresentation a misrepresentation which is not fraudulent, but the

representor has not taken reasonable care to ensure the accuracy of the statement of act
made

Neutral by convention, the neutral is the tenn used to describe a neutral, independent
person app'-ointed to act as a'!lE..diator,__ conciliatt!r, or adjudicator

Nominal damages a token amount awarded for the technical infringement of a right where
no actual loss or hann has been suffered.

Non est factum it is not my deed. This is a common law defence which enables a person
who has executed a written document in ignorance of its nature at the time of execution to
plead that, notwithstanding the execution, 'it is not my deed'

172
1I
-'

t GLOSSARY

I
Ii Novus actus interveniens a new intervening cause which breaks the chain of causation

! Nuisance unlav.ful inteljerence with the use or enjoyment of another person's land

Null without legal effect

Obiter dictum statement of a judge on a point not directly relevan.t to his ci.ecision and
therefore not strictly of authority

Offer a proposal made by one person (the offeror) to another, (the offeree) coupled with an
intimation that the offeror is ready to peTjorm his promise if the offeree accepts it

OfficiaI reference a judge who tries technical cases in the Queen's Bench division of the
High Court

Official solicitor an officer of the Supreme Court who acts for persons under a disability

Ordinance legislation in hong kong made by the governor by and with the advice and
consent of the Legislative Council

Pari passu in proportion; on an equal footing

'Particulars details of some allegation pleadeil in an action; if a pleading is insufficient the

opponent may ask for jurther and better particulars

I Partnership an unincorporated association of persons in business with a view to profit

I Part performance an equitable doctrine enabling a plaintiff to' enforce a contract in spite
of a lack of necessary formalities where he has done (lcts in peTjorming his obligations under
it, and where it would be a fraud on the part of the defendant to set up the legal invalidity
, of the contract
-.
Past consideration an act which is wholly executed and finished before a- promise by
another person is made

Patent the grant of an exclusive right to exploit an invention

Penalty a sum provided by'a contract as p(lYable in the event of breach, which sum is not
deemed to be liquidated damages

PenaltY clause in a-contract" cm extravagant and extortionate sum fixed 'in advance as
p(lYable in the event of the breach of contract; it will not be enforced by the court

Petition a document used to begin certain civil actions such as winding up a company

! Plaintiff the party who begins an ordinary civil action

-t
I
173
GLOSSARY

Plea. a defence

Pleading a written statement of a party's case in a civil action

Points of claim, defence the title of pleadings in an arbitration

Power of attorney authority conferred by deed on one person by another enabling the
former to act for the latter

Prescription a claim to some right, based upon long user

Prima facie at first sight

Private company a company which by its articles of association restricts the right to
transfer its shares; lilT-tits "the number of its members to fifty, not including persons who are
in the employment of the company and persons who, having been formerly in the employment
of the company, were while in that employment, and have continued after the determination
of that employment to be, members of the company; and prohibits any invitation to the public
to subscribe for any shares or debentures of the company

Privity of contract the relationship that exists between parties to a contract; at common
law, only the parties to a contract can sue and be sued under it

Privy council the judicial committee of the privy council is the final court of appeal for
some commonwealth countries

Proceedings a general term for civil or criminal cases ,

Profit a prendre a right to take something from another person's land

I
f

I
Promissory note an unconditional promise in writing made by one person. to another signed
by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum
certain in maney to, or to the order oj, a specified person or to bearer

Public company a company which is not a priw<te company

.
I
I
Punitive or exemplary damages damages awarded to punish the defendant and to deter him. "
from similar behaviour in the future

Quantum meruit an action claiming a reasonable price for work or goods

Quasi as if it were

Quasi contract not a true contract, but is an obligation created by law for reasons ofjustice
andfaimess
I
174
1
i
ri GLOSSARY
I

i Queen's Counsel a senior barrister, appointed by the Lord Chancellor. Q. c. 's are known
I colloquially as 'silks' because they wear silk gowns

Ratification confinnation, for example, of a contract, so as to make it binding

Ratio decidendi the relevant part of a judge 's decision in a case, which is authoritative

Re in the matter of

Real property certain interests and rights in land; as opposed to personal property

Receiver a person appointed by the court or privately to take possession of or recover

property and hold it for the payment of creditors

Rectification correction by the court of a document so as to express the parties' true

I intention

Remedy the means provided by the law to obtain redress or compensation for a wrong

Remoteness of damage in contract and in tort a lack of sufficiently direct connection

between a wrong complained of and the injury alleged to have been sustained by it
I Reply a pleading from a plaintiff in answer to a defendant's defence
.. .

I Repudiation an express or implied refusal by one party to peiform his obligation under a

I
contract

Res a thing

Rescission the cancelltition of a contract. ab initio, as if it had never existed

I Res ipsa loquitur the matter speaks for itself

I
I
RE:Spondent the defendant in certain types of action, including an arbitration

Revocation an act by which one annuls something he has done

I
I:
Rylands v F1etcher, rule in a principle of strict liability for dangerous things accumulated
on land that escape and cause damage that was first stated in the case of Rylands v Fletcher.
. - - - ." -- .-

Seal an impressed piece of wax attached to a document so as to make it 'under seal'

.-

I
ri Sequestration order of the High Court to seize goods and lands of a defendant who is in

;
I, contempt of court

IJ
Set aside cancel

175
 .'

\
GLOSSARY •
t.

Set-off diminution or extinction of the plaintiff's claim in an action by deducting the

defendant's counterclaim

Settlement a disposition of property, made by deed or will, under which trusts are created i
1 .
by the settlor designating the beneficiaries and the terms on which they are to take the
property

Several where two or more persons share an obligation so that it may be enforced in full
against anyone of them, independently

Sign write on a document, etc., indicating that one has authorised it. In the case of a
person unable to write, the affixing or making of a seal, mark, thumbprint, or chop is
acceptable I
I .

Simple contract a contract not under seal, whether oral or in writing

Solicitor a lawyer whose main functions include the giving of legal advice, the drafting of
legal documents, the preparation of cases for litigation, and the representation of clients in
court I
Solus agreement an agreement by which a retailer binds himself to buy a product from one
source only - for example, a garage proprietor agreeing to kuy all his petrol from one oil
comparry

Special damages ascertained or calculated monetary loss; as opposed to unascertained or

general damages

Special indorsement a full statement of claim indorsed on a writ; as opposed to a general

indorsement
I
!--- ~:

Speciality contract a contract under seal t

I
Specific performance an equitable remedy whereby a person may be compelled to peiform
his obligation under a contract
I
}
i

Statement of clalin the plaintiff's initial pleading in an ordinary civil action in the high le
court followed by the defence and reply

Statnte an act of Parliament

-. Statntory instrument a form of delegated legislation, which has fuil force of laW

Strict liability in tort liability for a wrong that is imposed without the necessity of proving
intention or negligence on the part of the defendant

Subject to contract an agreement which is subject to contract has no binding force: the
parties do not intend to be bound until aformal contract is prepared and signed by them

176
1
I
1 GLOSSARY
I
i
! Subpoena an order requiring a person to appear in court and give evidence or produce
,
!
documents
I Subrogation the right to bring an action in the name of another person

Sue to take legal proceedings for a civil remedy

Sui juris of full legal capacity

Sufficient consideration if the promisor gets what he has asked for in return for his
promise, that is sufficient consideration. A promise to do any act, or to forbear from doing
any act, which the promisor might lav.fully do, is generally a sufficient consideration

Summons an order to appear before a judge or magis:rate. Some civil actions are begun
by an originating summons

Supreme Court the High Court, the Court of Appeal and the Crown Court are collectively
known as the Supreme Court of Judicature

Third party a person not originally a party to an action, but who may be brought in by a
defendant

Testimony oral evidence·

Tort a civil wrong, independent of contract or breach of trust

Tortfeasor a person liable on a civil wrong other than a contractual or trust matter

Trespass a tortious injury to the person or goods of another, or an unwarrantable entry

upon his land .

Trial a civil or criminal court proceeding at first instance

Trust a disposition of property to be held by trustees for the benefit of beneficiaries

Trustee one who holds property for another under a trust

Uberrinia fides the utmost good faith, required in certain transactions, such as insurance
contracts

Ultra vires beyond their powers; espeCially of a limited ·compani or statutory body. The
opposite of intra vires
Il
If

177
 i!
r
j[
GLOSSARY
I
If
ji
Ultra vires doctrine in company law a company incorporated under the Companies
Ordinance has power to carry out the objects set out in the memorandum, as well as
everything which is reasonably necessary to enable it to carry out those objects. If an act
r
!
I
is peiformed or a transaction carried out which, though legal in itself, is not authorised by
the objects clause in the memorandum, it is ultra vires and therefore void, 'so that it cannot
be ratified even if all the members wish to ratify
I
Undue influence equity gives relief to a contractual party on the ground of undue influence
II
I
where an agreement has been obtained as a result of improper pressure exercised by the
other

Unilateral mistake a mistake made by one party only, the other not being mistaken at all

Unliquidated damages damages which cann6t be calculated as a monetary loss, arid which
are assessed by the judge; such as damoges for personal injury

Vacation the periods between legal terms, when the superior courts do not sit. There are
four vacations in the year

Vendor a seller, particularly a seller of land

Vicarious liability the liability of an employer for the careless acts or omissipris of an
employee which injure other persons; even though the employer himself has not been careless

Void without legal effect

Voidable capable of being made or adjudged void

Volenti non fit injuria . a defence in the law of tort that the plaintiff fully and freely
consented to the injury or to the risk of being injured

Waiver the act of abandoning or refraining from asserting a legal right II

Warrant a written authority to do some act, for example, to carry out a search ! i

Warranty a term of a contract which is not a condition; especially a statement by the

vendor as to the quality of goods

Without prejudice correspondence in connection with a dispute, thus headed, is privileged

I
and can,!ot, be taken as implying any admission by the writer

Writ a document used to begin an ordinary civil action; it must bear a special or a general
endorsement of the plaintiffs claim
I
I
178
11 -'

lt
I

BIBLIOGRAPHY

..•
 -' l-
II
•I
i
~(
I,
BIBLIOGRAPHY
Aqua Group, The (1992) Pre-Contract Practice for the Building Team 8th ed Oxford: BSP

Aqua Group, The (1990) Contract Administration for the Building Team 7th ed Oxford:
BSP

Aqua Group, The (1990) Tenders and Contracts for Building 2nd ed Oxford: BSP

Ashworth, Allan (1986) Contractual Procedures in the Construction Industry London:

Longman

- Atiyah, P.S. (1989) An Introduction to the Law of Contract 4th ed Clarendon law series
Oxford: Clarendon Press; New York: Oxford University Press

Baden Hellard, B. (1988) Managing Construction Conflict Harlow: Longman

Barker, D.L.A. & Padfield, C.F. (1992) Law: made simple 8th ed Oxford: Butterworth-
Heinemann

Bevan, A. (1992) ATternative Dispute Resolution London: Sweet & Maxwell

Building Law Repons London: Godwin

Burns, A. ed (1989) Construction Disputes Liability and the Expert Witness London:
Butterworths

Chui, Carole Pedley (1988) The Law of Contract in Hong Kong One country two systems
law series Hong Kong: China and Hong Kong Law Studies Ltd

Construction Law Digest London: Collins Professional and Technical Books

Construction Law Reports London: Architectural Press

Construction Law Journal Hampshire: Sweet & Maxwell

Comes, David L.(1989) _Design Liability in the Construction Industry 3rd ed Oxford: BSP
Professional Books

Cushroan, Robert F. (1991) ATtemative Dispute Resolution in the Construction Industry

I
London: Wiley
I I

180
11
f BIDLIOGRAPHY
I
i
De Bono, E. (1986) Conflicts: a better way to resolve them Harmondsworth: Penguin
f
i Emden, Alfred E. (1990) Emden's Construction Law 8th ed rev London: Butterworths

Graw, Stephen (1990) An Introduction to the Law of Contract North Ryde, N.S.W.: Law
Book Co

Hepple, B.A. (1991) Tort: Cases and Material 4th ed Butterworths

Hong Kong laws, etc The District Court Law Reports Hong Kong: Government Printer

Hong Kong laws, etc The Hong Kong Law Reports Hong Kong: Government Printer

Hong Kong Law Digest Hong Kong: Hong Kong Legal Publications, 1939

Howarth, D. (1984) Common,Law - Tort: from accident to liability London: Sweet &
Maxwell

Hughes, G.A. (1992) Building and Civil Engineering Claims in Perspective 3rd ed
London: Longman Scientific & Technical

Jervis, Bruce M. (1988) Construction Law: principles and practice McGraw-Hill

Major, W.T. (1988) Law of Contract 7th ed M&E Handbook series London: Pitman

Manson, Keith (1981) Building Law for Students 4th ed rev London: Cassell

Martin, Robyn (1987) The law of tort in Hong Kong One country two systems law series
Hong Kong: China an,d Hong Kong Law Studies

May, Anthony, Sir (1991) Keating on Building Contracts 5th ed London: Sweet & Maxwell

Powell-Smith, Vincent (1990) Building Contracts Compared and Tabulated 2nd ed

London: Legal Studies and Services Limited

Porter, Robert (1980) Building Contract Conditions London: George Goodwin

-
'

, Rogers, W. V.H. (1989) Winfield and lolowicz on Tort 13th ed London: Sweet & Maxwell

Shum, Clement (1992) General Principles of Hong Kong Law Hong Kong: Longman

Smith, Jim (1989) The Law of Contract: fundamental principles of law London: Sweet &
Maxwell

Stanton, K.M. (1986) Breach of Statutory Duty in Tort Modern legal studies London:
Sweet & Maxwell

181
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BIBLIOGRAPHY

Treitel, G.H. (1989) An Outline of the L([}V of Contract 4th ed London: Butterworths

Turner, Alan (1990) Building Procurement London: Macrnillan

Turner, D.F. (1989) Building Contract Disputes: their avoidance and resolution London:
Longrnan

Turner, D.F. (1984) Building Contracts: a practical guide 4th ed London: George
Goodwin

Uff, John (1991) Construction L([}V: l([}V and practice relating to the construction industry
5th ed London: Sweet & Maxwell

White, John (1988) The English and Hong Kong Legal Systems Hong Kong: Co=ercial
Press

Wickens, Robert.(1991) ProfessionaLLiability 2nd ed Hong Kong: Hong Kong University

Press

Willis, Christopher J. and Ashworth A. (1987) Practice and Procedure for the Quantity
Surveyor London: Collins

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1
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182
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I
I
I'I
I
INDEX
 .'

INDEX
A c
Acceptance . . . . . . . . . . . . . . . 2-6, 33, 39 Case law . . . . . , . . . . . . . . , . . . . . . ,. 1
Adjudication ........... , ........ 137, 148 Cause of action . . . . . . . . . , ' , . . . , . . . 34
Adler v. Dickson . . . . . . . . . . . . . . . . 182' Causes of delay . . . . . ' . . . . . , . . . . . 117
Advertisements . . . , . . . . . . . . . ' , , . , . . 4 Certificate of making good defects ... 110, 147
Agreement . . . . . , . . . , . . . ' . . . . , , . . . 1 Certificate of practical completion , . . . ., 109
Alternative dispute resolution (ADR) , 131, 137 Competitive tendering . . . , ' , . . , . . . 65-67
Amendments to a standard form . . " . . , ' 40 Certificates aod payments , . . . . . . ,... 105
Analogy .. , .. , , , ... ' , , , , .. , . .. 101 Claims for direct loss aod/or expense .. ,. 119
Antiquities . . . . . , . . . . . 97, 117, 119, 120 Clauses which empower instructions . , . . . . 97
Appeal . . . . . . . ' ... , . . . . , . . .. 1, 135 Clerk of works. , .. , .. , , , , . , , ., 53, 54
Appellant . . . . . . , . . . . . . . . ., .: . , . . 1 Clerk of works directions ... " , . . . . . " 96
Appendix . . . . . , '. .' .. , , ... , . . . . 39-41 Client . . . . . . . . . . . . . . . . . . . . . . . . . I
Arbitration ... , . . . . . . . . ,., .... 131-137 Collateral '; 7'.-,-,-.-.'7'.""', , . . . . , . , . . . 87
Arbitration Ordinance .... , , , , , . . 132, 135 Collins v, Godefoy . . . . , ' , . . . , . , . . , . 7
Arbitration procedure , , . , , .. , , , ... , 134 Completion . . . . , . ' , , . . . ' , , . . . . , . 71
Arbitrator ... , .. , . . . . . , . . . .. 131-137 Companies Ordinance . . , . . '. . . , . . . . . . . 9
Arbitrator's awards ,., . . . . . . . . . . . , 135 Comparison: arbitration aod litigation , . .. 137
Architect .,." .... , ... " . . . . , 51-54 Comparison of risk , , , , . . . . . . . , . . , . 64
Architect's instructions, . . . . . , ... , 95-103 Condition , , ' , , .. , .. , , . ' .. , ... ' , 16
Articles of agreement ... , . , . . . . , . . 3941 Conditional bond " . , " , ......... ,. 88
Assessor . . . . . , . . . . . . . , . . . . . . .. 132 Consideration . . . . . . . . . . . . . , . , .. 2, 6-8
Assigrunent . . . . . , . . . ' , . . . . , . . . , . 48 Consultant engineer , . . . . , , .. , , ., 52, 54
Auctions. , . . . . ' ... , . , , , , , .. , , ... 4 Contingency ., . . . . . " , . , . . 58, 64, 148
Automatic determination .. , ... , , .. " 127 Contra charge ... " . , . . . . . . , . . . . 122
Average wage index .. , .. ,', .. " . . 113 Contract sum ... , . . . . .. 39, 111, 112, 149
Awards . . . . . . . . . . . . . . . . . . . . . . 135 Contract bills . , , . . . . . . , . . . . . . . , 40-43
Contract drawings . , . , ... ' .. , ... , 40-42
Contractor . . . . . . . . . . . . . . . . . . . . . . 1
B Contractor's claims . . . . , ... , . ,. 113, 148
Contractors' All Risks policy ... " 80-82, 85
Bankruptcy of the employer .. , . . . . . 38, 129 Contracts contrary to a stalnte ' .. , . . . . , 13
Bankruptcy of the main contractor ... , " 127 Contracts for ao illegal purpose . . . , . ' , ,. 13
Banks , ... , ... " , ... , ... ,., ... 90 Contracts of employment ... , .. , . , . , . , 53
Base month , . , , , . , . , ' , . . . , . , . ., 113 Contracts under seal .. ,... 2, 6, 8, 34, 110
Bias ......... :" .. , .. , . . . . . . , 133 Contracts which are against public policy , ,. j j
Bid tender bond . . . . . . . . . . . . . . . . . . 88 Contracts which must be evidenced in writing 12
Bilateral discharge . , , . . . . .... ', . . , , , . 25 Contracts which must be in writing , . . . . . 11
Bills of quantities .... : : . , . , . . . . 38, 40 Contracts which must be under seal , , . . .. 12
Bond amount , . . . . . , . . . . . . . , , . . . . 91 Contractna1 arraogements . . . . . . . . . . . . 57
Breach .. , . . . . . . . , . . . . . . . ' ... , . 27 Contractna1 capacity ... " . . . . . . . . . 2, 8
Breach of condition .. , .. , , ... '. ',' .. , . 27 Contractna1 parties to the main contract .. 45-51
Breach of contract , . , , .. , . . . . , .. , , . 29 Contractna1 relationships . . . . . . . , . . . . . 45
Breach of warranty ., .. ' .. " . ' . . . . . 27 Costs .. , , . . . . . . ' . . . . . . , 123, 135, 146
Builder. ' .. , . . . . . . . . . , ... ' , . , , ' . I Cost reimbursement contracts . . . . , . . . . . 61
Building contract insurances . . , , . , . , . , . 79 Counter claim ... ,." .. " ' , . , 122, 123
Counter guaraotee . . . . . , . , , . , . . . . . . 88

184
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I i -'
!
i
I

,I INDEX
~
f Conciliation . . . . . . . . . . . . . . . . . . .. 146
I Cover . . . . . . . . . . . . . . . . . . . . . . . . 77
Cross claims . . . . . . . . . . . . . . . . . " 122
Executive tribunal . . . . . . . . . . . . . . .. ISO
Exceptions . . . . . . . . . . . . . . . . . . . . . 77
Excess . . . . . . . . . . . . . . . . . . . . . . . . 78
Customary implied terms . . . . . . . . . . . . 17 Exclusion and limitation of liability . . .. 18,19
Cutter v. Powell . . . . . . . . . . . . . . . . . . 23 Expense . . . . . . . . . . . . . . . . . . . . .. 119
Expert appraisal .. . . . . . . . . . . . . . .. 151
Express terms . . . . . . . . . . . . . . . . IS, 16
D Extension of time . . . . . . . . . . . .. 116-119

Damages . . . . . . . . . . . . . . . . . . . . . . 29
Date for completion . . . . . . . . . . . . . . . . 71 F
Date for possession'. . . . . . . . . . . . . . . . 71
Davis Contractors v. Fareham UDC . . . . . . 26 Failure .to honour certificates of payment .. 128
Dayworks . . . . . . . . . . . . . . . . . . . . . . 99 Fair valuation . . . . . . . . . . . . . . . . . . 102
Deeds . . . . . . . . . . . . . . . . . . . . . . . . . 8 FlDICcontract . . . . . . . . . . . . . 36,37,151
De Bernardy v. Harding . . . . . . . . . . . . . 24 Final accouut . . . . . . . . . . . . . . .. Ill, 148
DefectS liability period . . . . . . . 109-111,147 Final certificate . . . . . . . . . . . . . . 111, 149
Defendant . . . . . . . . . . . . . . . . . . . . . . . I Final measurement and valuation . . . . . .. I11
Definition of a contract . . . . . . . . . . . . . . . I Fire and Special Perils policy . . . .. 80-82, 86
Delay . . . . . . . . . . . . . . . . . . . . 115-120 First demand bond . . . . . . . . . . . . . . 88-94
Delay of artistS or tradesmen . . . . . . . .. 117 First party insurance . . . . . . . . . . . . . . . 78
Delay of nominated sub-contractors or Fluctuations . . . . . . . . . . . . . . 113, 114, 151
nominated suppliers . . . . . . . . . . . ., 117 Force majeure . . . . . . . . . . . . 116-118, 129
Delays caused by neither party to the contract 116 Foreman-in-charge . . . . . . . . . . . . . 46, 54
Delays caused by the employer . . . . . . .. 115 Form of a contract . . . . . . . . . . . . . . 2, 11
Delays caused by the main contractor . . .. 115 Frustration . . . . . . . . . . . . . . . . . . . . . 26
·Derivation. . . . . . . . . . . . . . . . . . . .. 100 Fundamental breach . . . . . . . . . . . . . . . . 19
Design bnild contract . . . . . . . . . . . . . . . 64
I Determination of employment . . . . .. 125-130
Determination by employer . . . . . . . 125-128
II Determination by main contractor ... 128-130
G
i Determination procedure ... -. . . . . . . .. 126
Genuiness of consent . . . . . . . . . . . . . . 2, 9
Direct loss andfor expense ... _ . . . . . .. 119
Gleeson v. London Borough of Hillingdon. . 42
Discrepancies . . . . . . . . . . . . . . -. . . . . . 43
Government of Hong Kong 37,76,93,113,138
Display of goods . . . . . . . . . . . . . . . . . . . 4
Disqualification of an arbitrator. . . . . . .. 133
Disruption. . . . . . . . . . . . . . . . .. 119-121.
Domestic sub-contractors . . . . . . . . . . . . 48 H
Domestic suppliers . . . . . . . . . . . . -.. . . 48
Donoghue v. Stevenson . . . . . . . . . . . . . 34 Harbutt's Plasticine v. Wyne Tank & Pump . 19
Duress . . . . . . . . . . . . . . . . . . . . . . . . 11 High court . . . . . . . . . . . . . . . . . 131, 13 6

I
i- E
HK Standard Form . . . . . . . : . . . . . . xi, 36
HKIA Standard Form . . . . . . . . . . . . . xi, 36
Hoenig v. Isaacs . . . . . . . . . . . . . . . . . . 25
Hsin Chong Construction Co. Ltd. v. Yaton Realty
Co. Ltd . . . . . . . . . . . . . . . . . 107, 108
Early completion . . . . . . . . . . . . . . . . . 72
Edward Owen Engineering Ltd. v. Barclays Bank
International . . . . . . . : . . . . . . . . . . . 92
Employer . . . . . . . . . . . . . . . . . . . . . . . I I
Employer's obligations . . . . . . . . . . . . . . 47
Employers' liability insurance . . . . . . . . . . 84 Implied terms . . . . . . . . . . . . . . . . . . . 17
Entores Ltd v. Miles Far East-Corporation ... 6 Inclement weather. . . . . . . . . . . .. 116-118
Errors . . . . . . . . . . . . . . . . . . . . . . . . 43 Indemnity agreement . . . . . . . . . . . . 87, 88
Essential requirements of a contract . . . . . . . 2 Indemnity and insurance clauses . . . . . . . . 82
Evaluation of -direct loss and/or expense .-: 120 Index of wage rate . . . . . . . . . . . . . . . 113
Injunction . . . . . . . . . . . . . . . . . . . . . . 31

185
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INDEX F
1
,
!

Injury or damage to property . . . . . . . . 83-85

N r
!,
Insurance . . . . . . . . . . . . . . . . . . . . 77-86 Negligence . . . . . . . . . . . . . . . . 11, 54, 55 ~ ,

Insurance companies . . . . . . . . . . . . . . . 90 Negotiated tendering . . . . . . . . . . . . . 67-69

Insurance of main contractor's plant and Mini-tria1 . . . . . . . . . . . . . . . . . . . . . 150
equipment . . . . . . . . . . . . . . . . . . . . 81 Nominated sub-contractors . . . . 48-51, 107-109
Insnrance of the works . . . . . .. 80, 109, 117 114-117
Interest . . . . . . . . . . . . . . . . . . . . . . 133 Nominated suppliers . . . . . . . 48-51, 114-117
Interim certificates .. 105, 106, 109, 114, 144 N.W. Metropolitan Hospital Board v. T.A.
Interim valuations . . . . . . . . -. . . . . 106; 145 Bickerton Ltd . . . . . . . . . . . . . . . . . . 51
Intermediate term . . . . . . . . . . . . . . . ., 16
Interpretation of contract terms . . . . . . . . . 20
Invest . . . . . . . . . . . . . . . . . . . . . . . 107
Invitation to treat . . . . . . . . . . . . . . . . 3, 4 o
Offer . . . . . . . . . . . . . . . . . . , 2-4, 39, 68
Offer and acceptance . . . . . . . . . . . . . . . . . 2
J OIley v. Marlborough Court Hotel ..' . . . . . 18
Open competitive tendering . . . . . . . . . . . 65
JCT Standard Form . . . . . . . . . . . 42
Oral instructions . . . . . . . . . . . . . . . . . . 96
Joint insnred . . . . . . . . . . . . . . . . . . . . 79

p
L
Package deal contract . . . . . . . . . . . . . . . 64
Lapse of time . . . , . . . . . . . . . . . . . . . . . 3
Parkinson v. Commissioners of Works ... . 33
Lateness of drawings . . . . . . . . . . . . " 117
Part performance . . . . . . . . . . . . . . . . . 24
Legality of object " . . . . . . . . . . . " 2, 13
Payment certificates . . . . . . . . . . . . . .. 105
Liability insnrance . . . . . . . . . . . . 79,82,84
Penalty . . . . . . . . . . . . . . . . . . . . . . . . 30
Limit of indemnity . . . . . . . . . . . . . . . . 78
Percentage of certified value retained .. " 107
Limit of retention fund . . . . . . . . . . 107,145
Performance . . . . . . 23-25, 30, 87-89, 92, 93
Limitation of action . . . . . . . . . . . . . . . . 33
Performance bond . . . . . . . . . . . . . , 88, 94
Limitation Ordinance . . . . . . . . . , 8, 34, 11 0
Period for honouring certificates . . . . 106, 128
Liquidated and ascertained damages . . . . . . 75
Period of delay. . . . . . . . . . . . . . . . .. 115
Liquidated damages . . . . . . . . . , . .. 29, 30
Period of final measnrement and valuation. 111
Loss . . . . . . . . . . . . . . . . . . . . . . . , 119
Period ofinsnrance .... . . . . . . . . . . . . 78
Loss andlor expense . . . . . . . . . . . . 119-122
PersollaJ injury or death . . . . . . '.' . . . 82-84
Lnrnp snrn contracts . . . . . . . . . . . . 57, 58
Phased completion (see sectional completion)
Philips Hong Kong Ltd v. The Attorney General of
Hong Kong . . . . . . . . . . . . . . . . . . . -76
M Plaintiff . . . . . . . . . . . . . . . . . . . . . . . . 1
Possession . . . . . . . . . . . . . . . . . . . .71, 75
Main contractor .......... 39,45, 115, 128 Possession and completion .. . . . . . . . . 71-76
Main contractor's obligations . . . . . . . . . . 45 Practical completion . . . . . . . . . , 72, 73, 106
Maintenance bond . . . . . . . . . . . . . . . . . 88 Practical Completion of the works 71, 108, 133
Management contracting . . . . . . . . . . . . ... 64 Precedence . . . . . . . . . . . . . . . . . . . . . 42
Material damage insurance . . . . . . . . . . . 80 Precedent . . . . . . . . . . . . . . . . . 1, 54, 137
Measnrement and valuation of variations . .. 99 Preminrn . . . . . . . . . . . . . . . . . . . . . . 78
Measurement contracts . . . . . . . . . .. 59, 60 Prevention of performance . . . '.' . . . . . . . 24
Mediation .. -: . . . . . . . . . . . . . . . 131,143 Prime cost sums . . . . . . . . .' .. 103, 111, 119
Memorandnrn of association . . . . . . . . . . . . 9 Privity of contract . . . . . . . . . . . . . . . . 7, 8
Misrepresentation . . . . . . . . . . . . . . . . 9-11 Pro-rata rates . . . . . . . . ; . . . . . . . . .. 100
Mistake . . . . . . . . . . . . . . . . . . . . . 9, 10 Procednre for claiming an extension of time 118
Monthly statistical bulletins . . . . . . . . . . . 41 Procnrement . . . . . . . . . . . . . . . . . . . . 57
Moore & Co. v. Landauer & Co. . . . . . . . 23 Professional negligence. . . . . . . . . .. 54, 55
Murphy v. Brentwood District Council. . . . . 34

186
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f i
I
!
,- INDEX
!"
I Proof of contract . . . . . . . . . . . . . . . . " 12 Sub-letting . . . . . . . . . . . . . . . . . . . . . 48
f
; Provisional quantities . . . . . . . . . . . . . , 111 Subsidiary agreement . . . . . . . . . . . . . . . 39
!, Provisional sums . . . . . . . . . . . 103,111,119
, , Public liability insurance . . . . . . . . . . . . . 84
Substantial performance . . . . . . . . . . . . . 25
I Sumpter v. Hedges . . . . . . . . . . . . . . . . 24 '
Public sector standard fonns . . . . . . . . . . 37

iI
Surety bond. . . . . . . . . . . . . . . . . . . 87-94
Sutcliffe v. Thackrab . . . . . . . . . . . . . . . 54

Q
T
-I Quantum meruit . . . . . . . . . . . . . . . . . . 31
Quantity Surveyor . . . . . . . . . . . . . . . . . 53 Tender . . . . . . . . . . . . . . . . . . . . . . . . . 4
Tender documents . . . . . . . 53,61,68,72,75
Tendering, competitive. . . . . . . . . . . . 65-67
R Tendering procedures . . . . . . . . . " .. : . 65
Tenns implied by the courts . . . . . . . . . ., 17
Re-nomination ... ',' . . . . . . . . . . . . . . 51 Tenns of a contract . . . : . . . . . . . . . . . . 15
Reasons for the use of a standard form .. " 35 Third party insurance . . . . . . . . . . .. 78, 84
Reconciliation of analysis . . . . . . . . . . . 101 Tbompson v. L.M.S. Railway . . . . . . . . . 18
Reference ... . . . . . . . . . . . . . . . . .. 131 Time at which arbitration may be opened.. 133
Rejection . . . . . . . . . . . . . . . . . . . . . . . 3 Time of performance . . . . . . . . . . . . . . . 25
Representations . . . . . . . . . . . . . . . . . . 20 Ton . . . . . . . . . . . . . . . . . . . . . . . . . 34
Rescission . . . . . . . . . . . . . . . . . . . . . . 31 Turnkey contract . . . . . . . . . . . . . . . . ., 64
Respondent . . . . . . . . . . . . . . . . .. 1, 135 Types of bond .. . . . . . . . . . . . . . . . . . 88
Restitution . . . . . . . . . . . . . . . . . . . . . 3 I Tyer v. District Auditor for Momnothshire . 55
Retention . . . . . . . . . 107-110, 144, 145, 147
Revocation . . . . . . . . . . . .... . . . . . . . . . 3
Rickards Ltd. v. Oppenheim . . . . . . . . . . 25 u
Right of appeal. . . . . . . . . . . . . . . . .. 136
RICS Stanfud Form . . . . . . . . . . . . . xi, 36 Unconditional bond . . . . . . . . . . . . . . . . 88
Undue influence .. .. .. .. .. .. .. . . . . 11
Unilateral discharge . . . . . . . . . . . . . . . . 25
s Unliquidated damages .............. 30

Sectional completion . . . . . . . . . . 72-75, 109

Sectional completion 'supplement . .- . . . . . . 75 v
. Selective competitive tendering . . . . . . . .. 66
Set-aside . . . . . . . . . . . . . . . . . . . . . , 136 Valnation of work in progress . . . . . . . . 145
Set-off . . . . . . . . . . . . . . . . . . . . 122, 123 Variation of contract tenns . . . . . . '-'. . . . 20
Significance of Clause 12 . . . . . . . . . . . . 42 Variations . . . . . . . . . . . . . . . . . . . . . . 98
Simple contracts . . . . . . . . . . . . . . 8, 11, 34
Single tender ., . . . . . . . . . . . . . ; . . . . . 4
Specific performanoe . . . . . . . . . . . . . . . 30 w
Standard forms of lmilding contract . . . . 35-44
Standard formS of main contract . . . . . . 36-39 Wage Index . . . . . . . . . . . . . . 113, 114, 150
Standard fonns of sub-contract . . . . . . . . . '39 Waiver of a condition. . . . . . . . . . . . . . . 33
Standard method of measurement . . . . 41,44 Warranty . . . . . . . . . . . . . . . . . . . 16, 27
I· _ Standing tender . . . . . . . . . . . . . . . . , .. 4
Statutory implied tenns . . . . . . . . . . . . " 17
Warranty,contract .. ' . . . .- . . . . . . .-. 39,50-
Wituesses . . . . . . . . . . . . . . " 12, 39, 135
Stilk v. Myrick . . . . . . . . . . . . . . . . . . . 7 Written instructions . . . . . . . . . . . . . . . . 95
Strikes, etc. . . . . . . . . . . . . . . . . . . .. 117
Sub-contractors . . . . . . . . . . 48-51, 107-109
Sub-contract . . . . . . . . . . . . . . . . . . . . 49
Subject to contract . . . . . . . . . . . . . . . . . -39 Young & Marten v. McManus Ltd . . . . . . 17

187