This is the second article in the series on the differences between Hong Kong and English construction laws. In the first article, the author explored the procedural differences between the two systems. In particular, the author discussed (1) some of the procedural differences between the two systems in court proceedings, (2) how the English and Hong Kong laws differ in terms of the incorporation requirement of an arbitration clause, (3) how the English and Hong Kong courts differ in their approach in granting a stay in favour of arbitration and (4) some of the procedural differences between the two systems in arbitral proceedings. For readers who are interested in the said topic, we invite them to visit the first article for more details.
In this and the next article, the authors will examine the differences between the two regimes on the following substantive issues:
- The breakdown of contractual machinery;
- The impact of failure to issue certificates under a contract;
- The consequence of denying a defendant an opportunity to rectify its defects; and
- The applicability of liquidated damages post-termination.
The article covering the above issues was originally planned as a single publication. However, as each of these issues will require discussion at some length, it turns out that it may be more appropriate to publish it in two parts. What is set out below is the first part, which discusses issues (1) and (2). The second part which discusses issues (3) and (4) will be published in due course at a later date.
B. Breakdown of contractual machinery
The difference in the approaches taken by the Hong Kong and English courts towards breakdown of contractual machinery can be seen when one compares the English case of Bernhard’s Rugby Landscape  EWHC Technology 326 (22 April 1998) and the Hong Kong case of Chun Wo Building Construction Ltd v Metta Resources Ltd HCCT 29/2013, 19 August 2016.
Bernhard’s Rugby Landscape was a case concerning a dispute arose out of the construction of a golf course at a reclaimed landfill site. The works were carried out under two contracts (Contracts 3010 and 3160). One of the issues that arose was whether the employer could insist on the compliance of the contractual machinery for dispute resolution under which, as the employer contended, disputes must first be referred to and settled by the construction manager before commencing proceedings in court. The contractor argued that the said contractual machinery had broken down; it was, therefore, entitled to proceed in court without further compliance. As held by His Honour Judge Humphrey LLoyd QC:
“This issue is really about whether SPCL [employer] has a defence to BRL’s claim [the contractor’s claim] on the grounds that it is for Schal [the contract manager] to determine an extension of time or the value of a variation or to issue a certiﬁcate or to make a decision and no action can be maintained until the document has been issued. BRL contend circumstances have arisen which entitle it in law to disregard the absence of the relevant document and it is now for the Court to do what Schal should have done.”
His Honour Judge held that where the contract mechanism broke down, either party was free to have its position established by the appropriate means available: litigation or arbitration (preceded, if the contract so requires, by recourse to adjudication or the like) . The case was not concerned with the invalidation of any time-bar notice provisions that are commonly found in construction contracts.
On the other hand, Chun Wo was a case concerning a dispute arose out of the construction of a large Buddhist temple. In that case, the employer sought to argue that the contractor had failed to comply with the formality (in writing on prescribe form) and the time-bar notice provisions in respect of its variation claims and the time-bar notice provisions in respect of its extension of time claims. It was contended that these provisions constituted conditions precedent to the contractor’s claims which it had failed to meet. 
It was held that while the time-bar notice provisions in respect of the extension of time claim constituted conditions precedent, the formality and time-bar notice provisions in respect of the variation claims did not .
More importantly for the present purpose, it was held that there had been a breakdown of the contractual machinery such that the employer could not in any event rely on the formality and the time-bar notice provisions to preclude the contractor’s claims, which in effect obviated the need for the contractor to comply with these provisions.
The breakdown was held to be the architect’s abdication of their responsibilities in the construction project under the interference of the employer. The architect made no decision of its own in relation to interim payments (including deductions in respect of defects). The employer’s representatives were interfering with the architect’s functions in granting extensions of time, deciding whether Certificate of Non-Conformance should be issued and other matters which should have been the architect’s responsibilities. The employer was accordingly in breach of the implied terms of co-operation, non-hindrance and non-prevention and that it would not interfere with the architect’s exercise of the functions they had to carry out independently (including certifier’s function) and ensure that those functions were properly performed .
On this basis, Anthony Chan J held at  and  that:
“154. Further, by reason of [the employer’s] interference and [the architect’s] abdication of responsibilities, the contractual machinery in this case had, in my view, broken down (see Bernhard’s Rugby Landscapes Ltd v Stockley Park Consortium Ltd  EWHC Technology 362 (22 April 1998), §§124-136 and Frederick Leyland & Co Ltd v Campania Panamena Europea Nevegacion, Limitada (1943) 76 Lloyd’s Rep 113 at 127). For instance, the [Engineer’s Representative’s Instructions] issued by [the architect] were all preceded by [the employer’s Provisional Endorsements of Variation Instructions]. In the circumstances, I do not see any reason to preclude the adjudication by a competent tribunal of the issues between the parties to the [main contract]. [The employer] cannot rely on its own wrong to capitalise on the absence of written instruction by [the architect] to deny [the contractor’s] entitlement: Keating, §6-090.
163… given [the employer’s] interference and [the architect’s] abdication of responsibilities as analysed above, I cannot see how or why [the employer] can take advantage of the SCC-23 notice requirements [with respect to extension of time].”
It appears that Chun Wo, while referring to Bernhard’s Rugby Landscape, actually extends the application of the concept of the breakdown of contractual machinery to the invalidation of time-bar notice provisions.
C. Impact of failure to issue certificates
It is not uncommon to find construction contracts which contain provisions to the effect that the issuance of certain certificates by the contract administrator is a condition precedent to a party’s entitlement to payment. The question is whether the court or the arbitral tribunal has the power to adjudicate the underlying disputes on entitlement where the contract administrator has failed to issue such requisite certificates when it ought to have done so.
The Hong Kong approach can be found in W Hing Construction Co Ltd v Boost Investments Ltd  2 HKLRD 501, which was a case concerning a dispute arose out of the renovation of a shopping centre. One of the issues faced by the court was whether the employer was entitled to liquidated damages in the absence of a certificate of non-completion.
In this case, DHCJ Westbrook SC held that the contract imposed two conditions that had to be satisfied before the employer was entitled to liquidated damages, namely (1) the main contractor failed to complete the works by the original or extended date for completion and (2) the architect certifies in writing that in his opinion the same ought reasonably so to have been completed (i.e. a certificate of non-completion) .
It was not disputed that the architect had never purported to issue the requisite certificate of non-completion . The issue was, in light of the finding that the certificate of non-completion was a condition precedent to liquidated damages entitlement, whether the court had the power to issue such certificate itself (or waive the requirement for one) in circumstances where the architect had not done so and had never been asked to do so.
Whilst the court considered that there was no need for a contract to confer on the courts power to open up and revise certificates as such power already existed as part of the court’s ordinary power to enforce a contract in accordance with its terms, what the court was asked to do in this case was different.
There was no certificate in existence and also no evidence that the architect had ever formed any opinion or made any decision to be opened up, reviewed or revised. Instead, the court was invited to exercise the architect’s power and to decide whether, in the court’s opinion, the works ought reasonably to have been completed by the completion date .
DHCJ Westbrook SC held that the court had no such power and that the claim for liquidated damages failed in the absence of the requisite certificate of non-completion. In particular, it was held at - and  that:
“135. When considering this question I bear in mind the unusual nature of a construction contract, which provides for the obligations, not only of the parties ie the main contractor and the employer, but also of the employer’s agent the architect, who is not himself a party to this contract, but is given various certifying powers, which he is expected to exercise impartially.
136. In the ordinary way, if the employer is dissatisfied with the way his agent has or has not carried out his duties, he would presumably sue the agent directly…If one talks about the court’s “ordinary power to enforce the contract in accordance with its terms”, it seems rather odd for the employer to sue the main contractor (in this case by way of counterclaim) for something this [sic] own agent (the architect) has failed or omitted to do, more especially when the agent has never been asked to perform the duty (until apparently at the last minute).
144. Since the issue of a GCC 22 certificate is a condition precedent to the right of the employer to levy LADs (see above), then, unless I have the power to issue the certificate myself, the claim to LADs must fail. Equally I do not see on what basis the court has power to waive such a contractual requirement.”
In other words, under the Hong Kong approach, where the issuance of a certificate is a condition precedent to an entitlement to payment under the terms of a contract, the failure of the contract administrator to issue such requisite certificate may be fatal to a party’s claim for payment and the court has no power to disregard such failure or to adjudicate the underlying substantive dispute.
Further, the court held (in obiter) that even if the dispute had been referred to arbitration, the scope of the relevant arbitration clause was not wide enough to encompass the issue. The arbitration clause in that case provided inter alia that:
“(1) Provided always that in case any dispute or difference shall arise between the Employer or the Architect on his behalf and the Main Contractor,…as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (including any matter or thing left by this Contract to the discretion of the Architect or the withholding by the Architect of any certificate to which the Main Contractor may claim to be entitled…) then such dispute or difference shall be and is hereby referred to the arbitration and final decision of a person to be agreed between the parties…
(3) Subject to the provisions of clauses 2(2) and 30(7) of these Conditions the Arbitrator shall, without prejudice to the generality of his powers, have power to…ascertain and award any sum which ought to have been the subject of or included in any certificate, opinion, decision, requirement or notice and to determine all matters in dispute which shall be submitted to him in the same manner as if no such certificate, opinion, decision, requirement or notice had been given.”
In particular, the court held that arbitration clause had no application because (1) whilst it referred to matters left to “the discretion of the Architect or the withholding by the Architect of any certificate to which the Main Contractor may claim to be entitled”, it said nothing about certificates to which the employer might claim to be entitled; and (2) the matter at issue was not concerned with “ascertaining any sum which ought to have been the subject of or included in any certificate” since the certificate of non-completion would not ascertain any sum – it would merely certify that the works ought reasonably to have been completed by the original or extended contractual date of completion.
Accordingly, pursuant to W Hing Construction, unless the arbitration clause specifically confers such power, the arbitral tribunal cannot adjudicate the underlying substantive dispute in the absence of the requisite certificate.
The position under English law is arguably different.
It is apparent from the English Court of Appeal decision in Prestige & Co Ltd v Brettell  4 All ER 346 that, under English law, the existence of an arbitration clause in general terms (a fortiori if it empowers the arbitrator to open up, review and revise any opinion or certificate) will, in the absence of clear indication to the contrary, empower the arbitrator to disregard a certificate or the absence of one.
In that case, the builders under a building contract applied to the architect for a certificate, which the architect refused to issue on the ground that he had received a complaint from the building owner with reference to the work. The English Court of Appeal held that the arbitrator had the power not only to decide as to the issue of a certificate, but also to make an award of the sum due. In particular, Slesser LJ held at 350A-F that:
“Where an arbitrator having jurisdiction has to decide that something ought to have been done by the architect or engineer which was not done, if the terms of reference are wide enough to enable him to deal with the matter, he may by that decision himself supply the deficiency, and do that which ought to have been done, and produce the result which ought to have been produced, if in his view what was not done is the only reason why the result of doing what ought to have been done does not follow…if, in this case, on a general consideration, apart from the actual scope of this reference, the arbitrator were to come to the conclusion that the certificate ought to have been granted, he could act as if it had been granted, and order the sum of £10,667 11s. – or, as he ultimately came to a conclusion in this case, the lesser sum which he actually ordered on this head of £7,500 – to be paid. What is material in considering the scope of the terms of reference is to consider what were the matters which the arbitrator was called on the adjudicate.”
MacKinnon LJ further held at 353B-C that:
“It is argued by Mr. Sandlands that all the arbitrator was asked to decided was whether the architect ought to have issued a certificate. I am not sure whether Mr. Sandlands says that he had no authority to say for how much money that certificate should have been issued, but, if he did, I think that is clearly wrong. If the reference to him was the question whether the architect ought to have issued the certificate that clearly must include the question of for much that certificate should be….”
Such power appears to be similarly possessed by the English court. In Henry Boot Construction Ltd v Alstom Combined Cycles Ltd  EWCA Civ 814, the English Court of Appeal held at :
“23. In my judgment, on the true construction of this contract, certificates are a condition precedent to Boot’s entitlement to payment under clause 60(2)(4), and they are not merely evidence of the engineer’s opinion. By “condition precedent” I mean that the right to payment arises when a certificate is issued or ought to be issued, and not earlier. It does not, however, follow from the fact that a certificate is a condition precedent that the absence of a certificate is a bar to the right to payment. This is because the decision of the engineer in relation to certification is not conclusive of the rights of the parties, unless they have clearly so provided. If the engineer’s decision is not binding, it can be reviewed by an arbitrator (if there is an arbitration clause which permits such a review) or by the court. If the arbitrator or the court decides that the engineer ought to have issued a certificate which he refused to issue, or to have included a larger sum in a certificate which he did issue, they can, and ordinarily will, hold that the contractor is entitled to payment as if such certificate had been issued and award or give judgment for the appropriate sum: see further paras 40-45 below. It is convenient to make such an award or to enter such a monetary judgment in order to avoid the risk of further proceedings in the event that the employer does not pay…” (emphases added)
As such, the failure of a contract administrator to issue certificates when it ought to have done so may have different implications under Hong Kong and English laws. Under Hong Kong law, such failure may be fatal to a claim as the court or the arbitral tribunal (unless the arbitration agreement has specifically provided for) may have no power to adjudicate the underlying disputes on entitlement.
On the other hand, under English law, the court or the arbitral tribunal (unless the arbitration agreement has specifically excluded such power) arguably has the power to adjudicate the underlying disputes as if such certificates had been issued and award or give judgment for the appropriate sum.
In this article, the authors have set out the differences between English and Hong Kong construction laws on two substantive issues relating to the breakdown of contractual machinery and the impact of failure to issue certificates under a contract. In the next article, the authors will continue to look at the differences between the two regimes in two other areas, namely, the consequence of denying a defendant an opportunity to rectify its defects and the applicability of liquidated damages post-termination.
 See Bernhard’s Rugby Landscape at 
 See Bernhard’s Rugby Landscape at 
 See Chun Wo at -, 
 See Chun Wo at , 
 See Chun Wo at -, -
 See W Hing Construction at 
 See W Hing Construction at 
 See W Hing Construction at