Contract Law in Hong Kong: An Overview

Non-described issues in a contract are almost inevitable when it comes to the implementation of a relational contract. As such, what is important is to have a mutual understanding for both of these parties to a contract. Besides this, both of the parties to a contract must be ready to cooperate with each other. Issacharoff, (1995, p.1783) explains that most of the disputes that are found especially regarding constructing contracts are usually related to misunderstanding and lack of cooperation. It is also important that each of the parties to a contract is aware of their responsibilities and obligations. That is, the contractor and the employer must execute their responsibilities and obligations and must understand the undue consequences of not doing so.

Responsibilities and obligations of an employee (ABC Ltd)

The contractor, in this case, ABC Ltd is the employee and as such, they have responsibilities and obligations related to a construction contract. Among these responsibilities is that of working on the task that they are hired to do. It is the duty of the employee to execute and complete the works and remedy any kind of defects that may be found as stipulated under the contract. Hughes, Champion, and Murdoch, (2015, p.408) found that in doing so, the employee accepts a large number of secondary responsibilities. In the event that there is a failure to do so, damages must be granted in lieu of specific performance like was the case in Johnson v Agnew (1980).

Another responsibility is that the contractor is expected to provide all the documents and equipment that are specified in the document that will ensure the completion of the task. Burton,(1980,p.105)found that among the things that a contractor is expected to provide include, consumables, goods, personnel, and any other things that are a need for the accomplishment of the task stipulated in the contract.

 Another obligation is that of ensuring that performance security remains valid and enforceable at such a time when the contractor will be performing their duty. ABC Ltd, the contractor happens to have its own employees. It is the duty of the company to ensure that they do everything possible to keep their employee safe. That is, they must give their employees the right gadgets that are aimed at keeping them out of danger. Hence, should anything happen to contractor personnel, it is the responsibility of the employee to the contract in this case (ABC Ltd and not XYZ Ltd).

Another responsibility that the employee to the contact has is that of following the employer’s instruction. The employer, XYZ has stipulated what they want to be done by ABC in the contract. It is the duty of ABC to ensure that all the instructions are implemented as per these instructions. Not doing so, or doing something else that is completely different from the earlier on instructions without the consent of the employer is deemed as a breach of contract.

Lastly, it is the duty of ABC ltd as the employee to showcase loyalty to their employer, XYZ. In so doing, they must not share out personal and private information about the contract to a third party without the consent of the employer. They must not act out on behalf of the employer without the consent of the latter.

Responsibilities and obligations of an employer (XYZ)

Like is the case with the employee (ABC), the employer too have responsibilities and obligation to which they are expected to abide by under the contract law? One of this is that it is the duty of the employer (XYZ) to pay the contractor, their money as stipulated in the contract price and this must be done in consideration of the execution of the works (Burton, 1980, p.401). Note that, this does not deny the employer the right to hire an engineer or any other personnel to supervise the work on their behalf. In the event that there is a delay of payment like was the case in Yau Fook Hong Co Ltd v Man Cheong Construction Co (1981) HKLR 60, the contractor may seek to possess the grounds/site until such a time that they shall be paid their dues plus any damages.

Another one of these responsibilities and obligation is that the employer shall give the employee the right to access the site, and also the right to possess the site until such a time as stipulated under the contract that the contractor shall be deemed to have completed their work.

The employer is also expected to cooperate with the employee. Hughes et al. (2015,p.403) write that the employer should cooperate with the efforts of the contractor and in so doing, must take similar actions like those of the employee to ensure safety procedures to ensure the protection of the personnel and the environment.

The employer must specify the duties and task of the employer to avoid overlapping of duties. This is usually common in a construction site that has got more than one contractor. Specification of duties is important as it ensures that each of these contractors takes responsibilities for their failures or delays.

Part 2

In every contract, there is the aspect of time. A construction contract generally allows the construction period to be extended up to a certain time, in the event; there is any form of delay. However, before the extension of the time, it must be understood that the delay was not due to the contractor’s fault. Kheng, (2003, p.199) states that the extension of time must be apparently reasonable. It must be done in instances where due to certain circumstances which are reasonable enough; the contractor was not able to finish the project on time. As such instances, the contractor must issue a written notice to the administrator or the owner who then decide what the next cause of action should be depending on the reasons stated in the notice.

Relevant events that may cause extension of time include variations, exceptionally adverse weather, civil commotion or terrorism, failure to provide information; loss caused by a specified peril, for example flood, force majeure or an act of God, among other things.

Hughes, Champion, and Murdoch, 2015, p.114 expound on the fact that assessment of claims for EOT can be complicated and at the same time controversial. As such, the assessment must be able to factor in the relative events that contributed to the delays in order to ascertain whether or not there was this was due to the contractor fault. For example, there are cases where the delay could be attributed to the fault of the contractor. In other words, they could be caused by the performance during the design periods, when producing drawings or during mock-up and samples (Hughes et al, 2005, p.118). In such instances, the extension of time could be somehow complicated. It is necessary to have all the information is the assessment of the extension of time as this is important in deciding the next cause of action to take in relation to this again by factoring in all the consequences of such actions.

The contractual implication of EOT could affect both the employer as well as the employee. Birchall and Ramus, (2007, p.400interpretation with regard to this is that it is important in drafting an extension of time clause for both the employer and the employee to consider the following. One is the grounds for the extension of time. That is, in terms of whether or not the reasons given are as a result of the contractor fault or the employer. Two is the fact that there is a contractor notification requirement that must be fulfilled. Three is the standard for determining the duration of the time that is to be extended. It must be agreeable between the employer and the contractor on the timeline for completion of the project. Four is the methodology they will be used in analyzing the delay and lastly, is a concurrent delay (Kheng, O.C., 2003, p.148).

Birchall and Ramus, 2007, p.106 further found that if the delay is due to the employer fault and that because of this the contractor is unable to complete their project on time, then the contractual completion date becomes unenforceable. In such case, EOT is granted automatically and in such instances, the employer may lose the rights to seek any liquidated damages under the contract. For example, like was the case in the ruling of Dunlop Pneumatic Tyre Company Ltd v. New Garage & Motor CO. Ltd (1915). At the same time, if the delay is due to the contractual fault, EOT may not be granted and as such the contractor may be asked to pay for damages to the employer like was the case in Multiplex Constructions (UK) Limited v. Honeywell Control Systems Limited. The delays were caused by Multiplex, the contractors and hence the plaintiff wanted damages from the sub-contractor Honeywell control systems limited who argued on the grounds that time was at large.

There are listed relevant events that warrant the grant of EOT. Birchall and Ramus, (2007, p.401) explain that upon receipt of the contractual claim, a quality surveyor shall examine these claims with the intention of ascertaining the additional payment for direct loss and/or expenses that are incurred by the contract. In doing so, the Q.S or the architect (DEF Design Ltd) look at things like whether or not direct loss/expense was incurred due to delay/disruption caused by qualifying events. Examples of qualifying events that warrant  additional payment related to direct loss/expense include, failure by the employer to give contractor possession of the site, failure to give access of the site on time, disruptions that may be caused by works being carried by the employer, discrepancies in the contractual document amongst other issues(Burr,2016,p.169).

The procedural matter related to the application/assessment of the EOT under SFBC2005 take into consideration the following. One, that an event that has been expressly included in the contact has been the cause of the delay. Note that, such an event must be under the relevant events. Two, that the delay must be affecting activities that are said to be on a critical path. For example, a project that has to be completed first in order for it to facilitate the completion of the other projects. Three is that fact that the overriding requirement is based on the satisfaction of Fair and reasonableness test (Birchall, S. and Ramus, J.W., 2007, p.106).

Part 3

Sub Part A

The contractual implications of an architect instruction to the contractor and the potential claims that contractor may entitle to submit under the relevant clauses of the construction contract

The construction contract gives a contract administrator, who is the architect the power to issue instructions regarding the project to the contractor. Such instructions which are referred to as architect instructions (AI) has to be executed as per. The AI instructions are that the contractor should add the reinforced concrete wall with a size of 6000mm long x3000mm high x150mm thick at the 10/F. Such instructions are valid. Other examples of instructions that can be given by the AI include varying the works, to postpone the work, to remedy workmanship, goods or materials, to sanction variation made by the contractor among other types of instructions.

Gaafar and Perry,(1999,p.303) state that the contractor must, however, comply with the said instructions but within certain limitations. For example, the contractor may reasonably object to an instruction unless the instruction is enforceable under the contract (QC, 2010, 130).In doing so, the contractor must ask the Architect to give grounds or the instruction issued and the conditions which empower the contractor to act on such grounds.  A disagreement is inevitable and a dispute may arise to that effect. In the event their instruction requires a variation design to be carried out, for example, like is the case herein, then such instructions may be considered to warrant an alteration of the employer’s requirements.

At the same time, should the contractor fail to comply with the AI instructions, the architect is at liberty of issuing a notice asking the contractor to comply? In the event that the contractor should fail to comply even after a notice has been issued to that effect, then the architect can instruct others to proceed with the work but this will be under the additional costs of the contractor. That is, the contractor will be required to pay for the additional costs that are incurred in the process. In order to ascertain that such costs occurred, it is imperative that such costs are recorded and where possible a range of quotes should be obtained (Gaafar and Perry, 1999, p.307).In the event that the instructions are given verbally, and then it is important that a subsequent confirmation of the same is given in writing. The written instructions stand as proof that the instructions were given to the constructor. More importantly, such instruction must be dated and signed.

There are instances where unmerited and exaggerated claims may be issued by contractors and subcontractors. In such cases, this may lead to criminal fraud and it is important to avoid this by ensuring that such claims are properly constituted and documents. In the course of ascertaining the validity of claims, there certain requirements that must be established; to start with, there must be an establishment of proper legal entitlement. Apart from this a cause and effect must be demonstrated through the presence of contemporaneous records. Lastly, additional costs must be backed up by recorded information.

Subpart B

Mostly, late design changes tend to affect the work of the contractor, timeline and the budget. At the same time, it might appear that the changes did not cause any additional cost and as such the employer, in this case, is not obligated to pay. However, in the event that there are some kinds of costs that may have been incurred due to the change of design, then the employer who may have authorized such changes is obligated to pay.

Han, (1992, p.231) expound on the meaning of a substantial contract. A substancial contract refers to a stage in a construction project where a portion of some work which complete and the owner of the project may want to use for some purposes. Note that a substantial certificate must be issued to that effect and the certificate act as a guarantee to the owner that the said part of the project is complete and ready for use.

 The architect is empowered to issue instructions after it is deemed that the project is complete. However, this is only done under special exceptions. There are many clauses which give the architect the right to issue instruction as stipulated under the construction contract. Although this happens to be the case, the architect has no powers whatsoever to suspend any work before the work after practical completion (Furst, S. and Ramsey, V., 2015, p.105).Like in the case of Kreyer v. Driscoll, where it was assumed that the plaintiff was entitled to payments for substantial performance for part of the work that was done. Although the defendant was dissatisfied with some of the works by the plaintiff, they could have accepted the work that was deemed complete without having to waiver full performance. Hence just was like the case in Manthey V. Stock, if the plaintiff felt the need to rescind the contract, that would have been done precluding substantial performance and hence the plaintiff had to sue on the ground of quantum meruit (Gaafar and Perry,1999,308).

Part 4

Subpart A

Mostly, a contract will have a clause that indicates how the contract should be terminated. That is, it stipulates the grounds for the termination of the contract. Goldfield (2004,p.101) found that once a contract is terminated under the grounds that are indicated in the clause, then the parties to the contract may no longer be obligated to perform in accordance to the contract. However, termination of a contract can be complex and costly in the event that the termination is done wrongly. Hence, it is very important that are all the procedures that lead to the termination of a contract are adhered to the letter. Some of the most common grounds for the termination of the contract include the refusal to carry out work, abandoning the site, removing of plants from the site, denial of access to the site, failure to make payments among other grounds. Note that there are instances where repudiation is said to have occurred. In such cases one of the parties must accept the repudiation and either way may terminate the contract.

Unless it has been fully ascertained that the contractor has refused to perform their work, then the employer is at liberty to terminate the contract. Then again, if there is the substantial performance of the work that is being carried out, termination of contract may proof complex.

In terminating a contract, there are a number of things to consider, one of this is whether or not this was due to a contractor fault. In the event that it is ascertained that the work was not to be completed due to the fault of the employee, then these are enough ground for termination of the contract. There is also the aspect of considering relevant events that may lead to termination of a contract. For example, force majeure which is circumstances which could have not otherwise be avoided. However, if the employer wants to terminate the contract on the ground of relevant events, then this would be deemed to be a breach of contract and it is therefore unlawful. Such relevant events warrant an extension of time (EOT).

There is also the prevention principle where one contracting party may enforce their contractual obligation against the other party to a contract (Goldfayl, 2004, p.102). This usually happens in construction contract where there is no provision for extension of date and as such this prevents the employer from enforcing a date for completion (Cheng, Wong, and Soo, 2004,p.185). Besides this, the employer cannot issue a valuation or even suspend the work. However, the contractor will be obligated to complete the work within a reasonable time after which the employer can still enforce their contractual obligation towards the other party is the work still remains uncompleted. Note that any action by the employer before the contractual completion date may be deemed as actions aimed at causing a delay

Subpart B

An interim valuation is issued for work that need to be paid for which was not initially included in the project work. An employer may ask the contractor to undertake some work which they promise to pay what is referred to as interim payment. Note that an interim valuation is prepared by the contractor and it generally stipulates the work that was undertaken and the amount of payment that the employer is required to pay for such kind of work. Any employer seeking to use an interim valuation must ensure that it contains the following clauses in details. First of all, it must have a method of valuation. It also must contain a criterion stipulating how the interim payments are to be paid out. More importantly, it must stipulate payments timings and the administrative rules that are to be adhered to while undertaking valuations.

Note that these interim valuations may vary from one contractor to another as they are interdependent on the kind of work that is performed. However, whereas this is true, most of the time calculations of these interim payments are based on the activity schedules which are then assessed in terms of the percentage achieved (Gellhorn, 1967 p.465).Apart from this, the consideration must also look at the milestone reached, measurement against bills of qualities as well as looking at the stages of payment in references to the duration of the contract (Laleta, 2011, p.156).

Goldfayl, (2004, p.201) in their work stipulates that interim valuation should for all the work complete and not pay for work completed during a certain period. In other words, what this means is that while calculating for interim payments, it is important for an employer that they are able to factor in the previous valuation which should be subtracted from the interim calculation. Besides this, any deductions must also be made while calculating the interim payments.  Understanding all these clauses in details is important as it ensures that the employer is not put at risk due to interim valuation.

However, should a contract be terminated on the grounds of convenience, then the contractor should be paid damages which should be in the amount of the cost of the contract work performed as at before the termination of the said contract like was the case in Nicon Inc. v United States.

References

Birchall, S. and Ramus, J.W., 2007. Contract practice for surveyors. Routledge.

Burr, A., 2016. Delay and disruption in construction contracts. Informa Law from Routledge.

Burton, S.J., 1980. Breach of contract and the common law duty to perform in good faith. Harvard Law Review, pp.369-404.

Cheng, T.Y., Wong, E. and Soo, G., 2004. Construction law and practice in Hong Kong. Sweet & Maxwell Asia.

Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd, 1915 A.C. 79 (1915).

Furst, S. and Ramsey, V., 2015. Keating on Construction Contracts eBook. Sweet & Maxwell.

Gaafar, H.K. and Perry, J.G., 1999. Limitation of design liability for contractors. International Journal of Project Management, 17(5), pp.301-308.

Gellhorn, E., 1967. Limitations on Contract Termination Rights--Franchise Cancellations. Duke LJ, p.465.

Goldfayl, G., 2004. Construction contract administration. UNSW Press.

Han, A.M., 1992. Hong Kong’s Basic Law: The Path to 1997, Paved with Pitfalls. Hastings Int’l & Comp. L. Rev., 16, p.321.

Hughes, W., Champion, R. and Murdoch, J., 2015. Construction contracts: law and management. Routledge.

Issacharoff, S., 1995. Contracting for Employment: The Limited Return of the Common Law. Tex. L. Rev., 74, p.1783.

Johnson v. Agnew, 1980 A.C. 367 (1980).

Kheng, O.C., 2003. Extension of time and liquidated damages in construction contracts. In Construction Contracts and Arbitration Seminar.

Kreyer v. Driscoll, 159 N.W.2d 680, 39 Wis. 2d 540 (1968).

Laleta, S., 2011. Termination of employment contract (Doctoral dissertation, Pravni fakultet, Sveučilište u Zagrebu).

Nicon, Inc. v. US, 331 F.3d 878 (Fed. Cir. 2003).

QC, R.W.S., 2010. Construction contracts: law and practice (p. 210). Oxford University Press, New York.

Yau Fook Hong Co Ltd v Man Cheong Construction Co (1981) HKLR 60