Hong Kong Court of Appeal Decision Is Reminder to Review All Construction Contract Documents Carefully

Maeda Corporation and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited¹

Commercial practicality and business common sense may take a backseat to the clear wording of contract documents, according to the Court of Appeal (CA) in a recent judgment regarding complex measurement rules (MR) in sub-contracts for the Hong Kong section of the Hong Kong to Guangzhou Express Rail Link (XRL), now known as the “High Speed Rail” which commenced operations in September 2018.

What Was the Case About?

Maeda v Bauer was an appeal from the Court of First Instance, which was in turn an appeal from an underlying arbitration between the main contractor and sub-contractor on two XRL contracts involving the excavation of diaphragm walling (D-wall).

How Did the CA Interpret the Contract?

The CA followed recent English case law (including Arnold v Britton², Marley v Rawlings³ and Wood v Capita Insurance Services Ltd⁴), in summary:

• Interpretation is deciding what a reasonable person would think the parties meant by the words of their contract, looking at:
  • the natural and ordinary meaning of the words;
  • the purpose of the contract;
  • the facts at the time the contract was made;
  • common sense;
  • any knowledge the parties had which would affect the way in which the language of the contract would be understood by a reasonable man.
• Where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. It does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.
• Common sense and the surrounding circumstances should not be invoked to undervalue the importance of the plain words of the contract. Usually, parties have control over the language used in a contract. Where the parties have used unambiguous words, the court will apply them. The court will be slow to reject the natural meaning of the words of the contract simply because it appears to disadvantage a party: commercial common sense will not be invoked retrospectively.
• The court will not easily accept that parties have used the wrong language. On the other hand, it will not attribute to the parties an intention they plainly could not have had. Where there are two possible constructions the court may prefer the one which is consistent with business common sense.
• Where it is clear that the contract was not intended to cover a particular event, if it is clear what the parties would have wanted to happen in such event at the time of the contract, the court may give effect to this. However, the court will not rewrite the parties' agreement because it was unwise, or a bad bargain.
• An appellate court may take account of the fact that an experienced judge of a specialised tribunal reached the conclusion that a particular construction would have a surprising and uncommercial result.The court dealing with an appeal against an arbitrator’s decision should approach the matter with care.It should have full regard to the views the experienced tribunal felt able to reach on matters of business or commercial sense that form an important dimension of the context within which a decision of law is reached on the true interpretation of the contract.

What Was the Outcome?

The sub-contractor argued that following the strict wording of the MRs was against commercial common sense in that the D-wall excavation would be measured in a way that did not match how the work was actually carried out and would have significant negative commercial consequences for the sub-contractor. The arbitrator accepted the sub-contractor's arguments.

On appeal, the CA rejected the sub-contractor's arguments. Applying the principles of interpretation above, the CA found that the clear language of the MRs did not necessitate any rewriting of those MRs as the sub-contractor argued for. The CA considered the language of the MRs was sufficiently clear to support the main contractor's interpretation, which aligned closely with the plain words of the MRs. 

Read, Check and Understand the Contract Before Signing

All parties to construction contracts are advised to review them carefully, and make sure they fully understand, all of the terms in the (sometimes very long) contract documents. This includes cross-checking specifications and measurement provisions to ensure that they are coherent and do not conflict. As this case shows, confusion or errors in the contract documents may lead to substantial legal and commercial consequences.

¹ CACV 113 & 122/2019; [2020] HKCA 158

² [2015] AC 1619

³ [2015] AC 129

⁴ [2017] AC 1173