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Compelling the performance of construction works

Courts and arbitral tribunals in many jurisdictions have the power to order contractors to perform building works - to order "specific performance" of a construction contract.  But these powers are rarely exercised.  A recent case from Hong Kong’s highest court considered the approach to be taken when applications for specific performance are made.

A construction contract is one under which a contractor undertakes to perform works for an employer. The contractor’s undertaking to the employer is legally binding, in the sense that if the contractor fails to do what it promised, the employer may claim money from the contractor as compensation for the contractor’s breach of contract. Ordering that compensation be paid is usually regarded as an adequate remedy, especially where (as is commonly the case) the employer may always arrange for another contractor to perform the outstanding work.

Specific Performance

However, in some circumstances, an order that compensation be paid will not provide an adequate remedy for the employer. In such cases, the court or an arbitral tribunal may order specific performance of a construction contract (or certain obligations under it), but only where additionally:

  • The work or obligations that the contractor will be required to perform are sufficiently defined. A failure to comply with an order for specific performance may constitute a contempt of court, and it is therefore vital that any order for specific performance be capable of clear definition, given the potential consequences of non-compliance. A further problem is that even if the court's order is tightly framed, there may be disputable issues between the parties as to whether the order has been complied with. For example, if a court orders a contractor to bring the works to practical completion, there may be a real issue as to whether practical completion has been achieved. This may, in turn, lead to numerous applications to the court to decide whether its order for specific performance has been implemented. This type of "supervision" by the court is seen as undesirable, and a reason for not ordering specific performance.
  • The contractor is in a position to perform its obligations. If a contractor has been evicted from site, or is otherwise disabled from performing its obligations, it will be futile for the court to order specific performance, and therefore it will not be ordered.

On top of these factors, ordering specific performance is a discretionary matter for the court, and there are various matters that will militate in favour of or against the court making such an order.

 

Xiamen Xinjingdi Group Co Ltd v Eton Properties Limited [2020] HKCFA 32

Background

  • Eton Properties Limited and Eton Properties (Holdings) Limited (the "Defendants") held shares in a company, and a corresponding right to develop and use a plot of land in Xiamen, mainland China. They entered into an agreement (the "Agreement") with Xiamen Xinjingdi Group Co Ltd (the "Plaintiff"), under which the Plaintiff agreed to purchase the development and use rights by acquiring the shares in the company.
  • Delivery of the land was to take place within six months of the date of the Agreement, after residents on the land had moved out and structures had been demolished by the Defendants. However, the Defendants failed to deliver the land to the Plaintiff and terminated the Agreement, asserting that it had become impossible to perform.
  • The Plaintiff commenced arbitration proceedings, and the tribunal ordered the Defendants to continue to perform the Agreement. At the enforcement stage, the Hong Kong Court of Appeal granted an award of damages, which the Plaintiff appealed against – seeking specific performance of the Agreement.  The Plaintiff was therefore requesting the court, among other things, to order the Defendants to carry out the demolition and other works on the land in question.

Decision

The Hong Kong Court of Final Appeal dismissed the Plaintiff’s appeal, holding that the Agreement was not specifically enforceable.  Lord Sumption – a former UK Supreme Court judge sitting as a judge of the Hong Kong court – gave the court’s reasons as to why specific performance would not be ordered in this case.

In particular, the court emphasised that specific performance of the Agreement would require "close co-operation between the parties" in order to fulfil the terms of the Agreement. If, therefore, specific performance were to be ordered, there would be a significant possibility of the courts later being called upon to adjudicate over whether its order had been followed, or not.

 

Practical Implications

Xiamen Xinjingdi v Eton Properties provides an illustration of what is often the starting point (and end point) in applications for specific performance where construction contracts are concerned, i.e. the courts are not generally inclined to make such orders in respect of contractors.

Nevertheless, there are cases in which specific performance may be desirable in terms of "delivering justice" and it is feasible from the court’s perspective because the need for any court "supervision" is limited.  Examples include where:

  • The amount of work to be performed is limited, and the contractor is uniquely placed to perform the work (i.e. there is little prospect of finding a replacement contractor).  This may be the case where proprietary products and intellectual property rights are concerned.  However, there have been instances of where the courts have refused to order specific performance against a party with special knowledge of a matter – for example in one Singapore case, the court refused to order a contractor to prepare "as built" drawings, which the contractor was best-placed to prepare.1
  • A contractor is required to provide a bond or bank guarantee as security for performance.2  The nature of a contractor’s obligation is often specifically defined by a construction contract, where the contract may append the form of wording required for the security. The fact that the contractor’s obligation is closely defined means that the court can make an order for specific performance where there should be limited scope for dispute over whether the order has been complied with. This also usually holds true where collateral warranties are concerned.3

Finally, we note that specific performance is not all one-way. Contractors too may seek orders for specific performance, for example where an employer is required to pay retention money into a trust account,4  or where the employer is required to pay money into a project bank account,5  but it has failed to do so.

 

1 Store+Deliver+Logistics Pte Ltd v Chin Siew Gim [2012] SGHC 89.
2 Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 4110 (TCC); CCIG (Australia) Pty Ltd v Amicus Hospitality Group Pty Ltd [2019] QSC 232.
3 Scottish Widows Services Ltd v Harmon/CRM Facades (in liq) [2010] CSOH 42.
4 Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 34.
5 L&M Specialist Construction Ltd v Johnny Ho & Partners Ltd [1992] HKCFI 58.

 

Martha Glaser (White & Case, Associate, EMEA Disputes 2, London) contributed to the development of this publication.

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