Can a valid claim notice issued, on time, referring to one contractual basis, be relied upon where a claim is ultimately pursued on a different ground? In the first authoritative case to consider this issue, the Hong Kong Court of Appeal ruled that it could not.
Many construction contracts specify that notices of claim must contain certain information and be submitted within a certain time frame, failing which a claim may be 'time barred'. In some instances, such notices of claim must provide a statement of the legal or contractual basis of the claim. If a claimant specifies an incorrect legal basis in an otherwise valid notice, will its claim fail?
Maeda Corporation v. Bauer Hong Kong Ltd [2020] HKCA 830
In this case, the project related to the construction of tunnels for the Hong Kong to Guangzhou Express Rail Link connecting Hong Kong to Mainland China. The contractor, a joint venture of Maeda and China State Construction Engineering, engaged Bauer as subcontractor to carry out diaphragm wall works. Once work commenced, Bauer discovered unanticipated, onerous ground conditions which meant that it had to excavate additional quantities of rock.
- Bauer issued a notice of claim, which referred specifically to these additional works as a Variation under the contract. However, Bauer subsequently decided that its entitlement was better argued under the contractual provision for unforeseen ground conditions.
- In arbitration, Bauer therefore pursued its claim on two alternative bases: both as an unforeseen ground conditions claim, and as a Variation. Both grounds relied on the same facts.
- The arbitrator dismissed the Variation claim but decided that the facts gave rise to a valid unforeseen ground conditions claim.
The key issue then was this: if the subcontractor had given a valid notice of claim on the basis of a Variation, but its claim was ultimately pursued on a different ground, could it rely upon the original claim notice?
Clause 21.2 of the contract contained the relevant notice requirements and provided as follows:
"If the Sub-Contractor wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Sub-Contractor shall as a condition precedent to any entitlement, within twenty eight (28) Days after giving of notice under Clause 21.1, submit in writing to the Contractor:
21.2.1. the contractual basis together with full and detailed particulars and the evaluation of the claim…"
The arbitrator, Sir Vivian Ramsey QC, decided in favour of Bauer and held that both as a matter of "sympathy" and contractual construction, "the contractual basis of the claim stated in the Clause 21.2 notice does not have to be the contractual basis on which the party in the end succeeds in an arbitration." The rationale for this decision was that it was not realistic to expect a party to finalise its legal case within the period set out in the time bar provision: it was sufficient to communicate the factual basis of the claim.
Decision
The Hong Kong High Court overturned the arbitrator's decision on this issue, taking the view that the arbitrator "failed to pay heed and give effect to the express provisions of Clause 21.2, which is clearly stated to be a condition precedent for any claim to additional payment or loss and expense, and is required by the express provisions of Clause 21.3 to be 'strictly complied with'".
The High Court held that Clause 21 employed "clear and mandatory language" in relation to the service and contents of the notices required, noting further that it contained no qualifying language such as "if practicable", or "in so far as the sub-contractor is able". It further commented that the period for providing details of the contractual basis of a claim was not unrealistic.
Bauer appealed to the Hong Kong Court of Appeal, which upheld the High Court's earlier decision. It confirmed that the subcontractor's failure to specify in its claim notice the contractual basis on which it later relied was a bar to bringing the claim. The subcontractor could not substitute one contractual basis for another. The court noted it was open to the subcontractor to identify more than one basis in its notice, or to serve multiple notices with different contractual bases if in doubt.
Commercial Implications
Time bar provisions are common in construction contracts:
- The 2017 Editions of the FIDIC Red, Yellow and Silver Books contain similar notice provisions to the one seen in Maeda v Bauer, requiring an initial notice of claim within 28 days, followed by a fully detailed claim including a "statement of the contractual and/or other legal basis of the claim" within 84 days. Importantly, the FIDIC Books expressly state that where the statement of legal basis is not provided, the "Notice of Claim shall be deemed to have lapsed" and "it shall no longer be considered as a valid Notice".
- Under the NEC4 contracts, 'compensation events' must be notified within eight weeks of "becoming aware that the event has happened". Failure to do so may result in the loss of any entitlement to additional cost or time, but there is no express requirement that the legal basis of the claim be provided.
In Maeda v Bauer, failure strictly to follow the notice provisions of the contract was catastrophic for the subcontractor, resulting in it losing all entitlement to compensation in the face of difficult ground conditions for which it was otherwise entitled to relief. The question of how any notice and time bar provisions in a contract should be interpreted is therefore of utmost importance:
- There is case law to suggest a contra proferentem approach should be taken against the person who relies upon the clause, such that it will be construed against them if ambiguous. The Hong Kong Courts in Maeda v Bauer did not apply this approach, upholding the contractor's use of the time bar provision against the subcontractor.
- Some adjudicators and arbitrators are reluctant to allow time bar provisions to defeat otherwise meritorious claims. The arbitrator in this case–a highly experienced former TCC judge–was sympathetic to Maeda's position.
- Contractors making claims need to be wise to the possibility of either a strict or a flexible interpretation to time bar provisions. This may result in contractors taking a 'kitchen-sink' approach to giving notices, attempting to identify all possibly applicable contractual or other legal bases, or some form of 'catch-all' wording that seeks to cover all eventualities.
- An interrelated question–not addressed in Maeda v. Bauer–is whether a notice needs to refer specifically to the actual clause of the relevant contract in order to satisfy the requirement to provide a legal basis. The answer to this will depend on the wording of the particular contract and its specific requirements. At the very least, it is certainly good practice to refer to the contractual clauses relied upon.
The primary imperative for contractors whose claims are potentially subject to time bars is to notify the claim within time. Maeda v. Bauer highlights a second yet equally crucial matter, sometimes overlooked, namely the importance of the content of the notice.
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