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PRocuREMENT

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lssue5-December20l2

Welcome to lssue 5 of our Bulletin - the Festive Edition. We start with a tale of seasonal cheer before turning to the gritty business of seismic design standards, indemnity costs awards and the dangers of submitting non-compliant tenders.

A Christmas ta[e: the Crinch who saved Christmas

ln a land far, far away; Santa's elves were busy making toys for a[[ the girls and boys. As the elves were so busy, Santa decided to subcontract some of his toy making work to Extra Elves Limited. Extra Elves sent 100 additional elves with their tools to make more toys in Santa's workshop in the North Pole. Two such elves were Jingte and Jangle; who were busy working on the teddy bear conveyor. Jingle was responsible for fixing the eyes on the teddy bears, whilst Jangle fixed on the noses. lt was late at night and the snow was fatling heavity. The elves had been working so hard, night and day, to get the toys ready for Christmas Eve which was now only 4 days away. Jangle was so tired he said to Jingte that he was going for a nap and would be back in an hour. Whilst he was gone, coutd Jingle fix the noses on the teddy bears as well as the eyes?
Jingle was a hetpfut elf and happity agreed. However doing both the eyes and noses was hard work and Jingte soon started to get more and more tired. Suddenty, whilst Jingte was fixing a nose on the teddy bear he didn't see the eye fixing machine come down. lt hit him hard on the arm and sent him fatting to the floor! The alarm was raised and Santa Claus came running onto the shop ftoorto see what had happened. As a dutifuI ctizen Santa reported the workload. Santa was convicted of failing to ensure a safe work premises. Some tme tater Jingte fortunately recovered from his injury and returned to work. However, on his return he found that Santa had closed his workshop and cancelled Christmas for the rest of time. Jangte totd him that Santa had been so depressed after his conviction, he could just not continue. The Grinch witnessed a[[ this and atthough he did not care so much for Christmas, he was particularty bothered by the magistrate's legal ruling. It appeared to the Grinch that the problem was not that Santa's workshop was unsafe, but rather that it was the system of work used by Extra Elves Limited which was unsafe. lndeed, he considered that it would be a very wide interpretation of the law to hold that if there was an unsafe system of work on the premises, this necessarily meant that the premises themselves were unsafe. The Crinch finally persuaded Santa to let him appeal his conviction in the Nonh Pote High Court. ln his judgment on the appea[ the judge said: " I do not think the plain meaning of "premises" in secton 7 of the Ordinance needs to be enlarged so as to include an unsafe system of

accident immediately to the North Po[e Worker Elves Department. To his great surprise, on that Christmas Eve, the Worker Elves Department served a notice of prosecution on Santa. Santa was distraught and could not understand why he had been prosecuted. The elves were emptoyed by Extra Elves Limited. Surely they were responsible? Santa was so upset he could not even deliver the presents to the children that Christmas Eve.
The next day Santa went to see the Grinch as he had heard that although he was a bit pessimistic, he had found his catting in the law and gave good legal advice. Like many other lawyers before him, the Grinch was, fortunately for Santa, working on Christmas Day. The Grinch looked at the summons Santa gave him and told him gravety that as an occupier of the workhop, Santa was responsible for ensuring that the premises were safe and without risk to health. Whitst the Grinch did an excellent job of representing Santa at trial, his arguments fell on deaf ears. The magistrate hetd that the workhop was unsafe on the ground that twas an unsafe practice forJingteto have a double

work instituted by a contractor or a subcontractor on the premses. That being so, and there havng been nothing established as to the premises in the present case being themselves unsafe, the appeal is allowed, the conviction is quashed and the sentence imposed on the appellant is set aside." The Grinch was delighted with his victory; Santa reopened his workshop and Christmas was restored!
Secretly the Grinch always wondered why the Worker Elves Department did not prosecute under the Factories and lndustrial Undertakings Ordinance; which could mean that Santa coutd be tiabte for an offence committed by Extra Elves if the workshop was considered an industriat undertaking. However, as he much preferred to be known as the Grinch that saved Christmas rather than the Grinch who stole Christmas, he decided to keep that point to himsetf. And that is the story of how the Crinch saved Christmas...
For more information about how the Grinch saved Christmas email Zoe de Courcy at zoe.decourcy@pinsentmasons.com or ca[[ her on

+85222943351.

Continued on nert page

Change on a seismic scale?

Buildings Department ("8D") has issued a "Consultation Paper for lntroducing Seismic-resistant Building Design Standards in Hong Kong". The proposal is to introduce seismic standards to govern the design and construction of new buitdings and any major alteration or addition works to existing buitdings. The purpose is to bring the design and construction of buitdings in Hong Kong in tine with international practice to reduce damage to buitding structures and casuatties in the event of earthquakes. Mainland's "Code for Seismic Design of Buildings" were adopted, the square metre construction cost (labour and materiats) of new residential buitdings will increase by about S40 and S120 respectively against a median construction cost of S13,400 per square metre.

Hong Kong is not in an active seismic zone and the possibility of serious earthquakes is low although minor earthquakes are detected from time to time. Historically, buitdings in Hong Kong have not had to meet specific seismic standards although existing requirements to design to withstand high wind loadings due to typhoons have brought relatively high resistance to seismic activity. Upon consultants' advice, BD is of the view that with current levels of seismic activity, the annual structural damage to existing buitdings is about 56OO mittion. lf these buildings had complied with the seismic design requirements of, say, the United States then the estimated annual damage could be reduced to about S120 mittion. More importantly, in a high intensity earthquake the estimated average number of fatalities wou]d be about 3 instead of 130- 1s0. It is proposed a tailor-made code be drawn up for Hong Kong taking into account the relevant international standards and Hong Kong's geology, topography and construction practices. ln line with international practice, consideration wilt be given to mposing more stringent requirements for buitdings having a post earthquake recovery rote (the majority being Government buitdings). lt is expected the new seismic standards woutd not be apptied retrospectively to existing buitdings.
BD is of the view

to "stock standard Hong Kong developer style" residentiaI buitdings with substantiaI massive concrete shear wa[[s incorporated into the tayout. Other forms of structura[ systems, say reinforced concrete frames or buitdings utilizing transfer plates, would require more bespoke analysis, design and detaiting which woutd tikely lead to more significant increases in construction costs. BD does not make any comment on the cost of design, which witl obviously increase as engineers get to grips with the new seismic standards and implement them in their designs. Legal responsibitities witt also need to be considered and in the future damage due to earthquakes may we[[ lead to owners and others seeking legal redress against designers and contractors who fail to adequately take account of seismic requirements.
These costings apply BD's consultation involves professional bodies such as Hong Kong lnstitution of Engineers; associations such as The Rea[ Estate

Developers Association of Hong Kong; academics from Hong Kong Universities; others such as the Building Sub-committee (BSC) of the Land and Development Advisory Committee. However, the consultation is by no means limited to such groups and a public consultation forum wi[[ also be conducted on 1 February 2013 (enquiries by email to seismic-enquiry@bd.gov.hk) so you have a chance to have your own say in what cou[d we[[ become a permanent and obviousty highty important feature of the future of design and construction in Hong
Kong.

To discuss the issues arising why not emaiI Legal Director Shalean Sen

that if standards similar to those in the US or the

or call him on +852 22943394.

Challenging an arbitral award? You'd better think twice

The Hong Kong court has once again reaffirmed its pro-arbitration and pro-enforcement position. When a party on the wrong end of an ICC arbitral award failed to persuade the court to set t aside they found themselves having to pay the other party indemnity costs.
ln civil proceedings, costs are ordinarily awarded against the unsuccessful party on a party and party basis. This usually means the winning party wtt only be able to recover about two-thirds to three quarters of its [ega[ costs. However, if the successful party can establish special circumstances then they may get indemnity costs and recover

its case and the arbitral procedure was not in accordance with the
Partes' agreement.

pretty much everything. Special circumstances usually means

misconduct and indemnity costs are not awarded tightly.
This general principle as to allocation of costs, however, does not apply to arbitration cases in the Construction and Arbitration List, as confirmed in a recent Hong Kong case Pacfc China Holdings Ltd v Grand Pacific Holding Ltd, CACV 13612011.|n this case the Court of Appeal uphetd the validity of an ICC arbitraI award and overturned the Court of Frst lnstance's earlier ruling in favour of Pacific China to set aside the award on the basis that Pacific China was unable to present

When it came to the question of costs, under a separate judgment handed down in )uly 2012, the Court of Appeal ordered Pacific China to pay 6rand Pacific's costs on an indemnity basis. ln reaching its order the Court ptaced a heavy emphasis on the undertying objective of the Civil Justice Reform to ensure fairness between parties to an arbitration agreement. lt was considered unfair if the tosing party s only made to pay costs on a conventional party-and-party basis, as the arbitral award creditor would in effect be subsidising the losing party's abortive attempt to challenge enforcement of a valid award. Where a party to arbitration unsuccessfully makes such challenges, it is clear that the current practice is for him to pay costs on a higher basis even in the absence of speciaI crcumstances.
For more information about the case and the issues which arise from it please email Alvin Ho at alvin,ho@pinsentmasons.com or ca[[ him on

+85222943450.

Continued on nert page z

Not the (n)tendered outcome

Putting in a tender can involve some difficult calls. On the one hand you may want to show some innovation in your proposals and pricing. On the other, you'[[ want to ensure that you compty with the invitation to tender. Two recent cases in Hong Kong (atbeit not from the world of construction) show how easy it can be to submit a non-compliant bid.
ln October 2012 the Court of Frst Instance gave judgment in Cheung Shing Scrap Metals Recycling Ltd v Secretary for Justice [201 2] HKEC 1354. Cheung Shing had been purchasing scrap cars and bicycles from the Covernment under a contract which had been running for some time. When the contract came up for renewaI tenders were invited and the invitation included two schedutes of estimated quantities of cars and bicycles for purchase. The Terms of Tender required quotation of a "...separate price in Hong Kong dollars for each of the items in Schedules Al and A2 to form the total of all items payable... " and also stated '?n offer containing any prce variation condition or formula with not be considered further..." Cheung Shing duly priced the two schedules as requested based on the estimated quantities but also put in a further price tist with lower rates which wou[d appty if the quantities of cars and bicycles were significantly higher than estimated. Far from being wetcomed this ted to the Covernment deeming the tender non compliant. ln later litigation (over a variety of issues) the Court upheld the Covernment's position with the judge stating "...Quite clearly, making a bid with two different price lists depending on the quantities to be purchased is, in my view, an offer containing a price variation..." and "...quite clearly the defendant was entitled not to consider the plaintiff's tender any fufther..."
Even if the result can be regarded as correct as a matter of nterpretaton of the Terms of Tender it is difficutt to reconcile in terms of commercial common sense. lt seems that Cheung Shing provided the fixed prices requested for the estimated quantities and the lower prices were also fixed and offered only on the basis that quantities were very different. The alternative prices could onty benefit the Government and presumably the tender wou[d have been considered comptiant if Cheung Shing had only indicated a wi[lingness to negotiate lower rates for volume as opposed to setting out offered rates.

A[so in October 2012,in Bondson Technology Ltd v Secretary of State forJustice [20121 HKEc 1430the Court ofAppeaI considered another challenge to a Covernment decision that a tender was non comptiant. The contract in question related to provision of digitat audio recording and transcription services for the courts. This included ensuring an adequate stock of spare microphones for court rooms and the tender enquiry required completion of various schedules where tenderers were to set out what they were to provide. The contract specification stated the minimum [eve[ of spares required and in the tender information it was advised that the Covernment already had a stock of spares which coutd be considered for use before the contractor's own spares. Bondson did not complete the tender schedules showing provision of new spare microphones. lnstead it stated "Judiciary's used microphones taken as serviceable'i The Covernment decided that this made the bid non-compliant. Bondson chatlenged this in court primarity on the basis that its tender confirmed it wou[d compty with a[[ requirements of the specification and it had not made any qualification to this. ln other words, even if the Covernment's spare microphones were insufficient Bondson would still meet any need to provide new ones. The Court of First instance and the Court of Appeat did not agree. ln their view, the correct interpretation was that contractors were being required to stock a minimum amount of new spares and the tender documents required them to set this out in the tender - simpty confirming compliance with the specification was not enough. Rightty or wrongly, Bondson had no doubt hoped to make their bid more competitive by relying on the Covernment's existing microphone stock although, similarto Cheung Shing, it was not what tenderers had been asked to do. As these cases show, great care must be taken to understand exactly what an invitation to tender is asking for and where necessary clarification shou[d be sought. Whitst achieving a [eve[ playing fietd for tenderers is clearly criticatty important, some greater ftexibitity in what can be proposed may we[[ deliver better value. For more information about these cases and the issues arising ptease emaiI partner Peter Clayton at peter.clarton@pinsentmasons.com or call him on +852 22943395.

The material and information in this Bulletin is prepared for general information onty. lndependent professional advice should
be sought and obtained before taking or refraining from any action based upon it. Whilst we endeavour to ensure the accuracy and completeness of the materia[ and information herein, we accept no responsibitity for loss occasioned as a result of reliance placed thereon.

Distribution of articles not prepared by or on behalf of Pinsent Masons is subject to copyright limitations.

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