SUN FOOK KONG CONSTRUCTION LTD v. CHINA CONVERGENT CORPORATION LTD

HCA 3761/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3761 OF 2003

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REASONS FOR JUDGMENT

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1.  On 26 July 2005 I gave judgment for the plaintiff against the defendant as follows :

(1)	The sum of HK$4,702,438.82;
(2)	Interest on the said sum from the date of issue of the writ namely, 9 October 2003 until judgment at 1% above prime rate and thereafter at judgment rate until payment;
(3)	A declaration that the defendant shall indemnify the plaintiff against any sums which the plaintiff may become due to pay to the HKHA in relation to remedy and defects to the Main Contract Works pursuant to the Guarantee referred to at para. 10 of the amended statement of claim;
(4)	A declaration that the defendant shall indemnify the plaintiff against any sums or legal fees which the plaintiff may become due to pay or may incur under or in respect of HCCL 66/99 pursuant to the Settlement Agreement referred to at para. 14 of the amended statement of claim.

2.  I also made an order that the costs of the action including the costs reserved at the pre-trial review be costs to the plaintiff against the defendant.

3.  I indicated at the time that I would give my reasons in writing later.  This I now do.

The witnesses

4.  The defendant did not appear at the trial and was not represented.  I heard evidence from Alan Chan Kin Chung,(“Chan”) the managing director of SFK and Davie Lam Wai Ki, (“Lam”) the Quantity Surveying Manager of SFK.  I have no hesitation in accepting their evidence and finding that they were truthful, honest and reliable witnesses.

Background

5.  The plaintiff (“SFK”) was the main contractor of a Hong Kong Housing Authority (“HKHA”) Project, Hing Tung Estate Phase 4, infill site(“the Main Contract Works”).  The Main Contract was the HKHA Contract No. 26 of 1995 entered into between HKHA and SFK under the Articles of Agreement made and entered on 26 June 1996 (“the Main Contract”).

6.  On 2 July 1996 SFK subcontracted the Main Contract Works to OLS International Ltd (“OLSI”), now known as Prosperity Construction and Decoration Ltd (“Prosperity”) by way of the Management Agreement entered into between SFK and OLSI dated 2 July 1996(“the Management Agreement”).

7.  By cl. 5(1) of the Management Agreement OLSI as the Manager was obliged to

“discharge, observe, perform and comply with all the obligations of SFK under the Main Contract as if [OSLI] were SFK and without limiting the generality of the foregoing, [OSLI] shall commence and complete the [Main Contract Works] within the time specified in the [Main Contract] or within such extended period or periods as may be granted under the [Main Contract]”

8.  Thus OSLI were obliged to carry out all the obligations of SFK under the Main Contract as if it were SFK.

9.  By cl. 5(2) of the Management Agreement OSLI was also obliged to

“at its own cost and expense provide all materials, plant, tools equipment and adequate staff and workers for carrying out and executing the [Main Contract Works] in accordance with the [Main Contract]”

10.  Chan gave evidence, which I accept, that OSLI commenced work under the Management Agreement on 21 September 1995.  However, the progress of works was slow and OSLI’s performance was not satisfactory.  SFK was asked to consider a novation of the Management Agreement to Petway as OSLI was losing money on the works under the Management Agreement.  Chan agreed to the novation provided that the parent company provide a guarantee as security.

11.  OLSI was a wholly-owned subsidiary of OLS Asia Holdings Ltd (“OLSAH”).  Petway Ltd (“Petway”) was also a wholly-owned subsidiary of OLSAH. 

12.  In 1997 there was a restructuring in the OLSAH group.  As a result of this OLSI, SFK and Petway entered into a Deed of Novation on 3 June 1997 (“the Deed of Novation”).

13.  By cl. 2(1)(a) of the Deed of Novation it was agreed that OLSI be released and discharged from all its obligations under the Management Agreement. 

14.  By cl. 2(1)(b) it was provided that :

“Petway shall assume and become solely responsible for the performance of all the obligations of [OLSI] under the Management Agreement and for the discharge of all liabilities of and claims whatever arising out of or in connection with the Management Agreement whether or not in respect of work, labour or services performed or provided or materials and goods supplied by [OLSI], and shall become bound by all the provisions of the Management Agreement in place of OLSI, as if it had been an original party to the Management Agreement in place of [OLSI].”

15.  By the Deed of Novation OSLI dropped out of the picture and Petway became the sub-contractor of SFK and assumed all the obligations under the Management Agreement.  Petway became responsible to perform all the duties of SFK under the Main Contract.

16.  On the same day, 3 June 1997 OLSAH provided the guarantee dated 3 June 1997 to SFK (“the Guarantee”).  OLSAH subsequently was known as China Prosperity International Holdings Ltd, then as China Broadband Corporation Ltd, and later on as China Convergent Corporation Ltd, the defendant herein (“CCC”).

17.  By cl. 1 of the Guarantee it was provided that :

“In consideration of SFK entering into the Deed of Novation, the Guarantor hereby irrevocably and unconditionally guarantees to SFK as a primary obligor and not as a surety the due and punctual performance by Petway, its successors and assigns of each and all of the obligations, duties and undertakings of Petway under and pursuant to the Deed of Novation (the “Guaranteed Obligations”) and the Guarantor hereby irrevocably and unconditionally undertakes to indemnify SFK, its successor and assigns against all losses, damages, costs and expenses suffered or incurred by SFK, its successors and assigns by reason of any act, omission, default or breach on the part of Petway in performing and observing the Guaranteed Obligations, save that nothing herein shall be construed as imposing greater obligations or liabilities on the Guarantor than are imposed on Petway under the Management Agreement.”

18.  Chan gave evidence, which I accept, that on 19 June 1997 SFK received a letter from HKHA informing SFK that the performance of the Main Contract Works from January 1997 to March 1997 had been rated as adverse.  He sent a copy of the letter to Petway on 3 July 1997 and required them to improve their performance of the Management Agreement immediately.  Also, at about the same time Chan was informed by his staff that some sub-contractors and/or suppliers engaged by OSLI and/or Petway to perform the works under the Management Agreement were complaining about delayed or non-payments.  As a result of this SFK was prepared to assist Petway in completing the Management Agreement works.  This led to the entering into of the Supplemental Agreement dated 30 July 1997 (Exhibit P5) whereby SFK agreed to manage the remaining works as Petway’s construction manager upon the terms set out therein.

19.  By cl. 6 of the Supplemental Agreement it was provided that :

“Petway shall initially deposit HK$4 million into the Project Account in order to meet partial payment obligations after 1^st August 1997.  As and when there is insufficient fund in the Joint Account to meet payment obligations, SFK will notify Petway for further deposit of funds into the Joint Account by Petway and Petway shall make the required deposit within 3 working days of receiving SFK’s such notification.  Notwithstanding the provisions of this Paragraph 6, SFK shall be at liberty to make emergency payments to relevant subcontractors/suppliers as it deems necessary when there is insufficient fund in the Joint Account and shall be reimbursed from the Joint Account any time when funds are available.  SFK shall provide Petway with a monthly account of payments and disbursements in respect of the Project Account.”

20.  It was also provided by cl. 7 of the Supplemental Agreement that :

“For the avoidance of doubt, the above-mentioned Deed of Novation dated June 3, 1997 between OLS, SFK and Petway shall remain valid and effective notwithstanding the appointment of SFK as Petway’s Construction Manager as herein provided.”

21.  As Chan said in evidence, which I accept, following the execution of the Settlement Agreement SFK arranged for payments to be made to Petway’s subcontractors out of the Project Account referred to in the Settlement Agreement.

22.  By early 1998 it was clear that the funds in the Project Account were about to run out.  SFK wrote numerous letters to Petway informing it that there were insufficient funds in the Project Account to pay the subcontractors and suppliers and asked for further sums to be paid into the Project Account.  However, no additional funds were paid by Petway into the Project Account.

23.  In September 1998 SFK then made voluntary payments in accordance with cl. 6 of the Supplemental Agreement to Petway’s subcontractors and/or suppliers to ensure that the Main Contract Works would be completed on time (“the emergency payments”).

24.  Despite demands made on Petway between end December 1998 and January 1999 to pay additional funds into the Project Account in order to reimburse SFK for the emergency payments made, no additional funds were paid into the Project Account.

25.  On 20 April 1999 Greatworth Industrial Ltd (“Greatworth”), one of the subcontractors of OSLI brought proceedings in the High Court for the payment of, inter alia, $1,647,609.54 as the balance of the amount due and payable to itin HCCL 66/99 against SFK and OSLI as the 1^st and 2^nd defendants respectively.  By way of a Third Party Notice dated 31 May 1999 (“the Third Party Notice”) SFK commenced proceedings against CCC as a third party in HCCL 66/99 and claimed,inter alia, an indemnity against Greatworth’s claims.  SFK was represented by Messrs Herbert Smith (“Herbert Smith”), its solicitors herein.

26.  SFK’s Third Party Action against CCC was settled by an agreement in writing made on 28 September 2000 between SFK, CCC, Prosperity and Petway upon the terms set out therein (“the Settlement Agreement”).

27.  By cl. 2.1 it was agreed that payment of the settlement sum of $600,000 plus interest by CCC to SFK shall be in full and final settlement of the Third Party Action in HCCL 66/99.  It was further agreed by cl. 5.2 that CCC, Prosperity and Petway shall jointly and severally indemnify and keep SFK indemnified against any claims (including any claim for costs) made in the Main Action whether made before or after the date of the agreement.

28.  By cl. 8.2 it was also agreed that CCC, Prosperity and Petway should bear and pay the legal costs of SFK in defending the Main Action.  It was also provided that SFK should instruct solicitors specified by CCC to act in place of Herbert Smith in the Main Action.

SFK’s claims

29.  The claims of SFK in this action are for breach of the Settlement Agreement and for re-imbursement of sums paid and declaratory relief under the Guarantee.  

30.  As pleaded in the amended statement of claim SFK claims the sum of $158,315.22 for legal fees under the Settlement Agreement.  SCC failed to specify solicitors to act for SFK in place of Herbert Smith in HCCL 66/99 until late 2002.  To protect its interest in the Main Action in HCCL 66/99 SFK continued to instruct Herbert Smith and incurred legal costs in the sum of $150,209.28 including a 2% handling fee pursuant to cl. 11(4) of the Management Agreement.  SFK also claims the sum of $8,150.94 being additional legal costs incurred and paid by SFK including a 2% handling fee for defending Greatworth’s claims against SFK in HCCL 66/99.  The claim for legal fees amount to $158,315.22.

31.  SFK also claims the sum of $66,990.82 for the payment of government and statutory charges which it paid but which should have been paid by Petway to ensure that SFK would not be in breach of the Main Contract.

32.  There is also a claim for $437,961.24 being sums paid by SFK to Petway’s subcontractors and suppliers on behalf of Petway.  This was reduced to $417,561.24 at trial as the evidence adduced showed that this was the amount paid to subcontractors and suppliers after 24 September 1999.

33.  SFK also claims the sum of $3,406,561.39 being the amount incurred by SFK for defects rectification works as a result of Petway’s failure to carry out the defects rectification works in respect of the Main Contract Works in accordance with the Main Contract.

34.  There is also a claim for $653,010.15 as SFK engaged and paid for Petway’s Quantity Surveyor, Mr. Edmond So, as Petway failed to provide adequate staff and workers in breach of its obligations under the Management Agreement.

35.  SFK also claims the declarations as set out at prayers 5 to 7 of the amended statement of claim although at trial SFK did not pursue prayer 7.

The Defences

36.  CCC’s defence consists largely of bare denials and putting SFK to proof. 

37.  Two further defences were raised:

(1)	that by making the Settlement Agreement CCC has been fully discharged and released from all liabilities under the Guarantee (para. 13 of the defence); and
(2)	that the parties intended and agreed that an account and set off should be taken upon completion of the Main Contract Works and/or the issue of the Final Payment Certificate.  That being so, there was an implied term of the Settlement Agreement that CCC’s liability under the Guarantee should not arise until after such account had been taken.  The Final Payment Certificate has not been issued and no account has yet been taken.  In the premises, SFK’s cause of action for the claims herein has yet to arise (paras. 19 to 24 of the defence).

38.  As to the defence set out at para. 37(1) above, I am satisfied that it is misconceived.

39.  It is clearly provided by cl. 2.1 of the Settlement Agreement that payment of the Settlement Sum (plus interest) by CCC shall be in full and final settlement of the Third Party Action in HCCL 66/99.  All that was settled were the Third Party proceedings brought by SFK against CCC.  There is nothing in the Settlement Agreement which has the effect of discharging CCC’s liabilities under the Guarantee.

40.  The plea at para. 13(a) of the defence that SFK sought an indemnity from CCC in respect of all the liabilities that it had incurred and might incur as a result of any breaches on Petway’s part including all sums paid or to be paid by it on Petway’s behalf is plainly wrong.  Para. 24(a) of the Amended Third Party Notice makes it clear that the indemnity that SFK was seeking was only in respect of Greatworth’s claims against SFK in the Main Action.  Greathworth’s claims against SFK are not part of SFK’s claims against CCC in this Action.

41.  Cl. 10.2 of the Settlement Agreement also provided that the agreement was without prejudice to any claims which may arise between, inter alia, the parties, save insofar as claims were expressly settled thereby.

42.  The defence raised is misconceived and I have no hesitation in rejecting the same.

43.  As to the defence raised as set out at para. 37(2) above, CCC relies on an implied term of the Settlement Agreement that CCC’s liability under the Guarantee should not arise until an account has been taken after the Final Payment Certificate has been issued.

44.  In Kensland Realty Ltd v Whale View Investment Ltd [2002] 1 HKC 243 the Court of Final Appeal adopted the requirements for implying a term in a written contract set out in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20.  Ribeiro PJ said at pg 262 :

“In a well-known passage, Lord Simon, expressing the majority opinion of the Privy Council, sets out the requirements for implying a term in a written contract:

‘... for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.’ BP Refinery (Westernport) Pty Ltd v. President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20 at 26.”

45.  It seems to me that cl. 10.2 clearly provided that the Settlement Agreement was without prejudice to any claims which may arise between the parties.  The parties did contemplate that there may be other claims arising between the parties.  The alleged implied term plainly offends rule (5) as it contradicts the express term of the contract.  It also offends rules (1), (2) and (3) in that it is not reasonable, it is not necessary to give business efficacy to the contract and it is not so obvious that “it goes without saying”.

46.  In my judgment there is no room for implying the term sought by CCC.  I also reject this defence.

47.  The details of the payments made by SFK are set out in the Appendix A attached to the witness statement of Lam whose evidence I accept.  He has also produced the supporting documents to substantiate the amounts set out in the Appendix A which I accept.

48.  Having heard and seen the witnesses called by SFK I accept their evidence.  I find that SFK has proved its case.  I find that SFK has proved that it has incurred and paid the following sums :

Legal fees	$158,315.22
Government and statutory charges	$66,990.82
Sums paid to Petway’s subcontractors	$417,561.24
after 24 September 1999
Defects rectification works	$3,406,561.39
Engagement of Quantity Surveyor	$653,010.15
TOTAL	$4,702,438.82

49.  By letters dated 18 June and 22 July 2003 SFK gave notice to CCC demanding payment of the sums due to it under the Guarantee.

50.  SFK is entitled to judgment in the said sum of $4,702,438.82 with interest on the said sum from date of issue of the writ namely from 9 October 2003 until judgment at 1% above prime rate and thereafter until judgment rate.

51.  SFK is also entitled to the declarations sought.

52.  For the above reasons, I gave judgment for SFK as set out at para. 1 herein.