GREATWORTH INDUSTRIAL LTD v. SUN FOOK KONG CONSTRUCTION LTD AND ANOTHER

cacv 167/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 167 of 2006

(on appeal from HCCT NO. 45 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Reyes J given on 4 April 2006.  The matter before the judge was a claim in respect of a sum said to be due from the first defendant amounting to $1,918,662.80.  By the time the matter came to trial the parties had agreed that if there were any liability on the part of the first defendant to the plaintiff the sum would be $1,640,000.  The claim was put on the basis that the second defendant had been the first defendant’s agent in entering a contract with the plaintiff and that the first defendant had been the undisclosed principal.  It was also put on the basis that the first defendant had been unjustly enriched by the plaintiff’s work and there was also a claim made under the heading of quantum meruit.  There were other bases for the claim but these have not been pursued in this court.  The judge dismissed the plaintiff’s claim.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2.  The first defendant entered what has been termed the Main Contract with the Housing Authority dated 21 September 1995 in respect of the construction of housing at Hing Tung Estate Phase 4.  There were provisions in the Main Contract which prohibited the first defendant assigning any interest under that agreement and from sub-letting the works in their entirety.  Whether as a means of circumventing those restrictions or not, there was on 14 September 1995 what has been termed a letter of acceptance from the first defendant to the second defendant accepting the second defendant’s appointment as the first defendant’s Manager to carry out the works at Hing Tung Estate Phase 4.  The manager was to be paid $289,650,000 which, as the judge observed, was almost the whole of the amount that the first defendant would be paid under the Main Contract less some 4.3% of the amounts of Bills Nos. 3 to 16 of the Bills of Quantities.

3.  There was then a Management Agreement dated 2 July 1996 between the first and second defendants.  Under the second recital of that agreement it was stated that the first defendant had engaged and desired to continue to engage the second defendant as the Manager to assist in carrying out, completing and maintaining the contract works under the Main Contract.  One of the important issues in this case is whether this Management Agreement dated 2 July 1996 constituted the second defendant a sub-contractor of the first defendant or constituted the second defendant the first defendant’s agent in carrying out the Main Contract works.

4.  There was then a further document dated 1 October 1996 headed Confirmation of Order addressed by the second defendant to the plaintiff by which the plaintiff was employed to do certain Temporary Works and other matters for a sum of $378,800 and to do Steel and Metal Works in accordance with Bill No. 3 to Bill No. 14 for the sum of $3,377,905, $3,550,000 after discount.

5.  The work under the contract with the second defendant progressed slowly.  There is no dispute between the parties that there were complaints from the Housing Authority about the delay in the works.  This naturally caused difficulties and, because it appeared that the second defendant was in financial difficulties, an arrangement was arrived at whereby the first and second defendants and Petway Ltd, a wholly owned subsidiary of the same parent company as the second defendant, entered a Deed of Novation which released the second defendant from its obligations to the first defendant under the Management Agreement.  This was subject to the second defendant’s parent company providing a guarantee to the first defendant.

6.  This arrangement, in itself, did not prove to be wholly satisfactory and Petway Ltd was unable to complete the works.  The first defendant then entered into a supplemental agreement with Petway Ltd.  Under that the first defendant undertook to assist Petway Ltd in the works and assumed the role of Construction Manager to be responsible for administering payments from Petway Limited to some contractors working on the project.  Nevertheless, Petway Ltd was responsible for ensuring that there were adequate funds to pay the sub-contractors.

The claim that the first defendant was the undisclosed principal

7.  Since the second defendant was in liquidation and made no appearance at the trial the whole emphasis of the plaintiff’s case was against the first defendant.  The first basis upon which the plaintiff’s case was put was that although it was, of course, aware that the main contractor with the Housing Authority was the first defendant it was not until the Management Agreement dated 2 July 1996 was considered that the plaintiff appreciated that the first defendant was the undisclosed principal of the second defendant.  The basis of that claim, therefore, is not that the second defendant had any ostensible authority but it is simply based on a construction of the Management Agreement itself.

8.  The judge considered the Management Agreement and indeed all of the provisions relied upon by Mr Scott SC, who appeared for the plaintiff in this court but not below, and came to the conclusion that although other provisions of the Management Agreement did not expressly exclude the possibility of the second defendant being the first defendant’s agent, when the contract was construed as a whole it was clear that, on a contractual basis, the second defendant was not in a position to contract on behalf of the first defendant as an agent.  He said at paragraphs 11, 12 and 13 of his judgment:

“ 11. In my view, Management Agreement cl.12 makes it plain that, despite its appointment as Manager, OLS needed special permission from Sun Fook before OLS could sub-contract with third parties as Sun Fook’s agent.  It was only with Sun Fook’s express authority in writing that OLS could enter into sub-contracts with third parties on Sun Fook’s behalf.

  12. Clause 12 provided:-

“(1) The Manager shall not assign the whole or part of any part of this Agreement or the benefits, obligations or liabilities hereunder provided that the Manager may sub-contract any portion of any piece of the Contract Works either on a labour and material basis or labour only basis and provided however that:-

(a) the Manager shall obtain the prior written consent of SFK if any sub-contract shall be made in the name of SFK or otherwise;

(b) in the event that the Manager enters into any sub-contract, whether in the name of SFK or otherwise, the sub-contract shall contain provisions whereby in the event of this Agreement being terminated for any reason whatsoever,

(i) SFK may elect to be substituted for the Manager as the main contractor to the sub-contract; and; and

(ii) if SFK so elects, the sub-contractor shall not have any claims against SFK in respect of any obligations or liabilities of the Manager to the sub-contractor under the sub-contract subsisting as at the day on which SFK elects to be substituted for the Manager; and

(c) any sub-contract that does not contain provisions described in Paragraph (b) above shall not be valid.

(2) References in this Agreement (other than in Clause 12(1) to sub-contractors of the Manager shall be references to sub-contractors engaged in the execution of the Contract Works irrespective of whether the sub-contractors are engaged in the name of SFK, the Manager or otherwise.”

13. There is no evidence that OLS sought Sun Fook's permission to enter into the Sub-Contract with Greatworth.  It follows from cl. 12 that OLS had no authority to create direct contractual relations between Sun Fook and Greatworth.”

9.  In my view the judge was correct in his conclusion.  Although it was argued in this court, as in the court below, that clause 12 did not limit the scope of authority of the second defendant but simply enabled the first defendant to recover damages in the event of breach, that argument, in my view, is not correct.  As already pointed out, the plaintiff is not relying on ostensible authority but simply on the basis of authority given to the second defendant under the terms of the management agreement.  It is those terms, therefore, which must establish the agency.  That they do not.

10.  In this court, Mr Scott sought to raise an additional argument based on the case of Watteau v Fenwick [1893] 1 QB 346 that an undisclosed principal may be sued on a contract made on his behalf by his agent acting within the authority usually confided to an agent of that character notwithstanding the limitations put on that authority as between the principal and agent.  Whatever the status of the decision in that case, and it has been doubted in, for example, Bowstead and Reynolds on Agency: see 18^th addition para. 8-079, in circumstances where agency has not been established, this argument is clearly irrelevant.

Quantum meruit

11.  As argued this point amounted to a claim for unjust enrichment.  The basis upon which it was put was that the first defendant had obtained the benefit of the plaintiff having carried out the various works and yet the plaintiff had not been paid therefor.  The first and most immediate answer to that provided by Mr Clayton SC, who appeared on behalf of the first defendant in this court but not below, was that the first defendant had paid and had incurred the full liabilities to pay the second defendant, and later Petway Limited, for the work which was carried out.

12.  Whilst that, in itself, was not disputed by the plaintiff it was said that the first defendant had not pleaded the payment.  Nevertheless, it was established to the satisfaction of the court below and, in view of the nature of the plaintiff’s pleadings, I do not consider that it was open to the plaintiff to take a pleading point particularly at this stage.

13.  Reliance was placed not only on the fact that the first defendant had become the Contract Manager but, furthermore, that it had sent payments to the plaintiff with a receipt clause in the following terms:

“We draw your attention that the above payment and, if any further payment(s) you received from [the first defendant] made on behalf of [second defendant] in respect of your work/materials supplied for the above mentioned work site, shall not, unless otherwise specified, constitute or be deemed to constitute or be construed as having constituted any contractual relationship between [the first defendant] and your company, nor be construed as [the first defendant] acting as agent for [the second defendant].”

Underneath that, there was a typed acknowledgment of receipt in the following terms:-

“We acknowledge receipt of the above payment.

We further confirm our understanding and acceptance to the above-mentioned agreement.”

14.  It was said that the plaintiff had been placed in a position where it continued to carry out work under the illusion that payment would come from the second defendant whereas in fact it was coming from Petway Ltd.

15.  In my view, Mr Clayton was correct in his submission that the matter was one of contractual relations between the second defendant and the plaintiff.  As the judge observed, the plaintiff still remained the sub-contractor of the second defendant.  Unfortunate though it is, in cases of chain sub-contracts one of the sub-contractors may become insolvent and those in the chain below that sub-contractor may, as a result, not receive full payment.  As, Mr Clayton pointed out, the case was not put on the basis of misrepresentation or any similar footing.  If it had been, the evidence called on behalf of the first defendant might have been very different.  In the circumstances he submitted that the first defendant was entitled to proceed upon the basis that the second defendant and Petway Limited had their contractual relations with the sub-contractors in order.

16.  For these reasons I would dismiss this appeal and make an order nisi of costs in favour of the first defendant.

Hon Le Pichon JA:

17.  I agree.

Hon Barma J:

18.  I agree.