SUNG FOO KEE LTD. and Another v. CHUNG KIU DEVELOPMENT LTD. and Another

IN THE COURT OF APPEAL

1995, No. 9
(Civil)

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J U D G M E N T

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Bokhary, J.A. (giving the judgment of the Court):

1. This case arises out of the Laguna City development. More particularly, it concerns Phase 1A of Site A of that development. That phase comprises 13 residential towers, an indoor recreation centre and a carpark.

2. A Cheung Kong subsidiary was the Employer.

3. The two defendants acting in joint venture was the Main Contractor.

4. The two plaintiffs were the Services Sub-Contractors. One set of services works had been sub-contracted to both of them acting in joint venture. And two sets of services works had been sub-contracted to the 1st plaintiff on its own.

5. An action was commenced by the Services Sub-Contractors against the Main Contractor. It was for payment of $8,479,391.63 under the sub-contracts.

6. Then the Services Sub-Contractors applied for summary judgment.

7. In response, the Main Contractor applied for a stay of the action in favour of arbitration.

8. Each of the sub-contracts contains an arbitration clause referring any dispute or difference between the parties to arbitration.

9. The application for summary judgment and the application for a stay came before Sears J.

10. By his judgment given on December 20 last year, he gave summary judgment for the Services Sub-Contractors for $6,212,784.21 of their claim but stayed the action for the balance thereof, which comes to $2,266,607.42.

11. The Main Contractor appeals: contending that the whole action should have been stayed.

12. And the Services Sub-Contractors cross-appeal: contending that summary judgment should have been given for the whole claim.

13. The proper approach to be adopted by the court when one party seeks summary judgment while the other seeks a stay in favour of arbitration is illustrated by this passage in Lord Mustill's speech in Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1993] AC 334 at p.356B-E:-

" In recent times, this exception to the mandatory stay has been regarded as the opposite side of the coin to the jurisdiction of the court under R.S.C., Ord. 14, to give summary judgment in favour of the plaintiff where the defendant has no arguable defence. If the plaintiff to an action which the defendant has applied to stay can show that there is no defence to the claim, the court is enabled at one and the same time to refuse the defendant a stay and to give final judgment for the plaintiff. This jurisdiction, unique so far as I am aware to the law of England, has proved to be very useful in practice, especially in times when interest rates are high, for protecting creditors with valid claims from being forced into an unfavourable settlement by the prospect that they will have to wait until the end of an arbitration in order to collect their money. I believe however that care should be taken not to confuse a situation in which the defendant disputes the claim on grounds which the plaintiff is very likely indeed to overcome, with the situation in which the defendant is not really raising a dispute at all. It is unnecessary for present purposes to explore the question in depth, since in my opinion the position on the facts of the present case is quite clear, but I would endorse the powerful warnings against encroachment on the parties' agreement to have their commercial differences decided by their chosen tribunals, and on the international policy exemplified in the English legislation that this consent should be honoured by the courts, given by Parker L.J. in Home and Overseas Insurance Co. Ltd. v. Mentor Insurance Co. (U.K.) Ltd. [1990]1 W.L.R. 153, 158-159, and Saville J. in Hayter v. Nelson [1990]2 Lloyd's Rep. 265."

14. In Hayter v. Nelson (supra) at p.271, Saville J took the view, which we share, that "only in the simplest and clearest cases, i.e. where it is readily and immediately demonstrable that [the party seeking a stay] has no good grounds at all for disputing the claim should that party be deprived of its contractual right to arbitrate".

15. Mr Griffiths for the Main Contractor invokes that test. And he argues that there is a dispute which necessitates the whole action being stayed in favour of arbitration.

16. Mr Ma for the Services Sub-Contractors accepts that test. But he argues that it is readily and immediately demonstrable that the Main Contractor has no good grounds at all for disputing any of the claim, so that there should be summary judgment for the whole claim.

17. Both the appeal and the cross appeal turn on those rival arguments.

18. In the background is a dispute which arose between the Employer and the Main Contractor. That dispute led to negotiations. And the negotiations led to a settlement. Only the Employer and the Main Contractor were party to the negotiations and the settlement. The Services Sub-Contractors were not party to either.

19. At the negotiations, the Main Contractor asked the Employer for $139,138,922.02. Eventually, it settled for $23,600,000.00 from the Employer.

20. The Main Contractor has filed evidence saying that its acceptance of $23.6 million in settlement of its $139.1 million claim had taken into account a number of deductions. Those deductions are these:-

(a) $6,433,153.00 specifically attributable to defects in works carried out by the Services Sub-Contractors, including the estimated costs of rectification works;

(b) $18,391,117.00 for liquidated damages for delayed completion, all three sets of services works sub-contracted to the Services Sub-Contractors having been completed much later than they ought to have been;

(c) $1,156,567.00 for the repair and replacement of decoration works damaged by the bursting of a salt water pipe installed by one of the Services Sub-Contractors, namely the 1st plaintiff;

(d) $677,188.60 for the re-enamelling of bathtubs damaged as a result of that Services Sub-Contractors' failure, in breach of contract, to provide any or any sufficient protection for those bathtubs;

(e) $1,144,259.00 expended on remedial works necessitated by the Services Sub-Contractors' default;

(f) further sums for such remedial works; and

(g) interest on all the foregoing.

21. Accordingly, the Main Contractor contends, it has a cross-claim which not merely reduces or even extinguishes but actually exceeds the Services Sub-Contractors' claim.

22. In answer to the Services Sub-Contractors' reliance on the "pay when paid" clauses in the sub-contracts, the Main Contractor says that it has not been paid within the meaning of those clauses, each of which provides that:-

"Within fourteen days of the receipt by the Main Contractor of payment from the Employer against any certificate from the Architect the Main Contractor shall notify and pay to the Sub-Contractor the total value certified therein in respect of the Sub-Contract Works and in respect of any authorised variations thereof and in respect of any amounts ascertained under clause 8(c) hereof less:-

(i) Retention Money, that is to say the proportion attributable to the Sub-Contract Works of the amount retained by the Employer in accordance with the Main Contract; and

(ii) The amounts previously paid."

23. Here, the Main Contractor points to, among other decisions, that of this Court in Schindler Lifts (Hong Kong) Ltd v. Shui On Construction Co. Ltd [1985] HKLR 118. In that case (as one sees from p.124F of the report) this Court inclined to the view of "pay when paid" clauses taken by Hunter J in Hong Kong Teakwood Works Ltd v. Shui On Construction Co. Ltd [1984] HKLR 235.

24. There the rival arguments were summarised thus by Hunter J (at p.236I-J):-

" The issue ... is what constitutes 'receipt ... of payment'. For the defendants, it said receipt of payment means cash or cheque, money and nothing else. For the plaintiff it said receipt of payment means cash or a mutual discharge of the obligation arising under the certificate, and that discharge can arise from the exercise of a set off."

25. This is the view which Hunter J took (at p.237D-G):-

"Now the material words are 'receipt of payment'. I think that I must give those words their normal meaning. To me their normal meaning is receipt of actual payment, receipt of money. This seems to me to accord with the other phrases that one finds in these contracts. 'Pay or allow' is one in the main contract, paragraph 22, which is followed by the words 'the employer may deduct such sum from any monies due'. I think that all these words contemplate a simple piece of arithmetic, and that the prima facie meaning of receipt of payment is receipt of money.

To that it is objected strongly by the plaintiff, that this construction cold have horrendous consequences, that it could operate most unfairly to a sub-contractor. Attention is drawn particularly to the fact that the same phraseology is used in clause 11(c) in relation to retention monies and 11(g) in relation to payment in advance of the final certificate. It is said therefore that the court should construe these words 'contra proferentem', and put a construction on them which may depart from what I personally regard as the prima facie meaning giving an extended meaning to the word payment. I acknowledge that the word 'payment' can be given an extended meaning. But I have the greatest difficulty in giving an extended meaning to the phrase 'receipt of payment', and I have the greatest difficulty in seeing how that can be extended to cover set off."

26. Take a situation where what the main contractor receives from the employer has been diminished by a set-off arising out of default in which he was put by his sub-contractor's breach of the sub-contract. If the set-off is less than the sub-contractor's claim, then we consider it at least reasonably arguable that the main contractor remains, to the extent of the set-off, unpaid under a "pay when paid" clause. And if the set-off equals or exceeds the sub-contractor's claim, then we consider it at least reasonably arguable that the main contractor remains wholly unpaid under such a clause.

27. Where, as here, there is an arbitration clause, then those arguments are for the arbitrator.

28. In the present case as we have seen, the Main Contractor has filed evidence to this effect. What it received from the Employer had been diminished by a set-off which arose out of default in which it was put by the Services Sub-Contractors' breach of the sub-contracts. And such diminution exceeds the Services Sub-Contractors' claim.

29. Mr Ma attempts to counter such evidence: first, by an attack on the Main Contractor's figures; and, secondly, by reference to documents which, he submits, readily and immediately demonstrate that the settlement between the Employer and the Main Contractor did not in fact involve any deduction for anything attributable to any default on the Services Sub-Contractors' part.

30. As to the Main Contractor's figures, its starting figure of $139.1 million is explained by its evidence.

31. Such evidence is to this effect.

32. The $139.1 million is made up of two figures, namely $71.6 million and $67.5 million.

33. That $71.6 million was incurred by reason of the Main Contractor having to shift its workshops and equipment from a nine metre drainage reserve area allocated to and then withdrawn from its use.

34. And the $67.5 million was sought under an extension of time claim.

35. Then there are the deductions which have already been dealt with earlier on in the judgment.

36. That is the Main Contractor's evidence as to its figures. To require more would be requiring more than what is called for under the "readily and immediately demonstrable" test. The Main Contractor's evidence is contested. But that contest is for the arbitrator.

37. Turning to the documents to which Mr Ma points, we come first to the Architect's Certificate dated June 1, 1993, by which it was certified that the Main Contractor was entitled to an interim payment of $52,024,932.84.

38. Four sheets are attached to that Architect's Certificate.

39. The first sheet is dated May 28, 1992. It contains this statement signed by the Architects:-

"We certify that the Final Account for the Main Contract as agreed between the Employer and the Main Contractor is HK$909,258,472.93."

And it also gives a breakdown of that figure of $909,258,472.93. One item which goes into that breakdown reads:-

"5)

Add Agreed Total Final Subcontract Sums for All Nominated Subcontracts (see Appendix I)"

(+)$234,432,849.50

40. That item ("item 5") is the cornerstone of the Services Sub-Contractors' case. And we will be coming back to it. But first we will go through the other sheets attached to the Architect's Certificate.

41. The second sheet has this signed by the Employer on June 3, 1993:-

"We hereby agree the Final Account of this Contract is HK$909,258,472.93 and that the sum of HK$909,258,472.93 as shown in the Final Account is in full discharge of all claims under this Contract. The Employer will not impose any Liquidated & Ascertained Damages under Clause 22 of the Schedule of Conditions of this Contract."

And it also has this signed by the Main Contractor on May 29, 1993:-

"We hereby agree that the Final Account of this Contract is HK$909,258,472.93 and that the sum of HK$909,258,472.93 as shown in this Final Account is in full discharge of all claims and we shall have no further claims of whatsoever nature against the Employer and the Architect in connection with this Contract."

42. The third sheet is the appendix referred to in item 5. It shows that the figure of $234,432,849.50 referred to in item 5 is made up of the "agreed final sub-contract sums" for seven sets of works, the first three being the services works sub-contracted to the Services Sub-Contractors.

43. Finally, the fourth sheet, also dealing with those seven sets of works, includes the amounts previously certified and the net amounts due.

44. Turning to the Statement of Claim, we find the sums pleaded by the Services Sub-Contractors as the "Agreed and Certified Final Sub-Contract Sum" in respect of each set of services works sub-contracted to them. Each such sum is the same as the one appearing under the "Agreed Final Sub-Contract Sums" column in the third sheet which is the appendix to item 5.

45. The Services Sub-Contractors rely on the words "agreed" and "final" in item 5 and the appendix thereto.

46. Those words, Mr Ma submits, makes it readily and immediately demonstrable that the Main Contractor's settlement with the Employer did not involve any deduction for anything attributable to any default on the Services Sub-Contractors' part.

47. We are unable to accept that submission. The attempted counter fails.

48. Looking at the appendix to item 5, it can be seen that the "Agreed Final Sub-Contract Sums" appearing there are merely the "Original Contract Sums" plus any "Agreed Variation" upwards or minus any "Agreed Variation" downwards. And where there is no "Agreed Variation", there is no difference between the "Original Sub-Contract Sums" and "the Agreed Final Sub-Contract Sums".

49. It may be observed that the figures given in the "Agreed Final Sub-Contract Sums" column in the appendix to item 5 are repeated in the "Revised Sub-Contract Sum and Work Done" column in the fourth sheet.

50. It seems that what was agreed here were the variations and their values. Those go to the scope of the services works to be carried out under the sub-contracts. They do not indicate whether those works were carried out on time. Nor do they indicate whether those works were carried out free from defects.

51. The Main Contractor's case is not that its entitlement against the Employer was lessened by the Services Sub-Contractors' failure to carry out the sub-contracted services works. Rather, it is that such entitlement was lessened by their failure to carry out those works on time and free from defects. The delay and defects, the Main Contractor says, led to losses which the Employer set off against what was otherwise due from the Employer to it, the Main Contractor.

52. The Main Contractor wishes, if necessary, to rely on certain fresh evidence. Such evidence is to this effect. After the date of the judgment below, the Employer complained of extensive latent defects in the services works carried out by the Services Sub-Contractors. And the Employer has called upon the Main Contractor to make good such works or bear the expense of it being done by another or others.

53. Had it been necessary for the Main Contractor to rely on such fresh evidence, we would have been in favour of letting it do so. We would have considered that the just course. And, in our view, such fresh evidence would, even on its own, have disclosed a dispute making it appropriate to stay the whole action in favour of arbitration.

54. As it is, however, we of the view that the Main Contractor succeeds without any need to rely on any fresh evidence.

55. Everything which we have said is as applicable to the failure of the Services Sub-Contractors' cross appeal as it is to the success of the Main Contractor's appeal.

56. In the result, we allow the appeal and dismiss the cross appeal. It remains only to thank counsel on both sides and to invite their arguments on costs.

[Costs of the appeal, costs of the cross appeal, costs of the appeal against the single Justice of Appeal's refusal to admit the fresh evidence and the costs below to the Main Contractor.

No order as to the costs of the application before the single Justice of Appeal.]