XCHRX WENDEN ENGINEERING SERVICES CO. LTD. v. LEE SHING YUE CONSTRUCTION CO. LTD.

HCCT 90/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.90 OF 1999

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D E C I S I O N

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1. This is an application by the plaintiff to enforce the terms of a settlement contained in a schedule to a consent order dated 18 November 1999 ("the Tomlin order"). By the Tomlin order, a significant part of on-going litigation between the parties, who are a contractor (defendant) and sub-contractor (plaintiff), for ASD maintenance works were settled.

2. The plaintiff claims it should have been paid the following under the settlement (none of which has been paid) :

(i) $3,400,406.38 being interim payments which the defendant has received from the ASD but which it has not passed on to the plaintiff since the settlement.

(ii) $1,000,000.00 being the release of security money provided by the plaintiff, pursuant to the terms of the settlement.

(iii) $801,515.13 being monies which were wrongly deducted by the defendant when making some interim payments.

3. The defendant concedes that it has received the ASD payments but argues that the Tomlin order does not preclude its right to set off monies which may be due to it and has accordingly withheld the monies to safeguard its position. In short, the defence submits that :

(a) The defence may suffer loss as a result of the plaintiff's failure to provide "as-built" drawings (drawn records of the site after works have been carried out). Initially this potential loss for the failure to provide such drawings was put at $3 million. At the time of the hearing, it had been reduced to $1 million (as a result of a letter from ASD dated 14 November 2000).

(b) Pre Tomlin order deductions were justified.

(c) The interim payments are over-payments.

(d) The $1 million security should not be released because the plaintiff did not comply with the strict terms of the Tomlin order.

4. Whether or not these submissions are merited on the facts, the plaintiff submits that they fall outside the terms of the Tomlin order and the court should not and need not consider the factual merits. But further it submits that if the court does consider the facts upon which the defendant has based its entitlement to withhold money, the court should still find in the plaintiff's favour. There are therefore two issues, firstly, does the Tomlin order clearly preclude the withholding of money by the defendant and secondly, on the facts, has the defence shown it is entitled to withhold payments?

5. I have decided, for the reasons which follow, that for items (i) and (ii) above, one need look no further than the Tomlin order itself. I will nonetheless refer briefly to the evidence which I find also supports the plaintiff's case. Item (iii) is a separate issue with which I deal at the conclusion of this judgment.

Interpretation of the Tomlin order

6. The Tomlin order constitutes a separate and binding contract of settlement between the parties. It is for the court to determine its meaning and effect. I find there to be no ambiguity in the words used. Its meaning is clear. It imposes obligations as to payment on the defendant which it has not discharged. The obligations are not conditional on other matters. I now deal briefly with each of the clauses referred to in argument. The defence rely primarily on clause 4, and to a lesser extent clause 12. The plaintiff relies on, effectively, the whole document.

1. Clause 4 :

"4. The Plaintiff shall complete all electrical WOs and MWOs in Appendices II, IV and V in accordance with the terms and conditions of the Agreement and the provisions of this Schedule."

7. This imposes an obligation on the plaintiff. The defendant argues that if the plaintiff is in default of this clause, or even if there is a mere allegation of default, then the defendant's obligations contained in the subsequent clauses need not be honoured. It may simply not pay the plaintiff to safeguard the possibility of future loss arising from the plaintiff's breach of clause 4. I reject this contention. If, as the work progresses, the plaintiff is in breach of clause 4, they are liable to be sued.

2. Clause 5 :

"5. The Defendant shall pay the Plaintiff all moneys received from the ASD on the electrical WOs and MWOs as set out in Appendices I, II, III, IV and V under the Main Contract. Payments shall be made by the Defendant to the Plaintiff on 'back to back' basis pursuant to the relevant Payment Certificates issued by ASD including related computer printouts ('the Payment Documents'). The Defendant shall make payments together with copies of the said Payment Documents to the Plaintiff ...."

8. No conditions are attached to these terms. They are mandatory and unambiguous. The words "back to back" have been emphasized by quotation marks and it also imposes a burden on the defendant to provide evidence that the amount handed over is the same as the amount received.

3. Clauses 6 and 7 :

"6. (a) Within 7 days from the date of this Consent Order, the Plaintiff shall, at its absolute discretion, either provide the Defendant with a Cash or Demand bond in the sum of HK$2,000,000.00 as security ('the Security') to ensure and guarantee the due performance and to remedy and/or making good of defects of the electrical WOs and MWOs as set out in Appendices I, II, III, IV and V, if any, as instructed in writing by ASD during the relevant defect liability period under the Main Contract.

(b) The amount of Security, shall be reduced by half (1/2) on 31st July 2000. .....

7. The Defendant shall be entitled to withhold an amount up to HK$2,000,000.00 from the Plaintiff's entitlement under Clause 5 of this Schedule and shall forthwith release the amount withheld when the Security is provided by the Plaintiff in accordance with paragraph 6 of this Schedule."

9. The amount of security (as per clause 6(b)) as at 31 July 2000 was still $2,000,000.00. There had been no cause to utilize any of it. The sum due to be released was therefore $1 million. Nothing was in fact released.

10. The defendant has advanced a technical argument. It says, correctly, that the $2 million security in fact came to the defendant by virtue of clause 7, not clause 6. That is, the plaintiff did not actually take out a $2 million bond, rather it relied on clause 7 and permitted the defendant to retain a sum of $2 million from an earlier interim payment. The defendant submits that as clause 6(a) was not followed, then clause 6(b) need not be complied with. I reject this submission. Regardless of whether the machinery for providing security used was clause 6 or clause 7, the result is the same. The defendant got its security, none was used. $1 million should have been released on 31 July 2000.

4. Clauses 8, 9 and 10

11. All these clauses provide for the "reimbursement" of monies to the defendant from the plaintiff in certain circumstances. They all commence with the words "In the event that ...." and conclude "the Plaintiff shall reimburse ....". The individual events catered for by each clause are not material. In clauses 8 and 9, there is no mention of any right to set off for alleged over-payments. The provision clearly states that if there are any over-payments, they shall be re-imbursed. That is the simple and straightforward machinery. Clause 10 does mention the right to set off. However the way in which it is mentioned supports the plaintiff's case. It specifically states that the right to set off is only triggered should the plaintiff fail to re-imburse :

"..... the Plaintiff shall reimburse the Defendant for the corresponding amount of LD failing which the Defendant shall be entitled to set off the outstanding amount under this paragraph against any payment due to the Plaintiff under this Schedule or the Subcontract."

5. Clause 12

"12. For the avoidance of doubt, in connection with any other dealings between the Plaintiff and the Defendant other than the Subcontract and the provision of this Schedule, the Plaintiff and the Defendant shall not have the right to set off any money against any amount payable under this Schedule in connection with those other dealings."

12. This clause excludes the right of set-off in "any other dealings". The defendant's submission is that because this clause excludes the right to set off in other dealings, then by implication there is a right to set off in this dealing. I find there to be no merit in this submission.

The facts

13. There are two main areas of contention. I do not propose to deal with them in any detail because I have already found the defendant liable to pay items (i) and (ii) in full because of the clear meaning and effect of the Tomlin order. The two issues are :

(i) As-built drawings : As already indicated the up-to-date position is that just 10 drawings are outstanding. The plaintiff accepts it is its responsibility to provide them. They have provided all but 10. Their position is that they are waiting for "source drawings" before they can prepare them. It is at least probable that they will fulfil their obligations with regard to the outstanding drawings in the same way as they have done hitherto. In any event, the maximum liability to the defendant has been calculated at about $1 million. Even after the release of $1 million of the money held as security, a further $1 million remains in the hands of the defendant.

(ii) Over-payment : The plaintiff makes a fair criticism of the defendant's methodology of calculating and alleging over-payment. In calculating an average percentage allegedly over-claimed, the defendant selected a small number of non representative sample work orders. The affirmation from Chan Kwok Wa, the plaintiff's project manager, in reply is more detailed and more cogent on this issue. In particular he makes the following two points which are not traversed.

"31. In paragraphs 5 and 6 of the 2nd Affirmation of Timothy Lee, the Defendant alleges that the average percentage of 'over-claims' by the Plaintiff is 62.77% and therefore has assumed that the ASD has overpaid the sum of HK$463,091.59. This is inaccurate and misleading. It is inaccurate because the average percentage calculated by the Defendant is only based on selected 103 works orders, where in fact as at 31st August 2000, there are 2,361 works orders which the ASD has already given final offer value. Furthermore, one of the ASD's printouts (page 15) relied by the Defendant which has the highest percentage of 'over-claim' does not relate to the Plaintiff's works. It is misleading because in arriving at the over-claimed amount of HK$463,091.59, the Defendant has assumed that the ASD has already paid the Plaintiff's value of claim amounted to the sum of $1,200,903.32 as interim payment. As explained above, this is not the case because when the ASD makes an interim payment, the Plaintiff's value of claim is disregarded when it is greater than the ASD's estimated value and the interim payment will not exceed 85% of the ASD's estimated value.

and :

35. If there were over-payments by the ASD as alleged by the Defendant (which is not admitted), it is pre-mature for the Defendant to claim at this stage that the Plaintiff will not reimburse the Defendant for the over-payments. As it is agreed in the Consent Order, the Plaintiff will comply fully with the terms of the Consent Order and reimburse the Defendant for any over-payments made by the ASD (if any)."

Item (iii)

14. This sum of $801,515.13 relates to a sum deducted by the defendant, being their calculation of the plaintiff's contribution towards insurance premiums. There is no doubt that the plaintiff is liable to pay part of the insurance premium. The issue is how much it should pay. There is a factual dispute as to how the sum should be calculated. Most of the deductions were made pre Tomlin order, one is post Tomlin. In spite of my rulings in relation to the interpretation of the Tomlin order, I think the preferable approach to this separate amount is to make no ruling in respect of it at this stage. As the timings of the deductions straddle the Tomlin order and the majority are beforehand, the issue as to methodology of calculation should be dealt with only once and is therefore best left until the final account. I need say no more than that the plaintiff's submission that the amount of the deduction has been somewhat inflated has some force.

Order

(1) The defendant shall pay the sum of $3,400,406.38 being the cumulative outstanding sums due to the plaintiff for works orders from 5 April 2000 to 23 August 2000 inclusive pursuant to the consent order in HCCT90/99 dated 18 November 1999.

(2) The defendant shall pay the plaintiff the sum of $1,000,000.00 pursuant to clause 6(b) of the said order.

(3) I make no order in respect of paragraph 2 of the amended notice of motion dated 11 September 2000.

(4) Costs of the motion to the plaintiff.