YEE HING ELECTRICITY & WATERING CONSTRUCTION CO LTD v. NG HOK TAI t/a SUCCESS ELECTRIC ENGINEER

DCCJ 4609/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4609 OF 2004

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JUDGMENT

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1.  This is a case concerning contractual disputes over work done in relation to project under the Architectural Services Department (“ASD”) Minor Works Term Contract No. TC J325 (“the Project”).  The Plaintiff (“P”) was the sub-sub-sub contractor carrying out electricity installation and waterworks and the Defendant (“D”) was the sub-sub contractor of the project.  P claims for outstanding sum for work done for the project and D counterclaims for outstanding sum for materials supplied which D settled on P’s behalf.

2.  The project involved the following works:-

(a) Works Order No. ASD00734 for the works in SKH Lui Ming Choi Memorial primary School;

(b) Works Order No. ASD007428 for the works in Children’s Play Area at Ha Fa Shan Village, Tsuen Wan;

(c) Works Order No. ASD007418 for the works in Sok Kwu Wan Public Toilet, Lamma Island.

3.  The main contractor of the Project was Chun Wo Construction Co. Ltd, who subcontracted the Project to Consort Engineering Co. Ltd (“Consort”).  Consort in turn subcontracted the Project to D (“the Subcontract”) on or about June 2002.  In early October 2002, D orally agreed to sub-subcontract the Project to P.

The undisputed material facts

4.  The following facts are either not in dispute or indisputable:-

(a) In late September 2002, D’s Mr. Ng Hok Tai (“Mr. Ng”) negotiated with Mr. Chan Bing Sum of P (“Mr. Chan”) for subcontracting the Project. In October 2002, P and D entered into an oral agreement.

(b) The sub-subcontract between P and D applied the terms of the agreement between Consort and D on a “back to back” basis.

(c) P and D adopted the same terms and conditions of Hong Kong Construction Association Standard Form of Domestic Sub-Contract 1994 Edition (“Sub-Contract Document”).

(d)       The amount of payment to be paid by D to P was based on a percentage from the amount of works done according to the Schedule of Rates from the Architectural Services Department (“the Schedule” also known as “the Rate Book”). The Schedule sets out the fixed standard price for items of works.

(e)       The undisputed percentage of entitlement of the parties were 82% for D and 60% for P respectively of the contract sum payable to Consort.

The background

5.  This was the first time P undertook subcontract works from D.

6.  P commenced work in October 2002 to meet the expected completion dated in October 2003.

7.  Mr. Ng of D also owned an electrical supplies company, Success Electrical Supply Co Ltd (“Success”).  Mr. Ng and his wife were the only shareholders and directors of Success.

8.  By 31 August 2003, P obtained supply of materials from Success on credit in sum of $181,071.78.

9.  On 23 September 2003, Consort formally entered into a subcontracting agreement with D by using the Sub-Contract Document.

10.  On 2 March, 20 May and 6 July 2004, D received from Consort 3 interim payments by 3 cheques in the respective sums of $70,000.00, $12,000.00 and $30,000.00.

11.  D sent to P by registered post 3 interim payments by 3 cheques in the sums of $27,300.00, $4,680.00 and $11,700.00 on 3^rd March, 9 June and 10 July 2004 respectively (“the 3 cheques”).  In total, P had been paid a sum of $43,680.00.  Based on the final statement submitted by P for work actually done, working it backwards, the contract sum receivable by Consort was to be $815,491.50.  D was to receive 82% amounting to $668,703.50.  P was to receive 60% of the contract sum payable to Consort amounting to $489,294.90, leaving an outstanding balance of $445,614.90 due from D to P.

The dispute

12.  P now claims for this unpaid balance of the sub-sub-contract works of electrical installations done.  D says there had been an agreement that D need not pay P until D had received payment from Consort.

13.  In the meantime, D settled the material costs of $181,071.78 on P’s behalf to Success.  P says the payment by D to Success was made without P’s consent.

The issues

14.  The crux of this case is on the payment terms between P and D:-

(a) What was the payment term?  Had P and D agreed to a time for payment to be made by D to P?  If so, when?  If not, what should be the reasonable period for payment?

(b) Whether D was entitled to deduct costs of materials from P for settling P’s debts owed to Success?

The evidence

15.  D’s evidence is that throughout there had been an oral agreement that P will only be paid when Consort paid D.  At some time before 2 October 2003, Mr. Ng instructed his account clerk to prepare a Chinese document (“the Chinese Document”) setting out the previous oral agreed terms for P’s signature.  His explanation for why the Chinese Document was drafted so late is that he had to wait for the signed Subcontract from Consort (which was signed in September 2003) before he could prepare the Chinese Document for P’s signature. 

16.  The Chinese Document contained terms, inter alia, that the P would only get paid when D was paid by Consort “……在成功未收到聯合電機有限公司款項時，義興不能追討成功任何款項。”(‘Clause 2’) [“Pay if paid term”].

17.  According to Mr. Chan of P, there was no oral agreement as to the terms as regards to the time of payment from D to P.  It was only after D commenced work, the parties continued to negotiate the terms and in a meeting, D produced a Chinese document containing the “pay if paid term”.  P did not agree to those terms.

18.  It is P’s case that, upon receiving the Chinese document, P on 2 October 2003, returned the Chinese Document to D by signing it and adding after Clause 2 that Success could not take any recovery action against P before P received payment (“the 1^st Returned Document”).  “義興未收齊成功電器工程款項時，成功電器材料有限公司不能追討義興提取之電器材料款項。”

19.  Mr. Ng states D had not received the 1^st Returned Document.  This first returned Chinese Document was not signed by D.

20.  On 30 October 2003, D sent an invoice showing the amount of $668,705.50 to Consort for payment, but it is D’s case that such an invoice did not amount to ‘payment’ under Clause 2, it was subject to being certified by the ASD.

21.  In the meantime, Mr. Chan’s case is that he had difficulties reaching Mr. Ng of D, so he communicated with D’s employee Kendy Lam instead. D’s evidence is that Kendy Lam had in fact ceased to be D’s employee since September 2003.

22.  P on the other hand claimed that since he had not received any feedback from D in respect of the 1^st Returned Document, P sent another version of amended Chinese Document with additional terms in separate sheets.  This time, he amended Clause 2 by changing the stipulated time for payment from “after 7 days” upon receipt of payment (from Consort to D) to “within 10 days” upon receipt of payment (from Consort to D).  He signed it but did not delete or make amendment to the substance of Clause 2. 

23.  The additional terms in these separate sheets, in summary required Success not to take any recovery action before P received payment and shared the payment entitlement according to percentage of the material costs to the total work done for the Project.  P’s case is this amended version was handed to Kendy Lam (“2^nd Returned Document”).

24.  Mr. Chan’s evidence is that P would have honoured the terms per the 2^nd Returned Document had D agreed to the same.  However, paradoxically Mr. Chan insists that he did not agree on Clause 2 because he considered it to be unreasonable.

25.  D’s evidence is this D did not receive the 2^nd Returned Document.

Findings

26.  Counsel for P submits that based on the evidence there was no agreement as to the payment date, or alternatively, that Clause 15.5 of the standard agreement (namely 49 days after the completion) is the agreed time for payment. 

27.  Counsel for D submits that the Chinese Document should form part of the agreement between P and D, and that the Chinese Document evidences the terms of agreement for subcontracting the Project.

28.  D’s fall-back position is that even if the Chinese Document is found not to be part of the agreement, D would rely on Clauses 15.6(a)(iii) and (iv) of the Sub-Contract Document which provides that (emphasis added):-

“Clause 15.6(a)

Subject to Clause 3.4, 10.4 and 17.3 and as hereinafter provided and without prejudice to any rights which exist at Common Law, the Contractor shall be entitled to withhold or defer payment of all or part of any sums otherwise due pursuant to the provisions hereof where:-

(iii) the amounts or quantities included in any valid statement are not certified in full by the Employer’s Representatives, providing such failure to certify is not due to the act or default of the Contractor,”

(iv) the contractor has included the amounts or quantities set out in the valid statement in his own statement in accordance with the Main Contract and the Employer’s Representatives have certified but the Employer has failed to make payment in full the Contractor in respect of such amounts or quantities, or”

29. I am of the view that the Chinese Document does not form part of the agreement between P and D.  However, I find that some of the clauses in the Chinese Document are evidence of the terms of agreement for subcontracting the Project.  In particular, I find that Clause 2 is evidence of parties having agreed, that P would be paid after D was paid by Consort.

30.  Mr. Chan when giving evidence and despite being examined on this subject, was not able to offer any reasonable explanation as to why he had made no deletion to Clause 2.

31.  Had P found the “pay if paid term” not in accordance with what he had previously agreed, and this being an important term of the contract, I would have expected P to have deleted or made amendments to Clause 2 to reflect his disagreeing to be paid after D was paid by Consort.  Despite having had at least two opportunities, D chose not to delete Clause 2 from the Chinese Document.  This is particularly difficult to reconcile with the fact that P only chose to put an additional term after Clause 2 that Success could not take any recovery action against P before P received payment from D which does not reflect his alleged said disagreement to the “pay if paid term”.  I find P’s evidence that there was no agreement as to the “pay if paid terms” to be incredible. 

32.  Clause 2 of the Chinese documents together with its varied versions shows that in respect of terms of payment, P’s concern was mainly on whether he needed to pay Success before receiving payment from D and whether P gets paid 7 days after D receives payment from Consort.  This is more in line with the case that parties having had an agreement on a “pay if paid term”, but without specific agreement as to how long after D receives payment from Consort should P be paid by D.

33.  I find that the parties had agreed that P would be paid after D was paid by Consort.

34.  Accordingly, P is not entitled to be paid until D is paid by Consort.

35.  The Plaintiff’s claim for the unpaid balance of the Agreed Sum succeeds only to the extent of the sums already paid to D.

36.  From the evidence before me, D had been paid interim payments by Consort the sum of $70,000.00, $12,000.00 and $30,000.00 amounting to $112,000.00.  Since it is not in dispute that P is entitled to 60% of payments made to Consort, P is entitled to ($112,000/82 x 100) x 60% = $81,951.2.  Up to date, D has only paid P $43,680.  The balance of $38,271.2 remains outstanding to P.

A further sum of $7,317

37.  On top of the said $112,000, D has received a further $10,000 from Consort after the commencement of these proceedings.  Based on my findings, P is entitled under the “pay if paid terms” a further sum of ($10,000/82 x 100) x 60% = $7,317.  It may be arguable that since the sum had not been paid to D until after the commencement of these proceedings, action for the claim may be pre-mature.  On reflection, as P’s claim is for outstanding sum for work done, and since D has been paid this further $10,000 by Consort, albeit after the commencement of these proceedings, P should be entitled to this further $7,317.

38.  As to the balance of the contract sum, since I find there is no specific agreement as to how long after D receives payment from Consort should D pay P, I find that a reasonable period in the circumstances of this case to be within 10 days upon receipt payment from Consort, D should make payment to P.

39.  For the avoidance of doubt, this Judgment does not prevent or bar P from further claims against D for the remaining outstanding sum should D eventually receive payment from Consort.

The Defendant’s Counter-claim

40.  D claims the balance of the payment for materials paid by D on P’s behalf, amounting to $137,391.78.

41.  D also claims damages to be assessed for P’s failure to complete the alleged outstanding works and make good the defective works under the Agreement. 

Whether D was entitled to deduct costs of materials from P for settling P’s debts owing to Success?

42.  On 31^st August 2003, P obtained supply of materials for the Project from Success, accumulating in the sum of $181,071.78.

43.  I accept that there was ongoing negotiations between the parties after P had started work. 

44.  On 17^th November 2003, D sent a letter to P and gave indulgence that Success would not demand for the sum until Consort made the payment (“Deduction Letter”).  Instead only half of the P’s payment entitled would be deducted whenever Consort made payment for the Project. P did not reply to this letter.

45.  None of the written receipts of sums paid to P after deductions for material costs were signed by P.  Further, P did not present the 3 cheques received until advised to do so by his legal advisers.

46.  A petition for winding up against Success was filed on 16 February 2004.

47.  On 2 March 2004, Consort paid $70,000 to D.  On the following day, D paid $27,300.00 by cheque to P.

48.  On 27 March 2004 D sent a letter to P concerning the settlement of the costs of the supplied materials.  In this letter, D stated that the “materials debt” owed to Success will be set off against P’s entitlement under the contract against D.

49.  P denies consenting to such an arrangement.

50.  It is D’s case that the parties had agreed to the deduction for material costs.  Alternatively, it is an implied term, which can be inferred from the acquiescence of P, and D relies on a passage of Chitty on Contracts (29^th Edn, Vol. I, Para 29-116 at pg 1702):

“The Courts have often inferred from the circumstances an implied request by the defendant to the claimant to make the payment especially where the money paid by the claimant was in discharge of a liability which the claimant had undertaken at the defendant’s instance, or by his authority. Lord Greene M.R. has said “if a person knows that the consideration is being rendered for his benefit with an expectation that he will pay for it, if he acquiesces in its being done, taking the benefit of it when done, he will be taken implied to have requested its being done; and that will import a promise to pay for it….”

51.  I find that the Deduction Letter to be no more than a request or unilateral imposition from D on P, and that there is insufficient evidence to find that there was any agreement between the parties for D to make such deductions.  I accept that P had made request to make payment for materials to Success after he had received full payment from D.

52.  I find that D was not entitled to deduct the material costs and pay Success on behalf of P.  It follows that D’s counter-claim fails.

Whether P discharged his contractual obligations?

53.  It is not in dispute that P completed the works in August 2003 save for some minor outstanding or defective works.  It is P’s case that all minor defects have been remedied.

54.  Clause 15.3 of the standard contract states that:

“Clause 15.3

The Contractor shall make applications for payment in accordance with the Main Contract and subject to the Sub-Contractor having submitted a valid statement, shall include such applications claims for the value of works and materials.”

55.  It is common ground that P submitted one set of statement of account for the Project, which D submitted to Consort.  It is D’s evidence that this was also the basis for the final account to be agreed after the assessment from the ASD.

56.  Works done in relation to the Project by P was reassessed by ASD as shown in the “Dim Book” dated 24 June 2003.  It is clear that the quantities of work done had not been fully certified by ASD.

57.  On 14 April 2004, D made demand for payment to Consort.

58.  I refer to Clause 15.6(a) above, where it sets out certain scenarios which empower a Contractor to withhold or defer payment in part or in full.

59.  From Clause 15.6(a)(iii) it is clear that a subcontractor’s failure in certifying the amounts and quantities would not affect his right to payment if it is “due to the act or default of the contractor”.

60.  D’s argument that Clause 15.6 (a)(i) and/or (ii) are applicable fails because they have failed to provide evidence that the Project was not certified in full.

61.  Moreover Clause 15.6(b) sets out that even if payment is withheld under Clause 15.6(b)(iii), (iv) or (v), it shall be limited to the extent that the amounts in any valid statement are not certified.  However, as it is agreed between the parties that P has completed the works save for some minor defects and outstanding matters, it follows that even if there are outstanding works D should have been paid a sum greater than the existing $112,000 + $10,000.

62.  P’s submission is that D has failed its burden by not showing how the rectifications demands for outstanding works from correspondences between Consort and D (and also alleged oral requests) affects Consort’s payment to P.  It has been over two and a half years since P had completed its work for the project, I would have thought D should have taken steps to ascertain from Consort or Chun Wo the proposed deduction for the minor defective works, if any. 

63.  Mr. Lau for the Plaintiff has drawn my attention to Clause 15.6(c). Clause 15.6(c) of the Sub-Contract Document provides clearly that “in the event of the Contractor withholding any payment he shall notify the Sub-Contractor of his reasons in writing as soon as reasonably practicable but not later than the date when such payment would otherwise have been payable.”  Considering the terms of the standard contract, it is apparent that it should therefore be 49 days after August 2003.

64.  Between January 2003 and June 2004, D received several notices from Consort and/or Chun Wo requesting D to complete the outstanding works and to make good for the defective works of the Project.  On top of such written notices, D alleges that Consort had given repeated oral requests.  The last written requests from Consort for each works of the Project dated 8 March, 6 April, and 16 June 2004 respectively.

65.  In August or September 2003, D did not attempt to notify P in writing of Consort not being satisfied with the works.  It was not until in 2004, D by letters dated 27 March, 10 July and 18 August 2004, asked P to take all necessary actions to follow-up and remedial actions for the outstanding and defective works as raised by Chun Wo and/or Consort.  In these letters, D did not list out the outstanding works or defects Consort and/or Chun Wo alleges.

66.  P’s solicitors wrote to D seeking details for any outstanding works on 16 June 2004, and D did not reply to P until 10 July 2004 but did not confirm what the actual outstanding works were at the material time.

67.  Apart from his bare assertions in the witness box, the only documentary evidence produced by D which supports that he has discharged his duties is the ‘measurements for work done” in relation to work in SKH Lui Ming Choi Memorial Primary School.  The parties respectively blame each other for not completing the works and remedying the defective works.  D blamed P for not cooperating with D to confirm the figures which led to the result of no confirmation of the figures.  Mr. Chan said Mr. Kendy Lam of D did not arrange for a multi-party meeting including Consort, D and P to clarify the figures.

68.  D’s explanation in the witness box is that because P’s solicitors had sent to Chun Wo and Consort letters regarding contemplation of legal action, they withheld payment to D. However, D’s two letters to P respectively dated 10^th July and 18^th August 2004 reveal D believed that Consort had refused to pay him because P had failed to deal with Consort’s demands for outstanding works and defects.

69.  Mr. Chan in the witness box states that he could not contact Mr. Ng and only contacted Mr. Kendy Lam even up to 2004 on matters relating to the outstanding and defective works of the Project. Mr. Cheung challenges the credibility of P as Kendy Lam’s employment at D had terminated in September 2003.

70.  I find that D as the sub-sub-contractor, had the duty to liaise for a multi-party meeting to resolve the disputes. D had an obligation to take reasonable steps to ensure payment from Consort. At the very least, D is clearly in breach of Clause 15.6(c) in that he had failed to give written notification to P that Consort is with-holding payment and his reasons for doing so. It then follows that the condition that the ‘contractor’ must not be in default in Clause 15.6(a)(iii) is not fulfilled.

71.  On 16^th June 2004, P’s solicitors wrote to D enquiring on the outstanding works. D did not reply to P until 10^th July 2004.

72.  In the circumstances, I find that there is insufficient evidence before me to prove that P have not discharged his contractual obligations.

73.  I give judgment in favour of P for $45,588.2 and dismiss the counterclaim with interest from the date of the writ.

Costs

74.  The award to P is within the Small Claims Tribunal jurisdiction. In Cheung Yu Tin Alvin v Ho Kon Ka (unreported) CACV 255/2005 Woo VP held where a Plaintiff was awarded a sum within the Small Claims Tribunal jurisdiction in the District Court, the “only proper way of exercising the discretion was to award costs to be assessed in a manner similar to the costs allowed in the Small Claims Tribunal”.

75.  However, when taking into account the Counterclaim, P had successfully defended a counterclaim within the District Court Jurisdiction and it is only fair that P should get its costs of the Counterclaim in a District Court scale.  Since the Counterclaim was at a District Court scale, in practice even if P sought to transfer the case to the Small Claims Tribunal, the reality would be the case would proceed in the District Court.  The costs between the time of the issue of writ and when D filed its Defence is negligible and I make a cost order nisi to be made absolute within 14 days that D do pay P costs of the P’s claim and the counterclaim at District Court scale.

76.  Since the award together with the amount counterclaimed exceeds $150,000.00, there should be an order nisi to be made absolute within 14 days for certificate for counsel.