KINGPOINT PROFITS LTD. AND ANOTHER v. LEE SHING YUE CONSTRUCTION CO. LTD. AND ANOTHER

HCCT75/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO.75 OF 1998

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(Consolidated pursuant to the Order of the Honourable Mr Justice Burrell
dated 1 December 1999)

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J U D G M E N T

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1. This case concerns a government contract for the maintenance of certain government buildings for a period of three years. Lee Shing Yue Construction Company Limited ("LSY") is a Group C government approved contractor. This entitled it to tender for public works of unlimited value.

2. The contract was awarded to LSY on about 31 March 1998. It was contract TCG003/98. By a sub-contract dated 23 March 1998, LSY had contracted City Top Engineering Limited ("CT") to perform all the works. LSY would keep 4% of the monies received from the government and pay the remaining 96% to CT. Kingpoint Profits Limited ("KP") was CT's guarantor who entered into a financing agreement with CT in which by a letter of intent, KP agreed to procure an overdraft facility (of $20 million) to finance the works. KP's charge for this was to be 5% of the monies received from the government.

3. CT commenced work in March 1998. Although only liability is in issue in this trial, it is plain that CT performed works of substantial value in the 31/2 months (approximately) that the contract subsisted before it was terminated by LSY with effect from 14 July 1998.

4. The issue on liability is largely concerned with the construction of one clause in the sub-contract, clause 17. The clause reads as follows :-

"Effect of Agreement

This Agreement shall not come into effect until the Contract or a preliminary draft of such Contract or a Letter of Intent leading to the execution of such Contract shall be executed between the Client and Lee Shing Yue on or about 15th April 1998 or such extension of time as may be agreed upon by City Top and failing execution by the said time this Agreement shall not be regarded as having taken effect and shall be deemed cancelled and of no effect.

Further, City Top must within ten calendar days from the date of this Agreement demonstrate to Lee Shing Yue their capacity in carrying out the Contract, namely, City Top must :

(i) produce proof that the overdraft facility mentioned in Paragraph B of the Recital hereabove has been successfully arranged;

(ii) provide a list of sub-contractors together with their written undertakings to carry out each respective part of this Agreement; and

(iii) provide a complete organization chart with names of personnel from Contract Manager to the sub-contractor levels;

Failure to produce the documents listed above shall mean that this Agreement has not taken effect and the Agreement shall be deemed cancelled and of no effect."

5. This clause was put into the contract by LSY and is relied on by it on the issue of termination. It is common ground that CT did not comply with (i) and (ii) above, within the 10 day period. The contract nonetheless continued for about three months thereafter. By the time of termination, (i) and (ii) had still not been fully complied with.

6. The purpose of clause 17 is simple and obvious. If LSY is entrusting its government contract, and therefore its reputation as a government contractor, to a sub-contractor for a fee of 4%, it would want to be satisfied that it had both the financial and material resources to carry out the works.

7. The plaintiffs' argument is that the words of clause 17 simply mean that if the requirements of (i), (ii) and (iii) have not been complied with within 10 days, that is the end of clause 17. LSY then has a choice, either bring the contract to an end there and then or continue with the contract minus clause 17. The defendants' case, however, is that if the requirements have not been satisfied within 10 days, the contract is voidable at the option of LSY. LSY is entitled to give CT more time to comply and has the right to terminate at a later time if CT has still failed to comply within a reasonable time and/or having made time of the essence. For the reasons which briefly follow, I am satisfied that the defence submission is the correct one. Apart from anything else, it is clear that the purpose of clause 17 was to protect LSY. Their intention, at the time of contracting, would not have been to abandon that protection after 10 days but nonetheless to allow the contract to continue. Also, 10 days is a very short period to expect a party to both negotiate and formalize a substantial financial arrangement with the bank and also to have in written form all the contracts with the sub-sub-contractors for all types of maintenance on government buildings. The shortness of the period specified in clause 17 serves to demonstrate its significance and importance. It is plainly important to deal with these matters expeditiously. It cannot be said that the importance and significance of the requirements simply disappears after 10 days.

The legal effect of clause 17

8. The basis of my decision on clause 17 is that non compliance by CT did not make the contract void there and then, but made it voidable by the non defaulting party, LSY.

9. The precise words of clauses which have been considered in previous cases are of course different. The particular facts of each case have to be considered when determining whether a particular clause, the meaning of which is in dispute, has been breached. Where the facts are similar, however, it is of course helpful to quote general principles. For example, Lord Atkinson in New Zealand Shipping Co. Ltd v. Societe Des Ateliers Et Chantiers De France [1919] AC 1 at page 9 :-

"But if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract.

The application to contracts such as these of the principle that a man shall not be permitted to take advantage of his own wrong thus necessarily leaves to the blameless party an option whether he will or will not insist on the stipulation that the contract shall be void on the happening of the named event. To deprive him of that option would be but to effectuate the purpose of the blameable party. When this option is left to the blameless party, it is said that the contract is voidable, but that is only another way of saying that the blameable party cannot himself have the contract made void, cannot force the other party to do so, and cannot deprive the latter of his right to do so. Of course, the parties may expressly or impliedly stipulate that the contract shall be voidable at the option of either party to it. I am not dealing with such a case as that. It may well be that the question whether the particular event upon the happening of which the contract is to be void was brought about by the act or omission of either party to it may involve a determination of a question of fact."

10. In our case, the proper construction is that clause 17 survives the 10 day period. It is not necessary for the defence to "resurrect" it later in order to rely on it, because it never disappeared in the first place. In the light of the events which actually occurred, time for compliance was extended and time was made of the essence. LSY did not waive its right to invoke clause 17 but did waive as a matter of practical commercial sense, the time limit for compliance. Between April and July much work was carried out (there are literally thousands of works orders) and the parties were engaged in regular meetings. To construe the clause in a way contended for by Mr Pow for the plaintiffs would mean that the defendants would lose the protection of the clause, the inclusion of which was at their behest, if the plaintiffs even deliberately did nothing to comply with the requirements and allowed the 10 days to pass.

11. What then is the legal position between the parties after the 10 days and after non-compliance, i.e. the situation in this case. I have been helpfully referred to the case of Establissements Chainbaux SARL v. Harbormaster Ltd [1955] Lloyds Reports 303 by Ms Teresa Cheng SC, counsel for the defendants. Mr Pow seeks to distinguish it. The facts are certainly different, it is a mercantile contract involving letters of credit. Nonetheless, Devlin J, as to then was, made this helpful statement of principle which in my judgment has clear application in the case before me.

"Now, the position of a party who has started out with a contract where time is of the essence and has allowed the time to go by is, I think, quite clearly laid down in the authorities. He has got to make time of the essence of the contract again in the normal case, and that means that he has to give a notice giving the other side what is a reasonable time in all the circumstances to comply with their obligations, and it is only after they fail to do that that he is entitled to cancel the contract.

...

I ought perhaps to say that I have looked at the most recent case on this topic, which is the case of Charles Rickards, Ltd. v. Oppenhaim, [1950] 1 K.B. 616, in which the leading judgment was given by Lord Justice Denning. There he lays down the law on this point and summarizes all the authorities. I hope that I have stated the principles correctly, but, as I was saying, the notice is not always essential. If the seller, or the defendant, fails to give it, it is still open to him to prove that if he had given a reasonable notice it would have been of no use to the plaintiff. That, I think, must follow as a matter of the application of principles in the case to which I have just referred, although it is a point that goes beyond those principles."

12. When applying these principles, it is important to keep in mind the nature of the contract with which we are dealing. It was a three year maintenance contract requiring a whole ambit of works including plumbing, electrical, air conditioning, glazing and all sorts of building works, re-building and repairs in all sorts of buildings including schools, hospitals, administrative buildings and so on. The estimated value of the contract over three years exceeded $500 million. The stipulations in clause 17 were plainly important and necessary requirements in such a contract. Having rejected the submission that the clause 17 had a determinate life-span of 10 days and no more, I now move on to consider the facts in relation to the extension given and purported later compliance by the plaintiffs in respect of each of the two sub-clauses, (i) and (ii), which were not complied with within the 10 day period.

The overdraft facility

13. Generally speaking I found Mr Thomas Lee of the defendant company to be an impressive and reliable witness. His evidence was that it was an overdraft facility that was required. The minimum level of the overdraft was to be $20 million. Given the nature of the works to be undertaken, it has to be said that even $20 million seems to be on the low side. The evidence revealed that over the summer period works orders in the schools would cost about $30 million. Such works had to be carried out during the school summer holidays i.e. they had to be completed by the end of August. Moreover, if the total value of the contract over three years was over $500 million, a monthly budget, ignoring seasonal highs and lows would be about $15 million.

14. In any event, the facility which the plaintiffs rely on as satisfying clause 17(i) is, at best, an overdraft facility of $7 million together with a revolving loan of $13 million. This arrangement did not satisfy the requirement; the reason being, its inflexibility. A revolving loan had to be repaid within a specified period, an overdraft could be utilized without conditions. A loan was subject to conditions, failure to comply with the conditions could jeopardize the whole facility. The fact that only an overdraft facility would do, is evidenced by reference to a number of documents.

(i) 23 March 1988. Recital B to the sub-contract states:- "Whereas ... City Top has entered into an arrangement for an overdraft facility to be established..."

(ii) 7 March 1998. The letter of intent between KP and CT states "CT shall be entitled to call upon an overdraft facility offered by HSBC ... of which $20 million shall be available for drawing down immediately ..."

(iii) 16 May 1998. A Deed of Undertaking between CT and KP referred to "for the use on benefit of an overdraft facility".

(iv) 19 June 1998. An LSY Board resolution recorded "... in connection with an overdraft facility of up to $20 million set up and guaranteed by the Guarantor for the benefit of CT."

(v) 20 June 1998. A second Deed of Undertaking between all the four parties in HCA13906/1998 is in the same terms.

15. Mr Pow seeks to make the point that as Rectal B to the contract ((i) above) does not mention a specific amount of the overdraft facility, then the insistence of an overdraft in the amount of $20 million is misplaced. I reject this argument. Firstly, if that is right, a facility for $1,000 would comply. This does not accord with common sense. Secondly, all the other documents specify an amount. Thirdly, if no amount is specified, a reasonable facility would have to be arranged which, for reasons already stated, would be likely to exceed $20 million. Fourthly, KP and CT's letter of intent specifying a $20 million overdraft pre-dates the contract itself, containing Recital B, by two weeks.

16. In short, I find the provision of a $20 million overdraft facility to be an important condition, with which CT was under a continuing obligation to comply. The question now arises, did they comply with it at any stage? The answer, on the evidence, is that they did not.

17. HSBC's facility offer is contained in a 3-page letter dated 4 May 1998. This letter, or part of it, was given to the defendants in mid-May. There is a conflict of evidence as to whether the whole letter or just the first page was handed over. I prefer the defendants' version. I cannot accept the inference that Mr Lee's evidence namely "I only was given page 1" was invented. In any event page 1 contains the terms of the offer that the facility was to be split between a $7 million overdraft and a $13 million revolving loan. Mr Lee did not hide the fact that he had been provided with this information by virtue of page 1 of the letter. Pages 2 and 3 go on to deal with further terms of the facility which he did not see. I further accept Mr Lee's evidence that he was not satisfied with what he had been given and chased CT for proof that clause (i) had in fact been complied with.

18. The plaintiffs' case is that LSY was satisfied with the 4 May letter and so no breach arises. The facts are against this contention. If they had been satisfied, as Ms Cheng points out, there would have been no need to enter into discussions with Robert Wang & Co. prior to entering the 2nd Deed of Undertaking on 20 June 1998 which repeated the obligation to arrange the overdraft in the context of agreeing a mechanism for setting up an account into which CT's entitlements would be paid.

19. The problem remained unresolved, a meeting was held on 30 June 1998. The events of May and June show that CT was under a continuing extension of time to comply. Following the 30 June meeting LSY sent a letter dated 2 July specifically requiring proof of the overdraft facility (and also the sub-sub-contracts issue, with which I deal later) within a few days. This is evidence that time for compliance had become of the essence and also that the sub-clause was an important stipulation which was not going to go away. This letter turned out to be the final extension of time. There was no response to the 2 July letter either claiming that CT had already complied with its obligations under clause 17(1) or by providing the evidence of the $20 million facility as was requested. If CT was able to demonstrate that a sufficient facility was in place or that it felt it had already complied it would surely have said so.

20. Two final matters of fact warrant mention. Firstly, CT's bank statements at the material time suggest that the facility which the bank had actually made available to them at the time fell short of even the offer of a "split" facility in the 4 May letter. Prior to termination CT had issued cheques totaling $5.5 million under the $7 million overdraft facility. $4.5 million of the revolving loan was used to reduce that overdraft back to $1 million. Thus the total which was actually used was only $5.5 million. This may have been so because by 14 July CT had still not provided one of the securities required by the bank. The securities (four in all) were set out on pages 2 and 3 of the bank's facility letter, which Mr Lee had not seen.

21. Secondly, Mr Pow submits that the fact that the overdraft facility did not appear on the agenda at site meetings between the parties is evidence of the fact that, in truth, LSY was not particularly concerned with the issue. Mr Lee's explanation for this was that those meetings, the minutes of which have been produced in evidence, were primarily for on site issues such as progress of works, materials, sub-sub-contractors, staff and so on. Company finances were a separate issue and sensitive. It would not be appropriate for representatives of other companies to hear about financial negotiations between the parties and banks. Consequently it was discussed only between directors. I find this explanation to be highly plausible. Accordingly, I find that the absence of the issue from the minutes of meetings is not evidence of LSY's lack of concern about the matter. In fact, it is the opposite.

The sub-sub-contracts

22. Clause 17(ii) required CT to provide a list of their sub-contractors together with their written undertakings to perform the works. The importance of this clause is once again determined by considering it in the context of the contract as a whole. LSY had been engaged by the government to perform a huge variety of works. LSY had engaged CT to be responsible for those works. LSY would be most anxious to know the identity and appraise the capability of those sub-sub-contractors who would be carrying out each of the different types of works. LSY's reputation as a government approved contractor would be on the line. Certification of payments claimed by and paid to LSY would depend on the work being done by the sub-sub-contractors.

23. As with the overdraft issue under clause 17(1) CT's obligation extended beyond the 10-day period. In the same way extensions of time were granted. As a matter of common sense the urgency of the matter would vary depending on the progress and quality of the work being done. CT had mobilised itself and some sub-contractors from the outset of the contract in late March. There were, according to Mr Lee, signs of progress. This merely made the timing of compliance with section 17(ii) less urgent; it did not and never would mean that the section 17(ii) documents would not be required.

24. Although works were being done the issue of the sub-contractors list was regularly put on the agenda at meetings between the parties. Each time, more time was allowed. By the time of the 30 June meeting time had become of the essence and CT was notified of this by the 2 July letter. At that time CT had secured signatures on contracts with none of the sub-sub-contractors. Looking at the events as they unravelled at the time it is quite plain that one of the factors which brought the clause 17 issue generally, to a head was the fact that LSY had become concerned that the performance of the sub-sub-contractors was deteriorating. As will be seen later in the judgment I have not found it necessary to decide whether LSY would have been able rightly to repudiate the contract with CT at common law, due to the alleged poor performance, because the issues between the parties end with a decision on clause 17. However, the evidence of LSY's case on poor performance is relevant to show why they made time for compliance of the essence when they did.

25. If disputes were rumbling between CT and sub-contractors, those sub-contractors could simply walk away from the contract in the absence of a written agreement. This is yet another reason why evidence in writing was stipulated by LSY. It is clear that the 2 July letter had some reaction with CT. It is their case that between 7 and 9 July, six out of ten sub-contractors signed their agreements. In spite of this CT still face the following difficulties:

(i) The required list is deficient by four sub-contractors;

(ii) LSY disputed that it was informed of it. Whether or not it was informed, CT did respond to the 2 July letter in writing;

(iii) The missing sub-contracts included an electrical sub-contractor which was, arguably, the most important of all. It was estimated to be worth almost $40 million a year out of a total of about $180 million a year.

26. In conclusion and to summarise the above, I make the following decisions and findings :

(a) LSY waived the 10 day time limit in clause 17 but did not waive the requirement to comply with sub-paragraphs (i) and (ii);

(b) Such waiver as there was, namely of the time limit, was not a total waiver of LSY's rights under clause 17;

(c) Thereafter LSY gave CT reasonable time to comply;

(d) LSY made time of the essence again at the end of June 1998 and formally by its letter of 2 July;

(e) Once again they gave reasonable time for compliance. 12 days passed with no compliance;

(f) The provision of page 1 of the bank's letter of 4 May was purported but inadequate compliance with clause 17 by which CT inferentially conceded it was still bound;

(g) At the time of termination, 14 July 1998, CT had failed to comply with clause 17(i) and (ii); and

(h) LSY's repudiation of the contract by its letter of 14 July 1998 was not wrongful. It was entitled to terminate on the basis of CT's persistent failure to comply with clause 17.

Poor Performance

27. This is an alternative ground relied on by LSY for terminating the contract with CT. Much time at trial was spent on the evidence relevant to this allegation. In view of the court's findings and decisions concerning clause 17, it is no longer necessary to address this issue.

28. As already stated it is plain that LSY's perception that performance generally either was becoming or had become poor was not a separate or isolated matter. It plainly contributed to its decision to make time of the essence again for the compliance of clause 17. If the finances had been satisfactorily resolved and if the sub-sub-contracts had been signed, performance may not have declined in the first place or it would have provided comfort that performance would take a turn upwards.

29. The point is that it is not necessary for LSY to prove poor performance to justify its letter of 2 July. It is merely part of the factual matrix at the time. Had LSY been entirely satisfied with progress and performance throughout the first three months of this contract, it is very likely that Mr Lee would have given CT even more time to comply with clause 17. But that is hypothetical, the fact remains that LSY had been reasonable in permitting the time that it did but in the end, in the prevailing circumstances, an ultimatum had to be made. It was made reasonably but not met.

30. Based on this decision, which with the consent of the parties is limited to a decision on liability only, the parties must now revisit their position as to quantum. It is not in dispute that CT carried out substantial work between April and July 1998. It has received nothing in payment. The parties do not agree on the value of the works done but on any view it will have been considerable.

31. It is true that at the time of termination LSY had received from the government only a very small proportion of the value of the works done. After termination however substantial sums were paid to LSY during the months which followed. LSY has had the benefit of this money, much of which was in relation of works done by CT prior to termination.

32. Naturally, the decision on repudiation will affect the amount of money due to CT. However, it is hoped that a fair and reasonable account can now be produced so as to avoid the cost of further litigation.

33. I make a costs order nisi that the costs of litigating issues of liability be the defendants.