XCHRX WAI SHUN CONSTRUCTION CO. LTD. v. GAMMON CONSTRUCTION LTD.

1998, No. CT110
1999, No. 7 & 16

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background and the Pleadings

1. On 4 May 1994, the defendant entered into a contract with the Hong Kong Housing Authority to do construction and maintenance work. The defendant subcontracted all this work to the plaintiff on the same day. The plaintiff is now taking proceedings against the defendant to recover the sum of $6,297,737.28 that it says is due to it under the subcontract. I have before me a summons issued by the plaintiff by which it seeks an order for interim payment under Order 29.

2. The defendant does not, in its defence, seek to contest the amount claimed by the plaintiff, save to say that it is entitled to set off the amounts claimed in its counterclaim.

3. The counterclaim alleges another contract between the parties dated 31 March 1992, and says that the defendant has overpaid the plaintiff the sum of $3,127,080.39 in respect of this contract. The counterclaim also alleges that, in breach of this subcontract, the plaintiff has failed to pay the sum of $6,965,945.98 to Shun Cheong Electrical Engineering Company (Shun Cheong), an approved subcontractor. The defendant pleads that by "reason of the plaintiff's failure to pay Shun Cheong the defendant is liable to pay Shun Cheong $6,965,945.98" and the defendant "is entitled to damages and/or an indemnity in respect of this sum.".

4. In its defence to the counterclaim, the plaintiff does not admit that there was any overpayment as alleged by the defendant and that the alleged overpayment has not been substantiated by documents as requested by the plaintiff. As to Shun Cheong, the plaintiff says that this company was a subcontractor to the defendant, and that it does not owe any money to this company.

The Alleged Overpayment

5. In its evidence, the plaintiff says that the defendant claims that the employer has assessed that it has overpaid $3,127,080.39 for the plaintiff's work, that the plaintiff has disputed this assessment, and that the plaintiff has asked the defendant to provide documents to substantiate this assessment, but these have not been provided. The defendant's answer to this is that the plaintiff has not "provided any substantiation to support the suggestion that the Maintenance Surveyor's assessment is in any way inaccurate."

6. The defendant says that the amount of the overpayment is $3,088,983.62, not the sum of $3,127,080.39 as pleaded. After the management fee is deducted, the amount the plaintiff is required to repay is $2,965,424.28.

7. The plaintiff's response is that is that it completed all the work under the subcontract in about the middle of 1995, but it was not until late 1997 that it was first said that the plaintiff had been overpaid, and, in some cases, the allegation of overpayment was not made until some five years after completion of the work.

8. The plaintiff points out that the subcontract provides that the defendant is obliged to take "reasonable steps" to recover money due to the plaintiff, but it appears that the defendant has accepted the assessments made without challenge.

Shun Cheong

9. As to the claim concerning Shun Cheong, the plaintiff says that the main contract required the defendant to use Shun Cheong or another electrical contractor. The plaintiff produces a letter written by Shun Cheong to the defendant, although to the plaintiff's address, saying that it had the intention to enter into a subcontract with the defendant, and a letter by the defendant to the employer saying that Shun Cheong "shall be employed". On 19 May 1998, the plaintiff wrote to the defendant requiring that money payable to Shun Cheong be paid to the plaintiff, and not directly to Shun Cheong. On 22 July 1998, Shun Cheong's solicitors wrote a letter demanding payment from the defendant "and/or" the plaintiff. Shun Cheong proceeded against the plaintiff, and has obtained summary judgment in the sum of $3,157,581.73. The plaintiff is appealing against this judgment.

10. In this respect, the defendant says that all the work under the main contract, including the electrical work undertaken by Shun Cheong, was subcontracted to the plaintiff. The defendant says that the plaintiff's letter of 19 May 1998 is consistent only with the plaintiff's belief that the plaintiff had contractual relations with Shun Cheong, not the defendant. This letter pointed out that "any payment made to Shun Cheong by you shall not constitute a valid payment to us by you as specified in the contract signed between us.".

11. The defendant says that payment to Shun Cheong and instructions to Shun Cheong were transmitted by the plaintiff. The defendant says it has paid the amount due to Shun Cheong for the electrical work to the plaintiff, although it is apparent that the defendant has difficulties in giving particulars of this payment because the plaintiff claimed the money for all the work done, without identifying the specific amounts claimed by Shun Cheong. Because of this, the defendant calculates the amount due to Shun Cheong by taking the amount specified in a letter of demand from Shun Cheong's solicitors dated 22 July 1998 ($3,135,722.41) with the amount stated in a letter by Shun Cheong dated 18 March 1999 ($3,812,223.57).

12. This calculation results, in my view, from a misreading of Shun Cheong's letter of 18 March 1999. That letter says that the "outstanding subcontracting fee" was $3,812,223.57, but mentioned that the plaintiff "had already failed to release to us the amount of $3,153,722.41", which is the same amount as that demanded by its solicitors in the letter dated 22 July 1998.

Shun Cheong sued, and recovered summary judgment against, the plaintiff for only $3,157,581.73. The writ in this action was issued on 16 January 1999. Shun Cheong has not proceeded to recover any other amount from the plaintiff. It is clear to me that the greater amount mentioned in Shun Cheong's letter of 18 March 1999 includes the lesser amount.

13. The defendant says that it is "responsible to pay" Shun Cheong under Special Condition 6 of the main contract. This provides that, within seven days of payment by the employer, the defendant was obliged to pay the approved subcontractor.

14. The plaintiff responds by saying that, although Shun Cheong was not its subcontractor, the plaintiff collected and assessed Shun Cheong's payment applications on the defendant's behalf. The plaintiff says that it has passed onto Shun Cheong money received from the defendant.

The Third Amount

15. The defendant alleges that there is another amount that is due by the plaintiff to it, although this is not yet pleaded. This sum is $302,684.92, and is in respect $299,524 testing fees paid by the defendant on the plaintiff's behalf and a Construction Industry Training Authority levy of $3,160.92. In respect of the first amount, the defendant produces a letter dated 10 March 1999, in which the defendant says that $299,524 has become due and "we will arrange payment to the Housing Authority and deduct from your final account as agreed previously with your Mr Daniel Wong." The plaintiff has not challenged the accuracy of the terms of this letter.

The Law

16. The legal principles applicable to this kind of case are clear, and they appear fromShanning International Ltd v George Wimpey International Ltd [1988] 3 All ER 475. The plaintiff must satisfy me, on a balance of probabilities, but to a high standard, that, if the action were to proceed to trial, the plaintiff would obtain judgment for substantial sum, taking into account any claim to set off. If the defendant has a "genuinely arguable cross-claim for an amount that may equal or exceed" the plaintiff's claim, the plaintiff cannot satisfy this burden.

The Overpayment: Is this claim "genuinely arguable"?

17. It is clear that the plaintiff may raise complaints that the assessments of overpaid were unduly delayed, that the defendant should provide particulars so that the plaintiff can challenge these assessments is it so wishes and that the defendant has not adequately protected the plaintiff's position in this respect, but it seems to me that these are all matters for trial. I do not think, at this stage, I can possibly say that this cross-claim is not genuinely arguable. Accordingly, I cannot find now that the plaintiff would recover judgment on its claim without taking into account this cross-claim.

Retention of Money due to Sun Cheong

18. As I have said, the amount apparently due to Shun Cheong is the amount of $3,157,581.73 for which it has obtained judgment. In respect of this amount, it could be said that there is a "genuinely arguable" case that this amount has been paid by the defendant, but not passed onto Shun Cheong. But it is difficult for me to understand the basis on which it could legitimately be argued that the defendant is entitled to set off this sum. There is, in all probability and on the defendant's own case, no contractual relationship between the defendant and Shun Cheong. Shun Cheong cannot claim this sum from the defendant, and, indeed, it has not, by taking proceedings, sought to do so. The defendant does not, of course, seek to argue its case on this basis. What Mr Westbrook says is that, under Special Condition 6 of its contract with the employer, the defendant is bound to pay Shun Cheong. But the defendant also contracted with the plaintiff to the effect that the defendant would pay the plaintiff for the work by subcontractors, and the plaintiff would be obliged to pass onto the subcontractor what was due to it. And this was what happened. The plaintiff claimed, and the defendant paid. In my view, the defendant cannot plead its contract with the employer as a defence to its obligation to pay the plaintiff, or, in effect, to reclaim money not passed onto the subcontractor. If the defendant has undertaken to the employer to pay the subcontractors, but has undertaken to the plaintiff to pay the plaintiff, in this action the defendant's obligation to pay the plaintiff must prevail. As the defendant itself says, it cannot know what is due to Shun Cheong; that is a matter between Shun Cheong and the plaintiff which is being fought in the courts; Shun Cheong having obtained summary judgment, and appealing against this judgment. There is no suggestion that the employer is even considering proceeding against the defendant for a breach of Special Condition 6, and I would regard such a step has highly unlikely, especially so long after the contract was completed. Why, one must ask, should the employer get involved in this dispute when it has nothing to gain thereby. If, at trial, this set off were allowed, the effect would be that the defendant would be holding money to which it has no right. As I have said, Shun Cheong could not claim the money from the defendant, and there is no basis on which the employer could claim its return. So, the result could be that the defendant retains it. That cannot be right. Accordingly, it seems to me that the defendant has no genuinely arguable cross-claim in respect of this sum of $3,157,581.73.

The Third Amount

19. This is a comparatively small amount, but I accept that, once pleaded, this matter does raise a genuinely arguable cross-claim.

The Result

20. In the result, I accept that the defendant does have arguable cross-claims, but only to the extent of just under $3.3 million. That leaves more than $3 million of the plaintiff's claim with respect to which there is no genuine dispute. In these circumstances, I must exercise a discretion in deciding whether to order an interim payment of $3 million. There is some evidence that the plaintiff is in financial difficulties, but in my view this is not a strong reason for keeping it out of the money that I have found it would recover after trial. Indeed, part of its financial difficulties may be caused by the fact that it is being kept out of this money without good reason. In my judgment, an interim payment of $3 million should be made to the plaintiff directly, and I so order.

The Costs

21. The matter of costs has not been argued, but there seems no obvious reason why the costs should not follow the event. The plaintiff has been substantially successful. I make an order nisi that the defendant pay the plaintiff's costs of this application.