UNITED ELECTRICAL CO LTD v. WING HONG CONTRACTORS LTD AND ANOTHER

HCCT 51/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 51 OF 2006

-------------------

BETWEEN

-------------------

-------------------

J U D G M E N T

-------------------

1.  By the plaintiff’s summons dated 20 June 2011 the plaintiff applies for an order that the 1^st defendant (“the defendant”) do make an interim payment to the plaintiff in the sum of HK$2,816,365.50 or such other amount as the Court think fit.

2.  Particulars as of how the sum of HK$2,816,365.50 is arrived at is given in the 4^th affirmation of Tsang at paragraphs 77 to 79.

3.  The defendant was the main contractor under a term contract awarded by the Architectural Services Department (“ASD”) of the Government for the alteration, additions, maintenance and repair of land, buildings and properties for which the ASD was responsible in certain designated areas in Kowloon.

4.  In respect of the electrical works, these were sub-contracted by the defendant to Tung Yuen Hong Electrical Company Limited (“TYH”).

5.  TYH further sub-contracted the electrical works to RYBN Electrical Engineering Company Limited (“RYBN”).

6.  The plaintiff’s case as pleaded is that because of repeated complaints by the ASD about the poor performance of the sub-sub-contractor RYBN, TYH appointed the plaintiff to be their sub-contractor for the electrical works in place of RYBN in about July 2003 in respect of the YMT area, and in November 2003 in respect of also the TST, KB, MK and KT areas. The plaintiff was to carry out electrical works for the remainder of the term under the term contract and to rectify and remedy defective electrical works done by RYBN and also to complete the electrical works left unfinished by RYBN.

7.  From about the second quarter of 2004 TYH fell into serious financial difficulties and was unable to pay for the electrical works done by the plaintiff.  

8.  The plaintiff’s case as pleaded is that unable to pay its workers and to purchase materials the plaintiff intended and was about to stop the electrical works under the term contract and this was made known to the defendant.

9.  As pleaded at paragraph 5 of the amended statement of claim, the plaintiff’s case is that on or about 3 July 2004 a collateral agreement was entered into orally between Tsang Yun Nam (“Tsang”) of the plaintiff and C Y Hui (“Hui”) of the defendant in a meeting at the defendant’s office. 

10.  The collateral agreement is pleaded as follows :

“ (a) The Plaintiff agreed to complete all outstanding electrical works under the Term Contract, including the rectification of all defective electrical works done by RYBN and the completion of all electrical works left unfinished by RYBN (‘the outstanding electrical works’).

(b) The Defendant agreed to pay the Plaintiff for the outstanding electrical works so carried out and completed by the Plaintiff, which was duly certified by the ASD, if TYH failed to make payment for the same.

Particulars

The Collateral Agreement was entered into orally between Mr Tsang Yun Nam of the Plaintiff and Mr C Y Hui of the Defendant in a meeting held at the office of the Defendant on or about 3^rd July 2004.”

11.  The plaintiff also relies on the matters pleaded at paragraph 5 of the amended statement of claim and pleads that further or in the alternative the defendant agreed to guarantee TYH’s liability to pay the plaintiff for the outstanding electrical works (paragraph 6).

12.  The plaintiff’s case is that it has carried out and completed the outstanding electrical works between July 2004 and July 2005 to ASD’s satisfaction.  Invoices were issued to TYH for the value of the outstanding electrical works in the total sum of $19,264,584.73 and ASD has duly certified the sum of $15,505,965.35 as pleaded and particularized.

13.  TYH failed to make any payment to the plaintiff for the outstanding electrical works and it went into liquidation on 22 December 2004.

14.  The plaintiff’s case is that pursuant to the collateral agreement the defendant has paid the plaintiff the total sum of $1,265,138.21 in partial satisfaction of the value of the outstanding electrical works but that the defendant has refused or failed to pay the balance of the sum of $14,240,827.14 ($15,505,965.35 – $1,265,138.21).

15.  The plaintiff therefore claims the said sum pursuant to the collateral agreement or guarantee.

16.  In the further alternative the plaintiff claims the said sum on the basis of unjust enrichment on the part of the defendant.  Paragraph 12 of the amended statement of claim pleads as follows :

“ 12. In the alternative or further alternative, the Plaintiff has carried out and completed the outstanding electrical works between July 2004 and July 2005 at the request of the Defendant who has thereby obtained an unjust enrichment at the Plaintiff’s expense.

Particulars

(a) The Plaintiff was not prepared to carry out the outstanding electrical works when TYH was in serious financial difficulties and on the brink of insolvency.

(b) But for the Defendant’s agreement to make payment therefor, the Plaintiff would not have proceeded to carry out and complete the outstanding electrical works.

(c) Upon the completion of the outstanding electrical works, the value thereof duly certified by the ASD has been paid to the Defendant, who has thereby been unjustly enriched.

(d) The Plaintiff has incurred substantial sums in order to carry out and complete the outstanding electrical works, and therefore the Defendant’s unjust enrichment has been obtained at the Plaintiff’s expense.”

17.  The defendant denies that there was a collateral agreement entered into between the plaintiff and the defendant on or about 3 July 2004.  

18.  The defendant’s case is that there was a meeting on 3 July 2004 at the defendant’s office between representatives of the defendant, TYH and the plaintiff but denies that there was an agreement by the defendant to pay the plaintiff directly.  As pleaded at paragraph 5 of the amended defence

“ ……

The parties only briefly discussed about direct payment arrangement to the Plaintiff, including that such direct payment, even if and when agreed and made, would be made only at the request and on behalf of TYH; and that the matter would have to be discussed further later.  At the time, Central Lighting Company Ltd., a judgment creditor of TYH, had obtained a Garnishee Order Nisi dated 12^th June 2004 against the Defendant.  The Defendant was unwilling to make any direct payment arrangement until its position regarding the Garnishee Order Nisi became clear.”

19.  The defendant also relies on a supplemental agreement dated 5 August 2004 (“the supplemental agreement”) entered into between TYH and the defendant.  By the supplemental agreement (exhibit “TYN-53” to the 4^th affirmation of Tsang) amendments were made to the sub-contract appointing TYH as the defendant’s sub-contractor.  It is clear from the supplemental agreement that it was agreed between the defendant and TYH that if TYH failed to pay any of its sub-contractors or suppliers and the sub-contractor requests payment from the defendant, then the defendant

“ shall be entitled to, but shall not be obliged to, make a direct payment to such sub-contractor and supplier of the amount which the [defendant] reasonably believes is owing to the relevant sub-contractor or supplier.”

20.  The supplemental agreement was also witnessed by a staff member of the plaintiff.  No objection was ever raised as to the entering into of the supplemental agreement.  It is not disputed that in fact the plaintiff also contributed towards the legal costs for the preparation of the supplemental agreement.

21.  The defendant’s pleaded case is that the works allegedly completed by the plaintiff after 4 July 2004 was estimated to be $430,000 at most and not as claimed by the plaintiff.

22.  It is admitted that the defendant made direct payments to the plaintiff totalling $1,265,138.21 but it is the defendant’s case that this was done pursuant to the supplemental agreement and not pursuant to the alleged collateral agreement.

23.  The defendant denies that it has any obligation to make any payments to the plaintiff.

24.  Mr Clayton SC, with Mr Cheuk, for the defendant, has pointed out that the assertion of the alleged collateral agreement by the plaintiff was only made for the first time in the amended statement of claim.

25.  There is no mention of any collateral agreement in any of the contemporaneous correspondence in the evidence before me.

26.  The notes of the meeting held on 3 July 2004 (exhibit “TYN-47” to Tsang’s 4^th affirmation) do not even mention any agreement being reached as to direct payment by the defendant to the plaintiff in respect of the outstanding works.  On the contrary, point 5 as recorded in the notes suggests that the question of direct payment would be discussed in the future between TYH, the plaintiff and the defendant after resolving the court action where there was a garnishee order made.

27.  As was pointed out by Mr Clayton, even in Tsang’s 1^st affirmation filed on 31 October 2005 in relation to an earlier interlocutory application the plaintiff never relied on the alleged collateral agreement.  

28.  At paragraph 6 under particulars (9) of his 1^st affirmation Tsang sets out what he says was the agreement reached on 3 July 2004 but makes no mention of the alleged collateral agreement.  Under particulars (9) a) he says that it was agreed that the defendant would issue a cheque to him as a personal loan to him in the sum of $280,000.  And under particulars (9) d) he says :

“ After resolving the court case (Garnishee order on 12^th June 2004) TYH/UE/WH discuss direct payment;”

29.  Before making an order for interim payment the Court has to be satisfied that if the action proceeded to trial the plaintiff would obtain judgment for substantial damages or a substantial sum of money against the defendant (O.29; r.11(1)(c) and r.12(c) RHC).

30.  It is not disputed that the onus is on the plaintiff to satisfy the Court that it will (not “will be likely to”) obtain judgment in a substantial amount.  The standard of proof is a high one, on the balance of probabilities (Shenzen Envirotec Electronics Co Ltd & others v Cellplus (HK) Ltd & Others [2005] 4 HKLRD 217 at page 223 paragraph 19; British & Commonwealth Holdings Plc v Quadrex Holdings Inc [1989] 3 All E R 492 at pages 510 to 511).

31.  It is abundantly clear to me on the evidence that there are substantial disputes of fact as to whether or not the plaintiff and the defendant ever entered into the alleged collateral agreement.  It is wholly inappropriate to conduct a mini-trial based on the affidavit evidence alone.  The matter can only be resolved at trial with the benefit of discovery and cross-examination.

32.  It seems to me that as the claim on the guarantee is premised on the existence of the alleged collateral agreement, this must also be resolved at trial.

33.  At this stage I cannot be satisfied that the plaintiff has discharged its high burden of showing that the plaintiff will obtain judgment for a substantial amount at trial.

34.  The alternative claim based on unjust enrichment is pleaded at paragraph 12 of the amended statement of claim.  The pleaded case is that the plaintiff would not have proceeded to carry out and complete the outstanding electrical works but for the defendant’s agreement with the plaintiff to make payment for the same.  It is also pleaded that upon completion of the outstanding electrical works the value thereof certified by the ASD has been paid to the defendant who has thereby been unjustly enriched.  It also pleaded that the plaintiff has incurred substantial sums in order to carry out and complete the outstanding electrical works and therefore the defendant’s unjust enrichment has been obtained at the plaintiff’s expense.

35.  The plaintiff pleads that in the premises the defendant is liable to pay the balance of the value of the electrical works certified by the ASD by reason of the alleged collateral agreement, alternatively the guarantee or in the further alternative, reversal of the unjust enrichment.

36.  On the plaintiff’s pleaded case it is plain that on its alternative claim based on unjust enrichment the plaintiff relies on the fact that there was the agreement of the defendant to make direct payments to the plaintiff.  But for that agreement the plaintiff would not have proceeded to carry out and complete the outstanding electrical works.  The agreement relied on is the alleged collateral agreement.

37.  I have already held that the question of whether or not the parties entered into the alleged collateral agreement is a question to be resolved at trial as there are substantial disputes of fact.  

38.  The case of Shanghai Tongi Science & Technology Industrial Co. Ltd v Casil Clearing Ltd [2004] 4 HKLRD 217 relied on by Mr Vaughan, for the plaintiff, does not assist the plaintiff.

39.  The restitutionary claim based on unjust enrichment in that case was predicated on an alleged total failure of consideration.  On the facts it was held that there was consideration and the restitutionary claim based on a total failure of consideration failed.

40.  Mr Clayton also submitted that on the defendant’s case there was no unjust enrichment.  The defendant relies on the contractual obligations where the electrical works were sub-contracted under a sub-contract to TYH for a percentage of the monies to be received by the ASD.  TYH in turn sub-contracted the electrical works to the plaintiff also for a percentage of the monies to be received by the ASD.  The contractual obligation of the defendant to pay for the electrical works was owed to TYH under the sub-contract as amended by the supplemental agreement.

41.  As is stated at paragraph 1-074 Goff and Jones, The Law of Restitution 7^th edn

“ …………a claimant can never recover in unjust enrichment if the benefits were conferred while discharging an obligation which the claimant owed to a third party. Underlying that principle is the assumption that it is unwise to cut across contractual boundaries ………….”

42.  It was submitted that as there was on the evidence a contractual obligation on the part of the defendant to pay TYH, the benefit of the completion of the outstanding electrical works was obtained as a result of the defendant’s obligation to pay TYH.

43.  The defendant also relies on the judgment of Reyes J in Greatworth Industrial Ltd v Sun Fook Kong Construction Ltd & Prosperity Construction and Decoration Ltd (formerly known as OLS International Ltd) (HCCT 45/2003, 4 April 2006) where on the facts of that case it was held that the contractual regime could not be subverted to permit a claim for unjust enrichment.

44.  Reyes J’s judgment was upheld by the Court of Appeal (Rogers VP, Le Pichon JA and Barma J) in CACV 167/2006, 7 December 2006).  Rogers VP said at paragraph 15 of his judgment :

“ 15. In my view, Mr Clayton was correct in his submission that the matter was one of contractual relations between the second defendant and the plaintiff. As the judge observed, the plaintiff still remained the sub-contractor of the second defendant. Unfortunate though it is, in cases of chain sub-contracts one of the sub-contractors may become insolvent and those in the chain below that sub-contractor may, as a result, not receive full payment.”

45.  In my view Greatworth does seem to support the submissions of Mr Clayton.  

46.  The matter should be resolved at trial as there are substantial disputes of fact.  At this stage, the plaintiff has also failed to satisfy me that it will obtain judgment for a substantial amount at trial on its alternative claim based on unjust enrichment.

47.  I dismiss the plaintiff’s summons.

48.  I also make an order nisi that the costs of the application be costs to the defendant such costs to be taxed if not agreed.