ALPHA APPLIANCES LTD v. GET LUCK DEVELOPMENT LTD

DCCJ 589/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 589 OF 2005

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J U D G M E N T

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1.  By a summons dated 24 October 2005, the Plaintiff seeks, inter alia:

(1)	Final judgment against the Defendant for the sum of $691,959.00 and interest thereon following the court’s determination on three questions of law pursuant to Order 14A, rule 1.
(2)	In the alternative, summary judgment against the Defendant for the said sum and interest thereon pursuant to Order 14, rule 1.
(3)	In the further alternative, interim payment to be made by the Defendant in such amount as the court thinks fit pursuant to Order 29, rules 10 and 12.

The Parties

2.  The Defendant was the employer in the construction of a composite development at Tai Uk Wai, Tsuen Wan, New Territories.

3.  The Defendant appointed Hung Mau Realty & Construction Limited (“Hung Mau”) as its main contractor.  The main contract was entered into between the Defendant and Hung Mau on 19 May 2001 (“the Main Contract”).

4.  On 21 February 2002, the Plaintiff submitted its tender to the Defendant for the MVAC installation for the domestic flats and the club house.  The tender was accepted by the architect appointed by the Defendant, JADL Design Limited (“the Architect”), on behalf of the Defendant by a letter of intent dated 10 April 2002 (“the Letter of Intent”).  The accepted sub-contract price was the lump sum of $2,077,320.00.

5.  Towards the end of the Letter of Intent it was stated that:

“	Unless otherwise provided in this Letter of Intent and the contract correspondence, all terms and conditions stipulated in the Drawings, Specifications and Tender Documents shall remain valid and binding.
	Unless and until formal agreement is executed, this Letter shall constitute a binding contract between [the Plaintiff] and [the Defendant] subject to the terms and conditions mentioned above.”

6.  It was originally intended by the parties that the Plaintiff would become a nominated sub-contractor to Hung Mau upon the execution of the formal sub-contract to be signed between the Plaintiff and Hung Mau.

7.  Apparently there was some dispute between the Defendant and Hung Mau which led to the termination of the Main Contract between them on 7 March 2003.  The Defendant then informed the Plaintiff that the latter was no longer required to enter into the sub-contract with Hung Mau.

8.  This new arrangement was confirmed by a “Memorandum of Works Rearrangement” dated 5 May 2003 (“the Memorandum”) and signed between the Plaintiff and the Defendant.  It was stated under paragraph 2 of the Memorandum that:

“As the employment of Alpha Appliances Limited was made by way of Letter of Intent dated April 10, 2002, Alpha Appliances Limited had been and would be working as a direct contractor to Get Luck Development Ltd. according to the said Letter of Intent.”

9.  Paragraph 4 of the Memorandum further provided that:

“All the contract price and provisions for valuation, certification and honouring of payments for this contract should remain unchanged as before.”

10.  It is common ground that the Defendant had made a partial payment to the Plaintiff direct in the sum of $1,340,241.00 on or about 24 October 2002.  The Plaintiff is now claiming the sum of $691,959.00 being the balance of the contract sum of $2,032,200.00 as adjusted by the quantity surveyor appointed by the Defendant, Northcroft Hong Kong Limited (“Northcroft”), in July 2004.

The Order 14A Application

11.  Mr Ip, who appeared for the Plaintiff, proposed to deal with the three questions of law formulated in the summons in the following order:

(1)	whether terms of payment against the Architect’s certificate were incorporated into the agreement contained in and/or evidenced by the Letter of Intent as pleaded in paragraph 10(3) of the Amended Defence (“Question 1”);
(2)	whether the issue of the Architect’s certificate was otherwise a condition precedent to payment as pleaded in paragraph 10(1) of the Amended Defence  (“Question 2”);
(3)	whether the said agreement contained the implied term as pleaded in paragraph 3B of the Amended Statement of Claim (“Question 3”).

12.  The implied term pleaded by the Plaintiff was as follows:

“To give business efficacy to the said Agreement, the said Agreement also contained the implied term that if the Plaintiff was not required to enter into the sub-contract with the main contractor for the Development as contemplated in the said Agreement, within a reasonable time after completion of the Works, the Defendant would pay the Plaintiff the Sub-Contract Sum with adjustment for variations ordered or sanctioned by the Architect in accordance with the same principles set out in Clause 11 of the Conditions of Main Contract.”

13.  Clause 11 of the Main Contract set out the principles under which the Architect might issue instructions for variation of works, and sub-paragraph (4) thereof provided that all variations required or sanctioned by the Architect shall be measured and valued by Northcroft.

14.  Miss Cheng SC, who appeared with Mr Lam for the Defendant, referred me to Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174 where Mr Recorder Ma SC (as he then was) laid down a three-step approach for applications under Order 14A:

“	(1)	Is the relevant question one of law or of the construction of a document?
	(2)	If so, is the question one that should be determined under the O14A procedure?
	(3)	If the answer to (2) is yes, what is the determination of that question and what orders should the court make as a consequence of determining that question?”

15.  The learned Recorder observed that whilst step (1) would usually cause little difficulty for the court to ascertain, step (2) would require the court to have all the necessary facts and matters before it in order to determine the question of law or construction, and that the question would finally determine (subject to a possible appeal) the entire cause or matter or any issue or claim therein.  Further, the court has a residual discretion whether or not to embark on a determination of a question under O14A even where steps (1) and (2) have been fulfilled.

16.  Miss Cheng submitted that although Questions 1 and 2 relating to the incorporation of payment terms may arguably fall within an Order 14A application, Question 3 is not strictly speaking a question of construction.  Implication of terms is not the same as construction of a document.

17.  It should be noted that the Plaintiff is asking the court to determine the three questions formulated in the summons in the aforesaid order as proposed by Mr Ip.  Mr Ip no doubt recognized that the Plaintiff would only succeed in the O14A application if the court answers both Questions 1 and 2 in the negative and answers Question 3 in the affirmative.

18.  I am not convinced that I should exercise my discretion to determine any of the three questions in the present O14A application.  Miss Cheng must be right in saying that even if I were to decide on the Order 14A questions, it is not something that will avoid the expense of trial.  It will avoid the trial only if I then move on to another consideration of the matter under Order 14.  Miss Cheng submitted that having an Order 14A application stuck together with a ‘tagged on’ Order 14 application that depends on the outcome of the former is not quite what the rules envisage.

19.  Even if the Plaintiff’s hybrid application under paragraphs 1 and 2 of its summons is permissible under the rules, I do not think I have the benefit of all the necessary facts and matters for me to determine the Order 14A questions.  For instance, I do not know whether there were any negotiations that preceded the signing of the Memorandum between the Plaintiff and the Defendant; or whether there were any reasons why the parties would agree (under paragraph 4 of the Memorandum) that “the provisions for valuation, certification and honouring of payments . . . should remain unchanged as before” if, as Mr Ip seemed to suggest, there was in fact no such payment mechanism under the Letter of Intent in the first place.

20.  I therefore decline to make any determination under Order 14A.  I shall now turn to paragraph 3 of the summons.

The Order 14 Application

21.  It is the Defendant’s case that the Plaintiff should not be entitled to summary judgment on the following grounds:

(1)	The MVAC works required to be carried out by the Plaintiff (“the Works”) have not been completed.
(2)	No architect’s certificate has been issued for the Works.
(3)	There is a serious issue to be tried that the Plaintiff is liable for liquidated damages arising from its delay in completing the Works.

Non-completion of Works

22.  It is common ground that the occupation permit of the development was issued on 18 December 2002.

23.  The only particulars of non-completion of works pleaded by the Defendant in the draft Re-Amended Defence and Counterclaim were those defects or complaints mentioned in the letter from the property manager, Debenham Tie Leung, to the Defendant dated 29 January 2004:

(1)	improper installation of the water drainage pipe of an air conditioner on the 6th floor (by connecting the same to the flower bed);
(2)	inadequate air-conditioning in the club house; and
(3)	water dripping of an air-conditioner in Unit 7B.

24.  However, the Defendant’s own project manager, Mr K. C. Lam, accepted in his affirmation filed on 11 November 2005 that only items (1) and (2) above remained outstanding as at the date of his affirmation.

25.  The Plaintiff contended that the above items could not even be regarded as defects in the first place.  Mr Ip submitted that it was not for the building manager to determine whether the Works carried out by the Plaintiff met the required standard.  Rather, the Works should be measured against the Technical Specifications in the tender documents.

26.  Mr Ip also referred me to a ‘defects list’ dated 29 November 2003 faxed by Mr K. C. Lam to various sub-contractors including the Plaintiff.  The only complaint in the list that concerned the Plaintiff was the water-dripping of the air-conditioner in Unit 7B: a problem which is no longer relevant on Mr Lam’s own admission.

27.  Mr Ip was at pains to point out that it was only after the Plaintiff had taken out the present summons in October 2005 did the Defendant put forward for the first time in Mr K. C. Lam’s said affirmation the argument of non-completion of works, instead of the existence of remediable defects, on the basis of the aforesaid complaints by the building manager.

28.  It is also important to note that when the Defendant’s quantity surveyor, Northcroft, issued the draft statement of final account to the Plaintiff and copied the same to the Defendant on 7 July 2004, Northcroft had only deducted a small sum of $4,600.00 for construction drawings from the sum of $2,036,800.00 sought by the Plaintiff.  There is no evidence that this valuation by Northcroft has been challenged by the Defendant on the ground of incomplete or defective works.

29.  In any event, I accept Mr Ip’s submission that the aforesaid complaints raised by the building manager after the issue of occupation permit could at most be treated as defects or other faults falling within the realm of “remedial works” to be carried out after practical completion but within the defects liability period as provided for under Clause 15 of the Main Contract.  It will be absurd to suggest that the Works will never be completed unless and until they are free from any defects whatsoever.  Although the Plaintiff was not a party to the Main Contract, the concept of making good such defects within the defects liability period also appeared under Section 8.06 of the Specification Preliminaries which formed part of the Tender Documents submitted by the Plaintiff.

30.  I am therefore of the view that the Defendant’s allegation of non-completion of works is plainly an afterthought and does not constitute a bona fide defence.

Architect’s Certificate

31.  It is not in dispute that no final certificate has been issued by the Architect in respect of the balance of the contract sum that the Plaintiff is now claiming against the Defendant.

32.  Miss Cheng submitted that although the sub-contract was never executed between the Plaintiff and Hung Mau, the provisions of the same that had been referred to in the Tender Documents nevertheless formed part of the offer which was accepted by the Defendant by the Letter of Intent.  Therefore, Clause 11 of the sub-contract which provided for payment against architect’s certificate was brought in.

33.  Miss Cheng further submitted that the fact that there was no sub-contract did not prevent Clause 11 from operation.  The documents relating to payment applications and collections showed that payment was made by the Defendant direct as employer to the Plaintiff as sub-contractor.  If that was the case, why should the Plaintiff be suddenly released of the obligation of obtaining an architect’s certificate?

34.  With respect, I do not think that rhetorical question takes the Defendant’s case much further.  Even if the Architect’s certificate is required, the fundamental problem is that the Plaintiff has adduced evidence to show that the Architect has not been formally instructed or appointed by the Defendant to issue any further payment certificate after the termination of the Main Contract in March 2003.  In their letter to the Plaintiff dated 30 August 2005, the Architect had this to say:

“Although we acknowledge that a ‘Memorandum of Works Arrangement’ was signed between your office and [the Defendant] on 5 May 2003, up to the date of this letter, we have received no formal instruction or appointment from [the Defendant] to appoint this office to administer the direct contract and there is no formal document to entrust this office with the power of the ‘Architect’ as defined under the terms of the original contract or any new direct contract concerning the issuance of the ‘Interim payment certificate’.”

35.  Although the Defendant’s project manager, Mr K. C. Lam, in his affirmation dated 11 November 2005 seemed to suggest that the author of the above letter was mistaken as to the obligations of the Architect, any such argument will be unsustainable in light of the subsequent letter from the Architect to the Plaintiff dated 17 November 2005:

“We hereby clarify that the situation and our position regarding the payment certification remain unchanged since our letter dated 30 August 2005, and we have received no formal instruction from the Employer up to the date of this letter to express our opinion regarding the works under your subcontract completed up to 7 March 2003.”

36.  In the same letter, the Architect went on to indicate that should the Defendant request them to express their opinion regarding the Works completed up to 7 March 2003, they would work with the quantity surveyor, Northcroft, to provide an assessment to the Defendant within a reasonable period of time.

37.  As mentioned above, by 7 July 1994 Northcroft had already endorsed a draft final account in respect of the Works showing an adjusted sub-contract sum of $2,032,200.00: the base figure of the Plaintiff’s claim in this action.

38.  I therefore accept Mr Ip’s contention that even if the Architect’s certificate is required, the Defendant’s failure to put in place an architect for that purpose has disentitled the former to rely on any such condition precedent by reason of the well-established “prevention principle” (see Kensland Realty Ltd v. Whale View Investment Ltd (2001) 4 HKCFAR 381; Frederick Leyland & Co Ltd v. Panamena Europea Navigacion (1947) 80 Ll. L. Rep 205).

39.  In the circumstances, the defence that the Plaintiff is not entitled to payment in the absence of the Architect’s certificate is plainly unarguable.

40.  In deference to the argument of Miss Cheng I should also mention the fallback position of the Plaintiff.  Miss Cheng sought to make the point that even if the Architect’s certificate is not required because of what the Architect has said or the operation of the prevention principle, the Defendant would still be entitled to put the Plaintiff to strict proof on the quantum of the claim of $691,959.00.

41.  With due respect, it lies ill in the mouth of an employer who has failed to instruct its architect to process payment applications even though its quantity surveyor has effectively endorsed the final account to say that the balance of the contract sum may still be open to challenge.  It is incumbent upon the defendant to condescend upon particulars in an Order 14 application.  In this simple lump sum contract the Defendant could have adduced evidence to explain, at least in brief terms, why they say their own quantity surveyor’s valuation in 2004 is wrong or requires further adjustment.  There is however not even a scintilla of evidence in the affidavits to support this bare assertion.

Liquidated Damages

42.  It was stipulated under Condition 5 of the Letter of Intent that the Works (which fell within Phase I of the development) should comply with the main contractor’s programme and should be completed within 315 calendar days from the date of commencement of the Main Contract.

43.  It is not in dispute that Hung Mau’s programme commenced on 27 June 2001 and the Architect subsequently granted an extension of 122 days.  It is therefore the Defendant’s case that the Plaintiff should have completed the Works by 7 September 2002.

44.  On the other hand, the Plaintiff pleaded under paragraph 2(c)(1) of the Amended Reply that they had duly performed and completed the Works “in about October 2002”.

45.  The Defendant therefore argues that on the Plaintiff’s own case the latter would be liable for at least 24 days of delay, apparently on the basis that 1 October 2002 would be the earliest possible date of completion of the Works according to the Plaintiff’s pleaded case.  The Defendant thus counterclaims the sum of $2,160,000 (i.e. $90,000 x 24 days) for liquidated damages.

46.  It is important to note that the Letter of Intent was silent on the question of liquidated damages.  It is however the Defendant’s contention that since Section 5.02 of the Specification Preliminaries of the Tender Documents did refer to the terms on liquidated damages (at the rate of $90,000 per day for Phase I) stipulated in the Main Contract, it is arguable that those terms of the Main Contract were incorporated into the direct contract between the Plaintiff and the Defendant.

47.  In my judgment, the short answer to this is to be found in Sections 8.03 and 8.04 of the Specification Preliminaries which provided that:

“	8.03	Timely Completion of Sub-Contract Works
		The Sub-Contract works are to be carried out to suit the Main Contractor’s programme of works and are to be completed in good time so as not to cause delay to the Main Contract works.
	8.04	Delay by Nominated Sub-Contractor
		Should the Main Contractor become liable to pay liquidated damages to the Employer partly or wholly due to delay caused by the Sub-Contract works, the Architect shall certify the period of delay so caused by the Nominated Sub-Contractor who shall reimburse the Main Contractor accordingly.”  (my emphasis)

48.  There has been neither evidence nor even suggestion that the Architect had been instructed or requested to put on record, let alone to certify, any period of delay that is said to be have been caused by the Plaintiff.

49.  I was also reminded by Mr Ip that the Defendant’s intention to lodge a counterclaim for liquidated damages was only revealed in the affirmation of Mr K. C. Lam filed on 11 November 2005 in opposition to this application.  In its Amended Defence dated 10 October 2005 the Defendant was relying solely on the absence of the Architect’s certificate.  The counterclaim for liquidated damages was only inserted in the draft Re-Amended Defence and Counterclaim exhibited to Mr Lam’s 3^rd affirmation filed on 22 February 2006.

50.  I am therefore not satisfied that there is any triable issue or arguable defence on this ground either.

The Interim Payment Application

51.  Since I am not convinced that the Defendant has shown any arguable defence sufficient to warrant leave to defend, it is not necessary for me to deal with the Plaintiff’s alternative application for interim payment under Order 29 rule 10.

Orders

52.  I therefore give judgment for the Plaintiff in the sum of $691,959.00 together with interest thereon at judgment rate from the date of writ to the date of judgment and thereafter until payment.

53.  The Plaintiff has succeeded in obtaining summary judgment against the Defendant but has failed in its Order 14A application under paragraphs 1 and 2 of the summons.  Much of the time spent at the hearing was on arguments in relation to the O14A application, though I can see that it would not have made any material difference to the preparation of the affidavit evidence even if the Plaintiff had not invoked Order 14A.  Doing the best I can, I think it is only fair that the Defendant should bear two-thirds of the costs of this application.

54.  I therefore make an order nisi that the Defendant is to pay the Plaintiff the costs of this action including two-thirds of the costs of and occasioned by the Plaintiff’s summons dated 24 October 2005, to be taxed if not agreed.

55.   It only remains for me to thank the parties for their able assistance.