GREATWORTH INDUSTRIAL LTD v. SUN FOOK KONG CONSTRUCTION LTD AND ANOTHER

HCCT 45/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO. 45 OF 2003

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J U D G M E N T

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I.   Introduction

1.  By a Main Contract dated 21 September 1995 the Housing Authority as Employer engaged Sun Fook as Main Contractor for the construction of housing at Hing Tung Estate Phase 4 (the works).  The Main Contract prohibited Sun Fook from assigning any interest under the agreement without the Authority's permission.  Further, the Main Contract provided that Sun Fook could not sub-let the works in their entirety, but could only do so in part under certain conditions.

2.  By a Letter of Acceptance dated 14 September 1995 Sun Fook engaged OLS to act as Sun Fook's Manager for the works at a remuneration of $289,650,000.  The latter amount was calculated by reference to the total of the Bills of Quantities under the Main Contract less 4.345% of the amounts in Bill Nos. 3 to 16.

3.  By a Management Agreement dated 2 July 1995 Sun Fook and OLS more fully set out the terms of OLS' engagement as Manager.

4.  By a Confirmation of Order dated 1 October 1996 (the Sub-Contract) OLS engaged Greatworth to execute part of the works for a sum of $3,550,000.  That part of the works which Greatworth was engaged to perform involved certain "Temporary Works" as well as "Steel and Metal Works" set out in Bill Nos. 3 to 14 of the Main Contract.

5.  OLS is now known as Prosperity Construction and Decoration Limited.  As a result of a winding-up petition against OLS, Greatworth's claim against OLS has been stayed.  OLS did not appear in the trial before me.

6.  Greatworth has not been fully paid for its work at the site.  It claims the outstanding amount (which has been agreed at $1,640,000) from Sun Fook. 

7.  Greatworth contends that Sun Fook is liable to pay such sum on one or other of the following bases:-

(1)     OLS entered into the Sub-Contract as agent acting for and on behalf of Sun Fook.  Sun Fook was a party to the Sub-Contract as undisclosed principal.

(2)     Sun Fook procured OLS to act in breach of OLS' obligations to Sun Fook under the Sub-Contract.  Sun Fook is liable to OLS for the tort of inducing a breach of contract.

(3)     Sun Fook has been unjustly enriched by Greatworth's work on site.  Sun Fook is liable to make restitution to Greatworth.

(4)     Greatworth is entitled to a quantum meruit as against Sun Fook.

(5)     By not paying the outstanding balance to Greatworth, Sun Fook breached a collateral contract between itself and Greatworth.

II.  discussion

A.  Ground 1: Undisclosed principal

8.  Mr. M. C. Chiu (appearing for Greatworth) submits that, on their true construction, the Letter of Acceptance and Management Agreement authorised OLS to enter into the Sub-Contract as Sun Fook's agent.

9.  In particular, Mr. Chiu relies on the following matters:-

(1)     The Letter of Acceptance and Management Agreement refer to OLS as "Manager".  In its ordinary meaning, Mr. Chiu submits that the word "manager" implies the capacity of an agent.

(2)     Under Management Agreement cl. 3(1), OLS was to state its capacity of Manager in all communications.

(3)     Under Management Agreement cl. 3(2), OLS was permitted (with prior permission from Sun Fook) to prepare printed material bearing Sun Fook's name and containing express reference to the Main Contract.

(4)     Under Management Agreement cl. 5(1), OLS was obliged to discharge Sun Fook's obligations under the Main Contract as if OLS were Sun Fook.

(5)     Under Management Agreement cl. 11(1) OLS was to be paid a "remuneration" instead of a contract price.

(6)     Management Agreement cl. 11(5) states that OLS:-

"shall, on behalf of SFK [Sun Fook] and from time to and time and at such time as SFK shall be entitled to do so under the Contract, make prompt applications to the Housing Authority in writing for payments due to SFK under the Contract".

(7)     Management Agreement cl. 15(1) provides that nothing in the contract "shall be construed or have effect as constituting any relationship of employer and employee or partnership between SFK and the Manager".  Since cl. 15(1) does not expressly exclude an agency relationship, it must (Mr. Chiu argues based on the maxim expressio unius, exclusio alterius) imply that the Management Agreement was constituting OLS as Sun Fook's agent.

10.  I do not find Mr. Chiu's arguments persuasive.  In particular, I do not think that the mere fact that OLS is referred to as "Manager" means that Sun Fook conferred actual authority on OLS to sub-contract on Sun Fook's behalf.

11.  In my view, Management Agreement cl.12 makes it plain that, despite its appointment as Manager, OLS needed special permission from Sun Fook before OLS could sub-contract with third parties as Sun Fook's agent.  It was only with Sun Fook's express authority in writing that OLS could enter into sub-contracts with third parties on Sun Fook's behalf.

12.  Clause 12 provided:-

"(1)   The Manager shall not assign the whole or part of any part of this Agreement or the benefits, obligations or liabilities hereunder provided that the Manager may sub-contract any portion of any piece of the Contract Works either on a labour and material basis or labour only basis and provided however that:-

(a)     the Manager shall obtain the prior written consent of SFK if any sub-contract shall be made in the name of SFK or otherwise;

(b)     in the event that the Manager enters into any sub-contract, whether in the name of SFK or otherwise, the sub-contract shall contain provisions whereby in the event of this Agreement being terminated for any reason whatsoever,

(i)      SFK may elect to be substituted for the Manager as the main contractor to the sub-contract; and; and

(ii)     if SFK so elects, the sub-contractor shall not have any claims against SFK in respect of any obligations or liabilities of the Manager to the sub-contractor under the sub-contract subsisting as at the day on which SFK elects to be substituted for the Manager; and

(c)     any sub-contract that does not contain provisions described in Paragraph (b) above shall not be valid.

(2)     References in this Agreement (other than in Clause 12(1) to sub-contractors of the Manager shall be references to sub-contractors engaged in the execution of the Contract Works irrespective of whether the sub-contractors are engaged in the name of SFK, the Manager or otherwise."

13.  There is no evidence that OLS sought Sun Fook's permission to enter into the Sub-Contract with Greatworth.  It follows from cl. 12 that OLS had no authority to create direct contractual relations between Sun Fook and Greatworth.

14.  Mr. Chiu argues that cl. 12 is no bar to his agency submission.  He suggests that the failure to seek Sun Fook's permission would only constitute a breach which Sun Fook could waive.  Thus, Mr. Chiu suggests that, since Sun Fook was aware of Greatworth's involvement in the works as sub-contractor, Sun Fook must be taken to have waived the requirement for permission in cl. 12 and accepted that Sun Fook had a direct contractual relationship with Greatworth.

15.  The argument is untenable. 

16.  The evidence from Sun Fook's Managing Director Mr. Alan Chan was that, as far as Sun Fook was concerned, Greatworth was on site purely as OLS' sub-contractor.  I do not see how the fact that Sun Fook allowed Greatworth to work on site leads to an inference that Sun Fook accepted that it had a contractual relation with Greatworth.

17.  If what Mr. Chiu is saying is that Sun Fook by its conduct ratified the Sub-Contract and undertook rights and obligations under that agreement, the argument would still be problematic. 

18.  There is no evidence that OLS purported to be acting as Sun Fook's agent when entering into the Sub-Contract with Greatworth.  On the face of the Sub-Contract, OLS was dealing solely as principal with Greatworth.  It is not possible for a person P to ratify a contract between A and a third party, unless A purported to be acting as P's agent when entering into the contract.  There can be no question here of ratification.

19.  Finally, on undisclosed agency, Mr. Chiu submits that in light of the restriction in the Main Contract against a sub-letting of the entire contract, I should treat the Management Agreement as giving rise to an agency agreement.

20.  Mr. Chiu argues that, read as a sub-contract between Sun Fook and OLS, the Management Agreement would constitute a sub-letting of the entire works, contrary to the Main Contract.  It is only if the Management Agreement is read as giving rise to an agency that the Management Agreement would not offend against the stricture in the Main Contract.

21.  I am not convinced by the submission.

22.  First, I am not persuaded that the Management Agreement in fact constituted a sub-letting of the entire (as opposed to almost the entire) works.  There is some evidence from Mr. Chan, for example, that certain sub-contractors (including nominated sub-contractors) were engaged in direct sub-contracts with SFK.

23.  Second, the essential question is the construction of the Management Agreement.  On its terms, did the Management Agreement confer authority on OLS to enter into the Sub-Contract with Greatworth?

24.  It seems to me that, whatever the Main Contract might say, I cannot ignore the clear words of cl. 12 of the Management Agreement itself.  I cannot construe cl. 12 to mean something other than what it plainly says, merely because such alternative construction might be more consistent with Sun Fook's obligations under the Main Contract.

25.  Mr. Chiu relies on the maxim that "where the words of a contract are capable of 2 meanings, one of which is lawful and the other not, the Court should prefer the former".  But cl. 12 is not ambiguous.  Nor is it capable of alternative readings.

26.  Third, Mr. Chiu is in effect suggesting that the stricture against sub-letting in the Main Contract forms part of the factual matrix against which I should construe the Management Agreement.

27.  But, absent cogent evidence that Sun Fook and OLS held a common view of what the Main Contract allowed or disallowed, Mr. Chiu's submission cannot have much force.  For all one knows, Sun Fook or OLS or both may have rightly or wrongly regarded OLS' appointment as Manager (but not as agent) under the Management Agreement as perfectly consistent with the Management Agreement.

28.  For the foregoing reasons, I do not think that Sun Fook was an undisclosed principal.  The Sub-Contract was merely between Greatworth and OLS acting in its own right.

B.  Ground 2: Inducing breach of contract

29.  OLS commenced work on 21 September 1995.  Its progress was slow.  Sun Fook received many letters of complaint from the Authority about delay in the works and the lack of resources being deployed.

30.  OLS explained to Sun Fook that it was incurring heavy losses in connection with the works.  To obtain further financing for the project, OLS suggested entering into a Deed of Novation.

31.  The effect of the Deed would be to transfer the benefits and burdens of the Management Agreement to Petway Limited.  Such transfer would allow the OLS Group (including OLS) to be listed on the Hong Kong Stock Exchange.  Without novation, the Management Agreement would be included in the books of the OLS Group as an unprofitable item and thereby prevent listing.

32.  Mr. Chan of Sun Fook agreed to the novation, subject to receiving a guarantee from OLS' parent company.

33.  Accordingly, on 3 June 1997 Sun Fook, OLS and Petway entered into the Deed of Novation.  This released OLS from its obligations to Sun Fook under the Management Agreement.

34.  Unfortunately, progress on site remained slow.

35.  In July 1997, concerned that Petway could not complete the works, Sun Fook entered into a Supplemental Agreement with Petway.  By this contract, Sun Fook undertook to assist Petway in the works.  In particular, Sun Fook would assume the role of Construction Manager and be responsible for administering payments from Petway to sub-contractors working on the project. 

36.  Petway, however, remained responsible for ensuring that there were adequate funds to pay out.  In consequence, the Supplemental Agreement included provisions for the opening of a special account from which payment was to be made.

37.  Mr. Chiu submits that by the Deed of Novation OLS dropped out of the project altogether.  OLS (Mr. Chiu says) was unable to give instructions to Greatworth as a result.  Further, OLS became unable to make further payments to Greatworth and could not perform the Sub-Contract. 

38.  Mr. Chiu further says that Sun Fook entered into the Deed of Novation recklessly without regard to whether it would cause OLS to be in breach of the Sub-Contract.

39.  The submission is without merit.

40.  First, the Deed of Novation could not have affected the continued existence of the Sub-Contract between OLS and Greatworth.  The Sub-Contract was not novated.  Although (as far as Sun Fook was concerned) Greatworth was discharged of its obligations under the Management Agreement, OLS remained bound to Greatworth under the Sub-Contract.  OLS did not drop out of the picture altogether as a result of the Deed of Novation.

41.  Second, despite the Deed of Novation, Greatworth was in fact still able to enter the work site and execute its sub-works. This is self-evident from Greatworth's own case. Greatworth complains that it remains unpaid despite having completely fulfilled its obligations under the Sub-Contract.  Greatworth cannot claim that it completed its work on the one hand and yet was prevented by the Deed of Novation from completing on the other hand.

42.  Implicit in Greatworth's being able to enter the site and go on working is the premise that Petway must have entered into an arrangement with OLS whereby Greatworth would continue with its work unimpeded.  This is hardly surprising.  As Mr. Chan pointed out, the staff of Petway and OLS on site were in reality indistinguishable.  The entry into the Deed of Novation simply effected a change in the formal regime (a switch from one OLS company to another) under which such staff performed the works.  In substance, the project continued as before.

43.  Insofar as instructions were concerned, Sun Fook (acting as Petway's Construction Manager) gave Greatworth directions and Greatworth executed the same.

44.  Everything continuing in practical terms as before on site, it is unclear to me how the Deed of Novation can be said to have induced or led to OLS breaching the Sub-Contract.

45.  Third, if the alleged breach was that OLS failed to pay Greatworth, that must be a consequence of OLS' insolvency.  I do not see how it can be maintained that OLS' failure to pay was caused by Sun Fook's agreement to the Deed of Novation.

46.  Fourth, the whole purpose of the Deed of Novation was to enable the OLS Group to raise more finance for use on the project.  There is no basis for alleging that, by entering into the Deed of Novation, Sun Fook acted recklessly and without caring whether OLS fulfilled its obligations under the Sub-Contract.

C.  Ground 3: Unjust enrichment

47.  Greatworth's case on unjust enrichment runs as follows:-

(1)     Unaware of the Deed of Novation and Supplementary Agreement, Greatworth continued to perform the Sub-Contract.

(2)     In so doing, Greatworth acted under a mistake or as a result of a misrepresentation induced by Sun Fook and OLS to the effect that the Sub-Contract was subsisting.

(3)     Had Greatworth known the true situation, it would have considered stopping work altogether.

(4)     But since Greatworth continued to work oblivious to the change in contractual regime, Sun Fook was enriched at Greatworth's expense.

(5)     In particular, Sun Fook has benefitted by at least the agreed amount of $1,694,000 which remains unpaid under the Sub-Contract.

(6)     Given that Sun Fook induced Greatworth's continued working on the Sub-Contract, it would be unjust to allow Sun Fook to retain this benefit.

48.  Mr. Chiu accepts that normally a contract with X (here the Sub-Contract) to confer a benefit on T would preclude a restitutionary claim against T.  But he says that this is an exceptional case as here the contractual regime was subverted.  Unknown to Greatworth, the Deed of Novation (Mr. Chiu stresses) took OLS out of the picture.  As a result, OLS ceased to be in a position where it could sue Sun Fook for payment for works done by Greatworth under the Sub-Contract.

49.  I am not persuaded by Mr. Chiu's argument.

50.  Assume that Sun Fook has been "enriched" by Greatworth's performance.  It does not follow that there would be injustice to Greatworth in Sun Fook retaining the benefit of that enrichment.

51.  Sun Fook obtained the benefit of Greatworth's performance as a result, initially of entering into the Management Agreement with OLS and then subsequently novating that agreement with Petway.  In entering into the Management Agreement and Deed of Novation, Sun Fook incurred liabilities to OLS and Petway.  Thus, for example, Sun Fook undertook to pay remuneration of $289,650,000 to OLS.

52.  It cannot be said that Sun Fook has simply been enriched by Greatworth's performance without coming under any obligations itself.  Given that Sun Fook paid or became liable to pay valid consideration for the benefit of Greatworth's work, I do not see any injustice in denying a remedy to Greatworth against Sun Fook. Indeed, to allow a remedy could possibly expose Sun Fook to double liability: to OLS or Petway on the one hand and to Greatworth on the other.  That would be itself unjust to Sun Fook.

53.  In the normal course of events, Greatworth would look to OLS to recover the balance due for work executed by it.  This would be because OLS was the immediate enrichee of Greatworth's performance.  Sun Fook was a remote enrichee of Greatworth's performance and that only because of the contractual regime which Sun Fook entered into with OLS and Petway. 

54.  The doctrine of privity does not usually permit a claimant to sue a remote enrichee who is such as a result of a contract between himself and an immediate enrichee.  A claimant will not normally be allowed to "leapfrog" the immediate enrichee.

55.  Nonetheless, Mr. Chiu contends that there can be "leapfrogging" here because of a wrong or unconscionability inflicted on Greatworth by Sun Fook not informing Greatworth of the Deed of Novation.  But I do not think that this submission can be right.

56.  There was no duty on Sun Fook (with whom Greatworth was not even in contractual relation) to inform Greatworth of the Deed of Novation.  The effect of the Deed of Novation on OLS' ability to perform its obligations under the Sub-Contract would purely be a matter between OLS and Greatworth.  Insofar as the Sub-Contract and the relationship between OLS and Greatworth was concerned, Sun Fook could have no standing, obligation or duty.

57.  There being no duty on the part of Sun Fook to inform Greatworth, I do not think that any alleged mistake under which Greatworth laboured can be attributed to Sun Fook.  Nor do I believe that it can be said that Sun Fook misrepresented anything to Greatworth.  There has been nothing unconscionable in Sun Fook's conduct such that it can be claimed that "exceptionally" the law of restitution should grant Greatworth a remedy against Sun Fook as remote enrichee.

58.  Mr. Chiu suggests that it was wrong of Sun Fook to enter into the Deed of Novation, because then Greatworth could no longer garnishee payments to be made by Sun Fook to OLS.  After the Deed of Novation, Sun Fook would only be paying Petway (not OLS) as sub-contractor.  Mr. Chiu says that Greatworth was thereby prejudiced because it lost the possibility of enforcing OLS' obligations by the garnishee of debts owing from Sun Fook to OLS.

59.  The submission amounts to saying that Sun Fook did not just owe a duty to inform Greatworth about the Deed of Novation, but Sun Fook also had to obtain Greatworth's permission to enter into such Deed.  There is no principle of law (whether of restitution or otherwise) that would so restrict Sun Fook's ability to deal with its commercial agreements. 

60.  In any event, I have concluded that there was no duty on Sun Fook's part to inform Greatworth of the Deed of Novation.  It follows that the more onerous obligation of obtaining permission to enter into the Deed of Novation, did not exist either.

61.  It might be alleged that the Deed of Novation essentially constituted an unfair preference which deprived OLS of an asset (namely, the right to claim against Sun Fook under the Management Agreement).  If so, might it be said that the unfair preference constitutes a circumstance justifying "leapfrogging" in this case?

62.  I think that such argument does not sit well with the evidence that, as far as OLS was concerned, its obligations under the Management Agreement were a liability preventing flotation of the OLS Group.  However, assume that OLS' rights under the Management Agreement can be characterised as an asset.

63.  In that case, under the normal insolvency regime, an unfair preference can be set aside if entered into within (say) 6 months before the presentation of a winding up petition.  See Companies Ordinance (Cap. 32) ss. 266, 266A and 266B and Bankruptcy Ordinance (Cap. 6) ss. 49-51A.  It would not be right additionally to use the law of restitution to supplement the statutory insolvency regime and give a creditor in Greatworth's position a further remedy against a party who has (say) benefitted from the unfair preference.

64.  Either a transaction such as the Deed of Novation can be set aside under insolvency law as an unfair preference or it cannot.  If it can be set aside, there is no need for other remedy.  If, however, statute does not set aside a transaction for whatever reason (including lapse of more than 6 months before presentation of a winding-up petition), the legislative will evidenced by the statute should not be supplemented by recourse to the common law of restitution.

65.  In summary, what Greatworth is really complaining about is that OLS, being insolvent, cannot pay what is due to Greatworth. That is a position which is encountered daily in commercial life. OLS' insolvency cannot here be blamed on wrongdoing or unconscionability on Sun Fook's part.  If anything, by entering into the Deed of Novation, Sun Fook tried to assist OLS to obtain further finance and fulfil its obligations.  However one analyses the facts, there is no basis to modify the normal operation of insolvency and contract law to give Greatworth a direct restitutionary remedy against Sun Fook.

D.  Ground 4: Quantum meruit

66.  Some work orders were addressed to Greatworth on Sun Fook stationery.  Some of such orders may even have been signed by Sun Fook staff.  Mr. Chiu argues that in those circumstances Sun Fook came under an obligation to pay Greatworth for work done.

67.  In my view, the mere fact that orders or directions were given under Sun Fook letterhead, is not enough to make Sun Fook liable to pay the balance.  Greatworth executed the instructions so given, because it treated them as directions made pursuant to the Sub-Contract.

68.  Note that, following the Supplementary Agreement, Sun Fook itself paid OLS' sub-contractors (including Greatworth).  Upon making payments, Sun Fook requested the sub-contractors to sign a receipt printed on Sun Fook letterhead.

69.  The receipt form included the following paragraph:-

"We draw your attention that the above payment and, if any further payment(s) you received from [Sun Fook] made on behalf of [OLS] in respect of your work/materials supplied for the above mentioned work site, shall not, unless otherwise specified, constitute or be deemed to constitute or be construed as having constituted any contractual relationship between [Sun Fook] and your company, nor be construed as [Sun Fook] acting as agent for [OLS]."

70.  Underneath the paragraph just quoted, there was a typed acknowledgment of receipt in the following terms:-

"We acknowledge receipt of the above payment.

We further confirm our understanding and acceptance to the above-mentioned agreement."

71.  Greatworth signed such a receipt.  Its signature fortifies the view which I have just expressed on the quantum meruit ground.  By the receipt, Greatworth acknowledged that it acquired no rights of suit against Sun Fook.

72.  At trial, Mr. Yau Yiu Chin, Greatworth's director, claimed that he had signed the receipts under duress.  Mr. Yau said that he had no choice because he wanted his money.

73.  Mr. Chiu submits that, in consequence of Mr. Yau's evidence, Greatworth's receipt should be ignored since it was signed under duress.  But I am unable to accept the argument.  What Mr. Yau is saying is that, having weighed his options, he took a commercial decision and signed the receipt.  That is not enough to give rise to duress.

E.  Ground 5: Collateral contract

74.  A collateral contract arises where A promises to do something for B in return for B agreeing to enter into a contract with C.  A’s contractually binding promise to do something for B is collateral to the contract to be entered into between B and C.

75.  But that is not what Mr. Chiu means by “collateral contract”.  At trial he was unable to identify any particular contract which was collateral to some other agreement.  His submission on collateral contract amounted to little more than his quantum meruit argument. 

76.  In essence, Mr. Chiu submitted that, because Greatworth executed instructions communicated on Sun Fook letterhead, Sun Fook became contractually obliged to pay Greatworth. 

77.  That contention has been rejected in Section II.D of this Judgment.

III. Conclusion

78.  Greatworth fails on all 5 grounds of liability advanced.  Its claim against Sun Fook is consequently dismissed.

79.  Although Greatworth's case against OLS has been stayed, OLS' Counterclaim against Greatworth subsists.  That Counterclaim alleges that Greatworth's work on site was defective. 

80.  Mr. Chiu asks me to dismiss OLS' Counterclaim.  Given that OLS has not appeared to argue its Counterclaim or adduce any evidence in support, I think that Mr. Chiu is entitled so to request. 

81.  OLS' Counterclaim against Greatworth is dismissed.

82.  I shall now hear the parties on costs.