TRALACO LTD. v. ACTIVE TELECOM LTD.

HCA 21969/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 21969 OF 1998

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J U D G M E N T

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Introduction:

1. The plaintiff is a specialist contractor in supplying computer room equipment and providing installation. The defendant is a building contractor for a company called QAD. On 15 June 1998, the defendant entered into a contract with the plaintiff for the design and installation of a new computer room for QAD in Convention Centre for a consideration of $365,000, with 30% deposit to be paid after ordering. The defendant failed to pay the deposit on or before 18 June 1998. Thereupon the plaintiff terminated the contract and sued for damages. The defendant alleged that the plaintiff was in breach and counterclaimed.

2. The issues are:

(i) Whether on a proper construction of the contract, payment of deposit was a term, breach of which entitled the innocent party to terminate the contract;

(ii) Whether the defendant was in breach of the payment term or alternatively evinced an intention no longer to be bound by the contract; and

(iii) The measure of damages for the plaintiff if the defendant was in breach or for the defendant if otherwise.

The background:

3. The parties were strangers to one another and did not have any previous business relations. In early June 1998, the defendant's director, Mr Raymond Chan negotiated the contract with Mr Vicky Hung and Steve So of the plaintiff company. Hung was a sales engineer and has left the plaintiff's employ. Steve So is a sales manager. All pre-contractual negotiations between the plaintiff and the defendant were concluded on 8 June 1998. Chan requested the plaintiff to draw up the contract.

4. Steve So drafted the contract including the payment term referred to earlier. As this was the first time the plaintiff had business transaction with the defendant, Steve So discussed the payment terms with Chan, but he did not in plain language told Chan that the plaintiff would terminate the contract if deposit was not paid upon signing the contract. The contract was approved by the plaintiff's director, Mr Nelson Yu. It was faxed to the defendant on 12 June 1998 but without the installation schedule. In the meantime, the plaintiff's staff attended various site meetings with the defendant and QAD.

5. On the morning of 15 June 1998, Chan telephoned Hung and said he would attend the plaintiff's office to execute the contract. Hung told Chan to bring along the deposit which he said must be paid upon signing the contract. Hung was not called to give evidence, but his conversation with Chan was made at the instruction of Steve So who actually overheard the conversation.

6. Chan attended the plaintiff's office at about 2 p.m. Hung and Steve So explained the contract to Chan and agreed to the installation schedule, according to which work was to commence on 18 June 1998 and to be completed on 30 June 1998. Steve So told Chan that the deposit had to be paid forthwith and presented him an invoice in the amount of $109,500. The term of payment as written on the invoice was "against invoice". But Chan said that he left his office in a rush and forgot to bring along the cheque for payment. He reassured Steve So that the defendant would pay as soon as possible and that he was anxious that the plaintiff would proceed with the work. Then Chan left together with Hung to attend a site meeting with QAD in Convention Centre.

7. On the following day, 16 June 1998, Steve So telephoned Chan and reminded him to pay the deposit as the plaintiff had to start preparatory work. Chan promised to pay as soon as possible but Steve So insisted it be paid as soon as possible within that day.

8. The deposit was not paid on 16 June 1998 or by 5 p.m. on 17 June 1998. The plaintiff's account clerk, Miss Shirley Lau, telephoned the defendant company and pressed for payment. She spoke with Chan's secretary, Miss May Wong, and told her that if the deposit was not paid, the plaintiff might cancel the contract. Wong did not consider the matter as urgent and said it would take a few days to arrange payment but undertook to inform Chan. On the morning of 18 June 1998, the defendant received the plaintiff's fax terminating the contract. The letter reads:

"I refer to our yesterday phone discussion on the issue of deposit for the above contract, as we still not able to get a positive reply from you till now, we are not able to start work without your deposit. At this moment it seems that it is not possible to comply to the working schedule. And, we confirm you the contract void."

Though Lau was not called to give evidence, the content of her telephone conversation with Wong was not disputed by Wong.

9. Chan's account about the deposit was different. He said that no one from the plaintiff company had informed him about the importance of the payment of deposit and that the plaintiff only demanded payment after he signed the contract. He said he would require an invoice. Thereupon Hung went out to the office and arranged for an invoice to be typed and then gave it to him. He had to wait for the invoice, hence he and Hung were late for the site meeting. He said he had not been informed that the deposit had to be paid upon signing and believed he could pay within a reasonable time, so he placed the invoice in his out-tray to be processed in the ordinary course, which would take three to four days.

10. I do not consider Chan's account inherently credible. The parties did not know each other and never had any business transaction before. Even though the contract sum was not a significant amount, the plaintiff had to incur equipment and material costs and had them installed or attached to the building which would then become part of the fixture of the building and the property of QAD. It is unlikely that the plaintiff would incur equipment, material and labour costs without securing some form of partial payment first (see below).

11. In that setting, it is more likely than not that the purpose of Chan's visit on 15 June 1998 was to sign the contract and to pay a deposit and that he had been informed by Hung about these beforehand. Otherwise, there was no reason why the contract could not have been signed and returned by fax or through the mail, or given to Hung at the site meeting that very afternoon.

12. Chan's explanation for the visit was to have a look at the plaintiff's office and to see the size of its operation. This is hardly credible. The parties had entered into negotiation in early June and had finalised the terms of the contract. The plaintiff had in the meantime attended a number of site meetings with and on behalf of the defendant. The plaintiff had designed the work and performed certain preparatory acts. The work had to be completed urgently and time was pressing. I think by 15 June 1998, both parties were committed to the contract beyond recall. It is unlikely that either party would desire a last minute change of mind, which would mean a lot of inconvenience and additional costs of acceleration to the defendant. If the defendant wished to ascertain the status of the plaintiff company, it would have done so much earlier, and indeed I think it had so satisfied itself before committing that far into the project.

13. Chan was supposed to attend a site meeting at 2:30 p.m. that afternoon. Given that he had to go all the way from the plaintiff's office in Kowloon Bay to Convention Centre to attend the site meeting, half an hour was barely sufficient for travelling by the Mass Transit Railway, which was the quickest means of transport available. His visit at 2 p.m. allowed him no time to carry out his alleged purpose of ascertaining the status and reliability of the plaintiff company. In the circumstances, if the purpose of his visit was not to make a payment, there was no actual need for him to travel under such a tight schedule. He could have signed the contract and given it to Hung at the site meeting that afternoon. I think the truth is that the defendant had not been paid its deposit by QAD and in turn did not feel obliged to pay deposit to its sub-contractor. Chan probably thought the plaintiff would most likely tolerate late payment as the plaintiff had been very committed to the project.

14. Ms Chan for the defendant submitted that the plaintiff's motive in terminating the contract was that it acted under a misapprehension that Hung had unwittingly undertaken to complete the work by 24 June 1998, which rendered the contract unprofitable. This, she submitted, undermined the credibility of the plaintiff's witnesses. She referred to two letters dated 11 and 27 November 1998 in which the plaintiff's solicitors accused the defendant of having unilaterally advanced the date of completion of all the work under the contract from 30 to 24 June 1998 as evidence of the defendant's breach of contract. Under cross examination, Steve So said he was also of the opinion that the defendant had advanced the completion date of the entire project to 24 June 1998.

15. These two letters and Steve So's evidence are inconsistent with the minutes of site meeting on 16 June 1998, which showed that Hung on behalf of the plaintiff only agreed to complete a dust free room for installation of the PABX system on 24 June 1998 but not to complete the entire project. This shows that the plaintiff was indeed acting under a misapprehension that it was required to complete the entire project on 24 June 1998 and raised that as one of the two reasons for terminating the contract. The other reason being the non payment of deposit.

16. Jacky Yue, the plaintiff's director, denied that the plaintiff was so mistaken and put the blame on its solicitors. Ms Chan submitted that Jacky Yue was not credible as he was in court while Steve So was being cross examined on the solicitor's letters and hence made up the evidence. In the light of the contemporaneous documents, I am bound to reject Jacky Yue's evidence on this issue and find that the plaintiff was in fact labouring under its own mistake.

17. There was an obvious misunderstanding between its sales and administrative staff comprising of Steve So, Jacky Yue and Nelson Yu who gave instruction to the solicitors, on the one hand and its engineering staff, Vicky Hung on the other. This finding does undermine the credibility of Jacky Yue whose evidence on this issue was rejected by me. But it does not affect my assessment of Steve So's credibility. Steve So's evidence on this issue is consistent with his witness statement and the solicitor's letters. He had a misunderstanding but he did nothing to hide that. On the more important issue about the payment term, for reasons as explained above, I find his account more credible than Chan's. I accept his evidence and reject Chan's.

18. Ms Chan further submitted that the plaintiff's motive in terminating the contract because of its misunderstanding in turn undermined the credibility of the plaintiff's claim. With respect, I do not think her argument could be taken that far. Non payment of deposit was the only reason given by the plaintiff in its letter of termination. Though the letter did mention it was not possible to comply with the schedule, Lau was talking in terms of the delay in starting as a result of the non payment of deposit, rather than about the impossibility of completing the entire project by 24 June 1998. When the matter was passed into the hands of the plaintiff's solicitors, this misunderstanding was raised as an additional ground justifying termination. But even then, the issue of non payment of deposit was treated as a more important reason for termination in the letter of 11November 1998. The plaintiff had all along been complaining about non payment of deposit. The introduction of an additional though unjustified reason for termination, does not in my view, undermine the credibility of the plaintiff's claim.

19. On the facts, I find that Hung had made it clear to Chan that the deposit had to be paid upon signing the contract and had specifically reminded him to bring along the payment on the morning of 15 June 1998, that he was presented with the invoice for the deposit demanding payment against invoice, i.e. forthwith, but he declined to pay giving the excuse that he forgot to bring along his cheque. The plaintiff obviously regarded payment of deposit an important term and constantly reminded Chan on 16 and 17 June 1998, but Chan just gave empty promises. Again when Lau spoke to Chan's secretary on 17 June 1998, the secretary treated the matter as non urgent and gave no assurance of prompt payment.

CONSTRUCTION OF THE PAYMENT TERM:

20. Mr Wong for the plaintiff submitted that on a proper construction of the payment term, deposit had to be paid upon signing of the contract and the term was a condition or fundamental term, breach of which entitled the plaintiff to treat the contract as at an end. Alternatively, he submitted, by its breach the defendant evinced an intention no longer to be bound by the contract, and the plaintiff was entitled to accept the defendant's repudiation. On the contrary, Ms Chan submitted that the term was vague as to time of payment and could not have been a condition. In any event as in the case of sales of goods, she submitted, time for payment was not of the essence.

The legal principles:

21. At common law, stipulation as to time is as a general rule not considered to be of the essence of the contract unless (1) the parties expressly stipulate that conditions as to time must be strictly complied; or (2) the nature of the subject matter or the surrounding circumstances show that time should be considered to be of the essence; or (3) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence. In respect of sales of goods, section 12 of the Sales of Goods Ordinance provides that prima facie stipulations as to time of payment are not deemed to be of the essence.

22. The payment clause provides "30% deposit will be paid after ordering, 40% equipment on site and 30% balance after testing and commissioning." While the clause provides for the time of payment of deposit, it is silent as to whether the time of payment is of the essence.

Surrounding circumstances:

23. Ms Chan said that the contract consisted mainly of the supply of two pieces of equipment, i.e. a specialist air-conditioning system and a fire fighting system costing $362,600. This constituted 68% of the pre-discounted contract price. She submitted that the contract should best be considered as a contract for sales of goods. With respect, I do not agree. The contract was to design and install a computer room. Apart from the two pieces of major equipment, there were other equipment to be supplied, such as a raised floor system and water leakage detection system and in addition, builder's work. The contract was not merely for the delivery of two pieces of equipment and connecting them to a power source. It involved the design and building of a computer room, the selection of various other pieces of equipment and putting them together so that they could function as a system to meet the needs of QAD. This was certainly not a contract for sales of goods.

24. In my view, this contract was more like a construction contract, albeit of a much lesser magnitude. But the legal considerations are the same. A particular feature of this type of contract is that a sub-contractor can be expected to have expended heavily in performing the contract before it will be paid in full. Upon fixing of the work to the building, the property in it will have passed to the owner of the building irrespective of the degree of payment the sub-contractor has received. This would confer a major and irretrievable benefit on the owner with whom the sub-contractor has no direct contractual relationship and against whom he has no right of recovery. This would expose him to a substantial risk if the principal contractor should default.

25. The payment term provided that there shall be three instalments, one after ordering, the second one upon delivery of equipment on site and the final instalment upon testing and commissioning. The first instalment was called a deposit. The parties are total strangers to one another and never had any business transactions before. In the light of the consideration stated above, the inference must be that the deposit was intended to secure the performance by the defendant of its obligation under the contract or to minimise the plaintiff's risk exposure. It must therefore be an important term or a condition of the contract that the plaintiff be paid a significant amount of the contract price before it mobilised its labour force and placed order for relatively expensive equipment and commenced work. Therefore time of payment must be of the essence in this contract.

26. Furthermore, the contract was to be performed within a very short duration of thirteen days. According to the installation schedule and the minutes of site meeting, it appears that builder's work or the major part of it and the raised floor system would have to be completed within the first six days and the equipment would have to be delivered on site on the seventh day, and with commissioning on the thirteenth day. The protection intended to be given to the plaintiff by the deposit would be wholly frustrated if the time of its payment was not of the essence but the plaintiff was to be paid within a reasonable time after signing of the contract. The plaintiff had to complete the contract within such a short duration and work under such a tight schedule. Certainty that the defendant would honour its obligation under the contract was of utmost importance. The plaintiff could not incur liability in mobilising its labour force or ordering equipment and material without knowing if it would ever be paid. The plaintiff never had any business transactions with the defendant before and had no idea of its creditworthiness. Equipment had to be ordered before work commenced if they were to be delivered on time under such a tight working schedule. It would be commercially unwise to incur liability in ordering equipment and mobilising its labour force or engaging sub-contractors working for the defendant for three days or four days without knowing if it would be paid on the fourth or fifth day, when further liability would be incurred on the sixth day when the equipment were delivered. Its risk exposure would increase by the day. On the other hand, having contracted to work under such a tight schedule, the plaintiff would be in breach of its obligation to execute work diligently and regularly and in accordance with the installation schedule if it did not order equipment and commence work. In the circumstances, time of payment of the deposit must be of the essence. It must be paid upon signing of the contract.

27. On my finding, Hung told Chan before he went to sign the contract to bring along the deposit and that when signing the contract Steve So also asked for the deposit. These are commercial people and people in the trade. Chan must know that payment of deposit upon ordering means payment upon signing of the contract. In addition, he must also know by the nature of the contract and by the payment term that the deposit must be paid at the time of signing of the contract and that time of payment of the deposit was of the essence of the contract.

28. I therefore find, on a proper construction of the contract, the deposit had to be paid upon signing of the contract and that time of payment was of the essence of the contract. This term was therefore a condition, breach of which would entitle the innocent party to treat the contract as at an end and to sue for damages.

BREACH:

29. Ms Chan submitted that the contract was signed on 15 June 1998 which was a Saturday, and bearing in mind the intervening Sunday, it was unfair to terminate the contract by giving the defendant only one day to pay, i.e. 17 June 1998. According to my 1998 calendar, 15 June 1998 was a Monday. The defendant had a full three working days time to pay. He had all the forbearance he could reasonably expect from the plaintiff, a total stranger who had never done any business with him before. The non payment amounted to a breach of a condition or fundamental term of the contract. The plaintiff is entitled to accept that as the defendant's repudiation.

30. Further in view of the nature of the contract, in particular, its short duration and tight schedule, breach of the term of payment of deposit destroyed the plaintiff's confidence in the defendant's creditworthiness. When Lau telephoned Wong on 17 June 1998, the latter did not treat the payment as urgent and gave no assurance that the deposit would be paid. It was therefore reasonable for the plaintiff to conclude from the non payment, Chan's delay and Wong's response that the defendant evinced an intention no longer to be bound by the contract. On either of the above reasons, the plaintiff was entitled to accept the defendant's repudiation and to treat the contract as at an end.

QUANTUM:

31. Under the ordinary principle of contract, subject to the obligation to mitigate, an innocent party is entitled to recover such amount of damages as would put him in as nearly as possible the same position as if no wrong had been committed, that is as if the contract had been performed. In this case, the plaintiff is entitled to loss of profit less any saving in labour costs etc. The plaintiff sought to recover costs expended on the contract and not loss of profit. Ms Chan took no issue with this. In my view, it can be assumed that all the costs incurred would have been paid for or formed part of the profit had the contract run its full course. Accordingly, I proceed to assess the various items of the plaintiff's claim.

32. The plaintiff claimed $125,000 damages, of which $37,000 was for materials ordered for the contract and $28,000 was for 50% deposit paid to and forfeited by its sub-contractors for labour and material. The plaintiff operates a very large scale business supplying computer room equipment and providing installation services. The materials ordered were mainly off the shelf standard items, such as wires and ducting. I am quite unable to see under such circumstances why it could not have mitigated its loss by using those items in their other projects. As for the deposit forfeited, I am not satisfied on the evidence what that deposit was in respect of, that they were incurred and that the plaintiff had taken reasonable steps to mitigate its loss. In view of the plaintiff's very cautious attitude of not commencing work without being paid the deposit, I am not satisfied on the evidence that the plaintiff had entered into firm commitments with its sub-contractor. These two items must be disallowed.

33. The plaintiff claimed $60,000 in respect of its staff costs in preparation of design and in attending meetings with the defendant and QAD. Part of these costs were in respect of pre-contract expenses. On the assumption that these costs were part of the plaintiff's cost in performing the contract and would have been included in its costing exercise and paid for had the contract run its full course, I consider them recoverable as damages. Ms Chan submitted that these costs are excessive. There were indeed site meetings and the defendant had the benefit of the plaintiff's design and preparatory work. There is nothing to suggest that they were excessive. I therefore allow this head of claim, which is the only head of claim I found proven.

34. Accordingly, I enter judgment for the plaintiff in the amount of $60,000 with interest at judgment rate and costs to be taxed if not agreed.