CREATILES BUILDING MATERIALS CO LTD v. TO'S UNIVERSE CONSTRUCTION CO LTD

CACV 384/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 384 OF 2002

(ON APPEAL FROM HIGH COURT ACTION NO. 10677 OF 1998)

________________________

J U D G M E N T

________________________

Hon. Cheung J.A. :

Facts

1. The plaintiff was a building contractor engaged in applying granite spray coating to the external walls of buildings. The defendant was a builder engaged in the construction of a building in Tai Nan West Street, Kowloon, Hong Kong ("the building").

2. By a contract dated 11 November 1997 made between the plaintiff and the defendant ("the contract"), the plaintiff agreed to supply and apply granite spray coating to the external walls of the building for the sum of HK$2,156,600.00. The contract had the following relevant provisions :

1) "Time of delivery

(1) Mock up completion on mid Dec. 97;

(2) Materials delivered on site on mid Feb. 98; and

(3) Working period 60 days."

2) "Clearance

Actual quantity required is subject to final measurements on site and valued using our agreed unit price."

3) "Terms of payment

(1) 10% deposit upon signing of contract;

(2) 30% upon materials on site;

(3) Balance by each 14 days interim payment during work-in-progress."

3. Pursuant to the contract, the defendant paid the 10% deposit by a post-dated cheque of 22 November 1997. The cheque was only cleared on 15 December 1997. Due to changes in the instruction by the defendant of the colour of the granite spray, the delivery of materials to the site was not in accordance with the terms of the contract. The materials were delivered on 7 April 1998. The defendant acknowledged receipt of the materials in good order and condition. The plaintiff issued a debit note for HK$646,980.00 which was 30% of the contract price. It was paid on 30 April 1998.

4. The plaintiff's case is that it was not able to start work immediately because the defendant was unable to deliver the site to it to carry out work. Work was commenced on 9 May 1998. The granite spray was to be applied to the four elevations i.e. the exterior of the building. Five coats were to be sprayed on each wall. The first and undercoat was the primer/sealer, then two coats of granite spray and finally two coats of silicone/acrylic top coat.

5. On 21 May 1998, the plaintiff issued a debit note for HK$258,792.00. This represented HK$431,320.00 or 20% of the balance of the contract price then due less the deposit (10%) at HK$43,132.00 and materials on site (30%) at HK$129,396.00. The plaintiff issued the debit note pursuant to the interim payment provision of the contract. Despite the defendant's promise to pay this sum on 22 May 1998, this amount was not paid on that date. The defendant further promised to pay this sum on or before 27 May 1998. Again, the promise was not kept. In the meantime, the plaintiff continued with the work.

6. On 3 June 1998, the plaintiff's solicitors wrote to the defendant stating that if the payment was not made by 1:00 pm on 4 June 1998, the plaintiff would be at liberty to treat the contract as having been repudiated by the defendant. No payment was made by the defendant at this specified time. Instead, the defendant's solicitors wrote to the plaintiff's solicitors at about 12:30 pm on 4 June 1998, stating that the defendant would not pay the sum of HK$258,792.00 as demanded and that the reasons would be given in a forthcoming reply.

7. On 5 June 1998, the plaintiff left the site. On 6 June 1998, the defendant's solicitors wrote to the plaintiff's solicitors, alleging that the plaintiff had repudiated the contract by abandoning the site and as a result, the defendant had terminated the contract. The letter also contained an explanation why the plaintiff was not entitled to the interim payment.

8. The plaintiff claimed against the defendant for repudiation of the contract. The defendant counter-claimed against the plaintiff for damages arising from its repudiation. The defendant alleged that there was overpayment of the contract sum and it suffered damages as a result of the plaintiff's delay in the work. Deputy High Court Judge Saunders found for the plaintiff and dismissed the defendant's counterclaim.

9. The defendant now appeals against the decision.

Interim payment

10. I will deal first with the provision for interim payment in the contract. The judge found that the interim payment provision carried an implication that five progress payments would be made, each presenting 20% of the balance contract sum due under the contract. This arose because the progress payment was to be made at 14-days' intervals over a completion period of 60 days.

11. In my view, it is not necessary to draw any implication that the payment must be in respect of 20% of the contract sum then due. All that the contract required is that during the time when the plaintiff carried out the work, the defendant must make payment every 14 days. The amount of payment will depend on the quantity of the work that had been carried out by the plaintiff at the time when they issued the debit note.

12. However, in my view, on the question of liability, nothing turns on the matter relating to the 20%. The obligation was for the defendant to make interim payment every 14 days.

13. I agreed with the judge's finding that the interim payment is not subject to any interim measurement by the defendant of the work done. The contract provided that the "actual quantity required is subject to final measurements on site and valued using our agreed unit price". This means that there would be a final measurement after the work was completed and before the final payment. It does not mean that because of the use of the word "final", there must be an "interim" measurement as well. The effect of the phrase is that before the final payment, adjustments would then have to be made to the sum claimed by the plaintiff.

14. In the reasons given for the non-payment in the defendant's letter of 6 June 1998, it had not been expressly stated that the interim payment was subject to interim measurement of the work done by the plaintiff. I do not read the statement that the payment was to be paid "in proportion to the quantum of the work done" as meaning that an interim measurement was required but had not been carried out.

15. As to the amount claimed in the debit note of 21 May 1998, the evidence showed that on 20 May 1998 the plaintiff prepared a debit note for HK$215,660.00. This was based on 10% of the work-in-progress. The matter was discussed with the defendant's quantity surveyor who told the plaintiff that the format of the debit note was wrong. After discussion on the work that had been completed by the plaintiff the surveyor agreed that the plaintiff had completed 20% of the work. The plaintiff had checked that 20% of the work had been completed. According to Mr. Ng of the plaintiff, this was based on the following calculation : there were four elevations and each had to have five coats of paint making a total of 20 coats; the plaintiff had applied a primer on three elevations plus two coats of granite spray making a total of five coats which was 20% of the work. Although the figure should be 25% instead of 20% based on the plaintiff's calculation, there was no contrary evidence that the defendant's quantity surveyor had accepted that 20% of the work had been completed.

Non-payment amounting to repudiation?

16. As to whether the plaintiff could treat the non-payment by the defendant of the first interim payment as a repudiation and terminate the contract, the law in this regard is not particularly difficult. As a starting point, it is correct to say that there is no general right in common law to suspend work if payment is wrongly withheld : Lubenham v. South Pembrokeshire DC [1986] 33 BLR 39. In Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26, Diplock L.J. held that the test whether an event which discharges one of the parties from further performance of his undertakings is this :

“ Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?"

17. In Mersey Steel and Iron Co. v. Naylor, Benzon & Co. [1884] 9 A.C. 434, it was held that on the facts of the case the party which had postponed an instalment payment under erroneous advice had not shown an intention to repudiate the contract so as to release the other party from further performance. Earl of Selborne L.C. held that :

“ You must look at the actual circumstances of the case in order to see whether the one party to the contract is relieved from its future performance by the conduct of the other; you must examine what that conduct is, so as to see whether it amounts to a renunciation, to an absolute refusal to perform the contract, such as would amount to a rescission if he had the power to rescind, and whether the other party may accept it as a reason for not performing his part."

He held in that case no particular payment can be a condition precedent of the entire contract because the delivery under the contract was most certainly to precede payment. He further held that there was no evidence to show that the purchasers could not pay, or that they were unwilling to pay, the amount due.

18. In Decro-Wall International S.A. v. Practitioners in Marketing Ltd. [1971] 1 WLR 361 Salmon L.J. held that :

“ How is the legal consequence of a breach to be ascertained? Primarily from the terms of the contract itself. The contract may state expressly or by necessary implication that the breach of one of its terms will go to the root of the contract and accordingly amount to repudiation. Where it does not do so, the courts must look at the practical results of the breach in order to decide whether or not it does go to the root of the contract."

When he considered whether the practical consequences of the defendants' late payment in breach of contract were of such a character as to make the breaches go to the root of the contract, he held that in the past the plaintiffs had never regarded late payment as being of vital importance to them. He stated that :

“ The case would have been quite different if the defendants' breaches had been such as reasonably to shatter the plaintiffs' confidence in the defendants' ability to pay for the goods with which the plaintiffs supplied them. I think that, in such circumstances, the consequences of the breach could properly have been regarded as most serious, indeed fundamental, and going to the root of the contract so that the plaintiffs would have been entitled to refuse to continue doing business with the defendants."

In the same case Sachs L.J. held that to constitute repudiation, a breach of contract must go to the root of that contract. Buckley L.J. held that the history of the whole matter indicated that punctual payment was a matter of much less importance to the plaintiff than other aspects of the contract. See also Photo Production v. Securicor Ltd. [1980] A.C. 827.

19. At the same time the cases clearly recognize that a deliberate refusal to make an interim payment is capable of amounting to a repudiation of the contract. In Mersey Steel and Iron, Lord Blackburn stated that :

“ There was a statement that for reasons which they thought sufficient they were not willing to pay for the iron at present; and if that statement had been an absolute refusal to pay, saying, "Because we have power to do wrong we will refuse to pay the money that we ought to pay," I will not say that it might not have been evidence to go to the jury for them to say whether it would not amount to a refusal to go on with the contract in future, for a man might reasonably so consider it."

20. In Decro-Wall, Salmon L.J. referred to Withers v. Reynolds (1831) 2 B & Ad. 882 which involved an instalment contract of sale which called for cash on delivery of each instalment; the buyer insisted to pay instalment by credit instead of cash; the court held that the seller was not obliged to go on with the contract. Salmon L.J. stated that the decision was explicable on the basis that the stipulation as to time of payment was intended by the parties to be of the essence of the contract, alternatively that the buyer was seeking to alter the nature of the transaction by turning a cash into a credit transaction.

21. In Dymocks v. Todd [2002] 2 All ER 849 Lord Browne-Wilkinson at page 870 stated that

“ even in an ordinary commercial contract, the non-payment of an instalment of the price is normally to be treated as a repudiatory act".

He further held that :

“ But a party is not entitled to insist that he is not repudiating because he proposes to perform part of the contract in a manner not permitted by the contract."

22. In Canterbury Pipe Lines Ltd. v. The Christchurch Drainage Board (1979) 16 BLR 76 McMullin J. held that:

“ It is true that where a stoppage in payments is temporary only, in the sense of being no more than delayed rather than withheld, the contractor's rights may not extend beyond a right to sue the employer. There may be some cases in which the contractor can treat the stoppage as a repudiation. Much will depend on the facts."

23. Ultimately one has to examine the facts of the case to see whether the non-payment amounted to a repudiation. The principle is to consider whether the circumstances of the non-payment show an intention not to be bound. See also Hudson's Building and Engineering Contracts 11th Edn. Vol. 1 para. 4.221 and Keating on Building Contracts 7th Edn. para. 6-94.

The defendant's argument

24. The judge held that the non-payment by the defendant was repudiation which entitled the plaintiff to terminate the contract. Ms Cheng S.C., counsel for the defendant, argued that the non-payment was not a fundamental breach. The plaintiff had already received 40% of the contract sum and the failure to pay one interim payment of 20% of the balance of the contract sum does not amount to repudiation. She further referred to the fact that under the contract the plaintiff made a profit of $1 million while the plaintiff had already received about $860,000.00 by way of payment from the defendant and the costs of the materials was only about $436,000.00. Hence the plaintiff's financial position was not in way seriously prejudiced by the non-payment. She argued that despite the non-payment, the plaintiff should carry on with the work.

My view

25. I agree with the judge. I do not see how the profit that the plaintiff was able to make from this contract would have any impact on this issue. While the plaintiff had already received 40% of the contract sum, it is clearly provided in the contract that the defendant was required to make an interim payment every 14 days during the progress of the work. The finding of fact by the judge was that the debit note for the interim payment was made at the request of the quantity surveyor of the defendant. Further, the defendant had promised the plaintiff to make the payment first on 22 May and then again on 27 May. The defendant breached its promises on both occasions. The plaintiff then set a deadline for the defendant to make payment on 4 June 1998. It was clearly stated by its solicitors that the failure to make payment by the defendant on the deadline will be treated as a repudiation. The response by the defendant's solicitors in its letter of 4 June 1998 was that the defendant would not pay the sum. Although the letter said that the reasons for the non-payment would be forthcoming, bearing in mind that this was the very first interim payment under the contract, by 4 June 1998 the impression created by the defendant was that it had evinced a clear and unequivocal intention of not to be bound by the contract.

26. In the defendant solicitors' letter of 4 June 1998, after stating that the defendant would not pay the $258,792, it further stated that

“ Please let our client immediately know if your client would still comply with all the terms and conditions of the sales contract."

27. I do not read this as an indication that the defendant had not evinced an intention of not to be bound further on the contract. The defendant had expressly refused to pay for the work. The refusal was absolute in nature. It was not qualified by the last statement. By this statement the defendant was asking the plaintiff to state its position now that the defendant had expressly made known its refusal to pay for the interim payment. This was an unnecessary question in the light of the plaintiff's position as stated in the letter of 3 June 1998.

28. Further, if this statement was to be relied upon, it would reveal another aspect of the breach by the defendant, namely that it would unilaterally change the payment method under the contract. While it would not pay for the interim payment, it would expect the plaintiff to carry on with the work. In other words the payment term would be changed from cash payment to that of credit payment. This clearly entitled the plaintiff to treat it as a repudiation.

29. Although the defendant had in the letters dated 1 and 3 June 1998 respectively complained about the plaintiff's delay in the progress of the work and it had not provided protection sheets to the window, thereby causing stains to the windows, the judge's finding was that the plaintiff had employed a second contractor to assist with the work. The judge held that it was not possible to say in June 1998, that the plaintiff was in breach in failing to proceed at an expeditious pace. Further, the defendant had actually abandoned at the trial its claim on the cleaning of paint stains from aluminum windows. In any event, despite these two complaints, they were not relied upon by the defendant as reasons for not making payment to the plaintiff in the letter of 6 June 1998.

30. Hence, the position on 4 June 1998 is this : the defendant had previously made allegations about the lack of progress and defects in workmanship by the plaintiff. In the letter of 1 June 1998, it had even threatened to terminate the contract although this was not repeated in the letter of 3 June 1998. At the same time, it had repeatedly failed to pay the first interim payment and indicated to the plaintiff in unequivocal terms that it would not do so. In the meantime the plaintiff had carried on with the work before the deadline and there was evidence that by the time the plaintiff left the site on 5 June 1998 about 34% of the work was completed. On these facts the judge was clearly entitled to find that the defendant had evinced an intention of not to be bound by the contract. The judge also referred to the fact that the defendant had earlier delayed in the payment of the deposit and the material. While the plaintiff had carried on with the contract despite the breaches and therefore could not rely on these two breaches as repudiation, clearly, the judge was entitled to refer to them in construing the evidence leading to the non-payment on 4 June 1998 to see whether the refusal to make payment by the defendant amounted to repudiation.

Reasons given on 6 June 1998

31. The reason given in the defendant's solicitors' letter of 6 June 1998 for the non-payment of money was that all five coatings to one elevation must be completed before the plaintiff could claim payment. The judge found that this requirement cannot be an express or implied term of the contract. I agree. The contract was silent on such a requirement. There is simply no room for such an implication.

32. Ms Cheng referred to the decision of this Court in Keung Shiu Tang v. D H Shuttlecocks Ltd. [1994] 1 HKC 286 in which Godfrey J.A. stated that :

“ But a repudiation is not to be lightly inferred. There is now a trilogy of cases in which the court has made it clear that the mere fact that you insist on what you think are your rights, even if you later turn out to have been wrong about that, is not to be treated as evincing an intention on your part to repudiate the contract."

33. The three cases referred to by Godfrey J.A. were James Shaffer Ltd. v. Findlay Durham & Brodie [1953] 1 WLR 106, Sweet & Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 Q.B. 699 and Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1980] 1 W.L.R. 277. In the last case the House of Lords held that it would be wrong to hold that a party who bona fide relies upon an express stipulation in a contract in order to rescind or terminate a contract, should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights.

34. The authors of Chitty on Contracts 28th Edn. Vol. 1, para. 25-018 commented that the cases in this area are not easy to reconcile. The position would appear to be that it may not be a repudiation for one party to put forward his genuine but bona fide interpretation of what the contract requires of him but that where that party performs in a manner which is not consistent with the terms of the contract, it is no defence for that party to show that he acted in good faith.

35. In this case, the plaintiff had started work either since 6 May or 9 May 1998. The defendant was obviously aware that the plaintiff's method of work was to apply one coat to all the four elevations first before applying the next coat. Yet, between 21 May 1998 when the debit note was presented and 4 June 1998, the defendant had never stated that this method of work would disentitle the plaintiff from receiving the interim payment. Far from being a bona fide misconstruction of the terms of the contract, the reasons given were in my view spurious reasons. Mr. Teddy To of the defendant actually agreed in cross examination that it had never been an express or implied term of the contract that money would only become payable unless all five coats had been applied to one elevation. He in fact proffered another reason for non-payment and this was because the plaintiff had failed to give a breakdown of the work done. This reflected badly on the true intention of the defendant. It can not be said that the defendant had made a bona fide mistake.

The alternative argument

36. The plaintiff was clearly entitled to treat the non-payment as a repudiation and considered the contract to be terminated. This being the situation, it is not necessary for the plaintiff to rely on the principle that subsequently discovered facts can also be relied upon to justify a rescission or repudiation as decided in cases like Boston Deep Sea Fishing v. End Sale [1888] 39 Ch D 339 and the Mihalis Angelos [1971] 1 QB 164. As a matter of fact, I do not regard the reason given in the letter of 6 June 1998 to be a new matter which would reinforce the plaintiff's position on 4 June 1998 when it terminated the contract due to the defendant's refusal to pay for the interim payment.

Damages

37. The damages claimed by the plaintiff was for the loss of profit of the contract. Apart from the cost of the materials it had also entered into a sub-contract with Pak Lick Construction Company Limited ("Pak Lick") to carry out the spraying work for the sum of HK$504,000.00. On 23 May 1998, the plaintiff, through its associated company, Sinowell Engineering Limited ("Sinowell") engaged another sub-contractor, Maxim Painting Company Limited ("Maxim") to assist in the application of the spraying coating. The contract price was HK$455,210.00. As Maxim was to undertake half of the work, it was agreed between the plaintiff and Pak Lick that the contract price with Pak Lick would be reduced by 50% to HK$252,000.00. The judge found that the loss suffered by the plaintiff is as follows :

Contract price :		HK$2,156,600.00
Less :-
Cost of materials :	HK$436,455.00
Pak Lick contract :	HK$252,000.00
Maxim contract :	HK$455,210.00
Sub-total :	HK$1,143,665.00
Profit on the contract :		HK$1,012,935.00

The complaints

38. The defendant complained that the contracts with Pak Lick and Maxim only called for one top coat instead of two top coats required in the contract.

39. In relation to Pak Lick, the evidence of the plaintiff is that despite what was contained in the contract with Pak Lick, Pak Lick was instructed to apply two top coats. Pak Lick and the contractor who was instructed by it to apply the spray all confirmed that two top coats were applied to the elevation. The judge found that two top coats had been applied. His finding is supported by a report obtained by the defendant but disclosed only at a late stage of the proceedings. The report confirmed that two top coats had been applied. There is no merit in this complaint.

40. It was also argued that the Maxim contract was made with Sinowell and not the plaintiff. The judge found that the contract was made between the plaintiff and Maxim, through the associate company Sinowell. Again, there is no merit in this ground.

41. The defendant also complained that there was no evidence to show that the materials delivered to the site were sufficient for the whole of the work. The plaintiff's witnesses were not cross-examined on this point.

42. In my view the damages awarded to the plaintiff were correct.

The Counterclaim

43. As it was the defendant who was in breach of the contract it was therefore not entitled to claim against the plaintiff any damages arising from the breach. The judge rightly dismissed the counterclaim of the defendant. In any event, in relation to the plaintiff's alleged delay, the judge found that it was the defendant who had delayed in providing the site for the contract work. The judge also found that the evidence failed to establish that the whole of the delay on the building contract of the building could in any way be attributed to the contract. There was no evidence at all to substantiate the defendant's claim for "site preliminaries and overhead costs". The judge also found that there was no overpayment. The overpayment relied upon by the defendant was based on the 20% work done claimed by the plaintiff in the debit note of 21 May 1998. The true position is that the plaintiff had carried out further work after that date.

Conclusion

44. Accordingly, the appeal is dismissed with costs nisi to the plaintiff.

45. Numerous documents were photocopied by the defendant's solicitors for the purpose of this appeal. It is clear that only a few were relevant. In fact, only a few documents were referred to in this appeal. As between the defendant and its solicitors I will disallow 90% of the photocopying charge in relation to the documents prepared for this appeal.

Hon. Yeung J.A. :

46. I agree with the judgment of Cheung JA. I would also make the order as set out in paragraphs 44 and 45 hereof.

Hon. Burrell J. :

47. I agree.