JETS TECHNICS LTD v. T.O.P. CONTRACTING LTD

CACV 57/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 57 OF 2010

(ON APPEAL FROM HCCT NO. 43 OF 2008)

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J U D G M E N T

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Hon Le Pichon JA:

1.  This is an appeal from an order dated 12 February 2010 of Reyes J that judgment be entered for the plaintiff against the defendant in the sum of $1,111,000 and that the defendant’s counterclaim for damages arising from defective work by the plaintiff be assessed at $20,000 to be deducted from retention monies.  At the conclusion of the appeal judgment was reserved which we now give.

Background

2.  The plaintiff was a nominated sub-contractor in a project for the renovation of the Jockey Club’s Bees River Clubhouse.  The defendant was the main contractor.  Although no formal sub-contract was signed, the parties were content to proceed on the basis that there was such a sub-contract.

3.  The plaintiff’s claim is based on Interim Payment Certificate (“IPC”) No. 4 issued by the architect on 14 July 2008, certifying $1,111,000 as being due to the plaintiff.  Under clause 11(b) of the sub-contract, the main contractor must pay the sub-contractor against any certificate from the architect the total value certified in that certificate within 14 days of the receipt by the main contractor of payment from the employer.  It is not disputed that the defendant received payment in July 2008 from the employer and that it did not make any payment to the plaintiff.  The plaintiff commenced these proceedings on 16 September 2008.

4.  On 15 January 2009, several months after the commencement of these proceedings, the architect and the quantity surveyor issued IPC 6.  In pertinent part, it read:

“  2	Progress payments
2.1	Contract work done	3,195,499.001
2.2	Variation work done	99,000.00
2.3	Unfixed materials payable	0.00
2.4	Stage payments	0.00
2.5	Special payments (deductions for rejected defective work):	(603,000.00)
2.6	Special payments (deductions for non-submission of Bond):	(330,000.00)
2.7	Gross amount	2,461,499.00
3	Gross Valuation	2,461,499.00
4	Less Retention (5% of items 2.1, 2.2 & 2.5)	(140,000.00)
5	Nett Valuation	2,321,499.00
6	Less Amount previously recommended	(2,824,000.00)
7	Amount to be refunded	(502,501.00)
		”

5.  According to IPC 6, $603,000 should be deducted for ‘rejected defective work’, resulting in the plaintiff having been ‘overpaid’ by $502,501, on the assumption that the main contractor had already made payment in accordance with the terms of the sub-contract.  In the architect’s accompanying letter to the defendant, it was stated that:

“4. This payment valuation includes a refund of $502,501.00 by Jets due to rejection of work done.  The value to be deducted is based on the value of work deemed not done due to the rejection but excludes the possible contra-charge of removing the rejected work and re-installation by others in case Jets fails to rectify.”

6.  The alleged defective works were not identified.  However, between the dates of the two certificates, there were a number of “open-up” inspections: these took place on 3 November 2008, 21 November 2008, 15 January 2009 and 9 February 2009.  It was said that, as a result, the architect and the employer were able to identify defects and outstanding works attributable to and/or resulting from the plaintiff’s breaches of contract.

7.  The defendant did not challenge the correctness of IPC 4 subject to two matters: first, that the sum of $502,100 should be deducted from the amount of $1,111,000; and, second, the resulting balance should be set off against the value of its counterclaim.

8.  In its amended defence and counterclaim, the defendant pleaded the plaintiff’s breaches at §§ 12-17 which ran for almost 8 pages and gave extensive “Particulars of Defects and Outstanding Works”.  It is apparent from §§ 12-17 that the defects and outstanding works particularised resulted from the four open-up inspections mentioned earlier.

9.  It was then pleaded in §§ 18 and 19 of the defence as follows:

“ 18. By reason of the aforesaid breaches, the Architect certified under payment valuation Interim Payment No. 6 dated 16 January 2009 that the Plaintiff has been over-paid due to rejection of works done and is liable to refund to the HKJC HKD 502,501 (“the Refund”) and the same has been deducted under Interim Payment No. 6.

19. The Refund does not cover (1) contra-charges for removing the rejected works and re-installation by other parties in the event the Plaintiff fails to rectify the same, (2) deductions for liquidated damages for late completion, (3) costs of conducting Open-Up Inspections, all of which will be incurred by the Defendant as a result of the Plaintiff failing to rectify defects.  The quantum for the aforesaid contra-charges, deductions and inspections are to be assessed.”

10.  Almost the entire trial of three days was taken up with evidence relating to the defects alleged and the cost of remedying the same.  The judge considered the defendant’s complaints in considerable detail and rejected all the complaints save for the need for 165 remedial supports for 85 panels and minor repairs to a few uneven adjacent panels.  He assessed the defendant’s “counterclaim for defective work” at $20,000.

11.  The judge awarded the plaintiff the entire sum of $1,111,000 certified in IPC 4 and ordered that the $20,000 be deducted by the defendant from retention monies.

This appeal

12.  It has to be said that it was far from clear from the defendant’s written submissions what issues arise on the appeal.  In her oral submissions, Ms Cheung (who appeared for the defendant) submitted that in making the award, the judge erred in using the wrong starting point.  It was said that because a specific deduction of $603,000 for defective work was made in IPC 6, resulting in an ‘overpayment’ or ‘over-certification’ of $502,100, that amount falls to be deducted from the sum claimed of $1,111,000.  According to Ms Cheung, the award should have been the difference between $1,111,000 and $502,100, namely, $608,900 only.

13.  The so-called overpayment or over-certification of $502,001 resulted from allowing a deduction of $603,000 for defective work in the running account between the defendant and the plaintiff.  The issue therefore is the legitimacy of the deduction.

14.  Ms Cheung’s position was that that amount had emanated from the architect and not the defendant and was something different from the amount it sought in its counterclaim (which she accepted was unsuccessful other than in respect of the sum of $20,000).  It was further submitted that under clause 11(d) of the sub-contract, if a sub-contractor its aggrieved by an amount certified by the architect, redress was available in the form of arbitration proceedings which the sub-contractor would have to initiate.

15.  Notwithstanding Ms Cheung’s valiant efforts to distinguish the counterclaim from the deductions for rejected defective work made by the architect in IPC 6, the reality was otherwise.  First, it is clear from the pleadings that the defects the defendant relied on were those that had been identified by the architect and the employer during the open-up inspections.  Second, contrary to Ms Cheung’s submissions, the counterclaim concerned the same defects and the cost of remedying them.

16.  That was the understanding of the judge at the stage of the defendant’s closing submissions as the following extract from the transcript demonstrates:

“ COURT:   Yes.  There are special deductions for rejected defective work, 603,000.  How am I to treat that?  What is that?  What does that represent?

  MS CHEUNG: You mean the special deductions for…

  COURT:   Rejected defective work.

  …

  MS CHEUNG: Yes.  So I don’t see any instance here where it is said that the 603,000 should be given back to Jets.  It remains a refunded item.  So I don’t see the basis for …

  COURT:   And that’s the refund in relation to -- a refunded item in relation to the defects which are the subject matter of this case.

  MS CHEUNG: Of this case.”

(Tr. pp. 11S--13A)

17.  It was verging on the disingenuous to suggest that the counterclaim was about matters other than the defective work, such as contra-charges and the cost of getting a third party to remedy the defects since the contra-charges etc were predicated on there being defective work in the first place.  The counterclaim could not be made good without first establishing the defects that underpin it.  The trial was nothing short of a final accounting of work done by the plaintiff, it being a fact that practical completion of the plaintiff’s participation in the project was achieved in June 2008.

18.  It was then said that it would give rise to an unfair result in that if the defendant has to pay the full amount of $1,111,000 to the plaintiff, it remains liable to refund the $502,100 to the employer because of IPC 6.  But the defendant could have joined the employer as a third party and the employer and the architect (who was no more than the employer’s agent) would have been bound by the outcome.  Regrettably, the defendant chose not to join the employer and cannot now complain.

Conclusion

19.  I would dismiss this appeal.  I would also order that there be an order nisi of costs in favour of the plaintiff.

Hon Lunn J:

20.  For the reasons articulated in the judgment of Le Pichon J.A.  I would dismiss the appeal and make an order nisi of costs in favour of the plaintiff.

Hon Bharwaney J:

21.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

22.  Accordingly, there will be an order in terms of § 19 above.