CHUNG FAI ENGINEERING CO. (a firm) v. MAXWELL ENGINEERING CO. LTD.

CACV 981/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 981 OF 2000

(ON APPEAL FROM HCA 10504 OF 1996

& HCA 10631 OF 1996 (CONSOLIDATED))

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J U D G M E N T

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Hon Mayo VP:

1. This is an appeal from a judgment of Burrell J. He was hearing two actions which had been consolidated. Maxwell Engineering Company Limited ("Maxwell") was the plaintiff in HCA 10631/1996. In this action they claimed $7,482,200.00 against Chung Fai Engineering Co. ("Chung Fai") for breach of contract and $2,050,000.00 on a dishonoured cheque.

2. Chung Fai was the plaintiff in HCA 10504/1996. They were suing Maxwell for damages for breach of contract and the return of the cheque referred to and various declarations.

3. After a trial lasting six days the Judge entered judgment for $6,071,000.00 in favour of Maxwell. It is this judgment which Chung Fai is appealing from.

4. The actions relate to a building contract. The building is a printing factory which was being built at Tseung Kwan O. W. Hing Construction Company and its subsidiary Anpoint Engineering Ltd was the main contractor. The air-conditioning work was sub-contracted to Chung Fai who in turn sub-contracted the mechanical ventilation air-conditioning system ("MVAC") to Maxwell.

5. A contract dated 2 April 1996 evidenced the terms of the agreement concluded between Chung Fai and Maxwell. The total contract price was $14 million.

6. Maxwell commenced work on the site in April 1996. Not long after work began disputes arose between the parties concerning applications made by Maxwell for interim payments.

7. The contract terms relating to this were:

"Monthly progress payment on percentage workdone 5% of the amount certified by the Architect/Q.S. should be held for retention. Half of the retained value to be released on practical completion. The remaining balance to be released 12 months after the practical completion and all defects rectified."

8. Maxwell contended that they were not receiving payments in respect of the certificates which they were submitting to Chung Fai.

9. After an exchange of correspondence Maxwell wrote to Chung Fai on 17 July 1996 informing them that as a result of their withholding the payments which were due to them they proposed ceasing work and taking legal action against them. A meeting was convened shortly after this attended by all interested parties and a supplemental agreement was entered into in an endeavour to resolve the differences between the parties. The supplemental agreement was in these terms:

"Chung Fai unconditionally withdraw their following letters:

1.1 L95230/014 dated 24th June, 1996

1.2 L95230/023 dated 15th July, 1996

1.3 L95230/024 dated 16th July, 1996

1.4 L95230/025 dated 17th July, 1996

2. Maxwell shall complete the contract works to meet the Fire Services Department Inspection arranged on 12/8/96 and the overall completion date of 10/9/96.

3. The first payment claim submitted by Maxwell was 5/5/96 and the payment due date shall be 25/6/96. The payment due date for the consecutive payment claim shall be 25th of the following months."

10. In addition to this Chung Fai gave Maxwell a cheque for $2.05 million post-dated to 10 August 1996. This cheque was the cheque earlier referred to in this judgment. They also gave them a cheque for $245,000 as an additional payment in respect of the first interim payment application.

11. Further applications for interim payments were made on 15 July 1996 and 15 August 1996. The payments were for $3,311,590.00 and $801,435.00 respectively. Neither payment was made.

12. Also the post-dated cheque referred to was dishonoured on presentation.

13. On 2 August 1996 Chung Fai wrote to Maxwell making numerous complaints concerning the work which had been undertaken. The letter concluded with a threat that unless there was a substantial improvement of their work progress by 5:00 p.m. on 5 August 1996 they would exercise their contractual rights. In this connection they appeared to place reliance upon clause 13 of the contract which is in these terms:

"13. If in the opinion of Chung Fai Engineering Company the Contractor shall be or shall have been in breach of the terms or conditions of the Contract. Chung Fai Engineering Company may give a written notice to the Contractor requiring him to remedy such breach within a period of not less than 7 days. In the event that within the period stipulated in Chung Fai Engineering Company's written notice, the Contractor has not remedied the breach. Chung Fai Engineering Company may give a further written notice to the Contractor forthwith determining the Contractor's employment under the Contract."

14. On 12 August 1996 Chung Fai re-entered the site. When attempting to resolve the question as whether Chung Fai were justified in terminating the contract the Judge identified four main issues.

15. Although the first three are not directly relevant to the grounds of appeal which have been lodged it is necessary to briefly consider them as they have a significant bearing upon the fourth issue of delay which is the main subject of this appeal.

16. The first issue related to a contention which was advanced by Chung Fai that at the time when the contract had been entered into there had been an oral agreement between the parties that payments to Maxwell would only be made to them after Chung Fai had themselves received payment from their head contractor. The Judge gave cogent reasons for rejecting the evidence of Mr. C.K. Chan a director of Chung Fai in relation to this. No complaint is made concerning this finding in the notice of appeal.

17. The second issue related to a claim which was made by Chung Fai that they should not be bound by the supplemental agreement as it had only been entered into by Chung Fai as a consequence of economic duress. Indeed at the hearing Mr Ho for Chung Fai gave evidence to the effect that when he entered into the supplemental agreement he had not understood the true nature of the agreement. Perhaps not surprisingly in the circumstances the Judge rejected this evidence and held that the supplementary agreement was a binding agreement.

18. Chung Fai now appear to have changed their tune on this aspect of the case. In ground one of the notice of appeal they state that the Judge "correctly found that the supplementary agreement was valid and binding". Their reason for this sea change is that reliance is now being placed on clause 2 of the supplemental agreement that the necessary work had to be completed to enable a fire services inspection to be undertaken on 12 August 1996. In this connection it is noteworthy to observe that when Chung Fai purported to terminate the contract pursuant to clause 13 they did not give Maxwell the requisite seven days' notice to make good the deficiencies which had been referred to.

19. The third issue which was considered by the Judge was Chung Fai's claim that when the post-dated cheque was handed over at the 18 July 1996 meeting there had been an oral agreement that the cheque would only be presented for payment on the fulfilment of various conditions. Again for cogent reasons the Judge rejected the testimony of Chung Fai's witness and accepted the evidence of Mr Yum a director of Maxwell.

20. The main reason for referring to these issues is to provide a background to the main issue which is ventilated on this appeal which is whether the Judge could on the evidence which was before him have found that Maxwell had not been guilty of delay such as to justify Chung Fai in terminating the contract.

21. What is manifest is that Chung Fai were not complying with their contractual obligations to make payments to Maxwell when presented with applications for interim payments. This is particularly of relevance in relation to the first and third issues.

22. So far as the attempt to avoid the provisions of the supplemental agreement is concerned there has to be some doubt as to the sincerity of this claim in view of the claim now being made by Chung Fai, relying on clause 2 of the agreement, that it was incumbent upon Maxwell to complete the necessary work to enable the fire services inspection to take place.

23. It is now necessary to consider the question of delay and whether Chung Fai were by their letter of 12 August 1996 justified in terminating the main contract dated 2 April 1996.

24. The letter was in these terms:

		"By fax and post
To:	Maxwell Engineering Co., Ltd.	Ref.: L95230/068
	22/F, Sung Kee Factory Bldg.,	Date: 12th August, 1996
	18-30 Kwai Ting Rd, Kwai Chung
	N.T. Hong Kong
	Tel: 2489 9363 Fax: 2489 9635

Attn: Mr. Smauel Yum

Dear Sir,

Re: Paramount Printing Factory

We refer to our letter to you dated 10 Aug 1996 ref.L95230/067 and today's site inspection and have found that your progress of work is still behind your committed schedule and it has become something factual that you have not completed the GI ductwork for smoke extraction system which is critical to the completion of the project.

To summarized (sic), we have the following findings:

1. You have not perform (sic) the required duty of the scope of your contract work such as from time to time observe, follow and co-operate with the main contract programme.

2. You have failed to provide a competent staff to co-ordinate with the main contractor and us to receive site instruction and manage the site progress.

3. Your material and workmanship have failed to comply with the specification and you have failed to deliver the approved material on site.

4. The smoke extraction fans have not arrived Hong Kong and it is no way that you can complete the system by 11 Aug 1996.

5. Other than the smoke extraction fans, we have found that you have not delivered the required material and equipment on site to suit the main contract programme which will materially affect the completion of the project.

In view of the above, you have breach (sic) your contractual obligation and materially affect (sic) the main contract programme. Your delays have also created serious embarrassment between us and the main contractor and have condemn (sic) the image of our company. We are therefore forced to determine the contact with your company and you are instructed to leave the site before 5:00 p.m. 12 Aug 1996.

We will assess your work done and material on site in the following days and reserve our right to claim for all losses incurred due to your breach of contract.

..."

25. Two matters are immediately apparent from this letter. The first is that no claim is being made on the basis of clause 2 of the supplemental agreement and the alleged non-compliance with the requirement to complete work so that the Fire Department inspection can take place.

26. The second is that it is clear from the contents of the letter that work over and above the work required for the inspection is referred to and hence the date of 12 August 1996 would have no application to this.

27. There was an abundance of evidence concerning all of the work before the Judge. This included evidence that all the fire dampers had been completed and substantially the fire resistance panels for duct work had been completed. 82 smoke extraction fans had been ordered well in advance. It is however true that eight of the extraction fans had not been delivered by 12 August 1996. Time however was not of the essence of the contract. It was never pleaded in the pleadings.

28. Even if Chung Fai had attempted to invoke clause 2 of the supplemental agreement their efforts would have been unavailing. Mr Yum gave detailed evidence of what would be involved in a fire service inspection. The Judge accepted evidence that an inspection required the participation of other interested parties.

29. What this all meant was that the conditions on site had to be such that an inspection could take place.

30. Clearly these conditions had not been complied with. Amongst other things there was evidence that the electricity or water supplies were not ready on 12 August 1996.

31. In the fourth ground of appeal complaint is made that the Judge attempted to rewrite the bargain between the parties when he held that compliance with the target date of 12 August 1996 was unrealistic. As has been indicated earlier Chung Fai was not placing reliance on clause 2 of supplemental agreement. In addition to this there was no magic in the so-called target date. Certainly there was no agreement between the parties that if the target date was not met it would entitle Chung Fai to terminate the contract.

32. It is clear from the issues which are ventilated in this appeal that to a very large extent this court is being invited to interfere with findings of fact made by the Judge at the trial. It is no part of the function of the Court of Appeal to retry cases. It is only in the most exceptional circumstances that appeals based on findings of fact will be successful. The observations of Godfrey JA (as he then was) at p. 327 of Lobo v Kripalani [1998] 2 HKLRD 325 may be of assistance:

"APPEALS ON FACT

It is not a proper ground of appeal that the judge preferred the evidence of the respondent's witnesses to the evidence of the appellant's witnesses. It is for the judge, not for us in this court, to weigh the evidence, and to decide whose case is to be preferred. All we consider is the judgment, and the evidence before the judge. Unless an appellant can show that the judge had misunderstood the evidence, or failed to appreciate its effect, or has overlooked some documentary evidence, or other indisputable evidence, which should have compelled him to a different conclusion, this court will not interfere with his findings of primary fact.

In the present case, it has not been possible for the appellant to do any more than to contend that the judge should have preferred his case to that of the respondent. As I have said, that is not enough."

33. These remarks are apposite to the instant appeal. It can be added that there is every reason to believe on the basis of the material which is before this court that the Judge was fully justified in making the findings of fact which are complained of. In my view this appeal is without merit and should be dismissed.

Hon Keith JA:

34. I agree that this appeal should be dismissed, but I wish to add two observations of my own. First, the only point taken by Chung Fai on this appeal is that Burrell J erred in concluding that Maxwell had not failed to comply with clause 2 of the supplementary agreement in such circumstances as to entitle Chung Fai to terminate the principal contract between the parties. The allegation is that Maxwell had failed to complete by 12 August 1996 those works which had to be completed before the inspection by the Fire Services Department could take place. However, any failure by Maxwell to complete those works by then could only have entitled Chung Fai to terminate the principal contract between the parties if the stipulation as to the time for completing those works had been of the essence. Unfortunately for Chung Fai, it was never pleaded that time had been of the essence - no doubt because Chung Fai was then saying that the supplementary agreement had not been valid and binding.

35. In any event, I have not discerned any basis on which it could be said that time was of the essence. It was never expressly made of the essence, and the obligation to complete the works by 12 August could not have been impliedly made of the essence because the inspection by the Fire Services Department was not in fact due to take place until 21 August. Thus, even if Maxwell had been in breach of clause 2 of the supplementary agreement by failing to complete the necessary works by 12 August 1996, that failure could not have entitled Chung Fai to treat that breach as a repudiatory breach of the principal contract between the parties, thereby entitling Chung Fai to treat the principal contract as at an end. In my judgment, that is sufficient to dispose of this appeal.

36. Secondly, Maxwell would have been relieved of its contractual obligation to complete by 12 August 1996 the works which had to be completed before the inspection by the Fire Services Department could take place if its ability to complete the works by then had been rendered impossible by factors beyond its control. Such factors would have included the unavailability of electrical power or water to enable the works to be completed. Mr Ben Beaumont for Chung Fai (who did not represent Chung Fai at the trial) agreed. On that issue, the judge said:

"Electricity was eventually connected up on 10 October and water on 5 November. There is plentiful evidence in the correspondence showing Maxwell was complaining about the lack of power on site hindering its progress. Thus, the problems with power and water rendered both Chung Fai's deadline of the 12th and the actual target date of 21 August unrealistic."

If Chung Fai's appeal is to succeed, both elements of that finding of fact, namely that the disruptions to the supply of both power and water made the contractual deadline unrealistic, have to be set aside. I have not myself reached any conclusion as to whether the judge was entitled on the evidence to make the finding of fact which he did, in view of the facts that (a) it has not been open to Chung Fai to argue that the stipulation as to time was of the essence, and (b) the stipulation as to time was plainly not of the essence.

Hon Stock JA:

37. I agree with the judgments delivered, and that the appeal should be dismissed.

38. The complaint in this appeal is that the judge was in error in his findings as to delay, and it is contended that the respondent's delay in completing the ventilation works constituted a repudiatory breach.

39. There are certain fundamental problems with the appellant's case:

(1) 12 August 1996, the suggested deadline upon which the appellant relies, is a stipulation in a contract which the appellant has previously expressly disavowed. But, in any event, in so far as it is now sought to rely on that provision, one notes that it has never been pleaded, even in the alternative, that time was of the essence. It certainly was not made of the essence by any express term. Nor has it been pleaded that the nature of the subject matter in this case, as between appellant and respondent, was such that time should be considered to be of the essence. Nor was it pleaded, in the alternative, that it was shown that there was some unreasonable delay, followed by notice given to the respondent which made time of the essence.

(2) But all that apart, it seems to me, on the facts, to be impossible to say that the breach was such as to entitle the appellant to treat the contract as repudiated. The evidence is overwhelming in its effect that by 12 August 1996 there was no likelihood of a Fire Services Department inspection for some considerable time, and the reason for that has nothing to do with the respondents. The reason was that no inspection could take place without prior installation of a permanent supply of power and water, and that by reason of default of a third party, that installation was, as must have been clear by 12 August, significantly delayed. The fact that there was no imminent inspection due is evident from a letter dated 31 July 1996, and the appellant's reaction to it. In that letter, the respondent said to the appellant:

"We request your advice on the following critical dates which are essential for us to arrange our works to meet the target date:

1. Exact date arranged for Fire Service Department inspection.

2. Date of emergency power available.

3. Date of permanent power available.

Please confirm to us as soon as possible and not later than 5/8/96." (Emphasis added).

There was no reply to that letter. There was no suggestion of some imminent inspection. It is perfectly clear that what was important was not some theoretical date for inspection, but rather that the ventilation be completed in time for such inspection, when it took place. 12 August was, by reason of the supplementary agreement, a target date and was not one to be complied with, regardless of factors outside the control of the respondent. It was implicit in this agreement that, should it become apparent, as it did in this case, that inspection was, for extraneous reasons, significantly delayed, then failure by the respondent to meet the 12 August target would not be a matter going to the root of the contract. And that is precisely what happened. The evidence is clear, that the inspection could not take place until November, and that that delay had nothing to do with the respondent. There is no reason to suppose that the respondent would, but for the appellant's conduct in terminating the contract, not have been able to complete the work well in time before the inspection.

Hon Mayo VP:

40. The appeal is accordingly dismissed and after hearing counsel Maxwell will have their costs.