XCHRX SKYFORCE ENGINEERING & MANAGEMENT CO. LTD. v. WAN CHUNG CONSTRUCTION CO. LTD.

HCCT45/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.45 OF 1999

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J U D G M E N T

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1. This is an application by the plaintiff for summary judgment in Order 14 proceedings for $12,982,667 plus interest. In the alternative, they seek an order for an interim payment under Order 29, rules 10-12.

2. The contractual relationship between the plaintiff and the defendant is one link in a bigger contractual chain.

THE CONTRACTUAL CHAIN

3. The employer is the Architectural Services Department of the Hong Kong Government. They engaged the defendant, "Wan Chung" on a three-year maintenance contract. The defendant awarded the electrical sub-contract to Wah Tung Engineering Co. Ltd ("Wah Tung"). Wah Tung then entered into a sub-sub-contract with the plaintiff, "Skyforce", for the management of the electrical works. The plaintiff in turn entered into five sub-sub-sub-contracts with various electrical companies (referred to as "the electrical sub-contractors").

4. The original contracts date back to 1995. Works commenced under those contracts. The plaintiff's claim against the defendant in this action relates to a later agreement between them dated 26 March 1997. The plaintiff claims the defendant has breached this agreement. The plaintiff also has a second limb to its claim in relation to three dishonoured cheques.

5. It is accepted by both parties that the need for the later agreement was because problems had arisen between them and Wah Tung and the electrical sub-contractors. It is the plaintiff's case that the purpose of the later agreement was for it to completely drop out of the picture, play no further part in the works and be paid for work done. The sum claimed in this Order 14 action is, effectively, for the value of work done. Thus, the starting point in the summons is to examine the terms of the agreement of 26 March 1997.

AGREEMENT FOR ASSOCIATED SERVICES - 26 MARCH 1997

6. Considerable negotiations and correspondence preceded the signing of the agreement. It expressly reflected the position between the parties as at 1 August 1996 :-

(1) Clause 1 set out the background and in particular at clause 1(v) and (vi), it recorded as follows :-

"(v) By a '聯合聲明' (joint declaration) dated January 27,1997 to each of the Electrical Subcontractors duly signed by Skyforce and all of the Electrical Subcontractors, all outstanding liabilities between Skyforce and all of the Electrical Subcontractors relating to or connected with the Main Contract are and were agreed and confirmed.

(vi) As from August 1, 1996, Wan Chung has taken over the calculation of and direct payment of I.P. Payment to each of the Electrical Subcontractors."

(2) Clause 2 records expressly what are Skyforce's future obligations :-

"Effective from August 1, 1996, Skyforce will provide the following services to Wan Chung in relation to or connected with the Main Contract: ..."

Thus, clause 2, by its use of the words "Effective from August 1, 1996" sets out, as a separate item, Skyforce's only future obligations. The real nub of the agreement is at Clause 3.

(3) Clause 3 :-

"All contractual obligations and services previously performed by Skyforce under the Subcontract between Skyforce and Wah Tung and also between Skyforce and each of the Electrical Subcontractors in relation to and connected with the Main Contract shall henceforth be performed by Wan Chung or by any subcontractors retained by Wan Chung effective from August 1, 1996."

The core issue between the parties in this summons concerns the interpretation of the opening words in the next clause.

(4) Clause 4 :-

"In consideration of Skyforce's agreement to the nullification, cancellation and termination of all the previous contractual arrangements with Wah Tung referred to in paragraph 1(iv) above and also with the Electrical Subcontractors referred to paragraph 1(v) above and the provision of the Services (as described in paragraph 2 above):

(i) As at August 1, 1996, Skyforce had paid over to the Electrical Subcontractors listed under paragraph 1(iv) above a total sum of HK$46,177,251.35 in respect of works undertaken by them pursuant to works orders and minor works orders issued under the Main Contract;

However, Skyforce had upto August 1, 1996, received only HK$41,847,844.26 out of the sums released by the Hong Kong Government to Wan Chung under the Main Contract, leaving a shortfall as between the latter sum and the former sum of HK$4,329,407.09. (As per the '聯合聲明' dated January 27, 1997 duly signed by and agreed with all the Electrical Subcontractors for the detailed breakdown of the said shortfall).

As from August 1, 1996, Wan Chung has taken over the calculation and direct payment of I.P. Payment to each of the Electrical Subcontractors. ..."

It is the plaintiff's case that by reason of the "Joint Declaration" referred to in clause 1(v), it had already nullified, terminated, etc. all those contractual arrangements. Those contractual arrangements had come to an end and there was neither a need nor duty to take any further positive action.

7. The defendant submits, inter alia, that it is entitled to withhold payments ostensibly due to the plaintiff because the plaintiff has failed to nullify, terminate and cancel its previous contractual arrangement with Wah Tung and the electrical sub-contractors. The defendant relies on clause 7.

(5) Clause 7 :-

"If Skyforce should fail to perform any duty as stipulated hereof, Wan Chung reserves its right to withhold any payment due and payable to Skyforce with no interest accruing UNLESS and UNTIL Skyforce has resumed and performed its defaulted duty."

8. The plaintiff, on the other hand submits, that clause 7 has no bearing because it has not failed to perform any of its stipulated duties. In short, the plaintiff submits that clause 4 should be read as saying : "In consideration of Skyforce having nullified, terminated, etc. ...". The defence construction is : "In consideration of Skyforce's agreement that it will expressly nullify, cancel, etc. ...".

9. The plaintiff says it has nullified, etc. the previous contractual arrangements. If so, the defendant has no defence. The defendant submits that it is at least arguable that the plaintiff have not done so. It argues that although the intention was that the plaintiff would drop out of the picture on 26 March 1997, that "drop out" was contingent on the plaintiff carrying out certain obligation which it failed to do.

THE COURT'S DECISION

10. For the reasons which follow, it will be seen that I have come to the conclusion that the plaintiff had not failed to carry out future obligations stipulated in the agreement and accordingly, they did completely drop out of the picture (subject to clause 2 which I deal with as a separate issue later in the judgment). It follows that the defendant cannot rely on clause 7 and I am satisfied, having applied the legal principles applicable to Order 14 summonses, that the defendant has no arguable defence on the question of liability. As to quantum, it will be seen at the conclusion of the judgment that the court is unable to make a final quantification of damages and interest.

REASONS

1. The plaintiff's case

11. The plaintiff, through its counsel Mr Geoffrey Ma, SC, points to a number of matters in support of his contention that the agreement of 26 March 1997 unequivocally marked the termination of the plaintiff's involvement.

12. Firstly, on the same date, a number of other agreement were signed between the other parties to the same end.

(i) The plaintiff and Wah Tung terminated their sub-contract by a Mutual Release and Discharge agreement. By this agreement, the plaintiff released Wah Tung from a claim it had against them in the sum of $2,230,201 which the defendant took over. Further, by this agreement the plaintiff could no longer be paid by Wah Tung.

(ii) A further agreement between the defendant and Wah Tung was entered into to provide for a new company called Sheen Tech to take over from the plaintiff with effect from 1 August 1996.

(iii) Wah Tung and Sheen Tech also entered into an agreement appointing Sheen Tech as the new sub-contractor.

13. Secondly, by the joint declaration between the plaintiff and the defendant dated 27 January 1997 (as referred to in clause 1(v) of the agreement), the electrical sub-contractors unanimously agreed to authorize the immediate payment by the defendant to the plaintiff of $3,504,109. One week later, on 5 February 1997, the defendant made $500,000 part payment of this sum. This payment is recorded as having been paid in the agreement itself at paragraph 4(i)(2).

14. Thirdly, further evidence of the parties' true intentions at the material time can be found in the defendant's later oral agreement, made in July 1997, to pay the plaintiff a further sum of $825,297, being the balance of overpayments made by the plaintiff to the electrical sub-contractors. This sum was specifically referred to as a separate item in paragraph 3 of the joint declaration.

15. Fourthly, between 20 June 1997 and 30 September 1997, the defendant made payments (by six cheques) to the plaintiff, totalling $1.6 million in partial discharge of its contractual obligations under the agreement. Of the six cheques, three totalling $850,000 were honoured but the remaining three, totalling $750,000 were dishonoured. I shall deal with the issue of the dishonoured cheques as a separate item later in this judgment.

16. Fifthly, there is evidence on affirmation from the defendant's managing director, Mr Wong Law Fai, which clearly points to the parties' joint intention at the time. For example, on 16 June 1999, he stated :-

"I would emphasize that the proposed new arrangement was extremely advantageous to Skyforce. Under the new arrangement, it dropped out of the picture altogether."

and more recently :-

"... by the time the agreement was signed on 26 March 1997 the Defendant had already been running the project, co-ordinating the Electrical Subcontractors (and paying them) for six whole months, all without the assistance of the Plaintiff."

In fairness, it should be stated that Mr Wong's affirmations are of course in opposition to the plaintiff's claim. These extracts nonetheless serve to support the plaintiff's case as to what the parties intended at the time.

17. Sixthly, the conduct of the defendant after the agreement was consistent with the plaintiff's construction of the agreement, namely, that the plaintiff was under no separate obligation to terminate the electrical sub-contractors' contracts (because it had already done so by the joint declaration) and inconsistent with the defendant's pleaded case. They continued performance of the contracts under the new arrangements which had been in place since 1 August 1996. They made payments under the new arrangements. The plaintiff, through its solicitors, wrote a demand letter to the defendant on 31 July 1997 for monies due and the plaintiff wrote a complaint letter to the Architectural Services Department in August 1997. Part payments from the defendant followed.

18. Seventhly, the defendant's defences have only emerged relatively late in the day. Briefly they are threefold :-

(i) Breach of contract by failing to terminate the electrical sub-contracts.

(ii) Breach of an oral undertaking whereby the plaintiff would procure the electrical sub-contractors to enter into new contracts with Sheen Tech.

(iii) Breach of clause 2 of the agreement relating to testing equipment.

It is correct to observe that these defences were not apparent prior to the filing of the defence and counterclaim. As already indicated, the conduct and correspondence at the material time pointed to an acceptance of liability rather than a denial of it.

2. The defence case

19. Mr Daniel Fung, SC for the defendant, stressed the importance of the factual matrix leading up to the agreement of 26 March 1997. I accept the background is important but only in so far as it assists in the interpretation of clause 4. The parties are bound by the written agreement of that date plus any other oral agreement or agreements which supplement it.

20. As already indicated, I am satisfied clause 4 should be construed as submitted by the plaintiff. In my judgment, to suggest that it means that the plaintiff was under an obligation either on or after 26 March 1997 to procure the electrical sub-contractors and Wah Tung to terminate what had already been terminated is not arguable.

21. Mr Fung relies on a number of matters :-

(i) He points out that the list of other agreements entered into on 26 March 1997 has a conspicuous absentee, namely, a termination by the plaintiff with the electrical sub-contractors. He submits it is arguable that the absence of such a document or documents is evidence of a failure on the plaintiff's part to ensure the attendance of the electrical sub-contractors to the meeting of 26 March 1997 to sign release contracts when the other agreements were signed. In my assessment of the situation, the only credible explanation is that there was no requirement or agreement for them to attend because of the joint declaration which had already been signed and was to be incorporated in the agreement between the plaintiff and the defendant.

(ii) He also relies on the preamble to the 26 March agreement where it says :-

"... in relation to Skyforce's past and future role in assisting Wan Chung with its performance of its obligations under the Main Contract ..."

In fact, the contract in clause 2 expressly states what Skyforce's future role is. I am satisfied therefore that the only construction of the contract is that, apart from clause 2 (which I refer to later), there are no other future obligations. Clause 2 is discrete and specific.

(iii) Mr Fung next relies on the chronology of the events. He submits that as the joint declaration predates the 26 March agreement, if that terminated the contractual relations between the plaintiff and the electrical sub-contractors, there would have been no need to say anything about it in the 26 March agreement. I reject this submission. The 26 March agreements were a comprehensive statement of all the contractual relationships between all the parties. The agreement between the plaintiff and the defendant recorded what those parties were agreeing was the state of affairs between them as at 1 August 1996. That state of affairs was affected by the joint declaration and was necessarily incorporated in the 26 March agreement.

(iv) Mr Fung points to Note 5 in the joint declaration which states :-

"Each of the two parties shall reserve the right of recourse in case there exist any inconsistencies in such calculations."

This, he submits, provides arguable evidence that there was no finality between the parties and that contractual relations subsisted which remained to be nullified, terminated, etc. In my judgment, it does no more than provide for an accounting exercise after the termination of the contract. It cannot be construed as evidence pointing to the very opposite of the purpose of the joint declaration as evidenced by both the declaration itself and the conduct of the parties at the material time.

(v) Finally, the defendant relies on the existence of oral undertakings of which the plaintiff, it says, is in breach. In particular, it is alleged (as referred to earlier) that the plaintiff orally undertook to procure the attendance of the electrical sub-contractors at the meeting of 26 March. I find there is nothing in this point. The only evidence of its existence is the defendant's bare assertion of it. No further particulars are given and in any event, such alleged oral undertakings would be inconsistent with the clear language of the written agreements and also inconsistent with the correspondence and conduct of the parties prior to 26 March. All the evidence shows (and indeed clause 1(vi) of the agreement states) that as from 1 August 1996, the electrical sub-contractors were not working for the plaintiff, not being paid by the plaintiff and were not accountable to the plaintiff.

3. Clause 2

22. Clause 2 (supra) specifies the plaintiff's only future obligation, namely, "to provide for Wan Chung's use, all inspection, measurement and test equipment ...". The question which arises is : is there any evidence that the plaintiff is in breach of this clause, thereby entitling the defendant to withhold all the monies that it has withheld? Mr Fung submits that as the alleged breach has been pleaded, it cannot be ignored and is a matter for trial. A brief investigation of the allegation does not support him. It appears as no more than a bare assertion in the pleadings. It was not referred to by the defendant in contemporaneous correspondence and no further particulars have been provided. The plaintiff's deponent, Mr Cheang Woon Cheung deals with the matter extensively in his affirmation of 2 August 1999. There is no particularized contradiction to those assertions from the defence.

4. Dishonoured cheques

23. Three cheques, each for $250,000, dated 30 August, 15 and 30 September 1997 were dishonoured. The only argument by the defence is that the plaintiff's failure to "nullify, terminate, cancel, etc. ...", the electrical sub-contracts amounts to a total failure of consideration. This is the same issue already resolved in the plaintiff's favour. Consequently, there was no failure of consideration and there is no defence to the dishonoured cheques.

QUANTUM

24. The total value of the plaintiff's claim is set out in a three page schedule annexed to the Re-amended Statement of Claim dated 24 July 1999. At this stage, it is only possible to give summary judgment for part of the claim. The balance requires further accounting. If the parties are unable to agree the quantum and interest in respect of those items not specifically referred to hereunder, a further hearing on quantum will be necessary.

25. I now give summary judgment to the plaintiff for :-

(i) $3,004,109.48 pursuant to paragraph 4(b) of the Re-amended Statement of Claim.

(ii) $2,230,201.54 pursuant to paragraph 4(d) of the Re-amended Statement of Claim.

(iii) $750,000 pursuant to paragraph 4F of the Re-amended Statement of Claim.

(iv) Interest on the above sums at 1% over prime from the date of the Statement of Claim dated 16 August 1997 in respect of items (i) and (ii) above and from the date of dishonour in respect of item (iii).

(v) An order in the terms of prayer (2A) of the Re-amended Statement of Claim.

(vi) Liberty to restore on the question of the quantum of the balance of the plaintiff's claim for $12,982,667.93 plus interest.

(vii) Costs to the plaintiff.