WO HING ENGINEERING LTD. v. PEKKO ENGINEERS LTD.

1996, No. A5561

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 5561 OF 1996

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JUDGMENT

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1. The Plaintiff's claim is for moneys due and owing from the Defendant for building works done in respect of four contracts. At the start of the trial I was informed by counsel that the amounts claimed in the last two of these contracts had already been paid by the Defendant, however, there is still a dispute between the parties in respect of these last two contracts which affects the costs of this action. I shall deal with that dispute in due course.

2. The first two contracts on which the Plaintiff claims relate to air-conditioning installation works sub-contracted to the Plaintiff by the Defendant in respect of the Ming Pao Industrial Building. The Plaintiff, as its name suggests, carriers on business of air-conditioning engineering and installation. By Purchase Order No. M/1955/P269 dated 17th August 1992 the Defendant subcontracted to the Plaintiff the installation of air-conditioning works in respect of 15th to 18th floors of the Ming Pao Industrial Building at the agreed contract amount of HK$1.93 million ("the Ming Pao Contract").

3. The Plaintiff carried out these installation work and it is common grounds that the works were done by about October 1993. During the time that these works were implemented, there were from time to time variation orders which called for additional works to be carried out by the Plaintiff, additional to the works agreed under the Ming Pao Contract. Ultimately in March 1994, it was agreed between the parties that for these variation works the Plaintiff would be paid a further sum of HK$255,525.00. I shall deal with this in more detail later.

4. After the employer, the Ming Pao (Holdings) Co. Ltd., moved into the centre, it was discovered that the air-handling units on the 15th to 18th floors were dripping water. Remedial works attempting to rectify this dripping problem were carried out throughout 1994 but to no avail. In May 1995 one last ditch attempt was made with a view to rectify the dripping problem. This involved the installation of sump pit and sump pump to the air handling units. For this, a further Purchase Order was placed by the Defendant to the Plaintiff for such works at the contract price of HK$35,000.00 ("the Modification Contract").

5. The Plaintiff's claim now is for HK$221,222.00 being the outstanding balance owed to it under the Ming Pao Contract and for HK$17,500.00 being the outstanding amount under the Modification Contract. In respect of both these amounts the Plaintiff had invoiced the Defendant on 15th July 1995. When these sums were not paid, the Plaintiff issued the Writ of Summons on 18th May 1996.

The Ming Pao Contract

6. It is not in dispute that this amount of HK$221,222.00 has not been paid by the Defendant to the Plaintiff. Neither is it in dispute that this sum of HK$221,222.00 is made up of:-

(a) the sum of HK$96,500.00 being 5% of the contract amount of HK$1.93 million held as retention money under the sub-contract; and

(b) the sum of HK$124,722.00 which represents 50% of the agreed amount of the variation works (less HK$3,040.00 being the cost of the Y&A work).

7. The calculations of these figures are clearly set out on a sheet entitled "The Final Account of Wo Hing Air Conditioning Engineering Co. Ltd. for The Project Ming Pao Industrial Building, Chai Wan" dated 28th March 1994 and attached to a letter from the Defendant to the Plaintiff dated 29th March 1994. I shall return to this letter in due course.

8. The defence raised in respect of the Ming Pao Contract is that due to the defects in the Plaintiff's installation of the air handling units, no practical completion certificate has been issued in respect thereto and therefore the amount claimed is not due to the Plaintiff. The defects relied on by the Defendant are mainly the dripping of water from the air handling units on the 15th to the 18th floors and to a lesser extent the peeling off of the insulation from the pipes. The Defendant alleges that these defects are due to the sub- standard and poor workmanship of the Plaintiff in respect of the condensate pipework and the insulation. These allegations are, needless to say, denied by the Plaintiff who alleges that the dripping from the air handling units are the result of the high air flow coming from these units which were provided by the Defendant. It is not disputed that these units were provided by the Defendant.

9. Insofar as the Purchase Order relating to the Ming Pao Contract is concerned, the payment terms is expressly stated to be "as per sub-contract condition". Clause 5 of Part B of the sub-contract condition states that the limit of retention fund to be 5% and to be released within one month after issue of making good defects certificate. Clause 6 thereof states that the defect liability period to be 12 months after issue of Practical Completion Certificate.

10. Coming back to the letter of 29th March 1994, in that letter the Plaintiff was requested to acknowledge the initial contract sum to be HK$1.93 million and the total variation costs to be an extra HK$255,525.00 with no further claim. Moreover the letter states that 50% of the costs for the variation works will be settled and the remaining 50% "will be released when the practical completion certificate is issued". It also states that the Plaintiff are still under obligation to rectify any defects without charge until the defect liability period expires.

11. Both the Final Account and the letter have been acknowledged and accepted by the Plaintiff and bears the company chop and authorised signature of one Lee Tam of the Plaintiff. There can be no doubt that both these documents formed a further agreement between the parties in March 1994.

12. The evidence called by the Plaintiff came from Lo Kam Chuen, the project assistant of the Plaintiff who was responsible for the on-site management of the Plaintiff's air conditioning installation from July 1992 to August 1995, and also from Eliza Leung Yuk Ying, the project manager of the Plaintiff but who only played an active role in these matters after May 1995.

13. The evidence of Lo Kam Chuen was that the project was completed in about October 1993. After the completion of the project, the Defendant had verbally told them of certain defects which they had then put right. The defects which the Plaintiff had rectified were defects other than the dripping. According to Mr. Lo, the dripping defects were due to the high air flow from the air handling units and had nothing to do with the Plaintiff's installation works therefore responsibility for that defect should rest with the Defendant since they provided the air handling units.

14. When cross-examined by counsel for the Defendant, Mr. Lo was shown a letter dated 7th November 1995 from Associated Consultant Engineers, the consultant engineers engaged by the employer in the project. The letter was addressed to Ming Pao (Holdings) Co. Ltd. and lists out 14 defects relating to the works in respect of that project. Three of the listed 14 defects did not relate to the Ming Pao Contract as it related to floors other than the 15th to 18th floors and therefore outside the Plaintiff's sub-contract works. The other defects listed in the letter relates to water dripping from the air handling units (or AHU), the primary air handling units (or PAU) and the fan coil units (or FCU) on the 15th to 18th floors as well as to the peeling off of insulation in respect of the chilled water pipes on these floors.

15. When cross-examined on this letter, Mr. Lo said that the Plaintiff had never received a copy of this letter from the Defendant and that when he was shown this letter in Court, that was the first time he had seen such a letter. However, he was able to say that the defects listed in that letter were similar to the defects which were told to him by the Defendant in about October 1993 although he could not remember the precise detail. At that time he had jotted down on a piece of paper what those defects told to him were. After that he had sent some workers to fix up the defects complained of. Thereafter he had heard no more complaints from the Defendant.

16. Mr. Lo also said in his evidence that the last time he had inspected this project was in 1995 but he could not remember which month. At that last inspection he said he did not notice any of the defects listed in this letter of 7th November 1995.

17. Eliza Leung's evidenc confirms Mr. Lo's when she said that the Plaintiff had never received a copy of the letter dated 7th November 1995 from the Defendant. The rest of her evidence relates to the Modification Contract which I shall deal with later.

18. The Defendant called two witnesses, Yau Yiu Chung, the Defendant's project manager and also Kwan Sun Chuen, a director of the Defendant.

19. Mr. Yau's evidence was that after the Plaintiff had finished the installation works, he had informed the Plaintiff of the dripping defects and the Plaintiff had sent some workers to try to put right the defect of the dripping but could not. When the Plaintiff pressed for payment of the balance in March of 1994, at which time the practical completion certificate had not been issued, the parties then arrived at the further agreement in this matter which is contained in the Final Account dated 28th March 1994 together with the Defendant's letter dated 29th March 1994. As a result of that further agreement, the Plaintiff was paid 50% of the costs of the variation works with the balance to be paid when the practical completion certificate is issued.

20. Thereafter the Plaintiff still could not put right the defects of the dripping. According to Mr. Yau, even after the works of the Modification Contract has been carried out, that could not cure the dripping defects and up to the time when he left the Defendant in December 1995, those defects still exist and has not been put right by the Plaintiff.

21. Mr. Yau said that initially, the air rate flow of the air handling units had caused some problems because it was too high, but that had been corrected by adjusting the pulley and belt of the motor in the units and thereby the air flow had been regulated. The dripping problem was therefore not due to the high air flow rate. His evidence suggested that the dripping problem came about because of a number of factors, the main one being the poor workmanship involved in the insulation to the pipes of these units. He explained this saying that the insulation is to ensure that there is no air between the pipe and the insulation. If this is not done properly and air is present between the pipe and the insulation, this will cause condensation to form and the water from this condensation will then run along the fibreglass of the pipe resulting in dripping along it. According to him, if the workmanship for the insulation had been up to standard, it should last at least three to four years without peeling.

22. Mr. Yau also gave evidence that there were about 20 units of air handling units installed in each of the ground floor and first floor (by another sub-contractor, not the Plaintiff) of the Ming Pao Building all of which were made by the same manufacturers as those installed in the 15th to 18th floors by the Plaintiff; and although there were some dripping problems with three of those units on the ground and first floors, that problem was quickly cured by a simple adjustment.

23. Finally, Mr. Yau said that the works of the Modification Contract was done with a view to solve not the problem with the poor insulation but another problem relating to the poor flow of the condensate drain pipe which also led to water dripping from the air handling units. He also gave evidence that in October 1995, he had accompanied the consultant engineers of the employer to inspect the works and confirms that he saw the defects now listed in the letter of 7th November 1995 from the consultant engineers addressed to Ming Pao (Holdings) Co. Ltd.

24. The other witness called by the Defendant, Mr. Kwan Sun Chuen, is a director of the Defendant. In the early stages of the project, he was kept informed of the progress by the project manager Mr. Yau and he only took over when Mr. Yau left the Defendant in December 1995. His evidence of the earlier part of the project simply reiterates what Mr. Yau told the court and adds nothing to it and I do not propose to repeat it here.

25. In May 1995, in order to solve the dripping problem so that they can get the retention money held by the employer of the project, the Defendant issued the Purchase Order of the Modification Contract to the Plaintiff. However, even after the installation of the sump pit and sump pump, the dripping problem still continued.

26. In November 1995, the Defendant received a copy of the letter listing out the defects from Associated Consultant Engineers dated 7th November 1995 and forwarded a copy of it to the Plaintiff. The Plaintiff was chasing them for payment of the outstanding balance and he was trying his best to get the practical completion certificate issued but the project manager engaged by Ming Pao (Holdings) Co. Ltd. was not prepared to issue the practical completion certificate due to the unrectified defects of the dripping.

27. Finally on 25th September 1996, at a meeting with the representatives of Ming Pao (Holdings) Co. Ltd., it was indicated by them that they would hold back a sum of HK$400,000.00 to cover the costs of making good such defects and therefore the Defendant have not been fully paid for this project by Ming Pao (Holdings) Co. Ltd.

Findings of facts

28. From all the evidence relevant to the Ming Pao Contract, I make the following findings of facts:-

29. I accept the evidence of Mr. Yau that there were a number of factors causing the dripping problems or defects. I also accept his evidence that one of those causes, probably a major factor in the dripping defect came from the poor workmanship of the Plaintiff to the insulation of the pipework. I also accept his evidence that he was present at the inspection with the consultant engineers in October 1995 and saw the defects listed in the letter of 7th November himself. These defects, most of which were to be found from the 15th to 18th floors lend further support to Mr. Yau's evidence that they arose from the Plaintiff's poor workmanship rather than anything else.

30. From the evidence of Mr. Lo, I also find that as early as the end of 1993, the Defendant had complained of the Plaintiff's work resulting in the dripping from the air handling units and that in the early stages after these complaints were made, the Plaintiff did send workmen to try to put right the dripping defects but without any success. The fact that the Plaintiff did send workmen along to try to rectify these defects of the dripping indicates that the Plaintiff accepted that such defects were their responsibilities.

31. Moreover, I find that a copy of the letter of 7th November 1995 was sent by the Defendant to the Plaintiff after they had received a copy of it from the consultant engineers. It is quite unimaginable that anyone in the Defendant's position would not have done exactly that. However, I find that by that time the Plaintiff was unable to and therefore also unwilling to make any further attempts to rectify the situation. In this respect I do not accept Mr. Lo's evidence that when he last inspected the project in 1995 he did not see any dripping defects with the air handling units.

Conclusion

32. As a result of my findings above in respect of the Ming Pao Contract I come to the conclusion that on a balance of probabilities it was the Plaintiff's sub-standard work which was a significant cause of the dripping defects and as a result of that the practical completion certificate has to date not yet been issued. In the circumstances, the Plaintiff is not entitled to the release of the retention money under the terms of the Purchase Order of the Ming Pao Contract, nor are they entitled to the balance of the 50% of the costs of the variation works under the further agreement contained in the Defendant's letter of 29th March 1994.

33. Accordingly the Plaintiff's claim for HK$221,252.00 under the Ming Pao Contract fails.

The Modification Contract

34. It is not in dispute that the work of installing sump pit and sump pump has been performed by the Plaintiff. It is further not in dispute that the amount of HK$17,500.00, being half the agreed contract sum has not been paid by the Defendant. The defence raised here by the Defendant is that there was an oral agreement between the parties that the balance of the contract sum would only be paid upon the issuing of the practical completion certificate in respect of the main project. This evidence comes from Yau Yiu Cheung, the project manager of the Defendant whose evidence was to the effect that before the Purchase Order was signed on 17th May 1995, he had orally agreed with Eliza Leung of the Plaintiff that 50% of the contract sum in the Purchase Order would be paid upon signing of the Purchase Order and the balance to be paid after the modification works are completed and a practical completion certificate issued. Needless to say, this is disputed by Eliza Leung whose evidence was that there was never any such oral agreement but that the terms of payment agreed for this Modification Contract was as stated in the Purchase Order M/2824/P269.

35. In so far as that Purchase Order is concerned, the payment term is expressly stated as follows:-

"50% deposit, the remain 50% within 30 days after the completion and handover of the modification work."

36. When cross-examined on these words stated in the Purchase Order, Mr. Yau said he had drafted the Purchase Order but because he did not read the payment terms in the main contract, he may not have used the correct words.

37. It is trite law that oral evidence cannot be given to contradict the written terms of a contract. Quite apart from that, even if the evidence given by Mr. Yau is admissible, I find it extremely hard to believe that shortly after agreeing the payment terms in the way Mr. Yau said it was agreed, he would have drafted the payment terms in the Purchase Order in the way it now appears. I simply do not believe his evidence as to the oral agreement with Eliza Leung.

38. I find that the works contained in the Modification Contract was a last ditch effort by all concerned to try to remedy a long and nagging problem of the water dripping from the pipes and air handling units in the Ming Pao Contract. From the evidence of Mr. Yau, I find that the idea for the installation of the sump pit and sump pump came about as a result of discussions between the Defendant's technical personnel and the consultant engineer of Ming Pao (Holdings) Co. Ltd. and that the Plaintiff was not a party to those discussions. The Plaintiff's role was simply being asked to install the sump pit and sump pump after that course was decided upon by the Defendant's technical personnel and the consultant engineers of the employer.

39. There can be little doubt that by May 1995, the Plaintiff would have been only too well aware of the ongoing dripping problem which was holding up the practical completion certificate being issued. In those circumstances I can hardly expect the Plaintiff to still agree to payment for the Modification Contract being dependent on the issue of the practical completion certificate for the main project. For this reason I accept the evidence of Eliza Leung that the agreement between the Plaintiff and the Defendant as to payment in respect of the Modification Contract was as stated in the Purchase Order M/2824/P269. I find that these modification works were not intended by the parties to be a part of the Ming Pao Contract although related to it, and therefore a separate contract and separate Purchase Order was entered into by the parties. I further find that it was for that reason the parties intended and did agree on the payment terms in the way it was stated in the Purchase Order and that there was no oral agreement by the parties as to payment which was at variance with the written payment terms in the Purchase Order.

40. The works in respect of the Modification Contract having been done by the Plaintiff, the fact that it did not remedy the dripping problem is neither here nor there since that was not a condition to payment nor did the Plaintiff give any warranty thereto. In the circumstances, the Plaintiff is entitled to be paid the balance amount of HK$17,500.00.

The H.K. Shipyard and the YCK Contracts

41. These last two contracts can be dealt with together as the same considerations apply to both. In respect of the H.K. Shipyard Contract, the Plaintiff's claim was for HK$42,997.00 and that for the YCK Contract was for HK$19,897.00. As already stated, the only relevance of these last two contracts relates to the costs of this action since the amounts claimed in both contracts have already been paid over in full to the Plaintiff by the Defendant some time after the issue of the Writ.

42. The dispute in so far as costs are concerned is that the Defendant says that at the time the Writ was issued, namely on 18th May 1996, the Plaintiff was not entitled to the amounts claimed under either of these two contracts as those amounts were not yet due to the Plaintiff. However, some time after the Writ had been issued, those amounts became due and have already been paid to the Plaintiff. The Plaintiff, however, maintains that it was entitled to those sums claimed even on the day the Writ was issued.

43. The facts of both these contracts are not in dispute and are quite simple. In both these case, the Plaintiff carried out work as the Defendant's sub-contractor. In the case of the H.K. shipyard the contract between the parties is contained in the Defendant's Purchase Order M/2972/P301 issued to the Plaintiff and dated 17th September 1994 for the agreed sum of HK$350,000.00 in respect of the sub-contracted works. The works were carried out by the Plaintiff and the project completed in July 1995. There is not the slightest complaint of unfinished or defective work by anyone. The Plaintiff invoiced the Defendant for the balance amount under the contract (i.e. the amount claimed) on 18th October 1995. The Writ was issued on 18th May 1996. The Defendant received their final payment from the main contractor on 31st January 1997.

44. In the case of the YCK Contract Purchase Order M/2956/P304 was issued by the Defendant to the Plaintiff dated 17th September 1994 for sub- contract works at the agreed sum of HK$340,000.00. The works were carried out by the Plaintiff and the project completed in December 1994. Again there was no complaint of any unfinished or defective work. The Plaintiff invoiced the Defendant in July 1995 and the amount claimed in the Writ being the balance of the invoiced amount. The Defendant received their final payment from the main contractor on 2nd July 1996.

45. In both the H.K. Shipyard Contract and the YCK Contract, the payment terms in the respective Purchase Orders were expressly stated to be "on back to back basis". Moreover in clause 2.11 of the Other Terms and Conditions in both Purchase Orders it is expressly stated as follows:-

"This contract is based on back to back basis including payment terms."

46. What falls for me to decide here is whether, on a proper construction of these terms in the contract, payment of the final balance is only due to the Plaintiff from the Defendant after the Defendant receives payment from the main contractor as contended by the Defendant, or whether the Plaintiff is entitled to be paid after a reasonable time has elapsed from completion of the works as submitted by the Plaintiff.

47. In this respect I have been referred to a number of authorities from Australia, New Zealand and the United States of America. The underlying principle from all these cases seems clear enough - that when having to construe a clause in a sub-contract that the sub-contractor will only be paid when the main contractor is paid, commonly called a "pay-when-paid" clause, sufficiently clear words will have to be used before a court will be prepared to construe that such a clause imposes as a condition payment to the main contractor which had to be fulfilled before the sub-contractor had the right to be paid as opposed to a clause limiting the time for payment. This principle is readily illustrated in the words of Master Towle in the New Zealand case of Smith & Smith v Winstone [1992] 2 NZLR 473 where he said at page 481:-

"While I accept that in certain cases it may be possible for persons contracting with each other in relation to a major building contract to include in their agreement clear and unambiguous conditions which have to be fulfilled before a subcontractor has the right to be paid, any such agreement would have to make it clear beyond doubt that the arrangement was to be conditional and not to be merely governing the time for payment. I believe that the contra proferentem principle would apply to such clauses and that he who seeks to rely upon such a clause to show that there was a condition precedent before liability to pay arose at all should show that the clauses relied upon contain no ambiguity."

and also

"For myself I believe that unless the condition precedent is spelled out in clear and precise terms and accepted by both parties, then clauses such as the two particular ones identified in this proceedings do no more than identify the time at which certain things are required to be done, and should not be extended into the "if" category to prevent a subcontractor who has done the work from being paid merely because the party with whom he contracts has not been paid by someone higher up the chain."

48. I am in total agreement with Master Towle's observation reflected in the two paragraphs cited above. The terms of the H.K. Shipyard Contract and the YCK Contract, namely that the contract is on a back to back basis including payment terms, is not sufficiently clear to cause me to construe them in the way as suggested by the Defendant, that the Plaintiff is only entitled to be paid when the Defendant receives payment. In the absence of any clear express words that the parties' intention is to that effect, I hold that those clauses merely provides for the time of payment and that the Plaintiff's right to be paid is not dependent upon the Defendant getting paid first.

49. The works in respect of the H.K. Shipyard Contract having been completed in July 1995 and the works of the YCK Contract having been completed by December 1994, and in both cases invoices having been issued by the Plaintiff in October 1995 and July 1995 respectively, I am satisfied that a reasonable time has elapsed when the Writ was issued such that these sums were due from the Defendant at the time of the Writ.

Conclusion

50. Based on the foregoing, there will be judgment for the Plaintiff in the sum of HK$17,500.00 as claimed under the Modification Contract.

Costs

51. Even taking into account the amounts claimed under the H.K. Shipyard Contract and the YCK Contract, these sums added to the amount the Plaintiff has now recovered, does not exceed the District Court jurisdiction. Accordingly, I make the Costs Order nisi that the Plaintiff be entitled to costs of this action but on the District Court level of costs. I will, however, grant a certificate for counsel in view of the fact that a substantial amount of law was argued in these proceedings.