FUNG CHEUNG v. KWAN LEE CONSTRUCTION CO LTD

IN THE COURT OF APPEAL

1994, No. 136
(Civil)

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H E A D N O T E

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Contract law - building sub-contract - collateral oral agreement - whether, in circumstances where court cannot order rectification of a written contract, there is room for importing oral terms.

Held : (Court of Appeal) : Appeal allowed. Declaration that plaintiff was not entitled to be paid additional sums for fluctuations in the cost of material and labour.

IN THE COURT OF APPEAL

1994, No. 136
(Civil)

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J U D G M E N T

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Litton, V.-P.:

1. The appellant in this case, Kwan Lee Construction Co. Ltd. (Kwan Lee), was the main contractor for the development of four phases of a housing estate at Ngau Chi Wan in the late 1970s. The respondent Fung Cheung was the sub-contractor for the works.

2. The work sub-contracted to Fung Cheung covered three areas: (i) site formation and caissons; (ii) concreting for the superstructures; and (iii) drainage works. For this purpose the parties entered into 12 sub-contracts, covering the four phases of the development, the first of which was signed on 28 June 1977 and the last two, covering drainage works for Phases III and IV of the development, were signed on 4 July 1978.

3. The development has been completed long ago but the parties have not been able to finalize the accounts between them.

Fung Cheung's claim

4. The writ was issued by Fung Cheung as the plaintiff and his principal claim for relief was stated as follows:

"An account to be taken of all payments due and owing by the defendants [Kwan Lee] to the plaintiff in respect of the work done by the plaintiff at Ngau Chi Wan, Kowloon".

5. There was an alternative claim for damages for breach of the 12 sub-contracts.

6. Fung Cheung's statement of claim has gone through a number of amendments. When, eventually, the matter went before Kaplan J for trial in March l994, the main relief sought by the plaintiff was a series of declarations concerning the parties' rights and liabilities, to enable accounts to be properly taken by a Master pursuant to Order 43 of the Rules of the Supreme Court.

7. At first blush, it may seem odd that some 14 years after all the works have been completed, the accounts have still not been finalized.

8. What seems to have bedevilled the proceedings in the court below is the averment in para 7 of the amended Statement of Claim as follows:

"7. Further, it was agreed orally between Mr. Fung Cheung of the Plaintiff and Mr. Yu Tai Peng of the Defendant at in or about March 1977 and thereafter confirmed from time to time that

(a) aggregate, sand and fine stone pieces were to accord with Anderson's current prices to be adjusted in the event of increase or decrease;

(b) the Plaintiff would be entitled to payment in respect of labour and other materials including cement in accordance with the fluctuations allowed under the main contract after deduction of the Defendant's agreed percentage under the respective subcontracts for the type of work in question."

Issue on appeal

9. In essence, Kaplan J found this averment proved to his satisfaction. There is now no appeal against this finding although, initially, such a challenge was made in the grounds of appeal, filed on behalf of Kwan Lee. The question before us on appeal turns on the effect in law of this finding.

10. Other grounds of appeal, particularly those involving the four concreting sub-contracts, have now fallen away, as has Fung Cheung's cross-appeal, and what we are left with in this court, unresolved, are the four drainage contracts.

11. The issue, after it has been honed down in argument, can be expressed thus:

Whether, on a proper construction of the drainage contracts, Fung Cheung is entitled to be paid for material and labour fluctuations, to be calculated on the basis of a proportion of the amounts for such fluctuations received by Kwan Lee from the Government under the main contracts

or

whether the plaintiff is not entitled to be paid for fluctuations for material and labour.

Proper construction of the drainage contracts

12. There were, in fact, two contract documents covering the drainage works for the four phases. They comprise terms put forward by Fung Cheung and accepted by Kwan Lee. The contracts for Phases IIA and IIB were signed on 1 September 1977; those for Phases III and IV were signed on 4 July 1978. It is only necessary to set out the contract for Phases IIA & IIB as, for the purposes of this appeal, the September 1978 document was identical except that the "discounts" retained by Kwan Lee were less.

KWAN LEE CONSTRUCTION CO. LTD.

THE DRAINAGE WORKS AT THE CONSTRUCTION SITE AT NGAU CHI WAN ESTATE PHASE II A & B OF THE HOUSING AUTHORITY ARE LISTED AS FOLLOWS:-

1. Drainage works

2. Remarks

A	The company is responsible for the supply of cement.
B	The company is responsible for the level measuring and setting out.
C	The company is responsible for the workmen compensation insurance.
D	Payment to be made once every 15 days.

E	Apart from actual B.Q. amounts received, the company is responsible for other payments.
	Cheung Kee Construction Co 23rd August 1977 (sd) illegible (illegible) approved (sd) illegible 1/9/77"

13. The contracts were written in Chinese and what is set out above is the English translation. The expression "to be paid according to the actual tendered company's BQ RATE/PRICE LIST" is the Chief Interpreter's translation of the Chinese characters used, being the closest approximation to the real sense of those words.

14. Obviously, the first task for the judge was to construe the parties' written contracts. If, upon a proper construction, the parties had, by the form of words used, made provisions for payment to the plaintiff for price increases in material and labour, there would be no room for inserting a collateral oral agreement to similar effect.

15. Sir John Swaine, Q.C., counsel for Kwan Lee, argues that the words "BQ RATE/PRICE LIST" contain two diametrically opposed concepts. "BQ RATE", he contends, refers to be rates for different items of work in Messrs Levett and Bailey's bills of quantity inserted by Kwan Lee for the purposes of their tender; "PRICE LIST" refers to the schedules submitted by Kwan Lee to the Government as employer under the main contract from time to time for the purposes of claiming increases in the price of material and labour.

16. What counsel's argument boils down to is this: Adopting "BQ RATE" as the correct English translation, it means that the parties have made no provisions in their written contract for price fluctuations; if "PRICE LIST" be the right translation, then the parties have indeed incorporated into their own written contract all the provisions for labour and material fluctuations in the main contract. Counsel argues that the judge had left this issue concerning the proper translation of the Chinese characters in the drainage sub-contracts unresolved; it is not open to us to decide the issue without entertaining further argument and, possibly, evidence.

17. If this was how the judge in fact left the matter, it would have been most surprising. It is difficult to imagine a trial judge proceeding to adjudicate on the issue of liability without deciding what the written contract meant.

18. The judge's broad conclusion was as follows: (i) the "oral agreement" pleaded in para 7 of the amended statement of claim was proved; (ii) the "pleaded term ... constituted a valid agreement in law and was part of or collateral to Mr Fung's promise to do the work"; (iii) where the sub-contract was silent, Mr Fung was entitled to claim payment for fluctuation.

19. As the other eight sub-contracts (dealing respectively with site formation and caissons, and concreting for the superstructure) clearly had provisions in one form or another for fluctuations, and were in that regard not "silent", the judge could only have meant by the expression "where the sub-contract is silent" to refer to the drainage contracts; and he could only have reached that conclusion - that the "oral agreement" was "part of" the written drainage contracts - if he had found those written contracts deficient in that regard: that is to say, that the expression "to be paid according to the actual tendered company's BQ RATE/PRICE LIST" gave Fung Cheung no entitlement to price increases for fluctuations. There would have been no point otherwise to his finding regarding the "oral agreement" in Fung Cheung's favour.

20. This view of the judge's finding is reinforced by his earlier reference to the caisson sub-contracts where the identical expression was used. In this regard the judge said:

"The parties have not been to agree on a translation of certain of the Chinese characters, hence the phrase 'BQ rate/price of the bill'. At the end of the day, both sides veered to the view, with which I agree, that there is nothing significant between these two phrases".

21. This is an implied rejection of Sir John Swaine's point. If his argument in this court were right, there would have been a great difference in the result between the "two phrases".

22. Coming back to the written contracts for the drainage works, one sees that it was Kwan Lee who was to be responsible for the supply of cement. In essence, the risk which Fung Cheung took as regards price increases related to the cost of labour and of aggregates and fine sand used in the mixing of concrete.

23. The question before us, quite simply, is whether the judge was right in finding that the "pleaded term" in para 7 of the Statement of Claim was part of the written drainage contracts or was collateral to it and gave to Fung Cheung the entitlement as regards fluctuation which it claims.

Collateral oral agreement

24. Obviously, where a trial judge has made findings of fact, after hearing oral testimony, an appeal court would be extremely slow in disturbing such findings. The limits to this court's jurisdiction are well-known and need no repetition. The difficulty in this case is to determine what precisely it was that the judge did find and how that finding squared with the written terms of the drainage contracts.

25. The "oral agreement" pleaded in para 7 of the Statement of Claim is not free-standing nor self-contained. If, by the "oral agreement", the parties meant that, thereafter, every time they should enter into a contract in the future, such contract would automatically contain the clauses as pleaded in sub-paragraphs (a) and (b) of para 7, that is not what the judge found. And if he did so find, it is contradictory to the undisputed facts. For instance, in relation to the concreting contract for Phase IIA, there were provisions to "compensate" Fung Cheung for increases in the cost of labour, but there was no "Anderson clause" in that contract - the clause providing for adjustment to the price for aggregate, sand and fine stone according to Anderson's current prices; yet one finds such a clause in the concreting contract for Phase IIB: the judge never held that the "Anderson clause" pleaded in para 7(a) of the statement of claim could be interstitially woven into the fabric of the concrete contract for Phase IIA, to make it in effect into a contract partly-written and partly-oral. That is common ground between the parties.

26. How, then, did the "oral agreement" get carried into the form of the drainage contracts? The judgment is silent on the point. Kaplan J merely said:

" In my judgment, it would have been absurd for some contracts to contain a fluctuation clause and others not. The oral agreement is clear on the evidence. Anything else would not have made commercial sense.

This issue is therefore decided in the Plaintiff's favour."

27. I am not satisfied that the drainage contracts necessarily required a fluctuation clause to make "commercial sense". Fung Cheung had no risk regarding any increase in the cost of cement, as this was supplied by Kwan Lee. There was no suggestion that the drainage contracts were to be fulfilled over a long period of time, exposing Fung Cheung to a high risk of increases in the costs of labour and aggregate.

28. The judge said that the "pleaded term ... constituted a valid agreement in law and was part of or collateral to Mr. Fung's promise to do the work". It is not clear what he meant by this.

29. Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] AC 30 at 47 gives an example of what is meant by a collateral contract:

"It is evident, both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. 'If you will make such and such a contract I will give you one hundred pounds,' is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract".

30. Both by virtue of the pleading in para 7 of the statement of claim and from Mr Fung's testimony in court, it does not appear that the plaintiff's case accords with Lord Moulton's example. And Lord Moulton added at p47:

"But such collateral contracts must from their very nature be rare".

31. It seems to be Mr Fung's case, emerging from his testimony, that he was saying that the written drainage contracts were defective in that they failed to incorporate the agreed fluctuation clauses. Indeed, this is apparent from para 16 of the statement of claim where the plaintiff sought rectification as a relief.

32. If ultimately it was rectification of the written drainage contracts which Fung Cheung sought, and that was how the judge understood the case, then he failed to take into account a number of relevant considerations:

(1) The written contracts already provided, to an extent, protection in favour of Fung Cheung against increases in the cost of cement.

(2) The case for the rectification of a written contract must be proved to a very high standard: "It is essential that the extent of the rectification should be clearly ascertained and defined by evidence .... The denial of one of the parties that the deed as it stands is contrary to his intention ought to have considerable weight, and unless the other party can convince the court that the document does not represent both parties' intentions at the time of execution, rectification will only exceptionally be ordered. Indeed, it has been said that it is not sufficient that the written contract does not represent the true intention of the parties; it must be shown that the written contract was actually contrary to the intention of the parties." See Chitty on Contracts (27Ed) Vol. I para 5 - 045.

(3) The contract was proffered by Fung Cheung for signature and no explanation was given as to why the terms pleaded in para 7(a) and (b) of the statement of claim were omitted.

(4) The "oral agreement" was entered into in March 1977. The last two drainage contracts were not made until July of the following year. The judge gave no consideration to the inherent improbability of an "oral agreement" so remote in time having any relevance to those two later sub-contracts.

(5) Although the pleading in para 7 of the statement of claim avers that the agreement was "confirmed from time to time", the evidence was virtually non-existent in that regard and the judge made no express findings as to when and where such "confirmation" took place.

33. In my judgment, the "oral agreement" is far too vague, vis-à-vis the written drainage contracts, to have any legal effect.

Declaratory relief

34. The declaration, embodying the judge's reasoning, is set out in these terms:

"(ix) Where the particular written contract between the Plaintiff and the Defendant governing the work to be carried out by the Plaintiff at Ngau Chi Wan Estate contained no express provision dealing with fluctuations, the Plaintiff is entitled to receive payment in respect of fluctuations under the Oral Agreement".

35. If Fung Cheung is not entitled in law to have an order for rectification of the written drainage contracts, it is difficult to see what other juridical plank exists for its "entitlement" to receive payment in respect of fluctuations regarding the drainage contracts.

Conclusion

36. In my judgment, Kwan Lee must succeed on this appeal. To avoid doubt, and to facilitate the speedy taking of accounts by the Master pursuant to Kaplan J's judgment, I would, in place of para (ix) of the judge's formal order, make the following declaration: that, pursuant to the four drainage contracts, the plaintiff is not entitled to be paid additional sums for fluctuations in the cost of material and labour.

Godfrey, J.A.:

37. Although we are differing from Kaplan J., I agree so completely with the judgment of my Lord, the Vice-President that I am satisfied it would serve no useful purpose to add anything of my own.

Mayo, J.A.:

38. I agree entirely with what has been said by my Lords Litton and Godfrey. I would however like to make some observations myself.

39. The scope of this appeal and cross-appeal narrowed significantly as it proceeded.

40. The appeals relating to the contracts for concreting and caisson works and the cross-appeal were not concluded. This left the four contracts relating to the drainage works.

41. The issue which remained outstanding on these contracts was whether Mr Fung Cheung was entitled to the benefit of what has been described as a fluctuation clause.

42. If such a provision was included in the contracts Mr Fung would have been entitled to be reimbursed by Kwan Lee for increases in costs arising during the currency of the contracts covering the expenditure included in the provision.

43. One of the problems plaguing this litigation has been the difficulty in formulating the issues where there is disagreement between the parties.

44. The trial before Kaplan J was protracted as a consequence of successive attempts being made to agree what was outstanding between the parties. These attempts were to a large extent unavailing. Perhaps as a result of this Kaplan J's judgment to a large extent took the form of giving directions to the parties upon how various different claims should be dealt with when the account was taken.

45. This was not a satisfactory approach to the problems.

46. At a late stage in the appeal the court formulated an issue on the subject of fluctuations in respect of the drainage contracts in these terms.

"Whether on a proper construction of the 4 drainage subcontracts Mr Fung was entitled to be paid for material and labour fluctuations on the basis of 80% on phase IIA contract 81% on IIB and 85% on phases III and IV of the amounts of such fluctuations received by Kwan Lee under the main contracts for work at the said stage made between Kwan Lee and the Hong Kong Government."

47. Counsel representing both sides seemed to accept that if the court was able to provide an answer to this question it would resolve the outstanding issue on this appeal. In any event I consider in the context of the history of this litigation that if this question is answered simply it will provide a resolution of the only outstanding issue on this appeal.

48. There are two ways of attempting to find an answer to this question. The first is to consider the contractual terms which were agreed between the parties in the contract and determine as a matter of construction what the parties had agreed between themselves.

49. The second is to consider whether the oral agreement which is conveniently encapsulated in para 7 of the amended Statement of Claim has the legal effect claimed by Sir John Swaine Q.C. who was representing Mr Fung.

50. The drainage contracts were in a very simple form. Mr Fung had provided what has been described as an invoice and Kwan Lee accepted the terms proposed. The form of the document was as follows:

"

CHEUNG KEE CONSTRUCTION COMPANY

KWAN LEE CONSTRUCTION CO. LTD.

THE DRAINAGE WORKS AT THE CONSTRUCTION SITE AT NGAU CHI WAN ESTATE PHASE II A & B OF THE HOUSING AUTHORITY ARE LISTED AS FOLLOWS:-

1. Drainage works

A.	Phase IIA	All the works to be completed according to the drawings inclusive of materials and to be paid according to the actual tendered company's BQ RATE/PRICE LIST less 20% discount (sd) illegible
B.	Phase IIB	All the works to be completed according to the drawings inclusive of materials and to be paid according to the actual tendered company's BQ RATE/PRICE LIST less 19% discount. (sd) illegible

2. Remarks

A	The company is responsible for the supply of cement.
B	The company is responsible for the level measuring and setting out
C	The company is responsible for the workmen compensation insurance.
D	Payment to be made once every 15 days.

E	Apart from actual B.Q. amounts received, the company is responsible for other payments.
	Cheung Kee Construction Co 23rd August 1977 (sd) illegible (illegible) approved (sd) illegible 1/9/77"

51. It would appear that on the face of it the contract cannot on any sensible construction be said to include a provision that Mr Fung is entitled to receive the recompense he is claiming for fluctuations in the various costs claimed.

52. Sir John Swaine submitted that it was also necessary to take cognisance of the oral agreement in March 1977 when Mr Fung and Mr Yu of Kwan Lee had discussed the question of fluctuations. Kaplan J had made a finding of fact that the parties had indeed agreed that Mr Fung should be entitled to receive fluctuations in costs incurred and this court should be very slow to interfere with such a finding.

53. While this is true it overlooks a number of difficulties. It seems to me that the main difficulty is that Kaplan J himself did not define with any satisfactory measure of precision what the oral agreement between these parties included.

54. He accepted as he had to that the oral agreement was inconsistent with a number of the written contracts which were later in time concluded between the parties. He attempted to deal with this problem by stating on page 16 of his judgment that where the contracts were silent on fluctuations the oral agreement should form part of the contract or be collateral to Mr Fung's promise to do the work.

55. What this approach overlooks is that on any careful analysis of all of the contracts it is clear that the parties did give detailed thought to the question of fluctuations and in some cases provision was made for fluctuations and in other cases there was no such provision.

56. In any event it would appear that Kaplan J was forced to accept that there may be situations where the oral agreement was inconsistent with the subsequent written contracts concluded between the parties.

57. This difficulty was compounded by the way in which Mr Fung gave evidence. We were taken through his evidence by Mr Harris who represented Kwan Lee. To say the least Mr Fung's evidence concerning the oral agreement was vague and inconclusive. Mr Fung was responding to leading questions which were put to him by his counsel and there was no satisfactory definition of the scope of the operation of the agreement.

58. Certainly the discussions which took place between Mr Fung and Mr Yu did not have the measure of clarity which Viscount Dilhorne had in mind when he was considering whether an assurance given might amount to a warranty at p 22 of IBA v. EMI and BICC (1980) 14 BLR 9:

"If this is right; then it would seem to me to follow that any representation, whether made innocently, negligently or fraudulently, which is intended to be acted on and which is acted on creates a contractual relationship. I do not think that this can be right.

In Heilbut Symons & Co v Buckleton [1913] AC 30 the warranty was alleged to have been given at the time the contract as to shares was entered into. The plaintiff, Lord Moulton, said at p. 47, must:

'show a warranty, ie a contract collateral to the main contract to take the shares, whereby the defendants in consideration of the plaintiff taking the shares, promised that the company itself was rubber company.'

He went on to say that collateral contracts

'must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown.'

and said at p.51:

'In the present case the statement was made in answer to an inquiry for information. There is nothing which can by any possibility be taken as evidence of an intention on the part of either or both of the parties that there should be a contractual liability in respect of the accuracy of the statement.'

Lord Haldane LC who agreed with these observations, said at p.38:

'Considerable confusion has arisen from failure to keep in view the simple principle ... enunciated by Holt CJ that an affirmation can only be a warranty provided it appear on evidence to have been so intended.'

Although in this case that alleged warranty was not given at the time of the making of the main contract and so was not collateral to that contract, it still is essential to justify the conclusion that a legally binding contract has been made, to show clearly that each party had an animus contrahendi."

59. I do not think that if the evidence is considered as a whole that it can be argued that the oral agreement constituted a separate collateral contract. Mr Fung accepted that the terms which were being discussed would later be incorporated into written contracts. This militates against the existence of a separate collateral contract.

60. Sir John Swaine attempted to surmount this problem by referring to the judgment of Roskill LJ at 1083 of J. Evan & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd. [1976]1 WLR 1078:

"It seems to me, as it seems to Lord Denning M.R., absolutely plain that the plaintiffs thought they had got an assurance from the defendants that if the plaintiffs, instead of using the trailers which had hitherto always been shipped under deck, were to allow the defendants to ship the plaintiffs' goods in containers, those containers, like the trailers before them, would be shipped under deck. It is only necessary to refer to though not to read passages from the evidence to see that that is absolutely plain. The judge said that all the defendants gave was an assurance: they did not give a guarantee. The real question, as I venture to think, is not whether one calls this an assurance or a guarantee, but whether that which was said amounted to an enforceable contractual promise by the defendants to the plaintiffs that any goods thereafter entrusted by the plaintiffs to the defendants for carriage from Milan to the United Kingdom via Rotterdam and thence by sea to England would be shipped under deck. The matter was apparently argued before the judge on behalf of the plaintiffs on the basis that the defendants' promise (if any) was what the lawyers sometimes-call a collateral oral warranty. That phrase is normally only applicable where the original promise was external to the main contract, that main contract being a contract in writing, so that usually parole evidence cannot be given to contradict the terms of the written contract. The basic rule is clearly stated in paragraph 742 of Benjamin's Sale of Goods, 9th ed. (1974) to which I refer but which I will not repeat. But that doctrine, as it seems to me, has little or no application where one is not concerned with a contract in writing (with respect, I cannot accept Mr. Hallgarten's argument that there was here a contract in writing) but with a contract which, as I think, was partly oral, partly in writing, and partly by conduct. In such a case the court does not require to have recourse to lawyer's devices such as collateral oral warranty in order to seek to adduce evidence which would not otherwise be admissible. The court is entitled to look at and should look at all the evidence from start to finish in order to see what the bargain was that was struck between the parties. That is what we have done in this case and what, with great respect, I think the judge did not do in the course of his judgment. I unreservedly accept Mr. Hallgarten's submission that one must not look at one or two isolated answers given in evidence; one should look at the totality of the evidence. When one does that, one finds, first, as I have already mentioned, that these parties had been doing business in transporting goods from Milan to England for some time before; secondly, that transportation of goods from Milan to England was always done on trailers which were always under deck; thirdly, that the defendants wanted a change in the practice - they wanted containers used instead of trailers; fourthly, that the plaintiffs were only willing to agree to that change if they were promised by the defendants that those containers would be shipped under deck, and would not have agreed to the change but for that promise. The defendants gave such a promise, which to my mind against this background plainly amounted to an enforceable contractual promise. In those circumstances it seems to me that the contract was this: 'If we continue to give you our business, you will ensure that those goods in containers are shipped under deck'; and the defendants agreed that this would be so. Thus there was a breach of that contract by the defendants when this container was shipped on deck: and it seems to me to be plain that the damage which the plaintiffs suffered resulted from that breach."

61. This is a correct statement of the law. The problem is that on the evidence which was before Kaplan J it was unclear as to what specifically had been agreed orally. One thing which was clear from the factual matrix was that the parties did subsequent to the oral agreement enter into written agreements some of which were inconsistent with the oral agreement. That being the case I do not think that Roskill LJ's observations can be of any assistance to Mr Fung. It is quite clear that the oral agreement was not intended to override provisions which would subsequently be incorporated into written contracts.

62. I am satisfied that the question which has been formulated must be answered in the negative.