BOUYGUES S.A. AND ANOTHER v. SHANGHAI LINKS EXECUTIVE COMMUNITY LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1998, No. 131
(Civil)

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J U D G M E N T

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Mortimer, V.-P. :

1. This is the plaintiffs' appeal against the dismissal of their claim by Keith J on 4 June 1998.

The background

2. The plaintiffs are construction companies who successfully tendered for the construction of 50 residential villas and infrastructure works. This was part of the initial development phase of the Pudong Area in Shanghai. The developers, Shanghai Pudong New Area Links Executive Community Ltd (SPNA) are a wholly owned subsidiary of the defendant. The plaintiffs and SPNA entered into a construction contract for the contract price of US$33.25m. in order to secure the payment of the contract price. A further agreement - the payment agreement - was made between the plaintiffs and the defendant whereby inter alia the contract price would be placed in a segregated account in Hong Kong in the defendant's name. Payments were to be made out of this account in accordance with the construction contract. Interim payments were made out of the account until the parties fell out and the contract was terminated. The payment agreement is the subject of this appeal.

3. The plaintiffs contend that SPNA failed to pay a sum of US$3m due and owing under an interim certificate. On 25 February 1998 they therefore terminated the contract. They contend that they became entitled to about US$11m representing the balance of work and materials supplied together with other sums for loss consequent upon the termination.

4. SPNA's case is that the plaintiffs were in serious breach of the contract themselves and that on 3 February 1998 it terminated the contract and that when claims, setoffs and damages are assessed, the plaintiffs will owe money to it.

5. These issues concerning the termination of the construction contract will not be litigated in the Hong Kong courts because they are the subject of an arbitration agreement.

6. Contrary to the defendant's contention, the judge below held that the segregated account was established following a written agreement (the payment agreement) between the parties and the investors contained in letters. It is necessary to refer to two. The first from Mr Ng, a lawyer representing SPNA, in which he said:

"We advise that under an agreement entered into by the [Defendant], all of the funds required to pay the US$33,250,000 Contract Price will be deposited in a segregated US$ account of the [Defendant] at Standard Chartered Bank in Hong Kong. Payment of the Contract Price under the Contract will be made from this account and funds can be paid out of this account by the signature of Barry Hansen and one other director of the [Defendant]."

The second is from the investors who were the pay masters. This reads:

"The undersigned is the representative of one of several investors which have agreed to make an investment in the [Defendant]. We confirm that in accordance with the terms of such investment, the [Defendant] is required to place the US$33,250,000 Contract Price in a segregated US dollar account of the [Defendant] for payment of the Contract Price. We agree that payment of the Contract Price will be made to you according to terms and conditions of the construction contract signed between the contractor and the developer from the [Defendant's] account by signature of Barry Hansen and a director appointed by one of the investors as described above."

The judge found:

"... the phrase 'the Contract Price' in Mr. Ng's letter does not relate to the sums which the Plaintiffs are claiming in the arbitration, i.e. the sums payable to them pursuant to cl. 69.3 of the FIDIC Conditions of Contract for Works of Civil Engineering Construction (4th ed.) which were incorporated into the construction contract in the event of termination of the construction contract by the Plaintiffs as a result of SPNA's breach of it, but the sums payable to the Plaintiffs for the performance of their obligations under it. Since the Plaintiffs' security related only to the latter and not to the former, the Plaintiffs are not entitled to any of the relief sought in the action - whether for breach of trust or breach of contract."

The appellant's contentions

7. In summary Mr Barlow submits:

(1) That the judge misconstrued the true meaning of the payment agreement in that the words "contract price" cover not only payments falling due during the performance of obligations under the construction contract but also all sums due on the termination of the contract.

(2) Alternatively, if the phrase "the contract price" is not apt to cover sums payable on the termination it does cover sums which had been certified as payable before the termination.

8. The appellant's main submission is therefore that the payment agreement provided security by means of the segregated account for all claims on the termination of the contract under clause 69.3 and clause 65.8.

9. Mr Barlow urged the Court in construing the effect of the contract to follow Lord Bridge's guidance in Mitsui Construction Co Ltd v The Attorney General of Hong Kong [1986]33 BLR 1 (P.C.) at 14:

"It is obvious that this is a badly drafted contract ... But the poorer the quality of the drafting, the less willing any court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention capable of an interpretation which. attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis."

The contracts considered

10. But with respect, this passage is nothing to the point. The words used in both the payment agreement and the construction agreement are normal English words and their meaning is clear.

11. "Contract price" is defined in general condition 1.1(3)(i):

" 'Contract price' means the sum stated in the Letter of Acceptance as payable to the Contractor for the execution and completion of the Works and the remedying of any defects therein in accordance with the provisions of the Contract."

The contract price therefore is the price for the whole contract payable "for the execution and completion" of the work. The contract price is the total sum of US$33.25m payable upon the completion of the contract, but payments on account are provided for before then.

12. There are separate provisions for payments on termination of the construction contract. Clause 69.3 provides:

"In the event of such termination the employer shall be under the same obligations to the contractor in regard to payment as if the contract had been termination under the provisions of clause 65, but, in addition to the payments specified in sub-clause 65.8, the employer shall pay to the contractor the amount of any loss or damage to the contractor arising out of or in connection with or by consequence of such termination.

13. Clause 65.8 provides:

"If the Contract is terminated as aforesaid, the Contractor shall be paid by the Employer, insofar as such amounts or items have not already been covered by payments on account made to the Contractor, for all work executed prior to the date of termination at the rates and prices provided in the Contract and in addition:"

There follows a comprehensive list.

14. These payments upon the termination of the contract arise in consequence of the termination under the above two clauses but they are recoverable under these clauses. In my judgment, they are not part of the "contract price". On this I cannot add to the reasoning of the judge with which I entirely agree.

The alternative submission

15. Mr Barlow submits that in any event certified payments which had fallen due before the termination were payments of the contract price and therefore are secured in the segregated account under the payment contract. He submits in particular that the certified payments are not payments on account but are payments of instalments for the work done were payable as part of the contract price. For this, he relies upon Lord Diplock's description of a building contract in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (HL) at 717B:

" ... a building contract is an entire contract for the sale of goods and work and labour for a lump sum payable by instalments as the goods are delivered and the work is done."

16. I would hold that the payments made the architect's certificate were "payments on account" in this contract because that is the way they are described in clause 65.8 and these payments are always open to later review. However, whether they are payments on account or instalments under the contract is nothing to the point because the disputed payments had not been made. Had they been paid during the currency of the contract, undoubtedly they would be on account of the contract price. Once the contract had terminated, those payments fell due under the provisions for termination to be assessed and recoverable under the appropriate clauses. In the absence of these clauses on a termination, only damages for breach of the contract would have been recoverable - not the contract price.

Conclusion

17. For these reasons, I would hold that the plaintiffs' present claim on termination of the contract is not in any of its elements a claim for "the contract price". Therefore, they are not secured by any sum which may be in the segregated account under the payment agreement.

18. For these reasons, I would uphold the judge and dismiss the appeal.

Godfrey, J.A.:

19. I gratefully adopt Mortimer, V-P's rehearsal of the facts as set out in his judgment.

20. As I see it, the only question with which we in this court are concerned is a short question of construction. I would identify that question as follows : Whether, on the true construction of the phrase "the Contract Price" in Mr. Ng's letter, the same comprehends (1) only the sums payable to the plaintiffs in the event of the plaintiffs performing all their obligations under the construction contract (construction A); or (2) all such sums, if any, as may become payable to the plaintiffs in the event which has happened, i.e., the termination of the construction contract (construction B); or (3) all such sums as shall, before that event, have already been certified under the construction contract to be payable to the plaintiff (construction C).

21. The task before the court is to ascertain the meaning which Mr. Ng's letter, with its use of the expression "the Contract Price", would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (but excluding, from this admissible background, the previous negotiations of the parties and their declarations of subjective intent, evidence of which would be admissible only in an action for rectification); see I.C.S. Ltd. v. West Bromwich Building Society [1997] 1 WLR 896, per Lord Hoffmann at pp. 912, 913.

22. The judge, in my opinion approaching the question correctly, adopted construction A.

23. I would do so, too. What may be coming to the plaintiffs after termination of the construction contract will not be the "Contract Price" or any part thereof; it will be such sums as may be found to be due to the plaintiffs under the specific provisions of the contract which prescribe what the plaintiffs are to receive in the event of termination of the contract. On that analysis, construction B must be rejected. As to construction C, this must be rejected as well; for the fact that before termination certificates for payment of instalments, or on account, of the contract price (I consider it to be immaterial how it is put) may earlier have been given does not impact on the rights of the parties after termination, which are governed, as I think, exclusively by the provisions in that behalf mentioned in the construction contract.

24. For these reasons, I would dismiss this appeal.

Leong, J.A.:

25. On 28.3.1997, the plaintiff entered into a construction contract for the construction of villas and infrastructures for the defendant. The "Contract Price" as stated in the Letter of Acceptance is US$33,250,000. The contract provides that the plaintiff's obligation to commence work shall be subject to payment arrangements to the satisfaction of the plaintiff and advance payment of 10% and deposit of 5% of the "Contract Price". Payment arrangements were duly made and agreed by the parties. The relevant terms are contained in a letter from the defendant's lawyer Mr. Ng to the plaintiff and they read as follows:

"We advise that under an agreement entered into by the [defendant], all of the funds required to pay the US$33,250,000 Contract Price will be deposited in a segregated US$ account of the [defendant] at the Standard Chartered Bank in Hong Kong. Payment of the Contract Price under the Contract will be made from this account and funds can be paid out of this account by the signature of Barry Hansen and one other director of the [defendant]."

26. Following this letter, the sum of US$33,250,000 was duly deposited in the relevant bank account by the defendant.

27. The plaintiff and the defendant fell out after the plaintiff performed the contract for roughly one year. On 2.3.1998, the defendant terminated the contract pursuant to a certificate of default on the part of the plaintiff issued by the Engineer and re-entered the site. At the time of termination, there were works executed by the defendant and certified by the Engineer and but no payment for them had been made.

28. The plaintiff claimed that the termination was not by its default but by the defendant's default. The plaintiff claimed it was entitled to the outstanding payments in respect of work performed and material supplied prior to termination after deducting payments received by them and in addition, to damages for wrongful termination. The amount claimed is in excess of US$11 million. The parties referred these issues to arbitration.

29. The plaintiff sought to require the defendant to withhold at least US$11 million of the sum deposited in the segregated account to secure the payment of the amount claimed pending the outcome of arbitration.

30. The judge found that the letter of Mr. Ng contained a promise by the defendant to provide the plaintiff with security for the payment of the "Contract Price". The judge also found "Contract Price" to mean "the totality of the sums payable to the plaintiff for the performance of their obligations under the construction contract" and that it did not relate to the sums claimed by the plaintiff.

31. No complaint has been made by the plaintiff on the judge's finding except that the plaintiff submits that "Contract Price" should include all sums which would be payable under the contract to the plaintiff including sums payable to the plaintiff under Clause 69.3 on termination by the defendant's default. If this interpretation is adopted, the outstanding payments for works executed prior to termination would come within the meaning of "Contract Price" and would be secured by the sum in the segregated account. The defendant on the other hand submits that once the contract was terminated all outstanding sums should fall within Clause 69 as payments on termination and therefore not as part of the "Contract Price" contemplated in the letter. The question left for decision is what "Contract Price" means or should include.

32. "Contract Price" is defined in the contract as to mean "the sum stated in the Letter of Acceptance as payable to the Contractor for the execution and completion of the Works and the remedying of any defects therein in accordance with the provisions of the Contract." This is the sum of US$32,250,000 which is specified for the execution and completion of the building of the villas and the infrastructures and other separately priced items and for remedying any defects in such works. The sum does not relate to payments that may result from termination of the contract.

33. Clause 69 relates to remedies in the event of termination of the contract by the employer's default. This clause provides that on termination the employer is liable to make such payments to the contractor as if the contract were terminated under Clause 65. Clause 65.8 as applied to Clause 69 provides that on termination the employer shall make payments in respect of, inter alias, work executed and certified prior to the termination of the contract and in addition payments for loss or damages arising out of the termination of the contract. These are clearly payments in accordance with the terms of the contract on termination and cannot be part of the "Contract Price."

The payments claimed by the plaintiff come under Clause 69. It would be against commercial sense that an employer of a contractor would give security to the contractor for possible payments on termination by the employer's own default. An employer would not normally contemplate default on his own. The judge must be right in concluding that the sum in the segregated account is not intended to secure payment of sums consequent upon termination of the contract. I would dismiss the appeal.

Mortimer, V.-P.:

34. The appeal is dismissed. There will be an order nisi that the respondent shall have the costs of the appeal.