FAR EAST CONSORTIUM LTD v. AIREDALE LTD

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JUDGMENT OF THE COURT

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Macdougall, J.A.:

1. On 11 December 1991 we dismissed an appeal by the defendant, Airedale Limited ("Airedale"), against an order of Kaplan J. that its third party statement of claim against the 1st third party, Henry Boot Far East Limited ("Boot") be struck out and that the third party proceedings against Boot be dismissed with costs. We said that we would hand down our reasons later. This we now do.

2. The main action was begun by the plaintiff Far East Consortium Limited ("Far East") against its sub-contractor Airedale for damages in respect of a contract for the construction of a container freight station at Kwai Chung. The claim related to alleged defects in pile-capping in the construction work

3. Airedale's third party claim against Boot arose in this way. On 21 May 1983 Airedale further sub-contracted what has variously been referred to as the sub-structure or foundation work in the project to Shine Construction Company Limited ("Shine"), a company which is now in liquidation, and the superstructure work to a company named ICC-Far East Construction and Engineering Company Limited ("ICC-FE") which in turn further sub-contracted that work to Shine.

4. It is not in dispute that on 2 July 1984 Shine's superstructure sub-contract was novated to Boot. In the meantime, on 24 May 1983, Shine had entered into a joint venture agreement with the 2nd third party, Bachy Soletanche, for the piling work. On 30 March 1984 Airedale instructed Shine to carry out the. pile-caps work.

5. In an-affidavit filed on behalf of Boot in the O. 18, r. 19 proceedings Mr. Jonathan Harris of Denton Hall Burgin and Warrens swore that Shine entered into an oral agreement with Boot to carry out the construction, but not the design, of the pile-caps in joint venture, and that there was a later oral agreement between the two companies by which the pile-caps construction work under the substructure sub-contract was assigned to the Boot/Shine joint venture.

6. In an affidavit filed on behalf of Boot, Mr. David Myles, the managing director of Boot, stated that subsequent to Airedale's instruction to Shine to commence work on the pile caps, problems arose on the project which led to High Court action No. A4152 of 1989 being brought by Boot against Airedale, High Court action No. A2189 of 1986 being brought by Boot against Far East and Shine, and to arbitration proceedings involving a claim by Boot against ICC-FE.

7. According to Mr. Myles, Boot first became involved in the project on 4 January 1984 when a Mr. Postle of Shine told him that Shine had a contract to design and construct the piling and pile-caps for the project and had recently completed the piling and the design of the pile-caps, that Shine expected to be instructed in the near future to proceed with the construction of the pile-caps, but that although Shine was capable of carrying out the work it did not have sufficient working capital to fund the construction operations. Mr. Postle told Mr. Myles that Shine was having discussions with the plaintiff about further construction works on the project and asked whether Boot would be interested in becoming involved. At this stage, Boot, although interested in the possibility of becoming involved in the superstructure works, was non-committal.

8. Pile-cap construction began in April 1984. On 2 April Shine again approached Boot suggesting that Boot finance the pile-cap operation but that Shine itself should do the actual construction work. It proposed that the profit be divided equally. between the two companies and that Boot provide a project manager to protect its interests by acting as pay master, signing sub-contracts and making payments thereunder. This proposal was accepted by Boot. According to Mr. Myles, Boot's only involvement with the construction work was the attendance of one of its staff, a Mr. Mosely, at the site for one or two hours a week to monitor progress.

9. In April 1989 Far East commenced proceedings in the main action against Airedale. On 3 January 1990 Airedale issued a third party notice against Boot claiming damages for breach of contract "on the grounds that [Boot] were at all times [Airedale's] sub-contractor by Assignment and/or novation responsible for the construction of part of the sub-structure works of the complex, namely the pile caps thereof....". In paragraph 13 of the statement of claim which followed in those third party proceedings and which was filed on 6 June 1990 Airedale pleaded:

10. As counsel for Boot at the hearing before the judge then observed, it was plain that although Airedale had nailed its colours to the mast in the statement of claim by alleging novation, it was not nearly so sure of the status of the agreement at the time of the issue of the third party notice.

11. In his affidavit Mr. Myles went on to say that because of his concern that since Boot was not a party to the sub-contract between Airedale and Shine, Boot would have no right to obtain payment in respect. of the pile-caps work from Airedale, he sought advice from Boot's solicitors and was advised that Boot should take an assignment of the Airedale/Shine sub-contract from Shine. Boot acted on this advice and on 14 April 1984 Mr. Myles sent a draft to Shine for its consideration. The accompanying letter reads as follows:

"         Enclosed is draft documentation dealing with the transfer of responsibility for execution of the works from Shine to the Boot/Shine Joint Venture.

 

          We shall be grateful if you. will examine the draft and if it is acceptable-to you please confirm this to us. The formal agreement can then be quickly drawn up and signed.

 

           We are also preparing a separate, simple agreement for operation of the Joint Venture to be agreed between us and will forward a copy in the next day or so."

 

12. It is common ground that the draft, which is headed "Assignment of Subcontract", was not sent to Airedale.

13. The relevant clauses of the draft on which Airedale places reliance are:

"(4)       Shine desires to assign the Original Subcontract, so far as it relates solely to the Phase I Work, ("the Phase I Subcontract") to the Joint Venture Parties, upon the terms set out in this Agreement, and (as between the Joint Venture Parties) in accordance with such other terms as are agreed or to be agreed between the Joint Venture Parties, and the Joint Venture Parties have agreed to undertake the Phase I Work in conjunction with each other accordingly.

 

(5)      The Joint Venture Parties have agreed that they will perform the obligations imposed upon Shine in the Phase I Subcontract and will be bound by the terms thereof, subject to the modifications herein provided, as if they were parties thereto in place of Shine, and BCC has accordingly agreed to release and discharge Shine from the performance of the Phase I Subcontract.

 

(7)      In consideration of Boot's undertaking' the performance of the Phase I Work in conjunction with Shine and of the Joint Venture Parties entering into this Agreement, FEC has agreed to guarantee the due and punctual performance by BCC of the Phase I Subcontract."

We should here observe that it is not disputed that BCC and Airedale are one and the same.

14. Mr. Myles asserted in his affidavit however that Boot's role in relation to the pile-caps work was purely financial. He referred to the minutes of an internal meeting at Boot on 7 April 1984 in which it is stated that Boot's idea that a Boot/Shine joint venture to construct the pile caps was not acceptable to Shine as Shine. took the view that such an arrangement would be unfair to it, and that accordingly Boot agreed to "administer" and for Shine to carry out the work, and that Boot would have a Mr. mosely as project manager to protect Boot's interests. In another internal document dated 9 April 1984 there is the reference, "Work on pile caps is about to commence, being carried out by Henry Boot and Shine in Joint Venture (value c. £1.5m)."

15. On 19 April 1984 Shine replied to Boot's letter in the following terms:

"          We refer to your letter dated 14th April 1984 enclosing a draft 'Assignment of Subcontract' from Shine, to a joint venture of Shine and Henry Boot.

 

            You propose that this 'Assignment' be signed by Airedale as the Client, and by Far East Consortium Limited (FEC) as guarantor of Airedale's contractual commitments, as well as by Shine and by Henry Boot. All other arrangements with regard to the setting-up of a Joint Venture and the operation of the bank account for the project need concern only Shine and Henry Boot; not Airedale and FEC.

 

           We agreed in general outline with your proposals, but consider that you are making matters a little more complicated than they need be.  In particular, references in your draft 'Assignment' to the 'Phase I Work' and 'Phase I Sub-contract' could lead to interminable confusion and possible contractual difficulties as the 'Phase I Work' includes the bored piles (which have already been completed), and the 'Phase I Subcontract' covers the works in Phase II as well.

 

           Shine as sub-contractors and Shine and Henry Boot as proposed Joint Venture assignees or sub-sub-contractors, need to secure the agreement of the Client and his guarantor to only the following items covered by the sub-contract agreement. dated 21st May 1983:

 

1)	The assignment or sub-letting of the subcontract by Shine to a Joint The assignment or sub-letting of the subcontract by Shine to a Joint Venture of  Shine and Henry Boot (as required under the conditions of Clause 33 of the Subcontract)
2)	The payment of all monies becoming due from the Client to Shine in respect of the Subcontract works into a Bank Account to be nominated by the Joint Venture.
3)	That no alternations to the terms of payment under the \Subcontract can be made by Shine alone dealing with the Client, but only by Shine and Henry Boot acting together in any such approach to the Client.
4)	That the provisions of Clause 34(2) of the Subcontract shall only have affect if both (and not one only) of the Joint Ventur Parties shall become bankrupt or etc.

       We enclose the draft of a letter to be' signed by all interested parties to effect the intentions outlined above. vie should be grateful for any comments you have to make on our proposed draft.

"

16. The proposed draft referred to in that letter reads as follows:

CFS Complex, Berth 3, Kwai Chung, N.T.
Construction of Pile Caps: Phase I
Sub-letting of Subcontract by Shine Construction Co. Ltd. to a Joint Venture of Shine Construction Company Limited and Henry Boot Far East Limited

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Reference is made to the following documents

17. On 27 April 1984 Boot replied by letter to Shine's proposal. We need only cite the following passage in that letter :

"          The bulk of the proposal, this is clause 5, is merely a reproduction almost word for word of the FEC guarantee suitably amended only to extend the guarantee to include Henry Boot.

 

             Notwithstanding the foregoing comments we are prepared to proceed along the lines set out in your letter and your draft letter to Airedale and FEC. However we feel that there are minor alterations required to your draft to ensure that all our requirements are covered particularly with respect to the guarantee by FEC.

 

              We therefore enclose a revised draft letter which is to be sent to both FEC and Airedale, after being sighed by Shine and HB.

 

             Since we have already. commenced work on site and started purchasing materials we suggest that the letter be forwarded to FEC and Airedale urgently."

 

18. The relevant part of the revised draft proposed by Boot reads:

"As you know, we have reached agreement with Henry Boot (subject to obtaining your agreement) for the assignment of the pile caps construction work for Phase I under the Subcontract ("the Phase I Pile Caps Works") to a joint venture of Shine and Henry Boot, and for the assignment of the benefit of the Subcontract Documents to Henry Boot accordingly. We would be grateful if, in consideration of Henry Boot's agreeing to undertake the Phase I .Pile Caps Work with Shine on this basis, you should each signify your agreement to this arrangement, and to the following points in particular:-

19. In response to this proposal Shine wrote to Airedale a letter dated 9 May 1984, the relevant part of which is as follows:

Signed for Henry Boot Far East Limited to confirm agreement to the above-mentioned arrangements

.............................................................

................................................................."

20. As stated in the last paragraph of Shine's letter, Mr. Myles had in fact signed in the space provided for Boot to sign in order to confirm its agreement with the arrangements referred to in the letter.

21. It is accepted by Airedale that after receipt of this letter from Shine, Mr. David Chiu, a director of Airedale, wrote on it the following note to Mr. Clement Fung, Airedale's project manager:

                    "Clement,

          It is up to Shine and Henry Boot. We should not sign this letter.

                   David"

22. Then, on 26 May, Mr. Clement Fung for Airedale replied to Shine in these terms:

                    "     We acknowledge receipt of your letter dated  9/5/84.

        We will act accordingly as mentioned in the item one of' your letter."

23. On 21 August 1984 Shine wrote to Airedale complaining that delays in payment in respect of pile-cap works that had been completed had become intolerable and had resulted in Boot being required to finance the works to a far greater extent than had been expected. Airedale were informed that if payment was not made in accordance with the terms of the sub-contract Shine would have to take legal action. That letter was marked for the attention of Mr. Clement S.T. Fung and was copied to Far East for the attention of Mr. David Chiu.

24. On 31 August 1984 Mr. Fung replied under Far East's letterhead and signed as project manager. After a reference to Mr. David Chiu in the early part of his reply as "our Managing Director" there is the following passage:

"C)

It is important to clarify that up to today we have not approved and do not see Henry Boot as a party to the contract on the construction of pile cap phase I. As far as we are concerned, we have signed the contract with Shine Construction only. However, we are prepared to be in good spirit on whatever agreement signed between Henry Boot and Shine."

 

25. In his reserved judgment ordering that the statement of claim in the third party proceedings against Boot be struck out on the ground that those proceedings were an abuse of the process of the court, the judge referred to paragraph 691 of Meagher, Gummow and Lehane on Equity 2nd edition:

"It is, of course, necessary to distinguish between on the one hand the benefit of a contract, or a contractual right, and, on the other, a contractual obligation. The former can be assigned, the latter can not.The only way in which a contractual obligation may be transferred from one person to another is by a novation, that is, by a further agreement between the parties to the original contract and the party who is to assume the obligation."

26. There was no dispute either in the lower court or before us that that passage is an accurate statement of the law.

27. In an affirmation filed on behalf of Airedale, Mr. David Chiu, a director of Airedale, stated that as a result of his meetings with a Mr. Paul Yip, a director and the general manager of Shine, it was his clear understanding that both Shine and Boot would become jointly bound as joint venturers to complete the pile-caps construction works on the project "as if they had been inserted in the place of Shine in the pile-caps contract". He asserted that in respect of the pile-caps Boot "took a full and active role in the actual construction works themselves."

28. There can be no doubt, as Mr. Huggins, who appeared for Shine before the judge, readily conceded, that had Airedale, Boot anu Shine all signed an agreement in the terms of the draft which was sent under cover of the letter of 14 April 1984 by Boot to Shine for the latter's approval, there would have been novation. But, since' none of the parties signed any such agreement it can at most serve only to indicate that, at that time, Boot was anxious for there to be novation of the pile-caps sub-contract.

29. However, as the judge observed, the matter developed in a somewhat different direction as in apparent from the correspondence that followed and culminated in Mr. David Chiu's handwritten note to Mr. Clement Fung on Shine's letter to Airedale of 9 May 1984 and Mr. Fung's letter in reply of 26 May stating that Airedale would "act accordingly as mentioned in the item one of your letter."

30. Mr. Rodway submitted that Mr. Fung's reply clearly amounted to an acceptance of the entire proposal put forward to Airedale by Shine and signed by Boot. The thrust of this submission was that it was unnecessary for Airedale to agree to points 2, 3 and 4 in Shine's letter and that Airedale's agreement to act in accordance with item 1 necessarily meant that it signified its agreement to the contents of the paragraph in Shine's letter immediately preceding the four points. Mr. Rodway focussed on the following passage in that paragraph:

"         We would be grateful if, in consideration of Henry Boot's agreeing to undertake Phase I Pile Caps Work with Shine on this basis, you would signify your agreement to this arrangement and to the following points in particular:-" (our emphasis)

31. We do not accept this submission. Plainly Shine's letter sought agreement not only to the four points but to the arrangement outlined in the preceding paragraph. Point 1 is nothing more than a requirement that the monies payable by Airedale in respect of the pile-caps work should be paid to Boot's bank account. It was only part of the proposal to which Shine was seeking Airedale's agreement. An acceptance of point 1 could not possibly be interpreted as an acceptance of the other terms. Nor is there anything else in Airedale's reply that could amount to an acceptance of those terms.

32. However, that is not all. Not only did Airedale not sign the letter as requested by Shine in order to confirm its acceptance of the proposed arrangement including the four points, but Mr. Chiu specifically endorsed on it a note to Mr. Fung that Airedale should not sign it as the matter was "up to Shine and Henry Boot".

33. The explanation given by Mr. Chiu in his affirmation as to why he wrote the note was that because he might not fully understand the implication of their contents it was not his practice to sign such letters unless he had obtained legal advice. Even if that were so - and it flies in the face of the opening sentence in the note, "It is up to Shine and Henry Boot" - the fact remains that Airedale never did sign the letter as requested by Shine.

34. Mr. Rodway valiantly submitted that in view of potential legal proceedings being instituted by Boot against Airedale, Mr. Fung's letter was "simply a disingenuous attempt on Airedale's part to distance itself from a contract that had already been concluded between Airedale, Shine and Boot". Not only is this mere speculation unsupported by any affirmation from Mr. Fung and not referred to by Mr. Chiu in his affirmation, it is totally inconsistent both with Airedale's failure to sign Shine's letter of 9th May as requested and with Mr. Chiu's handwritten note to Mr. Fung on that letter.

35. Although Mr. Rodway readily conceded that various documentation, in particular the draft agreement titled "Assignment of Subcontract" and sent by Boot to Shine on 14 April 1984 with a covering :letter referring to the draft as "dealing with the transfer of responsibility for execution of the works from Shine to the Boot/Shine Joint Venture'", did not effect novation, he contended that it was powerful evidence that Boot sought to have the Airedale/Shine subcontract novated so as to substitute Boot/Shine Joint Venture for Shine.

36. Be that as it may, the fact that a party negotiates for a novation of a contract does not' of itself create a novation. In our view the judge correctly concluded that the documentary evidence on which Airedale relied was not capable of establishing that there had been a novation of the pile-caps sub-contract.

37. As to Airedale's pleading that there was evidence that a novation agreement had been "made partly by conduct" we are of the opinion that in the light of the documentation which clearly demonstrates that Airedale did not accept the offer to enter into an agreement for novation, any evidence that Boot took an active role in assisting Shine in the pile caps construction, is of no avail to Airedale. For there to` be novation there must be agreement by all three parties.

38. Finally, we come to what Mr. Rodway conceded was the least strong of the three bases on which Airedale sought to establish its case, namely the allegation that the novation agreement "was made partly orally". There is, as the judge stated in his judgment, no pleading, nor indeed, we should observe, any evidence, that there was any oral discussion other than that which preceded the alleged written acceptance by Airedale on 26 May 1984 of Shine's and Boot's offer contained in Shine's letter to Airedale of 9 May the same year.  We therefore agree with the judge that this allegation did not assist Airedale in resisting Boot's strike out application.

39. We think the judge was right to exercise the inherent jurisdiction of the court to strike out Airedale's third party statement of claim against Boot and to order.that the third party proceedings be dismissed. Airedale has failed to disclose an arguable case. Its claim is groundless and unfounded and could not possibly succeed. To allow it to proceed would be to permit an improper use of the process of the court. We accept that this is a jurisdiction which is very sparingly exercised, and only in exceptional cases, but in our view this was a plain and obvious case for the granting of relief under O. 18, r. 19.   For these reasons we dismissed the appeal with costs.