XCHRX CHIU MAN ON PAUL t/a PACIFIC POWER ENGINEERING CO. v. VAFORD CONTRACTING CO. LTD.

HCA 16897/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16897 OF 1998

----------------------

-------------------

J U D G M E N T

-------------------

Background

1. By a contract contained in a Purchase Order dated 21st August 1997 ("the Contract"), the Plaintiff agreed with the Defendant to supply and install epoxy insulating flooring at the baggage handling area and ramp area of the Chek Lap Kok Airport. Payment of the work done by the Plaintiff was to be in stages :

"1) 30% deposit upon signing of the Contract.

2) 20% upon material on site.

3) 40% upon completion of work.

4) 10% retention upon receipt of the Airport Authority's satisfactory certificate."

2. In November 1997, the Plaintiff completed the work although the quantities of the work were different from those set out in the Contract. In June 1998, the parties agreed that the value of work carried out under the Contract was HK$712,349.88. The Plaintiff claimed that 90% of the work done was $641,114.89 and it was entitled to this sum. The Defendant had only paid the Plaintiff $426,538.75. The Plaintiff sought to recover, by way of summary judgment, the balance of $214,576.14 together with $71,234.99, being 10% of the $712,349.88. Acting Registrar Chan gave judgment on $214,576.14 and unconditional leave to defend on the $71,234.99.

The appeal

3. The Defendant appeals against the judgment of $214,576.14. The Plaintiff asks for judgment on the 10% retention as well.

The Defence

4. The Defence raised is that the Contract was subject to express terms that :

1) a written guarantee was to be presented after the work; and

2) the quality of the work was to be verified and governed by the Project Architect.

Further, the Contract was subject to an express and implied term that the Defendant should, within a reasonable time of the completion of the work, submit test reports on the material supplied and the workmanship for the quality to be verified by the Project Architect.

Guarantee

5. The defence on the written guarantee was not pursued upon by Mr Harris, Counsel for the Defendant.

Test reports

6. On the question of the test reports, when the Defendant confirmed in its letter of 24th June 1998 that the work was valued at $712,349.88, it did not state that the test reports were required for the payment of 90% of the work. This letter seemed to impose unilaterally a different percentage for the retention money. Instead of 10% it referred to 20%. The letter stated that :

"... the release of 15% of the retention will be subject to yourselves providing test certificates prepared and endorsed by an independent and accredited testing establishment."

This seemed to suggest that the test reports were required for the release of 15% of the retention money. When it was pointed out by the Plaintiff's solicitors that the retention was only 10% and the Defendant could not unilaterally impose the requirement of the test reports, the Defendant stated that the requirement of test reports applied to both the retention money and the other payment under the Contract.

Order 14 test

7. The test in O.14 is whether the defence is credible. If yes, the defendant is given leave to defend; if not, then judgment should be given to the plaintiff.

Term of the Contract

8. Quite apart from the factual inconsistencies in the letter, the real question is whether the requirement of test reports to be furnished by the Plaintiff can be implied into the Contract. There was clearly no express term to those effect. On the contrary, the express term of the Contract was that :

"Quality to be verified and governed by the Project Architect."

Verification of the quality will no doubt involve testing, but the term simply says that the verification is to be done by the architect. It does not say testing reports are to be supplied by the Plaintiff.

9. It is submitted by the Defendant that the term is implied to give business efficacy : B.P. Refinery (Westernport) Pty. Ltd. v. President, Councillors and Ratepayers of The Shire of Hastings [1977] 16 ALR 363. This is to be determined in the light of all the matters known to the parties at the time the contract was made : Investors Compensation Scheme Ltd. v. West Bromwich B.S. [1998] 1 WLR 896.

Contract effective without the term

10. The principle is clear that no term will be implied if the contract is effective without it : B.P. Refinery per Lord Simon of Glaisdale at page 376. In this case I just cannot see how the Contract between the parties would be ineffective if this term is not implied. The Contract no doubt requires verification by the architect but the test reports could be obtained by the architect or by either of the parties to the Contract. This is not something that only the Plaintiff could perform. I am unable to conclude that the term urged upon me by the Defendant must be implied.

Programme of 20th May 1997

11. The Defendant now relies on a document dated 20th May 1997 in which the Plaintiff submitted the programme of the work to the Defendant. This is before the Purchase Order of 21st August 1997. The last paragraph of this document stated that :

"After the final stone note GS4 coating is supplied, insulating resistance can be conducted to ensure meeting specification."

The Defendant relies on this paragraph in support of his defence that the term should be implied.

12. In my view, this document does not assist the Defendant. The presumed intention of the parties is to be ascertained at the time of the Contract. This document predated the Contract by about three months. The Defendant does not say this document forms part of the Contract between the parties. But more importantly, the paragraph I have just read is in simple language : testing can be conducted after the final coating to ensure it meets the specification. It does not say that this imposes an obligation on the Plaintiff to provide for the testing reports.

Defendant unsure of the type of reports

13. Leaving aside the difficulty of formulating the Plaintiff's obligations under the implied term, even the Defendant, by late December 1998 in its letter to the Airport Authority, was not clear what type of test reports were required. This being the case, how can it be said that the presumed intention of the parties at the time when the Contract was made was that such a term should be a part of the Contract.

Subsequent test

14. The Plaintiff did carry out test after the completion, but if the relevant time in ascertaining the intention of the parties is at the time of the Contract, then the subsequent event should not be taken into account.

Discovery and cross-examination

15. As to the Defendant's argument that the matter can only be dealt with after discovery and cross-examination of witnesses, I would say that this is an O.14 application and the burden is on the Defendant to show cause why it should be given leave to defend. The burden is clearly not discharged by the Defendant in this case.

Decision correct

16. In my view the Acting Registrar was correct to give judgment on the sum of $214,576.14.

The 10% retention

17. On the 10% retention, the Plaintiff's case is that the 10% retention is subject to an implied term that the Airport Authority's satisfactory certificate should deem to have been issued if the Project Architect did not express any dissatisfaction on the quality of the Plaintiff's work within a reasonable time after completion of the project.

18. Mr Houghton, Counsel for the Plaintiff, submitted that without this implied term, the parties would be in a stalemate position. I agree. The work was completed in November 1997. So far there was no complaint of any defect. Without this term, the Contract would be ineffective on the question of payment of the 10% retention. The matter could well be unresolved indefinitely. I will grant judgment to the Plaintiff on the 10% retention.

Conclusion

19. Accordingly, the Defendant's appeal on the judgment sum of $214,576.14 is dismissed. Judgment is to be entered for the Plaintiff on $71,234.99. Interests on both sums are to be awarded at judgment rate from the date of the service of the writ to payment.

20. The Plaintiff is to have the costs of the appeal.