SKK (HONG KONG) CO LTD v. HON FUNG ENGINEERING LTD

HCA 455/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 455 OF 2003

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J U D G M E N T

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1.  This is a claim for moneys due and owing.

2.  The plaintiff manufactures and supplies specialist paints and related materials.  Its income is derived in two ways.  The first is by sale of its products.  The second is by contracting with the owner of a property in need of redecoration, or his principal contractor, to undertake the application of its products and then subcontract that contract.  Under the subcontract and in line with the main contract the subcontractor is obligated to purchase the paint and materials from the plaintiff that are to be applied.

3.  From early 1999 until October 2000 (following which they fell out over non-payment of money) the defendant, a construction company, dealt with the plaintiff in both ways.

4.  The purchase by the defendant of paints and materials was uneventful.  Typically the defendant would submit a purchase order following which the plaintiff prepared a sales contract setting out the product, the price, the delivery date and the method of payment which the parties’ representatives signed.  Invariably payment was contracted to be by COD.  This was recorded in the invoice that accompanied delivery.  But in practice the defendant tended to pay late by a few days, sometimes longer.  In respect of 10 contracts of supply, in which the paints and materials were delivered and received and invoices rendered, and in respect of which the defendant has raised no complaint, the sum of $91,622.05 remains unpaid. 

5.  As well the defendant subcontracted with the plaintiff to perform its obligation to apply the plaintiff’s paints and products in three separated subcontracts, known for short as the Fanling (or North District), Shouson Hill Road and Matilda Hospital projects.  In respect of paints and materials supplied to the defendant to enable it to complete the Shouson Hill Road project, the plaintiff claims it has not been paid under 3 invoices the sum of $48,751.66.  In respect of the Matilda Hospital project it claims default under 24 invoices in a further $1,280,757.66.  The total claim thus comes to $1,421,131.37.

6.  In these proceedings the plaintiff sues to recover the total of $1,421,131.37.

7.  The defendant denies liability.  Not having been paid the sum of $780,605 due to it in the subcontract for the Matilda Hospital project it having long since performed its obligations without complaint it counterclaims for this amount.  It denies liability for the cost of materials supplied to it for the Matilda Hospital project because it has not been paid.  It is also out of pocket in respect of the Shouson Hill Road project.  But it makes no counterclaim for the outstanding amount due under this project because that is a claim separately being pursued in the District Court.  For the same reason it denies liability for the cost of materials supplied for use in this project.  Finally it does not dispute liability for the outstanding $91,622.05 save that it has a right to set this off against the counterclaim.

8.  It is clear from the above that of material moment are the terms by which the parties contracted with each other in the various projects and in particular the Matilda Hospital project.

9.  The plaintiff had contracted with a proprietorship called Asia Contracting Company to undertake the supply and application of specified paints and materials to the Matilda Hospital.  Prices were fixed at so much per square meter, the actual area to be determined by final site measurement.  The contractor Asia Contracting was committed to pay by three instalments; the first upon completion of half the work when 50% would be paid; the second upon completion (subject to a PC certificate to be signed by both parties) when a further 45% would be paid and the balance upon expiry of the retention period being 12 months after the PC.

10.  The subcontract entered into between the parties, dated 1 September 1999, committed the defendant to perform the plaintiff’s obligations under the main contract.  As with the main contract, prices were fixed at so much per meter subject to measurement upon completion.  A similar progress payment schedule was incorporated.  There was also this important stipulation:-

“

(2)

Lump sum payment will be released within 30 days after the contractor (plaintiff) received (sic) the actual and relevant amount of payment from the Main Contractor.”

11.  So, the plaintiff had no obligation to pay until 30 days after it had been paid by Asia Contracting, and there had been otherwise compliance with the terms of payment.

12.  It is of note that the subcontract provided for a unit cost of labour and materials; thus it became necessary for the defendant to purchase from the plaintiff the paints and related materials to be utilized on the project.  There was no specific reference to this in the subcontract.  However, subsequent documents reveal that the parties used the same three-stage process of delivery order, sales contract and invoice as before, the terms on the face of them thus being COD.

13.  Then it was that, not a month into the contract, by letter dated 29 September 1999, the defendant proposed revised terms.  Citing unfavourable economic conditions and financial difficulties it was suffering from, the defendant sought a credit period of 45 days in respect of paints and materials purchased for its own use.  In respect of paints and supplies required on those projects in which it was subcontracting from the plaintiff it proposed that payment for materials supplied be met by the plaintiff withholding this from progress payments received from the main contractor, with the balance to be paid to the defendant for labour but on a pro rata basis.  By illustration it proposed that if, for example, in a project valued at $1m comprising $600,000 for material and $400,000 for labour, the plaintiff received on account $500,000 when the job was half complete, $300,000 would be retained by it on account of materials supplied with the balance of $200,000 to be paid to the defendant on account of the labour content.

14.  By letter of 12 October the plaintiff responded.  In respect of the credit the defendant sought for straightforward sales and purchases the plaintiff turned it down flat; COD was to remain.  As to the second proposal, I repeat verbatim its response:

“	2.	For the projects which SKK sub-contract to Hon Fung:
		(a)	After SKK received progressive payment from Owner/Main Contractor, SKK retain and offset the material value which was already used and applied to the project.
		(b)	Balance of amount received by SKK will release to Hon Fung within 14 days from date of receipt of payment from Owner/Main Contractor.
	We appreciate that you have put great effort to the work.On the other hand, we hope that you understand that at present, the above-mentioned payment terms is fair and reasonable. (my emphasis)”

15.  There is no recorded response to that counter proposal, but the parties do not take issue that this response was accepted by the defendant; thus that there was agreement that thereafter the payment for paints and materials supplied to the defendant would be paid for by set-off in this way.

16.  As I read those terms, dealing in particular with the Matilda Hospital project, payments thereafter received by the plaintiff from Asia Contracting were to be utilized first to meet the cost of paints and materials supplied used and applied, secondly to reimburse the defendant for the labour supplied and thirdly to be retained by the plaintiff as its mark-up on the subcontract.

17.  It is to be noted that this differed from the defendant’s proposal in one particular matter; namely, that there was to be no pro rata division of materials and labour.

18.  Subsequent to 12 October, with this arrangement in place, documents produced reveal that materials were ordered, contracted for and invoiced as if on the same terms as before, and that included that payment be by COD.  But actual payment was made by the plaintiff withholding the requisite amount from progress payments received from Asia Contracting, an amount represented by invoices rendered from paint and materials supplied used and applied, paying the balance to the defendant.  As far as the Matilda Hospital project was concerned there are two examples of settlement achieved in this way, on 29 January and 5 April 2000.  Both parties signed under chop to the effect that the method was acceptable.

19.  The Matilda Hospital project proceeded, at least for a while, more or less uneventfully, until Asia Contracting began to complain of delays and substandard workmanship.  There seems to have been no significant justification for these complaints; certainly there is nothing in the pleadings for me to be concerned with.  But Asia Contracting did withhold payment.  And when the work was completed, its proprietor refused to co-operate in completing the PC certificate.  Meantime the plaintiff had supplied for application in the project paints and materials to the tune of $1,280,757.66 itemised in 24 invoices, and was out of pocket for that.  With no PC certificate forthcoming the defendant engaged a Mr Chong, quantity surveyor, to calculate the measurements and it was in reliance on a report submitted by him, called hereafter the Chong report, that it assessed what was the balance due under the subcontract, namely $1,919,423.61.

20.  The shortage of money all round caused the parties to fall out.  The defendant refused to pay the sum of $91,622.05 in respect of the 10 invoices rendered for the purchase of materials in order to protect its right of set-off.  The plaintiff having received the balance of moneys due on the Shouson Hill Road project declined to settle with the defendant for much the same reason.

21.  The next significant step was that the plaintiff issued a writ to recover from Asia Contracting the sum of $2,390,703.81 being the amount it claimed to be due on the Matilda Hospital project.  In arriving at that figure the plaintiff adopted the calculations of Mr Chong as set out in the Chong report.  Asia Contracting took no steps and judgment was entered by default.  But then Asia Contracting came alive and applied to have judgment set aside and be given leave to defend.  The matter came before Burrell J and his reserved judgment is included in the bundle.  In it he recorded briefly the history.  He noted that the defendant before me (Hon Fung) had been engaged to carry out the contract work and that it had been completed; that the plaintiff assessed the contract price at $3,288,756.76; that it had been paid by Asia Contracting sums totalling $898,052.95; that the plaintiff claimed a balance of $2,390,703.81; that in the absence of a PC certificate, the plaintiff relied on the Chong report (of course this came into existence at the behest of the defendant, Hon Fung).  There was another report but the judge found it to be inferior.  Asia Contracting did raise issues such as defects; in the end Burrell J gave leave to defend but as to a percentage only and upon condition that there be payment into Court.

22.  But the matter did not proceed to trial.  It seems the plaintiff’s judgment of $2,390,703.81 was not in the end set aside; one surmises that Asia Contracting did not or could not raise the amount needed to be paid into Court.  In the event, by a consent order there was a stay of execution of the judgment upon payment to the plaintiff of a total of $668,000 which included an amount of $266,872 from a garnishee being the Matilda Hospital.  A further $3,834.98 was recovered from Asia Contracting’s bank, a total in all of $671,834.98. 

23.  There is evidence as I shall come to that as far as the plaintiff is concerned it proposes to take the matter no further; there is an issue as to whether the plaintiff should have done or be doing more to recover the balance of the judgment debt.

24.  Before proceeding further I note that the parties take no issue with Burrell J’s figure of $898,052.95 as being the amount paid by Asia Contracting on account up to that point.  The plaintiff having distributed $738,547.39 in the two tranches in January and April 2000, that leaves $159,505.56 still to be dealt with, together with the sum of $671,834.98 since received; a total of $831,340.54.

25.  The remaining proceedings I have referred to earlier are those brought in the District Court by the defendant against the plaintiff for recovery of the balance due under the Shouson Hill Road project.  It claimed $403,591.14 less the total of the 3 Shouson Hill invoices of $48,751.66 being $354,839.48 plus retention moneys of $68,601.26.  The only issue being a right of set-off, I am told the parties are awaiting the outcome of the case before me before proceeding further with this matter, hopefully by settlement.

26.  As is apparent, most of the evidence is in the documents, but there were two witnesses called.  The plaintiff called the plaintiff’s Accounts Manager, Miss Wong Po Fong.  The defendant relied on a director called Mr Li Wing Chiu.  I have considered in detail the evidence of both, but need only refer to certain parts of that adduced by Miss Wong.  Miss Wong in chief stated nothing I have not already covered in the background.  In cross-examination she confirmed that in respect of the supply of paints and materials for projects where the defendant was the subcontractor the COD terms for payment were replaced by the credit terms spelt out in her company’s 12 October letter.  She confirmed that payment for material supplied for the Matilda Hospital project was thereafter by deduction from progress payments from Asia Contracting, notwithstanding that the invoices were sent out with COD on them.  She said that COD was no longer applicable; that the defendant did not have to pay until and unless payment was received by the plaintiff from Asia Contracting.  But she added the rider: ‘This was an arrangement to facilitate them (the defendant) financially.  We would still press them for payment.’

27.  She also accepted that in reliance on the Chong report the total amount due to the plaintiff by Asia Contracting was $3,288,756.76 and the total due to the defendant was $2,838,780.96.  She conceded that had the plaintiff been paid by Asia Contracting, this would have been due to the defendant.  Taken then to various accounts and other documents, she said that the total received from Asia Contracting prior to trial was $898,052.95 of which $777,418.30 was utilized to meet invoices for paints and materials supplied to the defendant with the balance paid to the defendant.  (I interpose here that leaves $159,505.56 not accounted for).  She went on to confirm that a further $671,834.98 has since been paid, making a total of $831,340.54 not accounted for. 

28.  Taken to the prospect of getting any more money out of Asia Contracting she said this was unlikely; the company has ceased operation.  The company being a proprietorship she was asked if the plaintiff had exhausted all avenues in getting from the proprietor what was properly due.  Her response: ‘We have pressed for it.’

29.  And so now to my findings of fact and law. 

30.  It seems to me and I so find that when the parties contemplated and then entered into the subcontracts to perform work on the Fanling, Shouson Hill Road and Matilda Hospital projects, there was no special arrangement envisaged for payment by the defendant for paints and materials supplied.  As with the purchase of these for its own independent use, the defendant was prepared to commit to COD terms of payment, albeit that the plaintiff historically allowed ad hoc credit.

31.  The counter-proposal to the defendant’s proposal of 29 September, made by the plaintiff in its letter of 12 October, which it is agreed was accepted by the defendant and acted on by the parties, changed all that.  Thenceforth the obligation by the defendant to pay was deferred until the plaintiff had been paid by the main contractor; then there would be a set-off.  There is no reference to a fallback in the event of default by the main contractor.  Perhaps that was overlooked.  But that cannot be provided for in the absence of express terms.  When it comes to the interpretation of contracts the words expressed are what must be considered, not the intentions of the contracting parties.

32.  As Huggins JA said in Hong Kong & Shanghai Bank Hong Kong (Trustee) Limited v Chan Lai Wah [1980] HKLR 570 at p 572:

“It needs to be said once more that in interpreting contracts we are not concerned to ascertain the intention of the parties so much as to ascertain the intention expressed by the parties.  If they have expressed their intention in words which are ‘perfectly clear and positive in themselves’ the Court may depart from the literal meaning only if it produces results which are repugnant or absurd.”

33.  I see no such repugnancy or absurdity; indeed, the same contingency on payment arises between the parties flowing the other way in the sub-contract to perform the Matilda Hospital project.  Miss Wong’s belief spoken in evidence that it was open to the plaintiff to press for payment when no payment had been forthcoming from the main contractor is not founded in contract.

34.  Mr Leo for the plaintiff submitted that the variation of the sub-contract terms on the issue of payment must fail for want of consideration.

35.  I do not agree.  The proposal was made by the defendant because it was financially no longer viable for it to proceed without the credit facility put forward.  The plaintiff acceded to assist.  But it would be wrong to suggest that it was doing so purely as an act of kindness.  The plaintiff would have had commercial reasons for protecting the integrity of the contract midway through its performance.

36.  In similar circumstances which gave rise to the case Williams & Roffey Bros. v Nicholls (contractors) Limited [1991] 1 QB 1, the Court of Appeal of England and Wales found that where a contractor found he had underquoted and asked for and was granted a higher contract price there was sufficient consideration upon which to find a new contract between the parties.

37.  Gladwell LJ said at p. 15:

“Accordingly, following the view of the majority in Ward v Byham [1956] 1 W.L.R. 496 and of the whole court in Williams v. Williams [1957] 1 W.L.R. 148 and that of the Privy Council in Pao On [1980] A.C. 614 the present state of the law on this subject can be expressed in the following proposition: (i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and (ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; (iii) B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and (iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and (v) B’s promise is not given as a result of economic duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding.”

38.  In the circumstances of this case I am satisfied that the defendant had stated enough to warrant concern on the part of the plaintiff and it acted on that concern.  And after all it was not, as with most credit terms, going out on a limb.  As long as the main contractor Asia Contracting performed, the funds to pay for the paints and materials supplied to the defendant would be forthcoming from that quarter.

39.  What follows from this is that the plaintiff’s claim for recovery of the sum total of the invoices rendered for material supplied, ‘used and applied’ fails to the extent that the funds it has received from Asia Contracting not already accounted for, namely $831,340.54, fall short of the outstanding total of the Matilda Hospital project invoices of $1,280,757.66.  That shortfall of $449,417.12 may be recovered only if and when the main contractor Asia Contracting satisfies the outstanding judgment against it.

40.  So, with the plaintiff already in funds to the extent of $831,340.54, and the claim to recover the balance of $449,417.12 premature, its claim for $1,280,757.66 fails.

41.  The plaintiff’s claim to recover the outstanding balance of $48,751.66 comprised in the Shouson Hill Road project fails because this may be and should be recovered in comparable fashion.  But in that case there will be sufficient left over to enable payment to the defendant under the subcontract.  In so far as the total of $91,622.05 for ordinary supply, the claim succeeds.

42.  I come now to the defendant’s counterclaim.  This can be shortly dealt with.  The defendant is caught by the same term that it relied on to dispute payment of all the Matilda Hospital invoices.  In the absence of payment by Asia Contracting to the plaintiff in an amount which exceeds the sum total of all the plaintiff’s invoices for paints and materials used and applied there is no obligation on the plaintiff to pay any more.

43.  Mr Chong for the defendant submitted that the defendant had ‘failed or not done enough to mitigate its loss’, by taking proper and reasonable steps in recovering the contract sum in the contract with Asia Contracting.  I think that is misconceived.  This is not an action in damages, but a claim for payment of a contract sum and the occasion for payment has not arrived; indeed the chances are that it probably will not arrive at all.  There is no contractual obligation for the plaintiff to pursue Asia Contracting for payment.  In any event the plaintiff as I find has taken significant steps to pursue a claim against Asia Contracting.  It issued a writ, got judgment and fought the application to set judgment aside.  Of course it had a vested interest to avoid or diminish prospective loss on the sales of paints and materials and the mark-up it had contracted to achieve.  That the judgment debt was settled no doubt arose by virtue of a pragmatic approach to the prospect of further recovery from a debtor no longer trading.  But all this is by the by; there was no contractual obligation owed the defendant to chase Asia Contracting. 

44.  The counterclaim fails.  The result is that there will be judgment in favour of the plaintiff in the sum of $91,622.05, with interest thereon at prime plus 2% from the date of the writ until today; thereafter at the judgment rate.  The counterclaim is dismissed.

45.  The remaining matter is that of costs.  The following order is nisi.  The plaintiff has succeeded in part but in respect only of that matter in which there was no dispute save as to set-off.  It has resisted the defendant’s counterclaim.  The defendant has lost its counterclaim but defended a significant part of the claim.  In the circumstances I make no order for costs.