BRILLIANT (MAN SAU) ENGINEERING LTD v. PROSPERITY CONSTRUCTION AND DECORATION LIMITED AND ANOTHER

HCCT 38/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 38 OF 2004

(formerly action No. 3837 of 2002)

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J U D G M E N T

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I.    Introduction

1.  The 2nd Defendant (Interior) applies to strike out parts of the Re-Amended Statement of Claim (RASOC) of the Plaintiff (Brilliant).  If Interior succeeds, Brilliant would have no effective claim against Interior.  Brilliant's action would then fall to be dismissed.

2.  Brilliant has in turn applied to amend RASOC.  Interior says that the proposed revised pleading (RRASOC) would still be bad.  Interior contends that RRASOC should therefore not be allowed.

3.  The issues before me are broadly the following:-

(1)    Whether as a matter of construction a "Letter of Assignment" (the Letter) dated 30 April 1997 constitutes a legal or equitable assignment by the 1st Defendant (Prosperity) of the benefit of Prosperity's sub-sub-contract (the SSC) with Interior.

(2)    If the Letter can be construed as an assignment, whether the Letter can take effect as an assignment if the SSC expressly provided that it could not be assigned.

(3)    Regardless of the Letter's true construction, whether it is open for Brilliant to argue that the Letter is an assignment, given previous proceedings (in which Brilliant appeared) where the Court held that the Letter was not an assignment.

(4)    Whether it is open for Brilliant to raise new causes of action in RRASOC which could have been (but were not) raised in the previous proceedings just mentioned.

4.  RASOC advanced a case that Interior was estopped from denying that the Letter was an assignment.  RRASOC proposes to delete that plea.  Thus, Interior's challenge to the estoppel plea ceased to be an issue by the time of the hearing before me.

II.    Background

5.  On 10 April 1997 Consolidated Hotels Ltd. (Hotels) as Employer engaged Paul Y-ITC Construction Ltd. (Paul Y) as Main Contractor for refurbishment works at the Sheraton Hotel.  Paul Y sub-contracted some of the works to Interior.  Paul Y and Interior are associated companies.

6.  On 23 April 1997 Interior sub-sub-contracted the relevant works to Prosperity under the SSC.

7.  On 30 April 1997 Prosperity and Brilliant signed the Letter.  The practical effect of the Letter was that Brilliant undertook to carry out the works which Interior sub-sub-contracted to Prosperity.

8.  Between May 1997 and November 1998 Interior paid $34,842,966.34 to Prosperity for work done.

9.  By letter of 18 July 1999 Prosperity authorised Interior to pay monies due under the SSC to Brilliant.

10.  Between August 1999 and January 2001 Interior paid Brilliant $2,449,445.41 in accordance with Prosperity's authorisation.

11.  By letter dated 8 August 2001 Prosperity revoked its authorisation.

12.  In February 2002 a Final Account was agreed between Interior and Prosperity.

13.  Between February and July 2002 Interior paid $3,500,220.06 (Sum A) to Prosperity.  Sum A formed part of the monies reckoned to be due to Prosperity by the Final Account.

14.  In October 2002 Brilliant sued Prosperity alleging that Prosperity had failed to pay monies due for works carried out by Brilliant as Prosperity's sub-contractor under the Letter.

15.  On 14 October 2003, in High Court Action No.6903 of 2002, a judgment creditor of Prosperity served a garnishee order to show cause on Interior.  The creditor claimed payment of the balance of the Final Account from Interior.

16.  On 13 November 2003 Brilliant applied to intervene in the garnishee proceedings.  Brilliant claimed that it (not Prosperity) was entitled to the balance of the Final Account.

17.  Around late November or early December 2003 Interior interpleaded in the garnishee proceedings by paying into Court $3,199,742.80 (Sum B), the balance of the Final Account.

18.  On 29 December 2003 Brilliant filed RASOC which for the first time introduced a claim against Interior.  Brilliant alleged that, by the Letter, in return for Brilliant undertaking the refurbishment works, Prosperity had assigned to Brilliant the benefit of Prosperity's agreement with Interior.

19.  On 2 April 2004 Master Wong held that the Letter was a sub-contract whereby Brilliant agreed to do the refurbishment works for Prosperity.  Master Wong concluded that the Letter was not an assignment in law.  He therefore dismissed Brilliant's application to intervene.

20.  By Notice of Appeal dated 6 April 2004 Brilliant appealed against the decision of Master Wong.

21.  On 21 April 2004 Sum B was paid out to Prosperity's judgment creditor.

22.  On 9 June 2004 the Court ordered that Prosperity be wound up.

23.  On 9 July 2004, on Brilliant's application to discontinue its own appeal, the Notice of Appeal was dismissed by Sakhrani J with no order as to costs.

III.     Discussion

A.      Is the Letter an assignment?

24.  I first remind myself that in a strike out application a defendant must show that a plaintiff has no prospect of success at trial.

25.  The Letter, which is from Prosperity (then known as OLS International Ltd.) to Brilliant, reads as follows:-

"RE:   REFURBISHMENT OF SHERATON HOTEL
         ON KIL 9170, 20 NATHAN ROAD, KOWLOON
         MAIN CONTRACT - LETTER OF ASSIGNMENT

We refer to our Contract with [Interior], the Letter of Award of which is enclosed herewith, and the discussions among Mr. Simon Cheung and Mr. C. W. Lee of [Paul Y], Mr. Alfred Siu of [Prosperity] and the subsequent meeting with Mr. Alfred Siu, Mr. Y. M. Chan of [Prosperity] and Mr. Benny Chu of [Brilliant].  We are pleased to confirm our agreement to assign the captioned Contract to [Brilliant] based on the following conditions:

(1)     You shall execute and perform the captioned Contract exactly in the same way, in the same manner and to the same extent as we are required to execute and perform under the captioned Contract on a back to back basis.

(2)     You shall observe and comply with all the terms, conditions, obligations and liabilities arising from the captioned Contract exactly in the same way as we are required to observe and comply under the captioned Contract.

(3)     All monies and other consideration received by us from [Interior] with respect to the captioned Contract shall be paid to your account in the following procedure:

Upon receipt of the notice of payment from [Interior], a cheque bearing the same amount in favour of [Brilliant] shall be issued by us and deposit with [Interior] in exchange for the payment from [Interior] within three working days from the day of receipt of the notice of payment and you shall collect the aforesaid cheque from [Interior] accordingly.

Until such time our formal contract is preparing for your signature, you are required to liaise with Paul Y - ITC's project director, Mr. C. W. Lee on site (Tel: 2312 0108) regarding the programme, phasing requirement and the execution of the works.

Yours faithfully,

for and on behalf of
[Prosperity]"

26.  At the bottom of the Letter are the following words:-

"We hereby agree and accept the terms and conditions of the assignment as aforementioned:
for and on behalf of
[Brilliant]"

27.  In my view, read as a whole, the Letter cannot be an assignment at law or in equity.  The Letter is plainly an agreement whereby Prosperity sub-sub-contracted the relevant works to Brilliant. 

28.  In particular, if the Letter were an assignment, the elaborate procedure for payment outlined in the last paragraph of the Letter would not make sense. 

29.  If the Letter were an assignment, Prosperity would simply give notice of the assignment to Interior.  Then Interior could (and indeed would be bound to) pay monies directly to Brilliant.  There would be little point in Prosperity making out its own cheques for delivery to Brilliant against payments by Interior to Prosperity.

30.  Mr. Hylas Chung (appearing for Brilliant) suggests that the Letter should be read in its factual context.  He stresses that all along Interior intended that Brilliant would do the works.  Prosperity was only brought into the picture as an intermediary.  The thinking was that routing payments through Prosperity would give an impression that Prosperity was a thriving concern. 

31.  Even if one accepts Mr. Chung's suggested context, that would at best be a neutral factor.  The context would be consistent with a sub-contract arrangement as well as an assignment.  The factual matrix in which Mr. Chung would have the Letter read is of no help in the Letter's construction.

B.      Could Prosperity's agreement with Interior be assigned?

32.  Even if I were wrong in my reading of the Letter, the fact is that SSC could not be assigned.

33.  The SSC is in the form of a letter from Interior to Prosperity.  Clause 5.1(a) of the SSC incorporates "[t]he articles of Agreement and Schedule of Conditions of Building Contract referred to in Bill No.1 -- Preliminaries Clause 5.01".

34.  Preliminaries Clause 5.01 of the Main Contract is entitled "Form of Contract".  It states:-

"'The Standard Conditions of Contract' mean the Articles of Agreement and Schedule of Conditions of Building Contract together with its Appendix issued under the sanction of the Hong Kong Institute of Architects, The Royal Institution of Chartered Surveyors (Hong Kong Branch) and The Society of Builders, Hong Kong, First RICS (HK Branch) Edition 1986 (with quantities).  The Standard Conditions of Contract may be purchased from the Secretary of the RICS (HK Branch), Room 1934, Swire House, 9 Connaught Road, Central, Hong Kong.

'The Conditions of Contract' mean the Standard Conditions of Contract as completed by Section 5.02 of this Preliminaries Bill and as amended by Section 5.03 of this Preliminaries Bill...."

35.  The Schedule of Conditions of Building Contract for Use in Hong, First RICS (HK Branch) Edition 1986 (the Schedule) referred to includes the following clause:-

"17.   Assignment or Sub-letting

(1)     (a)     The Employer shall not without written consent of the Main Contractor assign this Contract.

(b)     The Main Contractor shall not without the written consent of the Employer assign this Contract."

36.  For the purposes of the refurbishment works, clause 17 has been modified, as stated in Preliminaries Clause 5.01, by Clause 5.03 of the Preliminaries Bill.  Clause 5.03 provides:-

"Clause 17 -- Assignment or Sub-letting

Replace sub-clause 17(1)(b) by the following quoted item:

'The Main Contractor shall not assign the Contract."

37.  The general incorporation of the Schedule into the SSC has the effect that the terms "Employer" and "Main Contractor" in clause 17 are treated as references to "Interior" and "Prosperity" respectively.  See Augthon Ltd. v. MF Kent Services Ltd. (1991) 57 BR 1 (CA), 20-5, 30-1.  The modification introduced by Clause 5.03 therefore means that Prosperity could not assign the SSC at all.

38.  It follows that, even if on its face the Letter could be read as an assignment, it could not have been effective as an assignment.  See Linden Gardens Trust Ltd. v. Lenesta Sludge Disposal Ltd. and others [1993] 3 All ER 417 (HL).

39.  It may be suggested that Clause 5.03 did not modify the application of the Schedule, because (say) the SSC only expressly incorporates the Schedule as referred to in Clause 5.01.  Even then, there is no evidence of any written consent from Interior to an assignment of the SSC by Prosperity.

40.  Mr. Chung suggests that I should read the expressions "Employer" and "Main Contractor" in Clause 5.01 literally.  So interpreted, the words would only refer to Hotels and Paul Y.  That would deprive the incorporation clause in the SSC of any meaningful function.  It is a canon of the construction of contracts to strive, unless too uncertain or impossible, to give every term a meaning.  Mr. Chung's submission would go against that canon.  I accordingly reject it.

C.      Does Master Wong's decision preclude Brilliant from arguing that the Letter is an assignment?

41.  Even if I were wrong that the Letter is ineffective as an assignment, Master Wong's decision against Brilliant's contention gives rise to a res judicata.  It is no longer open for Brilliant to argue here that the Letter is an assignment. 

42.  There is a valid ruling of the Court, which has not been set aside on any appeal, that the Letter only gives rise to a sub-contract between Prosperity and Brilliant.  That decision is binding on Brilliant which appeared before Master Wong to argue the contrary.  That decision is also binding on Interior, which by interpleading agreed to abide by the outcome.  I cannot now go behind the decision.

43.  Mr. Chung submits that Master Wong's decision is not binding because it was only interlocutory.  I do not understand the submission.  Master Wong decided who was entitled to Sum B lodged in Court by Brilliant.  I accordingly do not see why the determination should not be treated as having a binding effect.

44.  Mr. Chung says that Brilliant only applied to intervene in order to "mitigate loss".  I do not see how Brilliant's subjective motive in appearing, affects my analysis of the objective effect of Master Wong's ruling.

45.  Mr. Chung suggests that Brilliant only abandoned its appeal because Sum B had been paid out to the judgment creditor.  That observation appears irrelevant.  If Brilliant had truly been concerned to ensure that Sum B remained available in Court pending an appeal, Brilliant could have applied for a stay of execution of any payment out order.  Brilliant never did so.

46.  Finally, Mr. Chung apparently submits that there would be injustice.  Had Brilliant refrained from applying to intervene in the garnishee proceedings, it would not have been bound by any decision of Master Wong.  Why should Brilliant be worse of because it appeared before Master Wong?

47.  I do not accept that Brilliant would be free of the consequences of Master Wong's ruling, if Brilliant refrained from appearing before him, despite having notice of the garnishee proceedings.  But I do not have to decide the point today, because the fact is that Brilliant did appear to argue its case.

48.  Accordingly, Brilliant can no longer argue that it was entitled to receive Sums A and B directly from Interior by reason of the Letter being an assignment. 

49.  Brilliant's claim to Sums A and B or any other payments from Interior based on the Letter as an assignment is bound to fail.  Such claim should be struck out.

D.      Can Brilliant raise new causes of action in respect of Sums A and B?

50.  RRASOC proposes to raise 2 new causes of action against Interior. 

51.  Essentially, Brilliant is now alleging that (by an oral contract in April 1997) Brilliant, Interior and Prosperity orally agreed to the following sequence of transactions:-

(1)     Interior would terminate an existing sub-contract for the works with Interior;

(2)     Interior would sub-contract the same works to Prosperity;

(3)     Brilliant would "be assigned the sub-contract of the Works and/or sub-sub-sub contracted the sub-contract of the Works on the condition that the 1st Defendant would not be making any profits or charging the Plaintiff any markup costs in respect of the Works; and,

(4)     "there would a collateral agreement among [Brilliant, Prosperity and Interior] that arrangements were to be made to guarantee that [Brilliant] would receive the payments in respect of the carrying out of the Works from [Interior] through [Prosperity]".

52.  RRASOC further pleads that:-

"[Interior] has given a collateral guarantee to the Plaintiff to guarantee that the Plaintiff will be paid for works carried out pursuant to the Sub-sub-contract in accordance with the Arrangements"

53.  RRASOC says that Interior breached the alleged Oral Agreement and Guarantee by failing to pay Sums and B to Brilliant and instead paying Sum A to Prosperity and Sum B into Court.

54.  I note initially that the Oral Agreement and Guarantee are badly unparticularised in RRASOC.  For example:-

(1)     It is unclear whether Brilliant is alleging breach of a collateral Oral Agreement and Guarantee or just of a Guarantee.  Are 2 separate causes of action being raised?

(2)     As to RRASOC §13(b), when, where, by whom on behalf of Interior, to whom on behalf of Brilliant, in what form (written or oral) was the Guarantee given by Interior to Brilliant.

(3)     As to RRASOC §13E, a new payment arrangement is said to have been agreed between Brilliant, Prosperity and Interior in July 1999.  But by whom on behalf of each, where, in what form (oral or written), and for what (if any) consideration was the New Arrangement reached?

(4)     As to RRASOC Prayer §(e) against the 2nd Defendant, what is the sub-sub-sub contract alleged to have been breached?  Who are the parties to this agreement?

55.  The foregoing allegations appear late in the day.  They have not been suggested before.  They were not raised before Master Wong. 

56.  Mr. Clayton (appearing for Interior) submits that, at least with regards to Sum B, there is an issue estoppel against Brilliant.  Following Yat Tung Investment Co. Ltd. v. Dao Heng Bank Ltd. [1973] AC 581 (PC), if Brilliant truly thought it was entitled to Sum B by reason of some Oral Agreement or Guarantee, it should have raised the matter before Master Wong.  It is now too late to do so.

57.  In Yat Tung, Lord Kilbrandon referred with approval to the following famous dictum of Wigram VC in Henderson v. Henderson (1843) 3 Hare 100, 115:-

"...  where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case.  The plea of res judicata applies , except in special circumstances, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."

58.  I think that Mr. Clayton is right.  If Brilliant claimed Sum B by reason of some Oral Agreement or Guarantee, it ought to have said so to Master Wong. 

59.  I am not impressed by Mr. Chung's submission that the Court should be tender with Brilliant because due to inadvertence the new allegations were not raised earlier.  Borrowing Mr. Chung's words, Brilliant is not entitled to a "second bite at the cherry".

60.  There is nothing before me to suggest that the facts and matters relating to the new causes of action pleaded in RRASOC are a late discovery by Brilliant.  On the contrary, if the facts are as now being alleged, Brilliant should have known of them from April 1997.

61.  It follows that Brilliant is precluded from raising its new actions to claim Sum B.  It is estopped from alleging that Interior paid Sum B in breach of an Oral Agreement or Guarantee.

62.  Mr. Clayton, however, would go further.  He submits that Yat Tung also precludes Brilliant from advancing its new causes of action in relation to Sum A.

63.  Here I disagree with Mr. Clayton.  The subject matter of the garnishee proceedings was Sum B.  Brilliant could have raised its new causes of action before Master Wong in relation to Sum B.  I cannot see how Brilliant not doing so means that it cannot raise the new causes of action in relation to Sum A.  Sum A was not the subject matter of the garnishee proceedings.

64.  Mr. Clayton referred to the counterclaim in Yat Tung.  In that case, the appellant mortgagee claimed that the bank's mortgage to him had been a sham.  The bank counterclaimed for loss on a resale of the property to a subsequent buyer.  The appellant lost.  In a later action the appellant claimed that the bank had colluded with the subsequent buyer to extinguish the appellant's title to the property.  The Privy Council held that the second action was an abuse.  The appellant could have raised its new allegations in a counterclaim to the bank's counterclaim in the first action.

65.  I do not see how the Privy Council's conclusions on the appellant's potential counterclaim to the bank's counterclaim assists Mr. Clayton's argument. 

66.  The issue before the Court in Yat Tung was essentially the bank's rights as against the appellant.  If the appellant's case was that the bank was not entitled to its counterclaim, because the bank defrauded the appellant of its equity of redemption, it ought to have said so in the course of the first action.  In contrast, before Master Wong, the key question was Brilliant's entitlement to Sum B, not Sum A.

67.  Accordingly, I do not believe that Brilliant is precluded from pleading its new causes of action in relation to Sum A.

68.  But it does not follow that I should allow RRASOC. 

69.  There are two considerations to bear in mind:-

(1)     RRASOC still pleads a case based on the Letter as an assignment.  The result of Interior's strike-out application is that all vestiges of a claim against Interior pursuant to the Letter as an assignment must go.

(2)     The new causes of action are ambiguously pleaded in RRASOC.  The latest allegations are unparticularised as I have mentioned.  The Court should not sanction imprecision and obscurity in Brilliant's claim at this late stage in the proceedings.

70.  I do not think that I can give leave for RRASOC to be filed in the state in which it now finds itself. 

71.  I propose instead to give Brilliant an opportunity to reflect on its claim in light of this Judgment.  If so minded, Brilliant may submit a revised RRASOC for consideration by Interior's lawyers within "x" days.  Interior may or may not agree for the revised RRASOC to be filed. 

72.  If there is no agreement, the matter can be restored before me for argument.  If no amended RRASOC appears within "x" days, the action by Brilliant against Interior shall stand dismissed.

IV.     Conclusion

73.  RASOC §§7, 8, 9, 10, 13, 13A. 13B, 18A, 18B, 18C, 18D and 19 (first 2 sentences only) are struck out.  RASOC §§18A and 18B are struck out since they relate to estoppel which is no longer pursued by Brilliant against Interior.

74.  Brilliant's summons to amend RASOC is dismissed, without prejudice to Brilliant re-applying to amend.

75.  However, unless Brilliant files an application for leave to re-amend RASOC within "x" days (such application to include a draft showing all proposed amendments), Brilliant's action against Interior shall stand dismissed with the costs of the action to Interior.

76.  I shall now hear counsel on what "x days" should be.

77.  I shall also hear submission as to the costs of today's applications.  On costs, my preliminary view is that, Interior having substantially prevailed on both, the costs of both applications should be to Interior, to be taxed if not agreed in any event.