FAR EAST CONSORTIUM LTD v. AIREDALE LTD AND OTHERS

HEADNOTE

Building contract - claim based on novation - whether assignment or novation - whether claim should be struck out as an abuse of process.

1990 CON. LIST NO. 13

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. By summons dated 20th July 1990, the 1st Third Party (Boot) applied to strike out the Defendant's Third Party Statement of Claim against Boot and sought the dimissal of the Third Party proceedings against Boot.

2. This action arises out of the construction of a Container Freight Station (CFS) at Kwai Chung. The contractual chain is complicated but in essence it is as follows. Asia Terminal Ltd. (ATL) were the employers and they entered into a construction contract with the Plaintiff (FEC), FEC then entered into a sub-contract with Airedale (also known as BCC). On 21st May 1983, Airedale sub-contracted the foundation works to a company called Shine which is now in liquidation. Airedale also sub-contracted the superstructure work to a company called ICC - FE which itself further sub-contracted the works to Shine. In relation to the superstructure works, there was eventually a novation whereby the benefits and burdens of Shine's superstructure sub-contract were novated to Boot.

3. On 24th May 1983 Shine entered into a joint venture agreement for the piling works with the 2nd Third Party (Bachy).

4. This action relates to the foundation or sub-structure works. On 30th March 1984, Airedale instructed Shine as part of the sub-structure sub-contract to carry out the pile cap works which are the subject matter of complaint in this action.

5. In or about April 1984, Boot and Shine together agreed to carry out the construction, but not the design, of the pile caps.

6. Boot maintain that at the time Shine had liquidity problems. Mr. Myles of Boot states in his affidavit that the suggestion was that, because Shine still wanted to do the pile cap construction work, Boot would finance the pile cap construction. Boot would provide a Project Manager to protect its interests and the profit was to be split 50:50. The idea was that Boot would 'administer' the contract in the sense that they would be the paymasters. It is not to be forgotten that Boot were going to carry out the superstructure works which commenced as soon as pile cap construction was complete. Mr. Myles states that Boot's only involvement was that a Mr. Mosley attended the site between one and two hours per week to monitor progress.

7. Mr. Myles appreciated that Boot was not a party to the Airedale - Shine sub-contract and would have no rights against Airedale, which was a Liberian corporation. (I will have to make some comment in due course about the relationship between FEC and Airedale.) Mr. Myles states that he was advised by Boot's lawyers to take an assignment of the benefit of the Airedale - Shine sub-contract from Shine. This was done.

8. The issue in this application is, whether or not, a novation agreement was ever entered into between Airedale, Shine and Boot, by which both the benefit and the burden of the Shine - Airedale sub-contract was assigned to Boot and Shine in joint venture.

9. This action is a claim for damages brought by FEC against Airedale alleging defects in the sub-structure works. Obviously, Airedale want to pass on any such liability to Bachy and Boot in the absence of Shine.

10. Airedale's Third Party Notice against Boot is dated 13th January 1990. It claims damages against Boot "on the grounds that you were at at all material times the Defendant's sub-contractor by assignment or novation responsible for the construction of part of the sub-structure works of the complex, namely the pile caps thereof and that you failed to carry out the work properly..." (my underlining)

11. The Third Party Statement of Claim against Boot is dated 11th May 1990. Paragraph 13 thereof reads as follows;

12. So it is clear that the claim against Boot is based on a novation and not an assignment. Mr. Huggins was at pains to point out that if you transfer the benefit and the burden of a contract to a Third Party, a new agreement is created provided that all the parties to the original agreement and the new party concur. Boot's case here is that they never agreed to a novation, in other words never took on the liability to perform the pile cap construction work, and what is more they contend that on the evidence neither did Airedale so agree. Although the law is not in dispute between the parties, it may be convenient to set out the basic principles before going on to apply them to the facts of this case.

13. At paragraph 691 in Meagher, Gummow and Lehane, Equity, 2nd Edition, one finds the following passage:-

"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."

In paragraph 580 in volume 4 of Halsbury's Law of England under the heading "novation", one finds the following passage;

"Contractual rights, but not liabilities, may, as a general rule, be transferred by assignment without the consent of the promisor. Novation, however, is an act whereby, with the consent of all parties, a new contract is substituted for an existing contract and the latter discharged. Usually, but not necessarily, a novation takes the form of the introduction of a new party to the new contract and a discharge of a person who was a party to the old contract. As common law, novation was the only known method of assigning a contractual right."

14. Although assignment is pleaded in the Third Party Notice, it is not followed through to the Third Party Statement of Claim, and thus on the authority of Cargill v. Bower (1878) 10 Ch. D502 & 508 and Lewis v. Durnford (1907) 24 TLR 64, it is to be treated as having been abandoned. See also White Book pages 320/1 & 247.

15. In 1986, Boot sued FEC and Shine. Boot alleged that by a letter dated 9th May 1984 (page 136 in the Bundle) from Shine to Airedale, Shine informed Airedale that it had reached agreement with Boot subject to Airedale's agreement for the assignment of the pile caps work under the sub-contract as well as a guarantee agreement to a joint venture consisting of Shine and Boot and for the assignment of the benefit of the sub-contract and the guarantee agreement. Boot went on to request Airedale to pay all moneys due under the pile cap agreement to Boot, and Airedale agreed to this by letter dated 26th May 1984. It was then pleaded that in the premises the joint venture was the successor and assign of Shine within the meaning of the guarantee agreement. The guarantee agreement referred to was an agreement by FEC and Shine, whereby FEC agreed to guarantee Airedale's obligations under the sub-contract. No doubt this was required because Airedale was a Liberian corporation.

16. In that action, Boot claimed an indemnity against FEC under the guarantee agreement. That matter was tried by Nazareth, J. in May 1988 and he gave judgment in favour of Boot. It is interesting to note that in that action Boot was contending for an assignment of the sub-contract to the joint venture whereas FEC denied the assignment and alleged that Boot was simply a sub-contractor of Shine. Nazareth, J. preferred the Boot witnesses. Mr. Myles had testified before Nazareth, J. that Airedale was regarded and dealt with as being FEC and the learned judge stated in relation to that evidence "... indeed the evidence does point to Airedale being the alter ego of FEC".

17. I must now look carefully at the matters referred red to in paragraph 13 of the Third Party Statement of Claim against Boot in this case to see whether there is in fact any evidence at all that a novation agreement was entered into thereby imposing a contractual obligation, and hence liability on Boot in relation to the construction of the pile caps.

Was the alleged novation agreement contained in or to be inferred from documents?

18. On the 14th April 1984, Boot wrote to Shine (page 117) enclosing documentation "dealing with the transfer of responsibility for execution of the works from Shine to Boot - Shine Joint Venture". The enclosure was a draft assignment of sub-contract which on the evidence was never sent to Airedale. It is true to say that this document did envisage the transfer of both the burden and benefits of the sub-contract from Shine to the joint venture. However, it was not executed. Mr. Huggins conceded that if all three parties had executed it, a novation would have occurred. But they did not, and the matter developed in a somewhat different direction.

19. On 19th April 1984 (page 128), Shine replied to Boot saying that they agreed in "general outline" with Boot's proposals but they thought Boot were making matters too complicated. They stated that Shine and the Shine/Boot Joint Venture needed to secure the agreement of Airedale and FEC to only four matters covered by the sub-contract. These were;

20. Mr. Huggins contended that this proposed arrangement was not a novation.

21. Boot replied on 27th April (page 132) by proposing certain amendments and enclosing a draft to be sent to Airedale. (Mr. Rodway, Q. C. for Airedale submitted that the word 'we' in the last paragraph at page 132 was significant in the light of Boot's assertion that they did not carry out the pile caps work. I do not agree. It must be a reference to the Boot - Shine Joint Venture.)

22. The draft at pages 133 and 134 became Shine's letter to Airedale dated 9th May 1984 (page 136). In this letter, Shine invited Airedale to agree to four numbered points. These points were as follows;

23. This letter was signed by Shine and by Boot.  Airedale did not sign this letter. There is a hand-written note on page 136 which is admittedly in the hand of Mr. David Chiu who has sworn an affirmation on behalf of Airedale in this application. The note read;

"Clement,

 

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

 

David "

24. Mr. Chiu's explanation appears at page 12 of his affirmation of 10th December 1990. He says Airedale was quite happy with the formation of the joint venture. How they wished payments to be made to the joint venturers was a matter for them and of no concern to Airedale. He says the letter seemed to be drafted by lawyers and it was not his practice to sign such letters without his own legal advice. However, he adds that on his instructions, Clement Fung did reply to Shine on 26th May 1984.

25. Airedale's reply is dated 26th May 1984 and appears at page 138. It acknowledges receipt of a letter dated 9th May 1984 and states;

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

26. This letter was signed by Clement Fung and copied to David Chiu. Item one was that all moneys payable in respect of pile cap work should be paid to Boot.

27. Mr. Huggins submits that this letter is not an acceptance of anything but item one in the letter of 9th May 1984. Mr. Rodway was constrained to call this letter somewhat 'bizarre', but he submitted that this was an acceptance of all the items by Airedale. After all, he points out there was nothing else for Airedale to do but to pay the money to Boot as requester.

28. I cannot accept Mr. Rodway's submission. Airedale had every opportunity to agree the terms of the letter of 9th May 1984, if they so desired. There was a place for them to sign. The other parties anticipated that they would sign. They did not sign, and I cannot possibly construe the 9th May 1984 reply as an acceptance of anything but item one. The vital element in a novation is the agreement of all parties, in this case all three of them. Mr. Chiu cannot have it both ways. What he instructed Mr. Fung to agree to was clearly an assignment of the benefits but not the burdens of the sub-contract. The reply of the 26th May 1984 is perfectly consistent with an assignment of the benefits and does not support a novation.

29. Airedale further relied on the joint venture agreement between Shine and Boot which starts at page 141, but this was never signed by Shine. For a novation, one is still looking for a tripartite agreement which this is not.

30. I n my judgment, there is nothing in any of the documents relied on in paragraph 13 of the Third Party Statement of Claim which shows that all three parties agreed to a novation as opposed to an assignment of the benefits of the sub-contract to Boot.  However, there is, in my judgment, a crucial letter at page 161 dated the 31st August 1984. It is from FEC and signed by Clement Fung. It is copied to David Chiu. It states at paragraph 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". (sic)

31. Whether or not it be right to consider Airedale as FEC's alter ego, and there is much to confirm this, including the view of Nazareth, J. on the basis of the evidence placed before him, nevertheless, this letter shows that, to the knowledge of David Chiu, FEC were contending in August 1984 that Boot was not a party to the sub-contract. Yet in Airedale's pleading, all the matters relied upon to support novation predate this letter.

Conduct

32. This is a non-runner. The only matter alleged in relation to conduct are set out in sub-paragraph 4 and paragraph 13 which I nave set out above. This pleading is wholly equivocal. As I am not satisfied that the documents relied upon get any way near to a novation, the alleged conduct takes the matter no further. Pile cap works were carried out, but this fact does not assist in establishing the novation contended for.

Oral

33. This allegation also takes the matter no further. The novation agreement referred to here is the one said to be contained in the documents which I have rejected. There is no pleading that there was any oral discussion which went in any way beyond what was set out in this agreement. I am sure there were discussions about this very matter, but it is a far cry from saying that these discussions resulted in a concluded novation agreement. FEC were certainly contending otherwise in August 1984.

34. Mr. Rodway referred me to a number of additional documents which he submitted showed, at least, on a prima facie basis, that Boot was actually carrying out the pile caps work. He referred me to Mr. Chiu's affirmation as well as that of Mr. Chow. The documents he referred me to do not assist for two important reasons.

35. Firstly, it is not in dispute that the Boot - Shine Joint Venture did carry out the pile caps construction. However, Boot's role is said to be that of financier and administrator, and it cannot be liable for defects in the absence of a novation. Documents, therefore, referring to the Joint Venture carrying out the construction of pile caps do not assist. They do not show that the burden of the contract was assumed by Boot with Airedale's consent.

36. Secondly, it is not in dispute that Boot were responsible for the superstructure works and thus they had a real interest in the completion of the pile caps because they could not start superstructure work until pile caps had been completed. Their interest was over and above their interest as financier and administrator.  It is not, therefore, surprising that Mr. Rodway can point to meetings at which Boot were present when the pile caps were discussed.

37. Mr. Rodway sought to rely upon observations in the judgment of Nazareth, J., for instance, at page 186, the learned judge said this;

"In my finding, therefore, between January and July 1984, Boot and Shine did reach agreement orally under which the sub-contract was assigned by Boot to the joint venture parties."

 

38. But in this passage, the judge is considering the assignment of the benefit without which Boot would not have been able to maintain an action. He is not referring to the assignment of the burden to Boot which is now alleged. There was a degree of confusion in Mr. Rodway's submissions between assignment and novation, the difference, however, being crucial to the matters before me.

39. Although I am dealing with the matter under Order 18 rule 19 and on affidavit, the position is as follows. The summons seeks to strike out the Third Party Statement of Claim on the grounds set out in the summons. The affidavit in support makes it perfectly plain that it is being alleged that Boot never took on the burden of the Airedale - Shine contract. Airedale have put forward all they have to support their claim for a novation. Mr. Huggins submits that they have not put forward any material that supports their pleaded case. He relies on a paragraph at page 338 of the white Book in which it is state;

"The issue of a writ making a claim which is groundless and unfounded in the sense the Plaintiff does not know of any facts to support is an abuse of the process of the court and will be struck out (Steamsnip Mutual Association Ltd. v. Trollope and Colls (City) Ltd. (1986) 33 BLR 77 C.A.)."

40. Airedale have had every opportunity of placing before me the material upon which they seek to rely to support their allegation of novation. I have given that material the most careful consideration but in the final analysis, I have come to the very firm conclusion that on the material submitted, Airedale do not have a claim based on novation. In those circumstances, it would be an abuse of the process of this court to allow the matter to go any further.

41. I prefer to rest my decision on the simple fact act that Airedale have not got any evidence to support the claim for novation, but on the contrary, all the evidence goes the other way. Although I am satisfied that there is a very close relationship indeed between Airedale and FEC, I am not prepared to found my judgment on res judicata or issue estoppel (the Nazareth action) nor on the wider aspect of abuse of process which can be gleaned from Wigram, V.C. in the classic passage in Henderson v. Henderson (1843) 3 HARE 100. The acknowledgement by FEC in their letter dated 31st August 1984 (page 161) that Boot was not a party to the pile cap contract, copied, as it was, to David Chiu and totally unexplained by Mr. Chiu in his affirmation, in such strong evidence against Airedale's claim, when viewed with the other contrary evidence as to make their position quite untenable.

42. I must add that I find Mr Chiu's affirmation most unhelpful when dealing with the relationship between FEC and Airedale. Nazareth J had found that Airedale was the alter ego of FEC but all that Mr. Chiu deigns to tell me is that Airedale is a Liberian corporation and that Airedale and FEC are seperate legal entities. He could not have been unaware of the fact that the relationship between these 2 entities was crucial. Mr Myles stated in his affirmation that Airedale was "a company controlled by FEC" and Mr Chiu does not explain why that statement is wrong if wrong it be.

43. Mr. Huggins raised a further point. He referred me to paragraph 17 of the Third Party Statement of Claim in this case which alleges that Shine and Boot fail to carry out the pile caps construction works in a good and workmanlike manner and the quality of the work was defective. He then points out that the only evidence exhibited in support of defective workmanship are two reports from Maunsells. He submits that it is clear from the documents that what is being alleged is a design defect and has nothing to do with defective work and, of course, he then adds that Boot were never responsible for the design work and it is never been so alleged. On that basis, he contends that there is no evidence put forward by Airedale to support the allegation of defective workmanship.

44. In response to this submission, Mr. Rodway conceded that Boot did not have the primary obligation with regard to the design of the caps. It was clearly Shine's. However, he added that Boot assumed an obligation to build the caps and implicit in that was that they would do so to a good design. They should have put the defects right. The design should have been checked by them.

45. Mr. Huggins submits that Mr. Rodway's submission does not accord with the law. He relies upon a passage at page 282 in Hudson's Building and Engineering Contracts (10th edition 1979) where it is said:-

"As a broad generalization, if plans and specification are supplied to a builder to work to, a fortiori if the building owner employs an architect, the contractor would not normally have to do more than carry out the work according to the plans and specification in a workmanlike manner and using proper materials though he may well be fully aware of the purpose to which the work is required, and may even shrewdly suspect that it will not fulfill that purpose satisfactory."

46. It is very dangerous to refer to Hudson because it is so out of date unless at the same time a check is made on more recent developments. In this area of the law there has been a proliferation of cases indicating that Hudson's view was too narrow and latterly there has been a retrenchment of this line of authority as the House of Lords has re-examined the Anns decision. The relevant cases in this area, inter alia, are Stag Line v Tyne Sniprepair and Ano [1984]; Equitable Debenture Assets v William Moss [1984]; Victoria University of Manchester v Hugh Wilson [1984]; Holland Hannen and Cubitts Welsh Health [1985]; Imperial College v Norman and Dawbarn [1986]; University of Glasgow v W. Whitfield and John Laing [1988]; T. E. Eckersley v Binnie and others [1988]; and D and F Estates v Church Commissioners [1988].

47. As I have not had the benefit of full argument on this matter it would be unwise to rest my decision on an en passant reference to an out of date text book.  It may well be that time has shown Hudson to be correct but I could not possibly so conclude without full argument.  I therefore propose to ignore this point for the purposes of this judgment.

48. Mr. Rodway seeks to take the matter a little bit further by referring to pages 291/2 in the bundle which is a passage in the Maunsells' Report. He refers to a paragraph No. 3 headed "causes of cracking in pile caps", and he then refers to the text of these passages and says that there is at least evidence there that defective workmanship is the cause, as opposed to, or in addition to defective design. Giving the passages at 291/2, the fairest possible reading, it does seem to me that Maunsells are stating that there were defects in design which led to the problems as opposed to defects in construction However, I am not prepared to rest my judgment on this point. It seems to me that if this was the only point, it would be a matter most suitable for trial when the experts could explain in much more detail the distinction between design defect and construction defect. As I say, it seems to me much more likely to be a matter of a design defect but I do not propose to decide this or rely upon it, as I only have had the benefit of affidavit evidence.

49. In all the circumstances, therefore, I conclude that these Third Party proceedings are an abuse of the process of this court because the Defendants have not produced any evidence to substantiate the novation for which they contended, and indeed all the evidence goes the other way as, indeed, does Airedale/FEC's stance in the Nazareth action.

50. Accordingly, I order that the Third Party Statement of Claim be struck out and that the Third Party proceedings against Boot be dismissed.

51. I propose to make a costs order nisi in favour Boot.