HONEYWELL LTD v. KIN MING E & M WORKS LTD & ANOTHER

HCCT 76/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS LIST

ACTION NO. 76 OF 2001

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J U D G M E N T

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I. Background

1. The Employer, Hopewell Holdings Limited ("Hopewell"), engaged Slipform Engineering Co. Ltd ("Slipform") as Main Contractor for a development known as Hong Kong International Trade & Exhibition Centre ("HITEC") in Kowloon Bay. Slipform entered into a sub-contract with the 2nd Defendant ("Mansion") for the provision and installation of fire alarm and related services (collectively, "the services").

2. On 31 March 1993 the Plaintiff ("Honeywell") submitted a tender in the form of a Proposal No. P92118 for the provision and installation of an automatic fire alarm ("AFA") system which would form part of the services. On 20 May 1993 Honeywell revised its tender sum to $8,800,000.00 with an optional cost saving offer of $8,500,000.00 if the number of intelligent loops in the AFA system to be installed did not exceed 97 loops.

3. Mansion accepted the tender but requested that Honeywell become involved in the HITEC development as sub-contractor to the 1st Defendant ("Kin Ming"). The proposal was that Mansion would sub-contract the services to Kin Ming which in turn would sub-sub-contract the AFA works ("the AFA works") to Honeywell. Honeywell was agreeable to the arrangement provided that Mansion guaranteed Kin Ming's contractual obligations to Honeywell, including Kin Ming's payment obligations. Mansion being amenable to providing the requisite guarantee ("the Guarantee"), Honeywell entered into a sub-sub-sub-contract with Kin Ming.

4. The Guarantee is contained in a document which consists of a letter (dated 29 June 1993) from Honeywell to Mansion and an acknowledgment (dated 30 June 1993) signed by Mr Henry Lam, a director of Mansion. The letter portion of the document reads:-

"We refer to our Proposal reference P92118 dated 3/31/93 and our letter to you dated 20/5/93 ref: CKL/HTL/ml and hereby confirm our agreement, at your request, to transfer our offer for the Honeywell DeltaNet FS90 Plus Automatic Fire Alarm System to Kin Ming Building Services Limited (hereinafter referred to as KMBSL) of 11/F, Room 09, Lucida Industrial Building, 43-47 Wang Lung Street, Tsuen Wan, N.T., Hong Kong.

All terms and conditions of our offer to you shall be transferred to KMBSL and shall remain unaltered except that all previous references to Mansion Fire Engineering Co. Ltd, shall now apply to KMBSL.

For the avoidance of doubt our Basic Tender Offer (HK$8,800,,000.-) and Optional Cost Saving Offer (HK$8,500,000.-) shall also remain unchanged.

We confirm that we are willing to enter into a formal agreement with KMBSL for the above works. This agreement will be prepared by KMBSL.

By countersigning this letter, Mansion Fire Engineering Co. Ltd, hereby guarantee that KMBSL will fulfil its obligations under the agreement to be entered into between KMBSL and Honeywell Ltd, including KMBSL's obligations with respect to payment of Honeywell Limited."

The acknowledgment portion states:-

"We confirm our agreement to the contents of this letter.

For and on behalf of Mansion Fire Engineering Co. Ltd"

There is no issue between the parties that the reference in the letter portion of the document to Kin Ming Building Services Limited was an erroneous reference to Kin Ming.

5. On 30 June 1993 Kin Ming issued a Purchase Order ("the Purchase Order") to Honeywell whereby Kin Ming accepted Honeywell's tender. The Purchase Order stated the following conditions (among others):-

" 1. Your offer includes delivery of all necessary material and equipment to the job site and in accordance with the Main Contractor's Master Programme of Works Which may be revised during the course of the work.

2. You will be paid on regular monthly intervals based on your application certified by us and within 30 days upon receipt of your invoice.

...

5. You agree and accept the Contract Completion Date is revised to end of April, 1994 at no extra charges."

Honeywell signified its acceptance of the Purchase Order by signing the same on 30 June 1993.

6. The scope of the AFA works included (but was not limited to) supply and installation of an AFA alarm system (in compliance with the requirements of Hopewell and its consulting engineer), provision of ancillary engineering services, testing, commissioning and a 12-months defects liability. During the course of the works the Architect (Hsin-Yieh Architects & Associates Ltd) issued instructions to Slipform for variation of the relevant works. Slipform passed such instructions to Mansion which then transmitted the same to Kin Ming. Kin Ming in turn relayed the instructions to Honeywell, which carried out them out.

7. Honeywell commenced the works in July 1993 and completed the same in May 1995. The AFA system eventually installed required more than 97 intelligent loops. The cost-saving option was therefore inapplicable.

8. Throughout the AFA works Honeywell was concerned by Kin Ming's late payments. On 16 December 1994 Honeywell even went so far as to commence High Court Action No. A12763 of 1994 against Kin Ming and Mansion for late payment of $172,800.00. The action was settled by Kin Ming's payment of that amount.

9. On 21 March 1995 Mr Pau Wai Keung ("Mr Pau") (then Honeywell's National Operations Manager, Building Systems Operations Department) handed to Mr Ko Tak Chee ("Mr Ko") (Kin Ming's director) a document entitled "Addendum 1 to Kin Ming Purchase Order dated 29 June, 1993" ("the Addendum"). The Addendum (which had been signed by Mr Pau) stated the following:-

" Retention Money
(1)	Kin Ming may retain from monthly interim payments 10% of the total value of work executed and of material and goods delivered to the Works. Provided always that when the amounts so retained equal HK$440,000.00 no further amounts shall be retained.
(2)	Upon issuance of the Architects Certificate of Practical Completion Honeywell shall be entitled to payment of one moiety of the amount so retained.
(3)	Upon expiration of the Defects Liability Period or upon issuance of the Architect's Certificate of Completion of Making Good Defects, whichever is the later, Honeywell shall be entitled to payment of the residue.

 

Interim Payments
(1)	Honeywell shall submit interim payment applications on or before the 15th day of each month, projected to the end of the month.
(2)	Kin Ming shall check Honeywell's interim payment applications upon receipt and shall notify Honeywell of any perceived errors within 7 days. Differences between Honeywell and Kin Ming shall be checked and mutually agreed by the end of the month following the month when the application was submitted, failing which Honeywell's interim payment application shall prevail.
(3)	Payment in respect of Honeywell's interim payment applications shall be made by Kin Ming during the second month following the month when the application was submitted.
(4)	Interest shall be payable by Kin Ming to Honeywell in respect of delayed payments at 2% above prevailing Hong Kong banks' best lending rates, simple interest."

10. Mr Ko revised §§(2) and (3) of the "Interim Payments" section of the Addendum. In §(2) he deleted the words "failing which Honeywell's interim payment application shall prevail" and substituted "for Kin Ming's onward submission to Mansion Fire Engineering Co., Ltd and/or the client, Slipform Engg. Ltd". In §(3) he deleted the words "during the second month following the month when the application was submitted" and substituted "within 3 to 7 days upon Kin Ming's receiving payment from Mansion Fire Engineering Co., Ltd". Mr Ko signed the amended Addendum. He dated the document 28 April 1995 and sent the same under cover of his personal memo slip to Mr Pau at Honeywell. Honeywell received the revised document on 12 May 1995. Nothing further appears to have happened in relation to the Addendum following receipt by Honeywell.

11. On 17 December 1997 Kin Ming and Honeywell agreed a Final Account ("the AFA Final Account") for the AFA works. By the AFA Final Account, Kin Ming certified the final contract sum in relation to the AFA works to be $13 million, inclusive of variations, landlord's fitting-out works and claims. The sum of $9,550,000.00 was certified as having been paid as of the date of the AFA Final Account, leaving a balance of $3,450,000.00 outstanding. A Section C of the AFA Final Account stated (among other things) as follows:-

" b. The Release of Payment shall be on a back-to-back basis, i.e. payment shall be released to Honeywell by Mansion Fire Engineering Co., Ltd directly, within 14 days upon receiving payment from Slipform Engineering Ltd; as per your facsimile transmission dated 17th Dec., 1997.

c. Contract guarantee from Mansion Fire Engineering Co., Ltd shall follow that of the sub-contract."

At the bottom of the AFA Final Account, Kin Ming and Honeywell incorporated the following Declaration:-

"We agree that the final sub-contract sum of HK$13,000,000 shown herein represents full and final settlement for the captioned works carried out under this sub-contract and without further claims."

The AFA Final Account was copied to Mansion.

12. Following the AFA Final Account, Honeywell received a total of $993,210.00 in further payment of the AFA system works. Of the latter amount, $700,000.00 was paid to Honeywell directly by Mansion. If one takes the $3,450,000.00 mentioned in the AFA Final Account and subtracts payments later received by Honeywell for the AFA works, one arrives at $2,456,790.00 as the outstanding balance due under the AFA Final Account.

13. As part of its contract with Kin Ming, Honeywell also carried out tenants' fitting-out works ("the tenants' works"), such as installation of fire protection services tailored to requirements of individual tenants at the HITEC development. By a fax dated 22 December 1997 ("the Tenants' Final Account") Kin Ming certified the final contract sum for the tenants' works as $936,000.00. The Tenant's Final Account stated that $736,319.75 had been paid for the tenants' works as at the date of the Tenants' Final Account and that a balance of $199,680.25 remained outstanding.

14. On about 16 June 1999 Kin Ming paid Honeywell $149,521.00 in respect of the tenants' works. Kin Ming says that this payment was made pursuant to an oral agreement between Mr Pau and Mr Ko whereby Honeywell agreed to treat the payment of $149,521.00 as full settlement of the outstanding sum of $199,680.25 in consideration of Kin Ming's making an "early" payment despite Kin Ming not having received a corresponding sum from Mansion. Honeywell denies that there was such an oral agreement.

15. On 20 February 2001 Honeywell issued an Invoice No. 86110908 for $2,784,059.25 said to be due in connection with the AFA and tenants' works. The invoice not having been paid, Honeywell claims that principal amount by this action. Honeywell further seeks interest at 2% per month from the date of the AFA and Tenants' Final Accounts respectively.

16. As against Mansion, pursuant to the Guarantee Honeywell claims the same amounts as it seeks from Kin Ming.

II. Discussion

A. Was the Purchase Order a "back-to-back payment" agreement?

17. There is no express back-to-back payment term in the Purchase Order. On the contrary, there is a condition that Kin Ming should pay Honeywell promptly within 30 days from receipt of an invoice.

18. Nonetheless, Kin Ming alleges that the Purchase Order was subject to a term that payments would only be made to Honeywell on a back-to-back basis. Thus, Mr Lee (appearing for Kin Ming) says that Kin Ming was only obliged to pay Honey if and when it was itself paid by Mansion. Since Kin Ming has not received the outstanding balance due under the AFA Final Account from Mansion, it follows (Mr Lee submits) that Kin Ming is not liable to pay Honeywell that amount.

19. Mr Ko gave evidence for Kin Ming that, before the Purchase Order was signed, Mr H T Lee ("Mr Lee") (Honeywell's Systems Sales Manager) and Mr K M Chan ("Mr Chan") (Kin Ming's Managing Director) orally agreed that Kin Min would only be obliged to pay Honeywell when Kin Ming was itself paid. There was no way (Mr Ko asserted) that Kin Ming would have entered into a sub-contract with Honeywell otherwise. This was because Honeywell was a large US-based international company in contrast to Kin Ming which was only a small-size local contractor.

20. I reject Mr Ko's evidence on this issue. The alleged oral agreement has never been pleaded in Kin Ming's Defence. Nor was it mentioned in Mr Ko's witness statement. Indeed, Mr Ko's account of the oral agreement is entirely hearsay. Mr Ko himself was not a party to the alleged conversation between Mr Lee and Mr Chan. Mr Ko only claimed to be relaying to the Court what he had been told by Mr Chan. But Mr Chan continues to work for Kin Ming. One would have thought that, if there genuinely were an oral agreement, not only would such vital evidence to Kin Ming's case have been signalled from an early date in Kin Ming's pleadings, but that Mr Chan himself would have provided a witness statement on the oral agreement and given live evidence on the matter. That has not happened. I am unable accordingly to place any weight on Mr Ko's account of the oral agreement.

21. In the alternative, Mr Lee relies on the revised Addendum as incorporating a "pay when paid" term into the Purchase Order. In particular Mr Lee asks me to have regard to the amended §(3) of the "Interim Payments" section of the Addendum. I do not accept Mr Lee's submission.

22. As a matter of legal analysis, the handing of the Addendum by Mr Pau to Mr Ko in March 1995 constituted an offer to vary the terms of the Purchase Order along the lines of the unamended Addendum. In revising the Addendum's terms and returning an amended document to Mr Pau, Mr Ko made a counter-offer. There being no evidence that Mr Pau responded to the amended Addendum, the counter-offer must be treated as having lapsed unaccepted. That means that the terms of the Purchase Order as originally agreed between the parties continued to govern the relationship between Kin Ming and Honeywell. Contrary to Mr Lee's submission before me, at common law mere silence on Honeywell's part could not constitute acceptance of the counter-offer.

23. The AFA Final Account refers in Section C to Mansion paying within 14 days of payment by Slipform. This is described as being on a "back-to-back" basis. However, it does not follow that, merely because Mansion assumed an obligation under the AFA Final Account (if it in fact did) to pay Honeywell directly upon being paid by Slipform, Kin Ming was consequently only bound to pay Honeywell when Kin Ming was paid by Mansion. If by the AFA Final Account it was intended by the parties that Mansion was to assume Kin Ming's obligations under the Purchase Order, one would have expected the parties to use clearer words to that effect.

24. Mr Lee suggests that the AFA Final Account was a "tri-partite agreement" among Kin Ming, Honeywell and Mansion varying the terms of the Purchase Order. There is no evidence of this. In any event, for the reason I have stated in the previous paragraph, I do not see how the AFA Final Account, even read as some sort of novation, absolves Kin Ming of liability to Honeywell.

25. I conclude that there was no back to back payment or "pay when paid" term as alleged by Kin Ming.

26. I should add that, had I found that there was a "back-to-back payment" term as alleged by Kin Ming, I would still not have held that such term provided Kin Ming with a defence to Honeywell's claim for the unpaid balance of the AFA works. The relevant works were completed in May 1995. Trial took place some 9 years later in April 2004. Plainly, Kin Ming would have been under an implied contractual obligation as part of the "back-to-back payment" term to use its best endeavours during that long interval to obtain payment from Mansion of any outstanding amount due to Honeywell. Although Mr Lee accepted that there was such an obligation, no evidence was adduced of Kin Ming's use of best endeavours.

B. What principal amount remains due on the AFA system works?

27. Honeywell adduced expert evidence from Mr Evelyn Kwok Kim Sang ("Mr Kwok") of Aria & Associates Ltd, Chartered Quantity Surveyors on quantum. Mr Kwok concluded as follows:-

(1) In respect of the AFA system works:-

"Based on the payment record referred to above and my analysis, the amount due and outstanding under the statement of final account in respect of the sub-sub-sub-contract between the Plaintiff and the 1st defendant in relation to the AFA Works including variations and landlord's fitting out works should be HK$2,470,633.00 (i.e., HK$13,000,000 - HK$10,529,367.00)."

(2) In respect of the tenants' works:-

"Based on the payment record referred to above and my analysis, the amount due and outstanding under the final certificate in respect of the Tenant's Works from the 1st Defendant to the Plaintiff should be HK$313,426.25 (i.e. HK$936,000.00 - HK $622,573.75)."

28. There are difficulties with Mr Kwok's methodology. He based his evidence on a Job Financial Progress Report ("the Report") prepared by Honeywell in May 2000. He then appears to have checked and confirmed the attributions by the Report of individual payments received as going towards AFA or tenants' works respectively. Nonetheless, as Mr Lee showed in the course of Mr Kwok's cross-examination, there were discrepancies in the Report which could not be explained by Mr Kwok. For example, the Report left out a payment of $40,057.00 which Honeywell received on 25 November 1996. The Report also referred to an adjustment of $13,843.00 without substantiation.

29. I therefore do not think that it would be safe or correct for me to rely on Mr Kwok's conclusions. They seem to be predicated on a Report which was unilaterally produced by Honeywell and which does not fully accord with the available evidence.

30. Indeed, as a matter of method, I do not see how I can go behind the AFA Final Account to which both parties agreed. I think that the proper approach here is that advocated by Mr Lee. One must take the AFA and Tenants' Final Accounts as starting points. If (for instance) one subtracts from the $3,450,000.00 shown to be due in the AFA Final Account all subsequent payments received by Honeywell for the AFA system works, this yields $2,456,790.00. I accordingly find that to be the principal amount outstanding from Kin Ming to Honeywell on the AFA works.

31. Before leaving this section, I record my view that it was inappropriate to call Mr Kwok to give expert evidence on quantum. The matters which Mr Kwok considered related to the time when payments were made and whether such payments were attributable to AFA system or tenants' works. These were not matters for expertise, but were questions of pure (as opposed to expert) fact. Consider the question of attribution. What is important is not what Mr Kwok thinks should or should not have been the attribution of a payment, but how the parties actually treated the payment as a matter of fact. Nor is it clear to me why, convenience apart, Mr Kwok should have selected the Report (in contrast to the AFA and Tenants' Final Accounts) as the foundation for his evidence. The question of a proper foundation must be a matter of pure law and actual fact, rather than expertise. For this reason, without in any way detracting from Mr Kwok's undoubted credentials as a quantity surveyor, I did not think that his evidence was pertinent to the issues before me.

C. What principal amount remains due on the tenants' works?

32. In relation to the outstanding amount (if any) due on the tenants' works, the starting point must be the Tenants' Final Account. If one subtracts the later payment of $149,521.00 from the amount of $199,680.25 stated to be due by that account, one arrives $50,159.25. The question is whether that latter amount remains due or whether (as Kin Ming alleges) Honeywell orally agreed to waive the sum in return for an early payment of $149,521.00.

33. Mr Ko raised the oral agreement to waive the $50,159.25 for the first time when giving oral evidence at trial. Kin Ming had said nothing about such oral agreement in its Defence. Nor had the matter been mentioned in Mr Ko's witness statement.

34. There are nevertheless 2 documents which may support Mr Ko's contention. The first is a Summary of Payment Flows which Kin Ming sent to Mr Pau on 15 July 1999. That states:-

" II. FITTING-OUT WORKS

...

b.	Payment from Kin Ming to Honeywell
	Outstanding Amount: NIL."

The second is a fax dated 13 November 2000 from Mr Ko to Mr Jeffrey Tsui ("Mr Tsui") of Honeywell. Mr Tsui was pressing Mr Ko for payment of all sums still due under the AFA and tenancy works. Mr Ko wrote in response:-

" Your letter of 31st October, 2000 refers.

Please contact the undersigned, when you back to HK next week, to discuss the details.

Please take note that we consider we have settled payment for Tenancy Work in full."

35. I am unable on the basis of such evidence to find in Kin Ming's favour on this point. I ask myself, if there had been an oral agreement as alleged by Kin Ming, why were chapter and verse of the agreement not pleaded before trial? Why is there no mention of the same in Mr Ko's statement? The 2 documents which I have just quoted are at best ambiguous. They are unilateral assertions by Kin Ming without any explanation being provided. Mr Lee submits that I should infer Honeywell's agreement to the position stated in the 2 documents from the fact that Honeywell objected to neither. But this is untenable. There are documents in the trial bundle which make it clear that Honeywell did not accept that the tenants' works had been fully settled. In any case, mere silence cannot without more validate an assertion.

36. There is a further difficulty in Kin Ming's case. Assume in its favour that there was an oral agreement by Honeywell to accept a lesser sum in full satisfaction of the larger debt. What would the consideration for such promise have been? I cannot find any. Even if this had been a promissory estoppel situation, promissory estoppel is only suspensory of a creditor's rights. Honeywell would be entitled after giving reasonable notice to claim all of the money due.

37. For the foregoing reasons, I reject Kin Ming's suggestion of an oral agreement in relation to the tenants' works. I find that Kin Ming continue to owe $50,159.25 in relation to those works.

D. Interest

38. Honeywell claim interest on outstanding principal amounts at 2% per month. Mr Cooney (appearing for Honeywell) bases the claim on 3 limbs:-

(1) It is said to be a common practice in the trade.

(2) It is said that there was a course of dealing between the parties as evidenced by invoices wherein Honeywell stipulated: "Interest of 2% per month will be charged on OVERDUE ACCOUNTS."

(3) Kin Ming did not object to the interest term.

39. The first limb must be rejected. The existence of a trade practice was not pleaded in Honeywell's Statement of Claim. Moreover, the evidence of a trade practice arises purely out of an answer to a question addressed by Mr Cooney to Mr Michael Lam Hin Lap (Honeywell's Operations Manager from 1987 to 1995) in the course of trial. Mr Lam's evidence here was unparticularised. For example, when Mr Lam referred to a practice of the trade, what specific "trade" was meant? What rate of interest is conventionally charged? Mr Lam's said that one "can apply interest on outstanding bills". What did he mean by "can apply"? In my view, Mr Lam's evidence was slim material on which to base an allegedly notorious trade practice.

40. The second limb is equally unviable. A course of dealing may give rise to a contractual term. But usually the course of dealing precedes entry into a contract. In this case Mr Cooney relies on invoices sent long after the Purchase Order had been signed. It should also be noted that not all invoices contained warnings that Honeywell would charge interest on overdue amounts.

41. The third limb does not give rise to an agreement on interest. Silence cannot signify acceptance of an offer to vary a contract so as to enable interest to be charged at a rate of 2% per month.

42. Mr Lee submitted that, if there had been a term allowing the charging of interest at 2% per month, such provision would have been a penalty in the absence of evidence that the interest charge reflected a genuine pre-estimate of damages. I agree. In this context, it seems to me difficult to contend that 2% per month is a reasonable pre-estimate of damage, given that the Addendum as originally tendered by Mr Pau to Mr Ko only proposed an annual rate of 2% over Hong Kong dollar best lending rate for overdue amounts.

43. I conclude that there was no contractual term entitling Honeywell to charge interest at 2% per month.

E. The Guarantee

44. On its proper construction, it seems to me that the Guarantee envisaged that Mansion would not simply be liable for the $8,800,000.00 amount quoted in Honeywell's tender, but also for such further amounts as may be incurred by Honeywell complying with variations authorised by the Architect. Here I would include the tenants' works since, although dealt with separately as a matter of accounting between Kin Ming and Honeywell, the tenants' works were in essence part of the one contract between Kin Ming and Honeywell.

45. My construction of the Guarantee is fortified by reference to the factual matrix at the time of its signing. Mansion called for tenders. It received Honeywell's tender. It requested Honeywell to become involved in the HITEC development as a sub-contractor to Kin Ming. In other words, Mansion undertook to be responsible under the Guarantee as if it had contracted directly with Honeywell.

46. Further, Mansion was aware of all variation instructions. Indeed, it issued such to Honeywell through Kin Ming upon receipt from Slipform. Payment applications, quotations and valuations went from Honeywell to Kin Ming. Kin Ming then copied the same to Mansion. It cannot be said that Mansion was unaware of any variations to the Purchase Order or that Mansion did not consent to the same.

47. I conclude that Mansion is liable to Honeywell under the Guarantee in respect of outstanding amounts due from Kin Ming.

III. Conclusion

48. There will be judgment in favour of Honeywell against Kin Ming and Mansion for the following amounts:-

(1) $2,456,790.00 in respect of the AFA works; and,

(2) $50,159.25 in respect of the tenants' works.

Interest will run on the said principal amounts at 2% over Hong Kong dollar best lending rate from date of writ (19 October 2001) until date of judgment. Thereafter, interest is to run on the judgment debt at the judgment rate until payment.

49. I make an Order Nisi that, save for the costs which it has incurred in connection with Mr Kwok's evidence, Honeywell is to have its costs of the action against Kin Ming and Mansion. Costs are to be taxed if not agreed.