SCHINDLER LIFTS (HONG KONG) LTD v. SHUI ON CONSTRUCTION CO LTD

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JUDGMENT

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1. The Plaintiff in this matter, Schindler Lifts (Hong Kong) Limited, was the sub-contractor for the installation of lifts and escalators in a building situated on the corner of Harbour Road and Fleming Road for the erection of which the Defendant, Shui On Construction Company Limited, were the main contractors.

2. The Sub-Contract provided in clause 11(b):-

3. Part IV of the Appendix to the Sub-Contract provided "Terms of Payment as described in Specification Preliminaries page 25". These Specification Preliminaries provided under the heading "Terms of Payment" that -

 

"Unless otherwise agreed payments will be made to the Sub-Contractor upon the Architect's certification as set out below."

4. Given the use of the words "Unless otherwise agreed" in this term, I do not see how it can, in any way, qualify or limit the force of clause 11(b). I am satisfied that if there is any inconsistency between this term and clause 11(b) then, it having been "otherwise agreed", clause 11(b) prevails.

5. The architect having certified for certain work and no payment having been made in relation thereto the Plaintiff now sues for the amount involved. The Defendant has not made payment in this regard because it has not received payment from the Employer. The Defendant has not received this payment because the Employer, acting under clause 22 of the Main Contract, has deducted sums from the amount certified for by the architect. Clause 22 of the Main Contract reads:-

 

"If the Main Contractor fails to complete the Works by the Date for Completion stated in the appendix to these Conditions or within any extended time fixed under clause 23 or clause 33(1)(c) of these Conditions and the Architect certifies in writing that in his opinion the same ought reasonably so to have been completed, then the Main Contractor shall pay or allow to the Employer a sum calculated at the rate stated in the said appendix as Liquidated and Ascertained Damages for the period during which the Works shall so remain or have remained incomplete, and the Employer may deduct such sum from any monies due or to become due to the Main Contractor under this Contract."

6. The architect certified under that clause and the employer, relying upon that certification, retained money which would be otherwise due because of the certification given under clause 11(b) of the Sub-Contract. It is the contention of the Defendant that, as he has never been in "receipt.....of payment" he is not bound by the terms of clause 11(b) to pay anything to the Plaintiff.

7. There are two summonses before me. One is brought by the Plaintiff for judgment under 0.14 and the other is brought by the Defendant for a stay pursuant to s.6 of the Arbitration Ordinance.

8. I will deal firstly with the O.14 application. Under that application this Court must decide whether in the circumstances there is an arguable case that the Main Contractor, the Defendant, has not been in receipt of payment from the employer in accordance with the meaning of that term as it is used in clause 11(b) of the Sub-Contract.

9. Mr. Wong, who appeared for the Plaintiff, submitted, at the outset, that all of the relevant facts are before the Court and that we are here dealing with the kind of circumstances referred to in European Asian Bank v. Punjab and Sind Bank (1983) 2 All E.R. 508. In that case Robert Goff L.J. said:-

 

"We wish however to conclude with this comment. If the judge has already decided, on the evidence, that there is a triable issue on a question of fact, it must in the very nature of things be unlikely that this court will interfere with his decision and decide that no trial should take place; because, where such a conclusion has already been reached by a judge, this court will be very reluctant to hold that there is no issue or question which ought to be tried. But where the appeal raises a question of law, this court may be more ready to interfere. Moreover, at least since Cow v. Casey (1949) 1 All E.R. 197, this court has made it plain that it will not hesitate, in an appropriate case, to decide questions of law under O.14, even if the question of law is at first blush of some complexity and therefore takes 'a little longer to understand'. It may offend against the whole purpose of O.14 not to decide a case which raises a clear-out issue, when full argument has been addressed to the court, and the only result of not deciding it will be that the case will go for trial and the argument will be rehearsed all over again before a judge, with the possibility of yet another appeal. The policy of O.14 is to prevent delay in cases where there is no defence; and this policy is, if anything, reinforced in a case such as the present, concerned as it is with a claim by a negotiating bank under a letter of credit."

10. Clause 35 of the Main Contract provides that in case any dispute or difference shall arise between the employer and the main contractor it shall be referred to arbitration. It goes on to provide in sub-clause (2) that except in certain circumstances, which Mr. Wong argues do not obtain in the present circumstances, a reference to arbitration shall not be opened until after the practical completion of the work. Mr. Wong submits that the only exception that might have had application to the present circumstances is contained in the following words:-

 

"whether or not a certificate has been improperly withheld or is not in accordance with these conditions."

11. He contends, however, that there is no question here of a certificate having been improperly withheld and that the Defendant has never suggested that the certificate was not been issued in accordance with the conditions of the Main Contract.

12. It was the argument of Mr. Wong that, whom an Architect's Certificate as to non-completion is given under clause 22, the main contractor, by virtue of that clause, becomes liable for the sums calculated in accordance therewith. Mr. Wong submitted that, the moment the certificate is given, the liability arises. The clause sets out three ways in which the laibility can be meet;

13. Mr. Wong submits that, the parties having agreed to this procedure, there can be no suggestion from the Defendant that the deduction made by the Employer in our case was not consensual. He submits that, as the Defendant has agreed that the Employer will have power to deduct if certain conditions are met, once those conditions are met, a deduction made by the Employer must be regarded as having been made with the consent of the Defendant. This would, of course, be so only if the conditions stipulated were met. It is one of the submissions of Mr. Walker, who appeared for the Defendant, that these conditions were not met and I will turn, in due course, to consider that submission.

14. Mr. Wong submits that, once the liability arises, it becomes a lawful contractual debt. It is, he argues, not material in an application of this nature that the main contractor might, at some later time when an arbitration can be opened, be entitled to challenge the validity of the certificate. He argues that, as the employer is entitled, by virtue of clause 22, to set off the amount due under that clause against the amounts being held by him, the Defendant cannot say that he has not "received payment" from the employer. Mr. Wong concedes that he has not received the payment of cash but argues, upon the authority of Larocque v. Beauchemin (1897) A.C. 358, that a set off is, in the eyes of the law, in circumstances such as this, equivalent to a payment in cash. In that case Lord Macnaghten cited the following passage, from Spargo's case, L.R. 8 Ch.407, with approval at 365:-

"In truth it appeared to me that anything which amounted to what would be in law sufficient evidence to support a plea of payment would be a payment in cash within the meaning of this provision..........If a transaction resulted in this, that there was on the one side a bona fide debt payable in money at once for the purchase of property, and on the other side a bona fide liability to pay money at once on shares, so that if bank-notes had been handed from one side of the table to the other in payment of calls, they might legitimately have been handed back in payment for the property, it did appear to me in Fothergill's case and does appear to me now, that this Act of Parliament did not make it necessary that the formality should be gone through of the money being handed over and taken back again; but that if the two demands are set off against each other, the shares have been paid for in cash ....... Supposing the transaction to be an honest transaction, it would in a court of law be sufficient evidence in support of a plea of payment in cash, and it appears to me that it is sufficient for this Court sitting in a winding-up matter."

15. He submits that the deduction by the Employer was a set off which must be regarded as a payment in cash to the Defendant and that the Defendant has, therefore, no answer to a claim being made by a sub-contractor under clause 11(b).

16. Mr. Wong finally referred to the unreported decision of Hunter J. in Hong Kong Teakwood Works Ltd. v. Shui On Construction Co. Ltd., Civil Action No. 10969 of 1983. In that case the learned judge, dealing with the words which concern us in clause 11(b), said "I think that I must give those words their normal meaning. To me their normal meaning is receipt of actual payment, receipt of money. This seems to me to accord with the other phrases that one finds in these contracts. 'Pay or allow' is one in the main contract, paragraph 22, which is followed by the words 'the employer may deduct such sum from any monies due'. I think that all these words contemplate a simple piece of arithmetic, and that the prima facie meaning of receipt of payment is receipt of money." Having taken this view, the learned judge refused to give judgment under 0.14. Mr. Wong urged me not to take the same view and pointed out that Hunter J. had not been referred to Larocque v. Beauchemin.

17. Mr. Walker first argued that clause 11(b) has no application as no payment has ever been made. He pointed out that, both in the Main Contract in clause 27(vi) and in clause 22, and in the Sub-Contract in Clause 8(a), the draftsman had used the words "pay and allow". He submitted that this clearly indicated that when the draftsman used the word "pay" or "payment", as he did in clause 11(b), he did not intend to include the making of an allowance within the meaning thereof. He further argued that the meaning could not be extended to cover the making of a deduction.

18. It must be borne in mind, when considering the above there clauses, that in each case a right was being given either to the mail contractor or sub-contractor. In each case the main contractor or sub-contractor was being given the right to elect to either pay on make an allowance. Clause 11(b) is on the other hand not concerned with the giving of any right. It is concerned primarily with the fixing of a time within which payment must be made. It fixes this time by referring to the point when there has been a receipt of payment by the main contractor. I am satisfied that this is an important distinction and one that must be borne in mind when construing the meaning of the word "payment" in clause 11(b).

19. Under clause 22 the main contractor becomes liable for a sum of money. It is true that this liability can be met in any one of three ways, other by the main contractor paying or indicating that he is prepared to have an allowance made or by the employer simply making a deduction. Whichever method is used, the liability is removed and the main contractor is given credit for money's worth.

20. Mr. Walker went on to argue that, even if he was not right in his contention that there had been no payment, it was for the Plaintiff to establish that the set off was one to which the employer was entitled. He contended that, unless the Plaintiff showed that the employer was entitled to make the deduction, there could not be said to be any liability resting upon the Defendant and that, if there was no liability, it could not be said that there had been any receipt of payment by the Defendant under clause 11(b).

21. Mr. Walker referred to clause 35, the arbitration clause, arguing that Mr. Wong had been wrong when he submitted that the issue of an Architect's Certificate created a liability which was not open to challenge and which was, until after practical completion, a contractual debt which the main contractor was required to meet. He referred to the reservation in clause 35(2) which allowed a challenge to be made prior to practical completion when what was called in issue was "whether or not a certificate has been improperly withheld or is not in accordance with these conditions. He submitted that, where a certificate was challenged, as it was in the present case, the Plaintiff could only rely upon the validity of the certificate if he proved it was issued in accordance with the conditions. It was his submission that it was implicit in clause 22 that the certificate be a valid certificate, i.e. not simply in formal accord with the conditions but also valid, i.e. truthful, as to the matters dealt with therein.

22. Where is, in my mind, no doubt that the intention of clause 35 is to prevent multiple arbitrations. The section endeavours to ensure that, except in the circumstances specified, there will be only one arbitration and that this will take place after completion. It is true that if a certificate has been improperly withheld", an immediate challenge can be made. That this should be so is clearly right as, if certificates are improperly withheld, what Lawton L.J. in Ellis v. Wates (1976) 2 BIR 57 at 63 called "the lifeblood of the building trade, namely money" will not paid.

23. The certificate can also be challenged where it is "not in accordance with these conditions". Mr. Walker argues that this that a certificate can be challenged on the ground that it does not correctly state the position, i.e. that it is not true as to its contents. Is this correct? The words "is not in accordance with these conditions" must be looked at with particular care. Mr. Walker, referred to Building and Civil Engineering Standard Forms, 1st Edition, where the author, at 159, without citing any authority for the proposition, states that a reference to arbitration can be opened at any time before completion upon the basis that a certificate was not in accordance with the conditions where the only contest is as to a simple dispute of valuation. The author was, of cause, dealing there with certificates which certified as to amounts for payments. He was not referring to certificates issued under clause 22. Mr. Walker also referred to dicta of Viscount Dilhorne, in Gilbert-Ash (Northern) Ltd. v. Modern Engineering (Bristol) Ltd. (1974) A.C. 689 at 709. Viscount Dilhorne was, in this passage, also dealing with payment certificates, I do not consider that the above citations are of any real assistance when one is dealing with a certificate under clause 22 whatever may be the arguments to support the contention that payment certificates, if theyset out an incorrect figure, are not in accordance with the conditions, I am satisfied that the position, as regards certificates of non compliance, is as is set out hereunder.

24. The condition which Mr. Walker submitted that the certificate in the present case was "not in accordance with" was clause 22. His submission was that, because of what had occurred prior to the issue of the certificate, the real position was that time was at large and that the date of completion was no longer material. He submitted, that being so, that the Architect's Certificate saying that the works ought reasonably to have been completed by the date of completion did not correctly and truthfully state the position. He submitted that the Plaintiff could only succeed in this application if he showed that the Architect's Certificate was right and that, as the Plaintiff had not attempted to do so, he must fail.

25. Mr. Wong contends that the interpretation of the word "is not in accordance with these conditions" suggested by Mr. Walker is wholly incorrect. He submits that it need only be shown, in order to comply with the words, that the certificate has formally complied with the conditions, i.e. it must be shown, as regards Clause 22, that it is the certificate of the architect, that it is in writing, that it states the opinion of the architect and that the opinion is that the work ought reasonably to have been completed by the date of completion. Mr. Walker did not argue that the certificate was not in formal accord with the provisions clause 22. His argument, as set out above, was that the certificate had to be not only for dally correct, but also had to be a true statement of the facts contained therein. During the course of the hearing in front of he, an affidavit was filed by Mr. Walker to which was annexed a copy of a certificate dated the 2nd June 1984, certifying that practice completion of the whole of the works was achieved on the 1st March 1984. This does not, however, seem to me to affect the matter, as given the view I have taken above of the effect of the certificate of non-completion, the contractual debt arose at the time when that certificate was given and the fact that it can now, a certificate of practical completion having been issued, be challenged does not seem to me to be material.

26. The point involved in this application, although a short one, is not without difficulty. I am satisfied, however, that the present applicant has raised a clear out issue, that full argument has been addressed to the Court and that the only result of my not deciding will be that the case will go for trial and that the argument will be rehearsed all ever again before a judge with the possibility of another appeal. Suck being the case, I am satisfied, following the decision in the European Asian Bank case, that I should decide the matter in this hearing. I am satisfied that the meaning of the word "payment" in Clause 11(b) is wide enough to include a deduction made under Clause 22 of the Main      Contract. I am satisfied that once a formally correct architect's statement has been issued under Clause 22, no challenge can be made thereto until after practical completion. I am satisfied, therefore, that in the present case, the Defendant did receive a payment within the meaning of that term as is used in Clause 11(b) and that he failed within 14 days to pay the sub-contractor the amount which is now being claimed against him. There must, therefore, be judgment for the Plaintiff in that amount.

27. I turn now to the application for a stay. Before me, the Defendant has not disputed that he owes the Plaintiff the amount claimed. The only dispute before me was as to a matter of interpretation affecting the time of payment which, I am satisfied, must be resolved in the Plaintiff's favour.

28. The only argument advanced by Mr. Walker when urging that a stay be ordered was upon the basis of the unreported decision in Northern Regional Health Authority v. Dereh Crouch Construction Co. Ltd. C.A. 2557 of 1983 which, he submitted, established that, if there was an arbitration clause and the parties take the matter to litigation, the Court does not have the power to open up and review the architect's certificate. That may be so but for the reasons which I have set out above, I am satisfied that no question of opening up and reviewing the architect's certificate arises in the present case.

29. Mr. Wong on the other hand relied on the following statement in Keating on Building Contracts, 4th Ed., at p.242:-

 

""Even where the various conditions of section 4 (our section 6) are complied with the court has a discretion whether or not to grant a stay and declines to fetter its discretion by laying down any fixed rules on which it will exercise it; but where there is a valid arbitration agreement it has a strong bias in favour of enforcing that agreement by granting a stay, and the onus upon an application for a stay is upon the person opposing the stay. Although these principles are applied in every case some guidance can be obtained on the manner in which the court exercise its discretion in particular cases, thus:"

30. The learned author goes on to discuss various matters which will be considered when the Court is determining whether or not to exercise its discretion and at p.243, the following passage appears:-

 

"Point of law. Where the only point alleged is one of law such as the construction of a contract not involving the meaning of technical terms, the court may refuse a stay as the matter 'will only come back to the court on a case stated'; but the party opposing the stay must still discharge the burden of showing why he should not be bound by his agreement. And where technical terms, or words used in a technical sense, are to be found in a contract, such as a building contract, and the parties have chosen as arbitrator an expert in the trade with personal knowledge of the meaning of the terms used, a stay will probably be granted.".

31. Authority for the proposition that the Court may refuse a stay where the only point alleged is one of law is Bristol Corporation v. Aird (1913) A.C.241. In that case Lord Parker said at p.261:-

 

"Everybody knows that with regard to the construction of an agreement it is absolutely useless to stay the action, because it will only come back to the Court on a case stated; therefore it is more convenient on a question of construction, to allow the action to proceed; and at the same time with regard to accounts and matters of detail to allow the arbitration to proceed."

32. It is true that this passage has been subjected to modifying comment in later cases. In Metropolitan Tunnel and Public Works, Limited v. London Electric Railway Company (1926) 1 Ch. 371 at p.386 Lord Hanworth N.R. said:-

 

"Lawrence J. came to the conclusion he would make no order, guided in particular to that end by some observations which were made by Lord Parker in Bristol Corporation v. John Aird & Co. It appears to me that Lord Parker was there speaking of arbitrations in general, and I do not think he was dealing with the particular class of arbitration with which we have to deal in the present case, where we have the possibility of a number of engineering questions arising and a contract between the parties by which they agree that all those questions shall be referred to a person qualified as an engineer."

33. In that case the majority upset the decision of Lawrence J. who had exercised his discretion by refusing to grant a stay. However the words of the Master of the Rolls, cited above, make it clear that there was "the possibility of a number of engineering questions arising". That being so, there were clearly circumstances which indicated the desirability of referring the matter to an arbitrator with specialized knowledge.

34. In Heyman and Another v. Darwin, Limited (1942) A.C. 356, Viscount Simon L.C. said :-

 

"Even if the learned judge were right in regarding the issue as one in which nothing but a question of law is involved, that circumstance would not necessarily and in all cases make it right to refuse a stay" Lord Parker's observation in Bristol Corporation v. John Aird & Co. refers to a question of construction. Moreover, in the present case questions of fact may well have to be determined and the dispute as a whole is of a class which is constantly dealt with by an arbitrator. There is no sufficient reason why the matter should not be referred, and there-fore, by the express language of s.4, there must be a stay."

35. Lord Wright, at p.389, also referred to the statement of Lord Parker saying:

 

"Any expression of opinion falling from that great judge must receive the most careful consideration, but it would not be safe to tear it from its context and give it a general application. I need not quote authorities for what has been said so often, that under a general submission the arbitrator is appointed to decide issues both of fact and of law. In the background, indeed, is the court's jurisdiction to set aside an award if it is bad in law on its face, and the opinion of the court on issues of law may be invoked by means of case stated under the Acts of 1889 and 1934, but, if the submission is general, it will require some substantial reason to induce the court to deny its due effect to the agreement of the parties to submit the whole dispute, whether it includes both fact and law or is limited to either fact or law."

36. As can been seen the dictum of Lord Parker has not escaped unscathed down the years and I bear in mind the reservations set out above when coming to my decision herein.

37. I am satisfied, in the present case, that there is nothing that calls for the specialized knowledge of an arbitrator. I bear in mind also there has never been any issue raised as to the entitlement of the Plaintiff to be paid. The only issue is whether the Plaintiff should, because of a dispute between the Employer and the Main Contractor, with which he is wholly unconnected be, for the time being, kept out of his money. I am satisfied that, in all of the circumstances, the Plaintiff has discharged the burden of showing why he should not be bound by his agreement and I refuse to order a stay. I make an order nisi that the Defendant pay the Plaintiff's costs of both applications to be taxed.