CHAN SAU KUT t/a YAT FUNG CONSTRUCTION & ENGINEERING CO AND ANOTHER v. GRAY & IRON CONSTRUCTION & ENGINEERING CO (a firm)

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HEADNOTE

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                Claim for return money advanced under a joint adventure agreement. Defence (inter alia) alleged the parties were partners and no action lay. Held:-

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. I have now heard all the evidence in this case, but only half of the speeches which counsel may wish to address to me. That is because it seemed to me convenient now to rule upon the first fundamental question which arises in this case, which is the nature of the relationship between the plaintiffs and the defendants, and to determine whether that relationship is one of creditor and debtor or one of partner or co-adventurer.

2. There are four people concerned. The 1st plaintiff, Mr. Chan Sau Kut, is the sole proprietor of a construction company called Yat Fung Construction & Engineering. The 2nd plaintiff is Mr. Yen Pui Sam, who was in this project closely associated with the plaintiff. Although he was not in fact a partner in Yat Fung, as will be seen, he in fact signed the relevant contract on behalf of Yat Fung. The defendants are a firm called Gray & Iron Construction & Engineering Company. They consist of two partners a Mr. Jonathan Gray and a Mr. Ng Tit Hon.

3. It is, I think, sufficient to recite the bare factual outline before coming to the crucial question. On 19th November 1981 the defendants signed a contract with a Leighton Contractors (Asia) Limited for the execution of certain drainage works at Shatin Stage II. I assume that Gray & Iron were very competent contractors, but they plainly had not sufficient capital to undertake this venture. They were looking for what Mr. Chan described very early in his evidence as "contributions". Gray knew Yen and as a result of conversation between those two, Yen and Chan put their heads together to decide what they were going to put up (I use that phrase deliberately and neutrally) in relation to this particular venture. Gray was asking for $800,000. Eventually Yen and Chan agreed to put up $400,000 with another $100,000 if demanded. In the course of their discussions at the outset Chan and Yen considered the question of risk. Mr. Chan's initial approach was that there could be no risk in a venture like this because Gray was so confident of success. Yen was rather more worldly and experienced in these ventures, because he said that in any construction job of this nature there is an element of risk. He said eventually that Chan accepted that view point. I am therefore satisfied that both of them went in knowing that they were on risk, but not expecting any risks to accrue because they were both so confident of success.

4. On the figures it is plain that the plaintiffs put up $390,000, There were three payments made. The first was on 2nd December of $100,000 by Yen to Gray personally. The second was on 10th December by Chan of $200,000. It was paid into a joint bank account opened for this purpose. The last was on the 15th December by Mr. Yen again, this time of $90,000, into the self same bank account.

5. After the first payment and before the second and the third, the parties entered into a written agreement. That agreement must have been signed on about the 9th December. The venture proved to be a total disaster. The first and obvious reason I think is that it was hopelessly under-capitalized. The money ran out very early in January, and before they were beginning to generate sufficient progress payments from Leighton. Either they had too little bash to begin with, or they were hopelessly thrown by Leighton's release of a particularly large area to them at the outset. In any event the work was proceeding much too slowly to satisfy Leighton.  Secondly there were disputes on the site between Chan and Ng, which resulted in Chan pressurising Ng to dismiss the initial foreman and his gang, and to substitute one of Chan's clansman as foreman and his gang. Doubts have been expressed amongst the competence of those later workmen.

6. Anyhow on 1st March Leightons had had enough and terminated the sub-contract. The job of doing the final measurement between Leightons and the defendant firm, was carried through with considerable expedition. This produced a payment of $393,000 to the venture which went into the joint bank account.  $180,000 of that was required to pay off contractors, sub-contractors and labourers on site. A cheque in that sum was given to Chan for that particular purpose. He behaved, to my mind, in a thoroughly reprehensible and unfortunate manner. He cashed the cheque and disappeared with the proceeds. He said that that was brought about by the person who had put up the original funds to him. Chan then left the remaining three parties their own devices. Between themselves they did their best to salvage such equipment and monies as they could from the wreck although, from what I have been told, there are still substantial obligations outstanding which Gray is doing his best to discharge solely.

7. The 2nd plaintiff, Yen, seems to have accepted that this was the sort of loss which occurs in this type of situation, and initially did not seek to claim anything. Not so Mr. Chan. He started this action, claiming the balance, as lie asserted unrepaid, of his $200,000 put up by the payment into the joint bank account on 10th December 1981. He also claims a further sum of $24,000 odd which he said was paid on the 19th January 1982 by way of salaries to workmen on site.

8. He purported to give credit for a part of the $180,000. As early as 7th September 1982, he asserted that that sum had been used in part to pay the debts of the venture. They were put at one figure in his red Amended Statement of Claim. They were put in at another figure in his Green Statement of Claim. They remained in that form until the first day of the trial, when by a purple amendment the allegation was deleted altogether. It was deleted altogether because there was never any truth in it at all. A man who makes assertions like that, and leaves them in a pleading until the first day of the trial, does not deserve and cannot expect any credit from this court. I may add to compound it, he was anything but frank about the events that were happening on site.

9. In the process of the action Yen was persuaded by Chan to join in as co-plaintiff. He is plainly a very reluctant party. These matters will only directly arise if I have to go into the figures in detail. Because the preliminary point has arisen as to what the true relationship of these parties was.  If they were in truth partners, or co-adventurers in this matter, neither is entitled to sue the other in the way that this action is at present constituted. Their only remedy between them-selves is to have a proper dissolution of the partnership, and the taking of accounts. There is ample authority for that, one of the most recent cases being Green v. Hertzog (1954) 1 W.L.R. 1309.

10. So to that matter I now turn. It depends first upon the construction of the written agreement of about 9th December.  Mr. Rodney Griffith has taken me most carefully and usefully through all the authorities, and the principles which I have to apply are, I think, perfectly clear.

11. First, one has to notice section 3(1) of the Partnership Ordinance (Cap. 38) which reads like this:

"Partnership is the relation which subsists between persons carrying on a business in common with a view of profit."

So the basic question here is this: were these parties carrying on a business in common with a view of profit?

12. The second fundamental proposition is that the law looks to the substance and not to the form. It decides for itself what the effect of the contract is, and does not give conclusive or decisive significance to the description or the label which the parties have chosen to put upon their relationship. This principle was simple and graphically stated by Lord Halsbury L.C. in Adam v. Newbigging (1888) 13 A.C. 308 at page 315. He said this :-

"If a partnership in fact exists, a community of interest in the adventure being carried on in fact, no concealment of name, no verbal equivalent for the ordinary phrase of profit or loss, no indirect expedient for enforcing control over the adventure will prevent the substance and reality of the transaction of being adjudicated to be a partnership."

In Weiner v. Harris, (1910) 1 KB 285, 290. Sir Herbert Cozen-Hardy M.R. used these words:-

"Two parties enter into a transaction and say 'It is hereby declared there is no partnership between us. The court pays no regard to that. The Court looks at the transaction and says 'Is this, in point of law, really a partnership? '"

The third relevant guiding principle is to be found in section 4(c) of the Ordinance:-

13. In Pooley v. Driver (1876) 5 Ch.D. 458, 485, Sir George Jessel M.P. explained the effect of that provision in the English Act in these terms:-

"I take it to mean this, that the person advancing must be a real lender; that the advance must not only profess to be by way of loan, but must be a real loan; and consequently you come back to the question whether the persons who enter into the contract of association are really in the position of creditor and debtor, or in the position of partners - ..... The Act does not decide that for you, you must decide that without the Act."

14. So that the question is: Is there a business in common; is there what Lord Halsbury called a "community of interest in the adventure?" Two other suggested tests are worth noting. The 10th edition of Underhill, The Principles of Partnership, page 14 poses this question (I have transposed the tense):

"Did those persons honestly mean that this advance is to be a true loan, or did they mean that it is to be a contribution to a joint adventure?"

The coincidence between the use of the word "contribution" in that text book and by Mr. Chan in his evidence is perhaps striking.

15. The last test is that suggested by the Privy Council in Mollow, March & Co. v. The Court of Wards L.R. 4 P.C., 419, 436, where one finds these words: "a partnership was not contemplated, and the Agreement is really founded on the assumption, not of community of benefit, but of opposition of interests." That is the suggested dichotomy: community of benefit or opposition of interest.

16. Now with those principles in mind that I come to look at this Agreement. It is expressed to be between the defendant firm and Yat Fung Construction. The defendant firm is described as Party A, Yat Fung as Party B. But as I pointed out already it is signed on behalf of Yat Fung by both the plaintiffs. The first important point is the recital where one finds this: "Whereas A and B wish to cooperate in constructing drainage and service ducts in Shatin New Town Stage II particulars of which are set out in the sub-contract dated 19th November 1981."  So the recital suggests community of interest. I pass over clause 1 which deems notice of the main contract, and go on to clause 2. "The parties hereto shall observe and perform all the terms and conditions of the sub-contract, special conditions of the sub-contract and the schedule of rates and bills of quantities in the sub-contract." So here one has express provision for the joint performance by Parties A and B of the defendant's obligations under the Leighton sub-contract.

17. Clause 3 provides for the investment by B through A initially of HK$400,000 "payable on the signing of this agreement" with a further $100,000 to be made available on request. I pass over the problem which would only arise on the other aspect of the case, which is created by the payment of the first $100,000 before the signing.

18. Clause 4 provides that the total of this $400,000 "shall be deposited in a bank account nominated by B and this account shall be opened in the joint names of A and B. All monies drawn from this account must have authorised signatures from Gray, Chan and Yen." I think that really ought to have read Gray and Chan or Yen. That was how it was construed. So that there you have provision for physical control over the monies in the joint bank account by the two parties.

19. Clause 5; "in consideration of the monetary investment by B, A shall share with B in equal share of all profits accrued and realised from the execution of the works aforementioned;" and to give teeth to that the clause goes on to require that all receipts be paid into this joint banking account. So that there you have express provision for the sharing of profits.

20. Clause 6 - and this is the clause upon which the plaintiffs particularly rely. "A shall return to B the said sum of $400,000 on or before six months from signing this agreement plus interest which is calculated at the current cash deposit bank rate and shall be payable to B at monthly intervals" The question which arises is whether that creates an absolute obligation, as the plaintiff's contend; or whether it is conditional upon sufficient profits and monies having been generated by the business when that six months expires.

21. Clause 7; "A and B shall have joint management and control as to how the said $400,000 is used and there shall be meeting between the represetatives from A and B twice a month to discuss the work in progress." Now if one stops reading there, and asks oneself the simple question: Do those provisions point to a creditor and debtor relationship? Or do they create a community of interest: A business in common with a view to profit? It seems to me that this simply admits of one answer only. It must be business in common. What else can be the affect of clause 2, with the obligation jointly to perform the sub-contract: 5 - the sharing of profits: and 7, the joint management and control of the capital of the venture. What other effect can they have? In the light of that I come on to clauses 8 and 9.

22. Clause 8 says this: "If there is any new sub-contract signed between A and the main contractor in respect of any further construction in Shatin New Town Stage II development, B shall have priority to carry out the new sub-contract in conjunction with A." When asked about that in the witness box, Mr. Chan gave an interesting answer. He said that his understanding of this clause was that if further contracts were signed between Leighton and the defendants, "we would still remain as partners of Gray." That really means two things. First that we are partners with Gray: I accept and I share his view on that. Secondly that we will remain partners of Gray in respect of any new contracts which Gray entered into. That I cannot accept, because that is expressly contrary to the terminology of clause 8, which says that B shall have "priority". It is a clause which purports to create something like first refusal and no more. Then one comes on to clause 9 which is the clause again particularly relied upon by the plaintiffs. It says this: "This agreement shall not constitute a partnership agreement between the parties hereto."

23. Now my first comment upon that is, that in the light of what is said earlier in this agreement, and applying the test of Lord Halsbury and Sir Herbert Cozens-Hardy, if that clause purports to exclude any partnership between the party, it is simply an empty claim and can be ignored. But the view I prefer of this clause is a somewhat narrower one than that. I think that all the draftsmen here were seeking to do was to make sure that this agreement did not constitute a partnership agreement in the broader sense of the word: A partnership agreement beyond that expressly created by the contract in the performance of the existing sub-contract. I think this was added to give further effect to clause 8 so that if there was a further contract entered into between Gray and Iron and Leighton, Gray and Iron would not automatically be entering into that in pursuance of this joint venture. There would not automatically be any further partnership, in that second or suggested second contract. If that construction be right then that clause simply does not affect the issue before me at all.

24. So simply as a matter of the true construction of this agreement, I have no hesitation whatever in concluding that the relationship it created between these four parties was a partnership relationship. It necessarily follows that that section 26 of the Partnership Ordinance applies.

25. Section 26 says this:

Now there was no express agreement here, and I can see no basis whatever for implying any agreement that they were not to contribute equally towards the losses. In the context of a partnership agreement, clause 6 cannot, in my judgment, be given absolute meaning. It was put in there in the confident expectation that in six months time, the monies received by the main contractor under the sub-contract would be sufficient to finance the further activities of the partnership, and therefore this initial capital could be returned. That was the reason for this clause and that I believe it is the true meaning. The obligation to return the capital, was subject to their being sufficient profits and the sufficient generation of money by the job at the expiration of the six months period.

26. In my judgment, therefore, the parties in this case were partners. They were equal partners in the sense that they were liable equally to the profits and to contribute to the losses. It follows that neither partner between themselves have any cause of action against the other, save for accounts and the dissolution of the partnership. The action is therefore in my judgment misconceived and must be dismissed, as must the counter-claim. Neither party is in fact asking for any order for accounts to be taken, and therefore I shall make no such order.

27. After argument Mr, van Buuren for the plaintiffs has objected to the ruling which I have just given. He has asked me specifically to record the following two points which I have done. For the purposes of the record what he has put to me was: "I wish to record that the court entered judgment this morning without hearing counsel for the plaintiffs on his claim as pleaded, and without making any ruling on matters of fact which may arise to support the plaintiffs' claim as pleaded. Secondly the plaintiff did not consent to the issue of partnership being tried as a preliminary issue." Mr, Rodney Griffith also asked me to record, as I have done, that he objects strongly to the correctness of either of these points, neither of which he accepts.

28. I will now add my own comments on them. In the course of yesterday's submissions, when Mr. Griffith had started to address me, he indicated that there were two lines of defence. The first line arose basically as a matter of construction of the agreement which was sued upon. It was a line which was expressly included in an amendment to the defence which I admitted in the course of the trial: But the argument on the construction of the agreement was probably open to him in any event, because this was the agreement being sued upon by the plaintiffs and being put before the court as conclusive of his case. I therefore allowed that amendment, and from that moment onwards the issue of partnership became openly a very live issue in the case. That was his first line of defence.

29. His second line of defence was a very much more complicated line. It involved investigating the mysteries of the entire contract. It involved entering into a very difficult field; I might always call it a back-water of the law. Having heard Mr. Griffith's argument it seemed to me that I might well decide the first point in his favour, and therefore it was quite unnecessary to go into the second. It was at that point that I stopped him, and said I would defer further submissions on his second point but would hear them if and when they arose.

30. I then invited Mr. van Buuren to address me upon the partnership point which he did. When he told me that he had made all the submissions that he. wished to make upon that point, it then being, I think, 4.30 in the afternoon, I said I would give my ruling upon the partnership point this morning, which I have now done.

31. I therefore for my part do not start to understand the objection which Mr. van Buuren has now made. I accept that he did not consent to partnership being dealt as a preliminary-issue. I decided, in the exercise of my discretion, as I feel perfectly entitled to do, to take this point first in the interests of saving time and costs. I had also in mind the fact that both sides in this case are legally aided.

32. As to the suggestion that I have not made all the findings of fact necessary to the determination of the claim and alternative defence I accept that I have not. I have not made findings in respect of the claim by the plaintiffs to have paid these additional sums of money. I have done that quite deliberately, because it seems to me wrong having decided that the true relationship here is partnership.  It seems to me totally impossible to contend that there is any other relationship in the face of this document, and nobody is asking me to take accounts. It seems to me wrong to start making findings of fact which would be relevant only to the taking of accounts which neither party is seeking.

33. If the Court of Appeal should hereafter say I am wrong in this I will accept their rebuke.

34. After further argument, I now have to deal with the question of costs, in the unusual circumstances in Hong Kong, of having two legally aided parties. It seems to me that the right approach is to ask myself first what order I would have made had neither party been legal aided. I understand the correct approach to be, that legal aid, or the existence of legal aid one side or the other, and still more on both sides, does not alter the ordinary principles governing the court's approach to costs. The position here is this. This claim was started by the plaintiff in circumstances, which I think were very unfortunate, and on facts which had to be admitted to be largely false on the first day of the hearing. It was that that provoked the counterclaim. Therefore although I have dismissed both claim and counterclaim I think I would have been minded to have awarded the defendant the totality of their costs. Other factors are the formulation of a counterclaim at a very stage; and that the defendants did not take the partnership point openly on the pleadings until the course of the hearing. I think that if I was adjudicating upon the matter as between private litigants I would have granted the defendants a substantial proportion of their costs, and not the whole.

35. Translating that into legal aid terms it seems to me that having regard to the liability of the Director created by the Ordinance itself in such circumstances I should be looking first at the amount of the successful defendant's contributions. I am told that they have both made contributions and that those contributions total $4,968 in  substance $5,000. I believe that in the circumstances the proper order to make in favour of a successful defendant is an order limited to the amount of his contribution. Having regard to the fact that I would not have given him the whole of this costs if he was private litigant, and I would only have given him a proportion, I believe that the proper order I should make here is that the defendants are to have their costs limited to the sum of $4,000. That is the order that I make.