XCHRX CHEONG CHI KIN AND ANOTHER v. HON SENG ENGINEERING LTD.

1998, No. Con 100

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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REASONS FOR JUDGMENT

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1. The plaintiffs are sub-subcontractors on some construction work. The defendant is a subcontractor to the main contractor. The employer is the government through the Architectural Services Department.

2. One of the terms of the contract between the plaintiffs and the defendant says -

"Payment of works shall be on a back to back basis after 21 days upon advice from the employer through a computer printout and within seven days upon money received by the [defendant]. In order to adjust any possible overpayment of accounts, the [plaintiffs are] to opt (2b) of the following conditions of payment -

(a) . . .

(b) Normal Payment

This is based on the assumption that the client's estimates in works orders are correct. Any overpayments are to be recovered by the [defendant] from monies payable to the [plaintiffs] together with interest at prime rate plus 5.5 per cent during the period of overpayment."

3. It is not disputed by the defendant that it has received $1,606,189.80 from the employer through the contractor for work done by the plaintiffs, other than in respect of work valued by the defendant at $132,020.

4. The defendant says, in its defence, that -

". . . the defendant seeks to set-off and/or by way of counterclaim against the plaintiffs so much of the overpayments yet to be verified by the [employer] arising from the non-schedule rate items over-claimed by the plaintiffs as may be necessary in satisfaction or in extinction of the plaintiffs' claim herein and the defendant counterclaims for the balance of the excess of overpayments insufficient to be covered by the plaintiffs' claim."

5. In the light of the terms of the contract and defendant's plea that it sought to set-off or counterclaim "so much of the overpayments yet to be verified" by the employer, it is not surprising, in my view, that the plaintiffs issued a summons seeking an order that the defendant make an interim payment. At the hearing of this summons, I ordered that the defendant make an interim payment of the sum of $1,474,169.80 within seven days, and said I would hand down my reasons later. These are those reasons.

6. It is not in dispute that the employer estimated the work done by the plaintiffs and then paid the sum it estimated to be due, less 15%, to the contractor. The contractor passed payment onto the defendant, but there it stopped. The defendant wants to keep this payment for work done by the plaintiffs until the employer says, taking into account the 15% retained, that it does not want to claim any of it back. Miss Cheng concedes that the employer has not yet made any claim, or even intimated that intends to make one. But, says Miss Cheng, by the time this matter comes on for trial, the employer might have made such a claim, and the defendant will then be able to say that it is entitled to retain the money that was paid earlier in respect of the plaintiffs' work.

7. Miss Cheng concedes that, if one looks at the cases for the parties as they presently stand, the defendant has no right to withhold this money from the plaintiffs. She says, however, that I am bound to look into the future and take into account "possible claims" by the defendant against the plaintiffs. I reject that submission. The contract between the parties makes it perfectly clear that only "overpayments" may be recovered from money payable; it does not say that the defendant may withhold payment because it pleads that it is worried that, at some time in the future, the employer might allege that there has been an overpayment. Miss Cheng accepts that, in the context of this contract, there can be an "overpayment", at the earliest, only when the employer says there was one. This must be right because, if the employer never suggests there was an overpayment, the defendant could not retain any part of the money coming from the employer in respect of the plaintiffs' work.

8. It is my view that, when considering claims for interim payments, the court should look at the cases presented by the parties at that time, and decide whether, on a trial on those cases, the plaintiff would recover a sum sufficient to justify the interim payment. It cannot possibly be so that a court should look to the future and say - "Well, this trial will not come on for six months. By that time, the situation might have changed. So, although the defendant has no case to answer that of the plaintiff now, it might possibly have such a case then, and I should refuse any interim payment." This, I believe, is the situation generally. It is all the more so in the context of this contract, which, like so many contracts in the construction industry, is designed to ensure a cash flow from the employer, through the chain, down to the smallest sub-contractor. If the law were to permit a contractor in the chain to stop the flow of money that the employer has paid after making its own estimate of the value of the work done because that contractor says that it fears that the employer, on re-estimating the work, might ask for some of the money back, the consequences to small sub-contractors would be very serious. I do not accept that the contract between the parties - and that is the only basis on which the defendant can resist an interim payment - permits this.

9. Accordingly, I ordered the interim payment mentioned, with interest and costs.