XCHRX SWIRE ENGINEERING SERVICES LTD. v. HIP HING CONSTRUCTION CO. LTD.

1996 No.Con.32

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

____________

_______________

J U D G M E N T

_______________

INTRODUCTION

1. The Defendant, Hip Hing Construction Company Ltd. ("Hip Hing"), were the main contractors for the construction of Times Square. It engaged the Plaintiff, Swire Engineering Services Ltd. ("Swire"), as sub-contractors to supply generators for the project. Swire claims that various sums due to it from Hip Hing under the sub-contract are still outstanding. It issued proceedings against Hip Hing for their recovery. No defence was filed, and Swire entered judgment in default for the sums claimed. Hip Hing now applies for the judgment to be set aside.

WAS THE JUDGMENT IRREGULAR?

2. Hip Hing maintains that the judgment was irregular because it was entered in breach of an agreement between Mr. Richard Clement, a solicitor with W.K. To & Co. who were instructed by Hip Hing, and Mr. Gilbert Kwok, a solicitor with Simmons & Simmons who were instructed by Swire. According to an affidavit sworn by Mr. Clement, the agreement was that the action would be stayed, but that it could be reactivited by either party giving 7 days' written notice to the other. No such notice had been given.

3. In determining whether the judgment was irregular on that ground, I am faced with three problems:

(i) The regularity of the judgment is dependent on the terms of this agreement. Since there is a dispute about its terms, I must decide as a fact what its terms were. If the only way of deciding what its terms were is to direct that Mr. Clement and Mr. Kwok give oral evidence, that is the course which will have to be taken.

(ii) In his affirmation, Mr. Kwok has chosen not to deal with the agreement at all. Instead, he simply criticised Mr. Clement for exhibiting to his affidavit "without prejudice" correspondence, on which Mr. Clement relied as confirmation of his version of the agreement. That criticism of Mr. Clement is wholly misplaced. It is well settled that "without prejudice" correspondence is admissible if the issue is what the terms of the agreement reached in the course of negotiations were.

(iii) There was another term of the agreement alleged by Mr. Clement which related to the payment of the sum of $594,025.00. Unfortunately, Mr. Clement did not state in his affidavit what was actually said about that payment. He merely stated his interpretation of what was said. My problem is that without knowing Mr. Clement's version of what was actually said, I cannot really say whether his interpretation is correct or not.

4. If the evidence is anything to go by, the competing versions of the additional term relating to the payment of the sum of $594,025.00 are these. Swire maintains that it was agreed that the action would be stayed only when it had actually been paid the sum of $594,025.00. Since Swire had never been paid that sum, the action had never been stayed. Hip Hing maintains that the payment of the sum of $594,025.00 was not a pre-condition of the stay. The stay was agreed because Swire knew that the sum of $594,025.00 was going to be released to it.

5. What Hip Hing maintains the agreement was is not borne out by the contemporaneous correspondence. The sequence of events which the correspondence reveals is as follows:

(i) On 27th June, Simmons & Simmons wrote to W.K. To & Co. The letter referred to a conversation between Mr. Clement and Mr. Kwok that afternoon. It concluded:

"As discussed, upon receipt of the sum of $594,025.00, our client is prepared to stay the action until 7 days after either side has given a notice to continue with the case to the other party by registered post. Please take instructions and revert whether this proposal is acceptable."

I make two comments on that letter. First, it shows that by then no concluded agreement had been reached. Whether a concluded agreement would be reached was dependent on what instructions Mr. Clement received. Secondly, the receipt of the sum of $594,025.00 by Swire was stated by Simmons & Simmons to be a pre-condition of any stay.

(ii) On 15th July, W.K. To & Co. wrote to Simmons & Simmons. They said that they had taken instructions on the letter of 27th June, and that the suggestion in it was acceptable. They added that Hip Hing had applied to the employer for the sum of $594,025.00. Again, I make two comments on that letter. First, the acceptance by Hip Hing of the offer contained in the letter of 27th June meant that the agreement to stay the action was concluded on the receipt by Simmons & Simmons of this letter. Secondly, W.K. To & Co. did not dispute that the receipt of the sum of $594,025.00 by Swire was a pre-condition of any stay.

(iii) On 18th July, the judgment in default was entered. On the following day, W.K. To & Co. wrote to Simmons & Simmons. In that letter, they confirmed that the offer made on 27th June which had been accepted by their letter of 15th July had been "that upon receipt of the sum of $594,025.00 the action would be stayed on the basis that either side could give 7 days' notice to continue". That is an unequivocal acceptance by W.K. To & Co. of Swire's case. It may be, as Mr. Clement stated later in that letter, that he had not interpreted the agreement as making the payment of the sum of $594,025.00 a pre-condition of the stay, but his interpretation was, I am afraid, contrary to the language of the correspondence.

6. There has today been a shift in Mr. Clement's position. He now accepts that the express terms of the agreement were that the action would only be stayed once Swire had received the sum of $594,025.00. He asserts, however, that it was "understood" that no steps would be taken by Swire in the action in the meantime. I have not seen any basis for implying into the agreement such a term. Mr. Kwok told me that it had not been his understanding. If that had been Mr. Clement's understanding, he would not have allowed Simmons & Simmons' notice under Ord. 19 r.8A of 12th July (which is date-stamped as having been received by W.K. To & Co. on 13th July) to go unanswered. His letter of 15th July would have added that entering judgment in default would have been contrary to what had been the common understanding of his conversation with Mr. Kwok on 27th June.

7. For these reasons, therefore, the agreement to stay the action had not taken effect by 18th July when the judgment in default was entered, because the sum of $594,025.00 had not been paid to Swire. The judgment, therefore, was a regular one.

THE SUMS CLAIMED BY SWIRE

8. Swire claimed two sums from Hip Hing:

(i) the sum of $637,500.00, which represented 5% of the sums due to Swire under the sub-contract which Hip Hing was entitled to retain until "the expiry of the Maintenance Period under the Main Contract";

(ii) the sum of $108,800.00, which represented the sum originally assessed by the architect as payable to Swire for variation works required by the architect on behalf of Hip Hing.

HIP HING'S PRIMARY DEFENCE

9. Hip Hing's primary defence to these claims is that this was a "pay when paid" sub-contract. Cl. 22 of the sub-contract provided that Hip Hing's obligation to pay the sums due to Swire, including the sums retained by Hip Hing, only arose when Hip Hing had been paid by the employer. Hip Hing claims that the employer had not yet paid to it either of the sums claimed by Swire. However, cl. 22 does not lie easily with a special condition which was agreed between Swire and the architect on behalf of Hip Hing during the tendering stage. That special condition laid down the stages for the payment of sums due under the sub-contract. It did not state that these stage payments would not be made until Hip Hing had been paid the relevant sums by the employer.

10. Mr. Anthony Houghton for Hip Hing argued that these provisions could be reconciled with each other on the basis that cl. 22 related to payment, whereas the special condition related to the certification of the work done for the purposes of payment. I do not think that that argument has a real prospect of success. The language of the special condition is not consistent at all with its subject-matter being concerned only with certification.

11. The only other question, therefore, is whether Hip Hing's argument that cl. 22 overrides this special condition has a real prospect of success. I do not think that it does. It is true that the sub-contract which contains cl. 22 was concluded well after the agreement of the special condition at the tendering stage, but cl. 1(1) of the sub-contract provided that any special conditions were included in the sub-contract. Unless a contrary intention is apparent, special conditions, especially those expressed in language selected by the parties, override conditions in a standard form. No such contrary intention is apparent, and it follows that the provision in the sub-contract making it a "pay when paid" sub-contract was superseded by the special condition. Hip Hing's primary defence, therefore, does not have a real prospect of success.

HIP HING'S OTHER DEFENCES TO THE CLAIM FOR $637,500.00

12. Hip Hing denies that it is liable to pay Swire the sums retained on three further grounds:

(i) The main contract between Hip Hing and the employer provided that such sums retained by the employer under the main contract would not be released to Hip Hing until a Certificate of Making Good Defects had been issued by the employer to Hip Hing. Since such a certificate had not been issued, and since the sums retained by the employer had not been released to Hip Hing, Hip Hing argues that it was not liable to release to Swire the sum which it retained. This argument does not have a real prospect of success. The schedule of payments to be made to Swire was laid down by the special condition. There is, in my judgment, no basis for saying that the release to Swire of any sums retained by Hip Hing was dependent on the release to Hip Hing of any sums retained by the employer - at any rate, not once the special condition is found to override cl. 22 of the sub-contract.

(ii) The architect decided that only half of the sums retained by Hip Hing should be released to Swire, and that the other half should only be released after the satisfactory completion of works to remedy defects. In my judgment, on a proper construction of cl. 29 of the sub-contract, any decision by the architect on a dispute referred to it for its determination was not binding. Accordingly, whether Hip Hing was entitled to withhold releasing to Swire any part of the sums retained, now that the maintenance period under the main contract has expired, depends not on the view of the architect but on the terms of the sub-contract and the general law. No evidence has been placed before me in support of the architect's assertion that Swire failed to carry out the remedial work. There is, therefore, no evidential basis on which it is open to me to say that Hip Hing's defence for withholding the release of any part of the sums retained has a real prospect of success.

(iii) Since the issue of these proceedings, the architect has informed Hip Hing that a contra-payment is due to Hip Hing from Swire for the sum of $76,600.00 for what is alleged to be the failure on the part of Swire to carry out certain works during the maintenance period. It may be that this duplicates Hip Hing's case on the sums retained by it, but even if it does not, no evidence has been placed before me in respect of the architect's assertion that Swire failed to carry out this work. There is, therefore, no evidential basis upon which it is open to me to say that Hip Hing's defence for withholding the sum of $76,600.00 has a real prospect of success.

HIP HING'S OTHER DEFENCES TO THE CLAIM FOR $108,800.00

13. Hip Hing denies that it is liable to pay the sum of $108,800.00 to Swire on two further grounds. First, although the sum of $108,800.00 represented the sum originally assessed by the architect as due to Swire for variation works, the architect has had second thoughts on the matter since the issue of these proceedings. The architect now assesses the variation works in the sum of $56,825.00 only. No evidence has been filed as to the basis upon which the architect has changed its view. In the absence of such evidence, it is simply not possible for me to say that Hip Hing has a real prospect of success in establishing that the original assessment of $108,800.00 was erroneous. Secondly, Mr. Houghton argued that cl. 22 of the sub-contract prevented Swire from claiming the sum of $108,800.00 until Hip Hing had been paid that amount by the employer. I do not think that that argument has a real prospect of success. If cl. 22 applied to the variations, then in my view so too did the special condition.

CONCLUSION

14. For these reasons, none of the defences which Hip Hing claims to have have a real prospect of success. It follows that its application to set aside the judgment must be dismissed.