MAN LEE E & M ENGINEERING CO LTD v. THE JARDINE ENGINEERING CORPORATION LTD

HCCT77/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.77 OF 2006

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 D E C I S I O N

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1. The plaintiff was a sub-sub-contractor to the defendant in four different construction projects.  It took out Order 14 proceedings for nine payments it claims are due.  The master granted leave to defend for Items 1 to 3.  The plaintiff has not appealed.  Summary judgment was entered for Items 4 to 9 which all concerned one of the four projects, the building of a school.  Items 4 to 6 were for the payment of the final retention money.  Items 7 to 9 were for additional payments for variation works.  The sums involved are :

Item 4 - $95,000.00

Item 5 - $34,750.00

Item 6 - $73,250.00

Item 7 - $369,941.94

Item 8 - $161,007.86

Item 9 - $155,519.15

2. The defendant has appealed.  At the first hearing of the appeal on 27 November 2006, the defendant applied to adduce new affirmation evidence and further sought leave to amend their defence.  These applications came only very shortly before the hearing of the appeal.  Mr Recorder Shieh, SC, allowed the new evidence and acceded to the plaintiff’s request for an adjournment as a result.  It was also transferred to the Construction and Arbitration List.

3. Before me therefore is the adjourned appeal, which is a re-hearing and an application to amend the defence.

The appeal

4. There has been one development since the hearing before Mr Recorder Shieh.  One of the main grounds of appeal is the existence or otherwise of a “pay when paid” clause in the contract.  Only recently, and since November 2006, the defendant has received final payments from the main contractor.  

5. In relation to Items 7, 8, and 9 it is now able to pay to the plaintiff a sum of $369,624.82 which is the amount it has now received for these items from the main contractor.

6. In relation to Items 4, 5 and 6 it has the balance of the retention money, which it accepts is now due, the defects liability period (the “DLP”) for the whole project having now expired.  However, it has not actually handed the money over because it says it is entitled to set off expenses incurred and arising out of these proceedings which, it says, have been wrongly brought.  In short the defendant contends that the Order 14 proceedings were premature in view of the pay-when-paid provisions.

7. Thus, the amount of money still in dispute is the balance of those sums due under Items 7, 8 and 9, a sum of approximately $315,000.  That amount has now been overtaken by the ever increasing costs of the proceedings and thus any commercial basis for a settlement has gone.

8. There are three issues to be determined in relation to the appeal :

Issue 1 :  In relation to the retention money (Items 4, 5 and 6) were the Order 14 proceedings brought prematurely?  The defendant says that the DLP of 12 months following final completion had not expired at the time of the filing of the writ and thus, as at that time, no cause of action had accrued.

Issue 2 :  In relation to all items, 4 to 9 inclusive, were the parties bound by “pay when paid” clauses?  The plaintiff contends that such clauses were deleted from the contract.  The defendant disagrees.

Issue 3 :  In relation to the variations, Items 7, 8 and 9, had the defendant agreed to pay the amendments made by the main contractor’s quantity surveyor (being the total sum claimed) or has the issue of the valuation of the variations remained a live one?

Issue 1 : Premature writ

9. The amounts being claimed by the plaintiff represent the final 5% of the contract price in each case under Items 4, 5 and 6.

10. The defendant relies on the sub-contract quotation dated January 2003 which provides for a breakdown of retention monies and when they are due and also provides for a 12-month DLP after practical completion (which was on 29 August 2003).

11. The plaintiff, however, points to the purchase orders actually sent out by the defendant to the plaintiff in July 2003.  Those documents stated “… 5% retention money to be released 30 days against invoice after DLP completed and defects signed off by client”.

12. Ignoring all the other sub-contractors on site and focusing on the plaintiff’s works, there can be no dispute that, at the time the writ was issued : (i) the DLP was over; (ii) the defects had been signed off by the client (there is clear correspondence in support); and (iii) the final 5% of the plaintiff’s agreed contract price was due.

13. The only relevant fact governing the plaintiff’s entitlement to the 5% referred to in the defendant’s own documents is the “signing off” after the expiration of the DLP.  This duly occurred and the plaintiff’s writ was therefore not premature.

Issue 2 : Is the defendant’s contention that the contracts were subject to pay-when-paid provisions a triable issue?

14. The burden is on the defendant to demonstrate a triable issue.

15. The clause in the contract which is under scrutiny in this issue is Clause 6.  The original version (as set out in the so-called “Blue Form” contract) is as follows :

“6.   (1)   RULES FOR CALCULATING PAYMENTS

Subject to the express provisions of this Quotation, the rules under the Contract for calculating the gross amounts due to J.E.C. shall, mutatis mutandis, be deemed to be incorporated into this Quotation.

(2)   If the Sub-contractor is entitled to amounts in respect of :

(i)     variations

(ii)     loss and/or expense following an extension of time

then such amounts shall only become due when J.E.C. is paid for the same by the Main Contractor.

(3)   TIMING OF AND DEDUCTIONS FROM PAYMENTS

The Sub-contractor shall be entitled to one monthly payment only and the amounts due under Clauses 6(1) and 6(2) shall be paid seven days after any such amounts are paid or allowed under the Contract, provided that no payment shall be due under this clause unless the Sub-contractor has submitted to J.E.C. by the day named in the Appendix hereto a true and detailed monthly application for such payments, less :

(i)    retention money as provided in the Appendix hereto;

(ii)   discount on the balance as stated in the Appendix hereto if payment is made as defined above;

(iii)  payments previously made.”

16. In the exhibited contracts Clauses 6(1) and (2) have been crossed out.  A plaintiff’s company chop also appears at each of the four corners of the crossing out.  Mr John Scott, SC, counsel for the defendant, submits that Clause 6 should be construed as a “pay when paid” provision.  He relies on three further points : (i) the defence witnesses have stated they were unaware of the crossing out until proceedings began; (ii) in any event the crossings out are not initialled by the defendant; and (iii) even if Clauses 6(1) and (2) were crossed out, Clause 6(3) was not.  Clause 6(3) refers to 6(1) and (2).  If it was intended to remain, then Clauses 6(1) and (2) must remain as well.

17. On the other hand, the plaintiff’s counsel, Mr Simon Yip, submits (i) that Clause 6(3) makes no sense on its own.  It must have been the parties’ intention to delete it as well as Clauses 6(1) and (2).  Only the entire deletion of Clause 6 makes sense; (ii) that the defendant’s “unawareness” of the deletions is unbelievable; and (iii) that the original defence made no pleading in relation to a “pay when paid” defence.

18. The master, at paragraphs 14 and 15 of her written judgment, rejected this defence.  I agree.  Clauses 6(1) and (2) are, together, headed “Rules for calculating payment” i.e. the “pay when paid” rules.  The apparent illogicality of not crossing out Clause 6(3) which is headed “Timing of and deductions from payments” does not dampen the plaintiff’s case that “pay when paid” was deleted.  Clause 6(3) is merely part of the mechanism for applying Clauses 6(1) and (2).  Once Clauses 6(1) and (2) have gone, Clause 6(3) is rendered nugatory.  

19. The plaintiff’s other submissions adds weight to this primary finding.  There is no written evidence of any objection to the deletion by the defendant.  It is not believable that they knew nothing about it until a much later stage.  The fact that the defence, dated October 2005, makes no claim of a “pay when paid” provision is a clear indication of their position at that time.  Mr Scott’s submission that the original defence is capable of being construed as containing a reliance on a “pay when paid” provision is valiant but, in reality, unsustainable.  The first written and clear reliance on the “pay when paid” argument came in the draft amended defence which was produced days before the adjourned hearing before Mr Recorder Shieh.  It was not before the master.  It is more than a mere “spelling out” of the defence, as described by Mr Scott.

20. The facts are that : (i) there is no correspondence, reminder or notes in support of the defendant’s objection to the deletions; (ii) there is no explanation, even in the defendant’s most recent affirmation evidence, why the “pay when paid” defence was not expressly pleaded; and (iii) no version of the contract without the crossings out has ever been produced.

21. I am satisfied that for Order 14 purposes no triable issue that these contracts were subject to pay-when-paid provisions has been demonstrated.

Issue 3 : Is the valuation of the variations (Items 7, 8 and 9) still a live issue?

22. As already referred to, the up-to-date position on this issue is that the defendant is willing to pay the amount it has recently received for the variations.  The plaintiff contends that its valuation was orally agreed some time ago.

23. On this issue I do not think that it could be regarded as “moonshine” (as per Godfrey JA in Man Earn Ltd v. Wing Ting Fong [1996] 1 HKC 225) to suggest that the final valuation of the variations remained a live issue.  There is evidence on both sides.  The plaintiff will rely on documentation, some of which has been checked and initialled by the defendant, supporting their quantification.  They will rely also on correspondence of demand letters to which the defendant did not respond.

24. The defendant, on the other hand, points out that neither its amended defence nor Mr Hung Sui Chi’s affirmation were before the master.  The affirmation sets out in some detail why a final agreement on the value of the variations has never, in fact, been agreed.  It also refers to more recent correspondence in support.

25. In short, I think the defendant’s submission satisfies the “triable issue” test. 

26. However, for two reasons I propose to grant conditional leave to defend this part of the claim.  Firstly, the defendant is now in possession of the sum they say is due.  Secondly, the plaintiff’s documentation, although not conclusive, is persuasive and is contemporaneous.  The defendant’s documentation on the other hand comes significantly after the event.  I consider a reasonable sum to be paid in to be a figure approximately half way between each party’s present valuation, namely a sum of $500,000 for Items 7, 8 and 9.

Order

27. The appeal is allowed in part in that leave to defend Items 7, 8 and 9 is granted conditional upon the defendant paying the sum of $500,000 into court.  Costs of the appeal shall be in the cause.  As this decision has been largely affected by recent developments, I make no order in respect of the costs below.  That order remains the same.

28. I grant leave to the defendant to amend its defence in so far as the proposed amendments relate to the issues upon which conditional leave has been granted with costs of the amendments to the plaintiff in any event.