ATAL ENGINEERING LTD v. EVERGREEN ENGINEERING AND CONSTRUCTION CO LTD

DCCJ10712/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 10712 OF 2001

---------------------

-------------------

__________

Judgment

__________

Introduction

1. This case has come about as a result of a well established practice in the building industry known as "borrowing a shell" or "licence borrowing". It is helpful to start by describing how it operates in general before enquiring how it took effect in this matter. In the usual building contract for reasonably substantial works the party that wishes to have the works carried out ("the employer") will invite tenders from suitably approved and qualified contractors. The successful bidder ("the main contractor") will then commonly sub-contract the entire contract to another contractor who although not on the list of approved contractors and therefore not qualified to bid for the contract in the first place is considered competent to perform the works by the successful bidder. The sub-contractor will do the works at a price agreed between the sub-contractor and the main contractor which will be a few percentage points less than the employer is paying the main contractor. The main contractor will therefore make a profit on the contract solely by virtue of having been awarded the contract in the first place by the employer.

2. As a matter of contract the main contractor will remain liable to the employer and be paid by the employer. The main contractor will in turn pay the sub-contractor keeping for itself the difference in price between what the employer has agreed to pay for the works and the price the sub-contractor has agreed to do the works. So far as the employer is concerned these works are being done for it by the main contractor. The employer will commonly be unaware of the existence of the sub-contractor because in order to facilitate the disguise the main contractor will allow the sub-contractor to correspond on its own letter heading and invoices for payment will go out to the employer (or to whoever is supervising the contract for the employer) on the main contractors letter head. Provided all goes smoothly and the work is done on time and to the expected standard the main contractor will be paid by the employer and it in turn will pay its sub-contractor. Everybody is content including the employer who knows nothing of the private sub-contracted arrangement between the main contractor and the sub-contractor. The sub-contractor will have borrowed the main contractor's "shell" and done the work on its behalf. I will need to return to the contractual implications of this type of arrangement presently.

Sub-sub contractors

3. There is a further dimension to this when the sub-contractor awards further sub-contracts, typically, to specialist contractors, to perform parts of the contracted work that call for certain kinds of specialist knowledge, in this particular case air-conditioning installation. The sub-sub contractor will be engaged by the sub-contractor as part of his remit to do all of the works in the main contract which will include the specialist works.

4. Where the sub-sub contractor is aware that the sub-contractor has borrowed the main contractor's shell it would invoice the sub-contractor directly and be paid by it once the sub-contractor has received payment from the main contractor. In such circumstances each party down the sub contracting line is aware with which party it is contracted to and no dispute of the type that has arisen in this case will occur.

The Problem in this Case

5. In this matter three parties are involved. The employer is the Hang Seng Bank. It wished to have its Yaumatei branch substantially re-built and re-designed as part of its new corporate image. The Defendant is a substantial civil engineering company. Its name appears on Hang Seng Bank list of approved contractors. It was invited to tender for this contract and was the successful bidder. Pursuant to the "shell borrowing" practices, which I hope I have sufficiently described, it decided to sub-contract out all the works to Wo Fung another reputable contractor. For the purposes of this description I don't propose to refer to the contract documents at this stage. In doing so it allowed Wo Fung to use its letter head and to represent itself as the Defendant (the main contractor for these works). Using this letter head Wo Fung approached the Plaintiffs, a reputable air-conditioning and ventilation contractor to carry out these specialist works which were required as part of the main contract. The evidence shows that as these works were done by the Plaintiffs, who can aptly be described as the sub- sub contractors in the "shell borrowing" model which I have already described. They presented invoices to the Defendants and in the Defendants name for payment. Once those invoices arrived at Wo Fung offices Wo Fung would then present these invoices as part of their charges to the Defendants. Once all of these charges were passed for payment by the employers consultants the Defendants would be paid by the employer and they in turn would pay Wo Fung who would then, using their own cheques, would pay the Plaintiffs. This proceeded perfectly satisfactorily until close to the finish of the contract. The relevant evidence which I will need to relate will, in due course, fill in the gaps but suffice it to say for present purposes that after some difficulties with the employer over some of the works, which needed to go to Arbitration, the employer released the final payment to the Defendant who in turn paid Wo Fung what was owing to it including the remaining payments due to the Plaintiffs. Unfortunately, Wo Fung went into liquidation, as a result of having lost a substantial court case relating to another building contract and they did not as they had done in the past pay the Plaintiff.

6. The Plaintiff then turned to the Defendant requiring it to pay them. The Defendants' reply is that it had no contractual relationship with the Plaintiff. Its contractual relationship was with Wo Fung - it has paid Wo Fung all that it was due - including the work done by the Plaintiff. It is submitted that the Plaintiff had a contract with Wo Fung and must look to Wo Fung for payment. The fact that Wo Fung is in liquidation is a misfortune that the Plaintiffs must bear. The Plaintiff reposte to this is that all its communications, in terms of being contracted to do the specialist works, were by all appearances with the Defendants. The correspondence was conducted on the Defendants letter head and the contract itself was signed by someone purporting to be employed by the Defendants. There was never any question of the Plaintiffs contracting with a company called Wo Fung. They had not made an appearance at the stage when the contract was entered into. All the Plaintiffs invoices were directed to the Defendants. It is accepted by the Plaintiffs that it was paid by Wo Fung cheques but that was assumed to be for the Defendants administrative convenience.

The Issue

7. It will be seen therefore that what I need to decide is whether the Defendants are to be held liable to the Plaintiffs by virtue of having held themselves out as being the contracting party by allowing Wo Fung to use their letter heading and to present a contract to the Plaintiffs in which the Defendant is the contracting party. This will essentially amount to a question of fact where on the Defendants behalf it is submitted that having regard to the notoriety of the "shell borrowing" practice the Plaintiffs must have been aware of the fact that Wo Fung had contracted with it and not the Defendant, particularly, when one realises that in the course of the works the Plaintiffs were being paid by Wo Fung cheques and not by the Defendants.

The Material Evidence

8. Its helpful to take this in the order that it was called, which was in fact out of order. The Defendants had experienced difficulty in locating Wo Fung's relevant directors Mr Michael Ng and his brother Mr Tem Ng. They were eventually located and served with a subpoena to attend and give evidence which they did. As a matter of convenience I allowed them to be called by the Defendants first before the Plaintiffs witnesses. Both have given a very fair account of how their company Wo Fung came to be awarded this contract by the Defendants. Having been awarded the contract which appears at pages A174-175 they set about finding sub-contractors to do various aspects of the contract. It is to be observed at page A174 that the Defendants letterhead as one might expect bears their office address in Sham Shui Po. The contract was signed by Mr K.F. Yeung for the Defendants and Mr Michael Ng of Wo Fung. Thereafter the Plaintiffs were introduced to Wo Fung by a Mr Lee as being suitable sub-contractors for the air-conditioning works. The Plaintiffs provided a quote for these works which Mr Michael Ng says was dealt with by Mr Kwok Ying Wai who was employed by Wo Fung. At this early stage the Defendants, according to Mr Michael Ng, had provided Wo Fung with the Defendants letter head to use in the conduct of the works including in its communication with sub-contractors that it had appointed such as the Plaintiffs. Pursuant to this arrangement Wo Fung sent the contract for the air-conditioning works to the Plaintiffs on the Defendants letter head signed by Mr Kwok, one of Wo Fung's employees, but holding himself out as the Defendants contract manager. [See ExP1 the original document - this is reproduced at pages A85 to A88]. It was signed by Mr Law one of the Plaintiffs directors on a date which on the evidence would appear to be on or about the 3rd October 1997 although the letter is dated the 15th August 1997. Mr Michael Ng says that although Mr Kwok has described himself as the Defendants contract manager he was at all times employed by Wo Fung and paid a salary by them. Mr Kwok was the person nominated by Wo Fung to oversee the contract on its behalf and he would have monthly meetings with the employer, Hang Seng Bank, as the Defendants contract manager. This is borne out by the organisation charts for the contract [A119] which describes Mr Kwok as the Defendants contract manager. Under cross-examination by Mr Maurellet for the Plaintiffs, Mr Ng explained the practice with "shell-borrowing" whereby the invoices would be issued to the main contractor, as happened here, with the effect that the shell "borrower" Wo Fung would remain in the shadow as he described it.

9. Mr Tem Ng was also called under subpoena. He was more involved with the actual work on site rather than the contractual arrangements. He confirmed that the Defendants had also provided their chop in addition to their letter head to facilitate the "shell borrowing" arrangements.

10. Mr Wong of the Plaintiffs then gave evidence on their behalf. His evidence is that he considered that they were contracting with the Defendants. When contacted in respect to these works he says that the individual who he was speaking to addressed him on the basis that he was speaking on behalf of the Defendants. At this stage he had never heard of Wo Fung. This was then confirmed for him when the letter of intent was sent bearing the Defendants letter head. It was signed by Mr Law the Plaintiffs director on its behalf. In cross-examination by Mr William Wong for the Defendants he agreed that "shell borrowing" was a common practice in the building industry under which sub-contractors would then engage sub-sub contractors to perform parts of the works. He also agreed that sub-contractors would negotiate with their sub-sub contractor down the line and that the main contractor would not be bothered with those negotiations. It was put to him that at worst he would have been aware of the existence of a line of sub-contractors after the first working conference. He agreed that this might be so generally but that his company have never been a sub-sub contractor before. He says that he first learnt of the existence of Wo Fung after several meetings when members of his staff told him that Wo Fung was working for the Defendants. He says he did not know of them initially and once he did he considered that they, like the Plaintiffs, worked for the Defendants.

11. Mr Law has also given evidence for the Plaintiffs. Much of his oral evidence turned on whether an oral agreement to award a contract would amount to a valid contract which would subsequently be confirmed in writing. This aspect relating as to when he actually signed the contract - the letter being dated the 15th August 1997. His witness statement seeks to support the case that they would wish to contract with the main contractor rather than a sub-contractor who might pose a greater risk to them in terms of them not getting paid.

12. The Defendants principal witness is Mr Yeung. Apart from verifying his witness statements which confirm what the subpoenaed witnesses have said as to the sub-contracting of the main contract he has also given evidence about a meeting on the 2nd August 2001 attended by Wo Fung and by a representative of the Plaintiff to discuss certain variation orders. The background to his was that Messrs Masons the Plaintiffs solicitor had written to the Defendants on the 13th October 2000 demanding payment of $142,000 against outstanding accounts which were then long overdue (see B2-160). The reply dated the 17th October 2000 (A260) which Mr Yeung had approved [it was signed by Mr Tem Ng of Wo Fung using the Defendants letter head on behalf of the Defendants], was to the effect that Hang Seng Bank had not paid and therefore the matter had to go to Arbitration. Under "back to back" arrangements the Defendants could not pay the Plaintiffs until after Hang Seng had paid them. Nowhere in the letter is the point taken that there is no contract between the Plaintiff and the Defendant or that the Plaintiffs contract is with Wo Fung and not with the Defendant. This was put to him by Mr Maurellet in order to contradict his evidence concerning the August 2001 meeting during which he said that the Plaintiffs had agreed to be paid by Wo Fung and that they would wait until the Defendants had paid Wo Fung who would in turn pay them after that.

Conclusion

13. It seems to me that overwhelmingly the evidence shows that when the contract was entered into, based on the letter of the 15th August 1997, that the Plaintiffs considered that they were contracting with the Defendants and not with Wo Fung. The Defendants had gone out of their way to mask the identity of Wo Fung by letting them use their letter head and putting them into possession of their company stamp or chop. Whilst I accept that the Plaintiffs subsequently became aware of the presence of Wo Fung as a sub-contractor of the Defendant and they were being paid by Wo Fung cheques the Defendants did nothing to alter the perfectly reasonable impression that they were dealing directly with the Plaintiffs. Everything points to that conclusion. Even though Wo Fung may have actually done the sub-contracting they must be held to have done so on behalf of the Defendants as the principal. The Defendants must on this evidence be bound by their acts in allowing Wo Fung to hold themselves out as the Defendants. I hold that the Plaintiffs were in fact ignorant of the sub-contracting arrangements between Wo Fung and the Defendants. In such circumstances there must be judgment for the Plaintiffs against the Defendants in the sum that now remains outstanding which is $128,000 together with interest thereon at half the judgement rate from the date when the sums fell due until judgment and thereafter at the judgment rate until payment. I will also make an order nisi that the Defendants do pay the Plaintiffs costs of the action to be taxed on a party and party basis together with certificate for counsel to whom I express my thanks for their admirable assistance.