ZHANG QIYUN v. SHUN SHING CONSTRUCTION & ENGINEERING CO LTD

HCA 1155/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1155 OF 2007

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D E C I S I O N

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1.  Prior to June 2000, Shun Shing entered into a contract with the Government of the HKSAR for the construction of a primary school in Sau Mau Ping, Kwun Tong.  On 15 June 2000, by an agreement Shun Shing, as contractor, entered into a contract with Gwen Construction Engineering Co Ltd (Gwen), as project manager, called a Project Management Agreement, to execute and complete the contract works for the primary school.  There was a supplemental agreement, but that is not relevant to the issues before me.

2.  The Project Management Agreement contained the following provision:

“14    (a)   (Gwen) shall not assign this Agreement or any interest therein without the written consent of (Shun Shing).

(b)   (Gwen) shall not sublet any works under this Agreement without the prior written consent of (Shun Shing) which consent shall not be unreasonably withheld by (Shun Shing) to the prejudice of (Gwen).”

The Project Management Agreement also contained, in usual terms, a submission of disputes of differences between the parties to arbitration.

3.  It was Shun Shing’s view that Gwen’s performance of the works required by the Project Management Agreement was unsatisfactory.  By letter dated 12 June 2001, Shun Shing terminated both the Project Management Agreement and the Supplemental Agreement with immediate effect.

4.  On 29 August 2001, Gwen was wound up by an order of this Court.  On 3 April 2002, the liquidation was converted into a creditor’s voluntary liquidation.  Mr William Nicholas Giles and Mr Alan Hubert Day were appointed joint and several liquidators.

5.  On 1 June 2007, the liquidators issued a writ against Shun Shing claiming damages arising from the termination of the Project Management Agreement and seeking an amount of $11,591,952.02.  The writ was issued 11 days prior to the expiry of the limitation period arising from Shun Shing’s termination of the Project Management Agreement.

6.  The writ was not served prior to the expiry of the limitation period.

7.  After the expiry of the limitation period, but before service of the writ, by a deed of assignment dated 29 May 2008, the liquidators assigned to Mr Zhang their interest in the litigation.  Mr Zhang was formerly a director of, and a shareholder in, Gwen.  The operative clause in the deed of assignment is in the following terms:

“The Parties hereby agree as follows:

1.  For the considerations stated in clause 2 below:

(i)  the Liquidators hereby sell and assign absolutely to the Assignee all rights, claims and entitlements which (Gwen) has or may have, against Shun Shing in connection with and/or arising out of the construction of a primary school in Sau Mau Ping Estate, Phase 9, Kwun Tong Contract no. SS H334 (the “Causes of Action”);”

8.  Notwithstanding the provisions of clause 14 of the Project Management Agreement, the consent of Shun Shing to as the assignment was not obtained.

9.  Still, the writ was not served.

10.  On 30 May 2008, nearly a year after the expiry of the limitation period, the writ was amended pursuant to O 20 r 1, RHC, and Mr Zhang was replaced as plaintiff, in the place of Gwen.  The Indorsement of Claim was also amended to reflect the assignment.  The writ was subsequently served, and upon service, Shun Shing learned, for the first time, of the assignment.

11.  On 9 September 2008, Shun Shing filed a summons under s 6 Arbitration Ordinance, Cap 341, seeking to stay the proceedings and have them referred to arbitration pursuant to the arbitration reference contained in the contract.  Subsequently, the summons was amended, by consent, to seek, as a prior alternative to the stay, orders under O 14A and O 18 r 19.  The amended application was for:

“1. A determination of the following question:

Given that no consent to assign was given by the Defendant within the meaning of Clause 14(a) of the Project Management Agreement for the Construction of a 24-Classroom Primary School in Sau Mau Ping as supplemented by a Supplementary Agreement both dated 15^th June 2000 (the “Agreement”), whether or not the Plaintiff has the locus standi to stand in the place of Gwen Construction Engineering Co Ltd (in creditors’ voluntary winding-up) (“Gwen”) or Gwen’s Liquidators to commence the action herein against the Defendant under the Agreement.

2.  In the event that the determination of the above issue is in the negative, an order that the Plaintiff’s action and/or claims against the Defendant be struck out and/or dismissed pursuant to O 14A, r 1, O 18 r 19(1)(a)(b) and/or (d) of the Rules of the High Court and/or under the inherent jurisdiction of the Court.

3.  If the reliefs sought under paragraph 2 above are not granted, an order that all further proceedings in this action against the Defendant be stayed pursuant to Section 6 of the Arbitration Ordnance,  Cap 341, Plaintiff and/or his predecessor and the Defendant having by an agreement in writing dated 15^th of June 2000 agreed to refer to arbitration the matters in respect of which this action is commenced;”

12.  There are three issues to be determined:

(i)  in the absence of consent to the assignment by Shun Shing, is the assignment effective at law, thereby giving Mr Zhang locus standi to continue the proceedings;

(ii)    if the assignment is effective, is Mr Zhang bound by the arbitration provision in the contract.

(iii)  If Mr Zhang is bound by the arbitration provision, should there be a stay.

Champerty:

13.  At first sight, the assignment of a bare right of action would appear to be savouring of champerty.  But that is an argument that is not available to Shun Shing in these proceedings.  By s 199(2)(a) of the Companies Ordinance, Cap 32, (CO), a liquidator in a winding up by the court shall have power:

“to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;”

That statutory power renders the transaction immune from challenge on the ground of champerty: see Circuit Systems (In Liquidation), Basten v Zuken-Redac (1996) 80 BLR 25 at 41-43.

14.  By s 251(1)(b) CO, a liquidator in a creditor’s voluntary winding up may, without sanction, exercise any of the other powers given by the CO to a liquidator in a winding up by the court.  Consequently, it makes no difference that this is a creditor’s voluntary winding up.  The liquidator has the statutory power to sell a bare right of action, and that transaction cannot be challenged on the ground of champerty.

Does clause 14 prohibit assignment without consent:

15.  Mr Chow relies upon the fundamental proposition contained in Chitty on Contracts, 30^th Edn, Vol 1, para 19-043:

“If rights arising under a contract are declared by the contract to be incapable of assignment, a purported assignment will be invalid as against the debtor.”

Chitty cites the decision of the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 in support of the proposition.  The House of Lords held that on the true construction of the prohibition clause, the assignment of the benefit of the contract, rather than merely vicarious performance, was barred.  It was further held that the was no reason of public policy not to give effect to the prohibition clause, the legitimate commercial purpose of which was to ensure that the original parties to the contract were not brought into direct contractual relations with third parties.

16.  Mr Hui seeks to distinguish Linden Gardens on its facts.  InLinden Gardens the assignor of the plaintiff was the leasehold owner of certain flats.  The assignor employed the defendant to remove asbestos from the flats.  The defendant did not perform the tasks satisfactorily.  Later on, when the assignor sold the flats to the plaintiff, is assigned to the plaintiff all rights of action vested in the assignor which were incidental to its leasehold on the flats.  The plaintiff, as assignee, then brought a claim against the defendant for the sub-standard work in relation to the removal of the asbestos.  This, Mr Hui said, was a case of an assignee of the employer claiming against the contractor, i.e. the person providing the service.  The point of distinction, Mr Hui said, was that the present case is a case of an assignee of the contractor claiming against the employer, i.e. the person paying for the service to be provided.

17.  In Linden Gardens the contract between the original owner of the flats, (the assignor) and the defendant was in a standard form of building contract containing a clause prohibiting assignment that is indistinguishable from the present case.  The rationale for the upholding of the clause prohibiting the assignment lay in the concern of the House of Lord’s but in complicated building contract contractor should be allowed to choose the employer which was working for or to whom it was providing services.  Mr Hui relied upon the following passage from the speech of Lord Browne-Wilkinson at p 105 D-F:

“The reason for including the contractual prohibition viewed from the contractor’s point of view must be that the contractor wishes to ensure that he deals, and deals only, with a particular employer with whom he has chosen to enter into a contract.  Building contracts are pregnant with disputes: some employers are much more reasonable than others in dealing with such disputes.”

18.  Mr Hui said that the distinction lay in the fact that in the present case Shun Shing was the employer as opposed to the contractor under the agreements.  Consequently, Shun Shing’s obligation was merely to pay Gwen such remuneration as was agreed upon Gwen’s completion of the works.  He said that while it might be important to Shun Shing that the contract works must be carried out by Gwen and not by any third party, the identity of the person to which Shun Shing must make the payment was not important.  Consequently, he said, the concern raised by Lord Browne-Wilkinson did not arise in the present case.

19.  But the passage from Linden Gardens relied upon by Mr Hui cannot be read in isolation.  It is necessary to read further in the speech, continuing from the point at which Mr Hui stopped.  Lord Browne-Wilkinson went on to say, at p 105E-H and 106A-C:

“The disputes frequently arise in the context of the contractor suing for the price and being met by a claim for abatement of the price or cross-claims founded on an allegation that the performance of the contract has been defective.  Say that, before the final instalment of the price has been paid, the employer has assigned the benefits under the contract to a third party, there being at the time existing rights of action for defective work.  On the Court of Appeal’s view, those rights of action would have vested in the assignee.  Would the original employer be entitled to an abatement of the price, even though the cross-claims would be vested in the assignee?  If so, would the assignee be a necessary party to any settlement or litigation of the claims for defective work, thereby requiring the contractor to deal with two parties (one not of his choice) in order to recover the price for the works from the employer?  I cannot believe that the parties ever intended to permit such a confused position to arise.

Again, say that before the completion of the works the employers assigned the land, together with the existing causes of action against the contractor, to a third party and shortly thereafter the contractor committed a repudiatory breach?  On the construction preferred by the Court of Appeal, the right to insist on further performance, being unassignable, would have remained with the original employers whereas the other causes of action and the land would belong to the assignee.  Who could decide whether to accept the repudiation, the assignor or the assignee?

These possibilities of confusion (and many others which could be postulated) persuade me that parties who have specifically contracted to prohibit the assignment of the contract cannot have intended to draw a distinction between the right to performance of the contract and the right to the fruits of the contract.  In my view they cannot have contemplated a position in which the right to future performance and the right to the benefits accrued under the contract should become vested in two separate people.  I say again that that result could have been achieved by careful and intricate drafting, spelling out the parties’ intentions, if they had them.  But in the absence of such clearly expressed intention, it would be wrong to attribute such a perverse intention to the parties.  In my judgment, clause 17 clearly prohibits the assignment of any benefit of or under the contract.”

20.  The concerns of Lord Browne-Wilkinson are clearly illustrated in the present case.

21.  Shun Shing took the view that Gwen’s performance of the works was unsatisfactory.  As noted in paragraph 3 above, long ago as 12 June 2001, Shun Shing had terminated the contract.  The letter of termination specifically reserved the right to claim against Gwen for all losses arising from that unsatisfactory performance.  Shun Shing have no rights to all against Mr Zhang to sue for that unsatisfactory performance, or to set off any damages that might arise from that unsatisfactory performance against any balance that might be due under the contract.  Indeed, having regard to the length of time between the termination and the commencement of proceedings Shun Shing would have been perfectly justified in believing that any claim to the balance might have been abandoned, the liquidator recognising a liability for unsatisfactory performance.

22.  The factual distinction advanced by Mr Hui is a distinction without a difference.  The case graphically illustrates precisely the reasons enunciated by Lord Browne-Wilkinson why the prohibition against assignment should be upheld.

23.  The last paragraph of passage cited in paragraph 19 above concerns also to demonstrate that Mr Hui’s submission that there is a distinction between the right to future performance under the contract and the right to a benefit accrued under the contract, i.e. to receive payment, must fail.  Plainly, the reason that submission must fail is that it would be quite wrong to allow an assignee to take advantage of the right to receive payment under a contract and thereby effectively deny to party liable to make payment the opportunity to raise a set off or counterclaim.

24.  It makes no difference that Gwen was in liquidation.  Circuit Systems considered the effect para 6 of Schedule 4 of the Insolvency Act 1986 (UK), a provision equivalent to s 199(2)(a) CO, on the validity of an assignment by liquidators in breach of a contractual prohibition clause.  The assignment was held to be invalid.  Although that was the case in insolvency, there is no reason why the same principle should not apply in a company liquidation.

25.  For the foregoing reasons I am satisfied that the purported assignment to Mr Zhang was not effective at law, the consent of Shun Shing not having been obtained.  Consequently Mr Zhang has no locus standi to bring or continue these proceedings.

26.  To permit a plaintiff to bring an action in which he has no locus standi would be frivolous: O 18 r 19(1)(b), or otherwise an abuse of the process of the court: O 18 r 19(1)(d). 

27.  The action must accordingly be struck out.

A stay for arbitration:

28.  If I am wrong in that conclusion, I turn to consider whether or not there should be a stay for arbitration.

29.  I accept Mr Chow’s submission that the arbitration provision in the contract is not worded so as to make it clear that it binds the original parties only.  In the present case, the assignment was of a cause of action, see paragraph 7 above.  The position is set out in the following passage from the judgment of Hobhouse J in The “Jordan Nicolov” [1990] 2 Lloyd’s Rep 11 at 15 (Com Ct):

“But where the assignment is the assignment of the cause of action, it will, in the absence of some agreement to the contrary, include as stated in s 136 all the remedies in respect of that cause of action.  The relevant remedy is the right to arbitrate and obtain an arbitration award in respect of the cause of action.  The assignee is bound by the arbitration clause in this sense the cannot assert the assigned the right without also accepting the obligation to arbitrate.  Accordingly, it is clear both from the statute and from a consideration of the position of the assignee that the assignee has the benefit of the arbitration clause as well as of the other provisions in the contract.”

30.  The reference to s 136 is a reference to that section in the Law of Property Act 1925 (UK), the Hong Kong equivalent of which is s 9 Law Amendment and Reform (Consolidation) Ordinance, Cap 23.  The provision that “all legal and other remedies for the same” pass with the assignment is identical in both pieces of legislation.

31.  The proposition that an assignee of a contract is bound by, and may take the benefit of, an arbitration clause contained therein, is confirmed by Chitty on Contracts, Vol 2 30^th Edn, para 32-038, with the statement being supported by numerous authorities.

32.  I have no doubt at all that, if the assignment is valid, Mr Zhang has both the benefit of, and is bound by, the arbitration clause.  In those circumstances, if Shun Shing seek to send the matter to arbitration it is no answer for Mr Zhang to say that he was not a party to the original contract.  The issue as to whether or not there should be a stay to enable the matter to go to arbitration must be determined in the traditional manner.

Should a stay be granted:

33.  The approach to be adopted in stay applications is that set out in the judgement of Ma J in Tommy CP Sze & Co Ltd v Li & Fung (Trading) Ltd [2003] 1 HKC 418.

34.  First it is plain that the clause in question is an arbitration agreement. 

35.  Second the arbitration agreement is neither null nor void nor is it incapable of being performed.  That it may be open to Shun Shing to raise a limitation answer before an arbitrator does not prevent the provision from being performed. 

36.  Third, there is a real dispute or difference between the parties.  Mr Zhang claims a balance due on the contract from Shun Shing.  Shun Shing claims damages from Gwen for unsatisfactory performance of the contract. 

37.  Finally, fourth, it is clear that that dispute is a dispute which is plainly within the ambit of the arbitration agreement.

38.  I have no doubt at all that this is a proper case where, assuming the assignment is effective, these proceedings should be stayed and Mr Zhang’s claims, and Shun Shing’s counterclaim or set off be referred to arbitration.

39.  Consequently, were the assignment effective, I would have made the order sought staying the proceedings, and referring the matter to arbitration.

Costs:

40.  Shun Shing have succeeded in all respects.  There will be an order nisi that Mr Zhang must pay Shun Shing’s costs of the proceedings, to be taxed on a party and party basis if not agreed.