YOUNG'S ENGINEERING CO LTD v. HANG SING CONSTRUCTION CO LTD

Procedure. Order 14 - Appeal from Master's decision under Order 14 giving summarily judgment for part of claim and granting leave to defend for balance. Notice of appeal only in respect of part entering judgment. No cross-appeal by Plaintiff in respect of rest of order. Held that even though appeal from Master is my way of re-hearing the Plaintiff could not argue that part of the Waster's decision for which leave to defend had been granted.

                Contractors effect of Engiineer's certificate contractor has right to set off against sub contractors claim unless that right is removed by clear terms in the contract. Dicta in Gilbert-Asb v. Modern Engineering, (1974) A.C. 689 followed.

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JUDGMENT

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Preliminary

1. This is an appeal by the Defendant under Order 58 of the Rules of the Supreme Court against a Master's decision dated the 10th of August 1984 on an application by the Plaintiff under Order 14 of the Rules of the Supreme Court for summary judgment. Master Betts ordered that judgment be entered for the Plaintiff in respect of the sum of $949,570.00 being part of the Plaintiff's claim and that leave be given to the Defendant to defend the balance.

2. A preliminary point was raised before me concerning the question of what matters were for my decision.

3. It was the contention of the Plaintiff that by appealing the Master's decision the whole matter which was before the Master should be re-heard. It was therefore within the power of the Court to reverse not only the Master's decision which gave summary judgment for the Plaintiff as to part of its claim but also the remainder of the decision which gave unconditional leave to defend in respect of the other part. Leading Counsel for the Defendant submitted that was not so and that the Notice of Appeal quite clearly set out in paragraph 2 that the Defendant was only appealing against the order for summary judgment. Obviously, he said, they did not appeal against that part of the decision which was in their favour.

4. I have been unable to find any direct authority on this point though it must have occurred quite frequently. The Plaintiff relies on the statement in the White Book which says that an appeal from the Master to a Judge in Chambers is dealt with by way of a re-hearing of the application. The footnote to Rule 58/1/2 reads inter alia:-

 

The Judge treats the matter as though it came before him for the first time save that the party appealing, even though the application was not by him but against him, has the right as well as the obligation to open the appeal. It is common practice for t he Judge in Chambers to admit further evidence by affidavit to that which was before the Master. The Judge is in no way fettered by the previous exercise of the Master's discretion and on appeal from the Judge in Chambers the Court of Appeal will treat the substantial discretion as that of the Judge and not of the Master.

5. Leading Counsel for the Defendant argued that nevertheless in civil proceedings it is an overall requirement that parties should not be taken by surprise and that if a matter is in dispute then notice should be given so that the parties are fully aware of what is to be argued. He says that his Notice of Appeal clearly set out what part of the Master's decision was to be disputed and that the Plaintiff had not itself appealed against the part which they now wish to put in issue. He said that he had not put his client to the expense of taking instructions as to that which they did not wish to dispute. If there was to be an issue against the Master's decision granting unconditional leave he would have to seek an adjournment to take instructions. I indicated at that stage that I considered that Mr. Bokary was correct and that if the part of the Master's decision granting leave to appeal was to be challenged the Plaintiff should have filed cross Notice of Appeal. On that basis the parties then agreed that so far as that part of the claim was concerned there would be an order by consent for a speedy trial. I then so ordered.

6. Subsequently having considered the matter further I had some doubts but I am now satisfied that the arguments put forward for the Defendant are correct and that if a party files Notice of Appeal against part of a Master's decision then it is only that part which the Judge in Chambers is called upon to consider. While the hearing is by way of a re-hearing of the application, nevertheless it is the overriding principle that parties should not be taken unawares. If the Plaintiff was dissatisfied with the part of the Master's decision granting leave to the Defendant they should have filed Notice of Appeal against that part of the decision. They did not do so and are thereby barred from raising the matter at this stage.

Background

7. The background to this claim is that the Defendant was the main contractors employed by Cathay Pacific Airways (CPA) to erect a building at Kai Tak International Airport. The Plaintiffs were the sub-contractors for the air-conditioning and refrigeration works. As is normal in building contracts there was a provision whereby on receipt of an engineer's certificate CPA paid sums of money to the Defendant as progress payments. There was a clause in the sub-contract whereby on receipt of such payments the Defendant should within 7 days pay the Plaintiff any sum which the engineer had certified was due and owing in respect of the sub-contract. The Defendant did not do so in respect of some payments received as it claimed that there had been delays due to the fault of the Plaintiff and that as a result of such delays the sum of $1,425,000.00 had been deducted by CPA from the amount owing under the main contract. It considered that it was entitled to set-off that amount from the sum due to the Plaintiff. The Master held that there was a triable issue on that aspect of the claim and granted unconditional leave to defend.

The Defendant's case

8. The Defendant however further claimed that because of the delays occasioned by the Plaintiff it had had to remain on the site longer than should have and that there were additional expenses incurred by way of general overhead because of that. The Master held that this did not riase a triable issue and gave summary judgment in respect of the balance of the claim. The Defendant argues that this is wrong in that if there were delays which might be the fault of the sub-contractor and the Master has found that this is a possibility by giving leave to defend in respect of the first part of the claim than as a matter of pure logic there must have been additional overhead expenses incurred and it is a triable issue as to whether this was so and what those expenses were. Counsel for the sub-contractor concedes that before the Master the particulars supplied by the Defendant were not as full and detailed as they could have been but that could be remedied by an application for further particulars. Such particulars have in fact been now supplied.

The Plaintiff's Case

9. The Plaintiff argues first of all that in building contracts there is no right at all for the contractor to withhold any payment received by it from the employer and that even if it considers it has some right of set-off it must pay the full amount owing, without any deduction, to the sub-contractor within 7 days of receipt. Prior to 1973 this was undoubtedly the case. The Court of Appeal had decided in Dawnays Limited v. F.G. Minter Limited and Trollope and Colls Limited (1971) 1 W.L.F. 1205 that where an architect's certificate (an engineer's certificate must be the same) was given in respect of work done by a sub-contractor and payment was made to the contractor on the basis of that certificate he was not allowed to deduct any amount which he might consider due by way of set-off. Lord Denning M.R. said:-

 

"When the main contractor has received the sums due to the sub-contractor as certified or contained in the architect's certificate the main contractor must pay those sums to the sub-contractor. He cannot hold them up so as to satisfy his cross claims. Those must be dealt with separately in appropriate proceedings for the purpose. This is in accord with the needs of business. There must be a cash flow in the building trade. It is the very life blood of the enterprise."

This is undoubtedly an attractive argument, especially in the Hong Kong environment where sub-contractors are often under capitalised. That decision was followed in several other cases subsequently and it was apparently settled that in the particular instance of a building contract there was no right to set-off when an architect's certificate had been presented in respect of work done under a sub-contract. Such a certificate must be considered as virtually cash.

10. That decision however was not followed by the House of Lords in the case of Gilbert-Ash (Northern) Limited v. Modern Engineering (Bristol) Limited (1974) A.C. 689. In that case Judge Edgar Fay sitting as the Official Referee had held that the terms of the contract provided for payment being withheld if the contractor considered it had a right of set-off and that he was accordingly entitled to defend the action on that basis. It was clearly a somewhat courageous decision in view of the then existing authorities. Not surprisingly the sub-contractor appealed and the Court of Appeal, presided over by Lord Denning, also not surprisingly followed their previous decision in Dawnays case and allowed the appeal. Leave was however granted to appeal to the House of Lords and there the Court of Appeal decision was reversed. The House of Lords in a unanimous decision held that the terms of that contract did provide for the right to set-off. They went on, however, to also hold that the right of set-off is a fundamental common law right. It is always open to the parties to a contract to remove that right but they must do so in clear and express terms. They held that there was nothing sacrosanct about an architect's certificate and that one must look to the terms of each individual contract to see whether the right of set-off was available to the contractor. If it had not been clearly removed then he could defend an action brought by a sub-contractor by a claim for set-off. In particular the House of Lords held that this right of set off was not limited to liquidated and ascertained amounts. Provided the set-off could be quantified it could be pleaded.

11. The clause in the sub-contract here upon which the Plaintiff relies is clause 15(3) which reads:-

 

Within 7 days of his receiving from the Employer on account of the Main Works any sum which includes a sum in respect of the Sub-Contract Works, the Contractor shall pay to the Sub-Contractor in respect of the work or material done by the Sub-Contractor and included in such payment under the Main Contract a sum calculated in accordance with the rates specified in this Sub-Contract."

Counsel for the Plaintiff says that the words shall pay within 7 days means precisely that and there can't be any deduction as set-off. I do not consider that the words can be given that meaning. Cilbert-Ash, it seems to me, makes it clear that the common law right to set-off remains unless it is removed by clear and express words. I did not consider that clause 15(3) does so remove this right.

12. The question then is: Has the Defendant shown that it has a real defence by way of set-off which should be investigated by the Court. In Ellis Mechanical Services Limited v. Wates (1976) 2 B.L.R. 57 Lawton L.J. said:-

 

"Now if a householder put in an affidavit like that in answer to an ordinary builder's claim before the Master under Order 14 he would get very short shrift indeed because it has long been accepted that it is not an answer to a summons for judgment under Orcer 14 to say 'I dispute the claim and I suspect that it has been wrongly formulated'. The ordinary practice is that there must be some real basis not a shadowy basis for saying that there is an issue worthy of investigation by the Courts. The Defendant's answer amounts to more than 'we dispute the claim'. That is not enough."

13. Here the Plaintiff argues that the Defendant does no more than that i.e. it simply says we were forced to remain on site longer than we should have, therefore we incurred overhead expenses and we are entitled to deduct what we think those expenses were. Leading Counsel for the Plaintiff said that is not an argument against leave being given to defend but is an argument in favour of being supplied with further and better particulars and that while there was not a great deal before the Master in support of the Defendant's claim for overhead expenses this has now being ratified in the form of an affirmation by Mr. Sofaer, the financial controller of the Defendant, setting out in considerable detail what those expenses were.

14. I have been through the correspondence between the parties which is exhibited to the previous affidavits which have been filed. I have also been through the minutes of the relevant site meetings. The Defendant's claim that the Plaintiffs were in default in supplying sufficient information for the Defendants in turn to obtain extensions of time. They point to their letters of the 19th and 27th October 1983 requesting such details. That however seems to me to be contradicted by their further letter to the Architect and Engineers dated the 6th of March 1984 in which they say:-

 

"Firstly we most emphatically deny that we have failed to submit claims for extension of time for the air-conditioning installation. We refer you to our detailed claim sent to you on 12th September 1983 in which we demonstrated by the issue of critical path network analysis the effect of, inter alia, variations and additional works, late instructions and revised works with specific and detailed reference to the air-conditioning works. The on-going effect of delays in the mechanical installation were also related by network to our overall building works programme and we cannot imagine what additional information could be required for you to be able to prepare your assessment.

The letter then goes on to refer to a letter of 9th November from the Plaintiff which set out the reasons why they had been delayed in completing their sub-contract. With regard to that letter the Defendant said:-

 

"Young's letter of 9th November 1983 has been dealt with by us as an internal matter between Young's and ourselves and is not a material part of either our sub-contractors or of our own claim."

There is no reference in any of the correspondence to any claim by the Defendant in respect of site overheads.

15. There was a site meeting on the 5th of May 1983 and I am satisfied from the minutes of that meeting that there were at that stage certainly other sub-contractors still actively engaged on the site. At that meeting on the 30th of June 1983 that position did not seem to have been substantially changed. There is furthermore evidence of extra air-conditioning installation work being requested by the Defendants from the Plaintiffs at a late stage in the contract.

16. The main argument of the Defendants is that if there is a triable issue as to delay of the contract caused by the Plaintiffs resulting in deductions made by CPA in its payments to the Defendant then there must inevitably be consequential damage due to their increased overhead expenses occasioned by that delay. I do not think that on the documents that has been made out. The claim in respect of overhead expenses was not made until a very late stage indeed. There seems to me to be ample evidence that in any event this delay was not caused solely by the default of the Plaintiff. I am of the opinion that the defence by way of set-off raised by the Defendant in respect of these overhead expenses is indeed a shadowy defence and that the Defendants should not be granted leave to defend in respect of that part of their defence. I am satisfied that the decision of the Master was correct.' The appeal is therefore dismissed. There was some preliminary argument on the question of what matters were at issue in this appeal on which the Defendant was successful. The Plaintiff will therefore have 2/3 of its costs of this appeal.