YEW SANG HONG LTD v. THE HONG KONG HOUSING AUTHORITY

HCCT79/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 79 OF 2006

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D E C I S I O N

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1. This is an application by the defendant (“HA”) to strike out the statement of claim on the ground that it discloses no reasonable cause of action pursuant to Order 18 rule 19 of the RHC.  It is acknowledged by the HA that the power to strike out should only be exercised in plain and obvious cases.  Put simply, the HA contends that, as a matter of law, the plaintiff cannot succeed.

2. The plaintiff (“Yew Sang”) was the electrical sub-contractor on a government residential construction project at Tung Chung.  The HA appointed Dickson Construction Company (“Dickson”) as the main contractor and instructed Dickson to accept Yew Sang as the nominated electrical sub-contractor.  Dickson and Yew Sang then entered into the sub-contract.

3. The works, including Yew Sang’s works, were certified as substantially complete on 29 February 2004.  A two-year maintenance period then commenced which was due to expire on 28 February 2006.

4. Unfortunately, Dickson got into serious financial difficulties during this period.  Those difficulties became public in December 2005 and Dickson is now in liquidation.  A winding-up petition was served on 16 January 2006.  

5. Yew Sang claims that, as a result of the winding-up, it has not been paid under four heads of claim :

(i)	it had completed variations which were not paid for;
(ii)	retention money has not been paid over;
(iii)	certain works under the contract were not paid for; and
(iv)	rectification works for defects, other than its own defects, have not been paid for.

The total value of the claim is less than $2.5 million.

6. In this application the HA has been represented by Mr Peter Clayton SC and Yew Sang by Mr Peter Ng SC and Miss Winnie Tsui. 

7. Mr Clayton submits that as there is no contract between HA and Yew Sang the doctrine of privity of contract precludes any claims.  Mr Ng accepts the basic principle but submits that he has an arguable case that the doctrine of privity of contract does not prevent his claim on three grounds.  First, a claim for restitution based on HA unjust enrichment.  Secondly, a claim based on an implied contract between HA and Yew Sang.  Thirdly, in relation to the retention money (a sum of $837,000 being held by HA) that HA is holding the money on trust for the sub-contractor.

8. Mr Clayton contends that all three bases of claim are bound to fail.

9. Whilst Dickson’s winding-up was a serious blow to Yew Sang which has resulted in non-payment of works done, I agree with Mr Clayton that Yew Sang’s claims against HA are forlorn attempts to circumvent the principle of privity of contract which are bound to fail.

(1) Restitution

10. Mr Ng relies on the principle of unjust enrichment.  There is no doubt that Yew Sang “enriched” Dickson under the sub-contract and that HA was “enriched” by Dickson under the main contract.  The question is : can Yew Sang “leapfrog” Dickson and claim restitution of HA’s enrichment?  In normal circumstances the doctrine of privity does not allow this.  However, Mr Ng contends that it is not an absolute bar, there can be exceptional circumstances and it is arguable in this case.

11. Birks Unjust Enrichment (2^nd Edition) page 90 sets out the basic rule :

“

At this point we return to those cases in which one party confers an enrichment which is procured by another.  Where a defendant receives a benefit from or because of the performance of a contract between two others and the party making the performance and thus conferring the benefit had a valid contractual right to be paid for that performance by the other party to the contract, the recipient of the enrichment is the immediate enrichee of the latter party, the party bound to pay, and the remote enrichee of the former, the party conferring the enrichment.  In such a case the former, who procured the performance, may never be leapfrogged by the latter, who conferred it.  Leapfrogging out of an initially valid contract is not allowed.  One may never attack one’s contractual counter-party’s immediate enrichee.”

12. In support of his submission that the foregoing statement is a “sweeping proposition” that does not prevent his claim in this case Mr Ng relies on certain authorities.  ABB Power Generation Ltd v. Chapple [2001] WASCA provides an example of a case where the doctrine of privity was by-passed.  However, that case concerned payments for works which were all outside the scope of the original contract and Mr Ng acknowledges that it is not a case on which he can rely on in support of his submission that, in certain circumstances, “leapfrogging” is permissible.  To that end he relies on Shanghai Tongji Science & Technology Industrial Co. Ltd v. Casil Clearing Ltd [2004] HKLRD 548.

13. However, the restitution claim in that case was in relation to a specific scenario.  Ribeiro PJ’s opening remarks under the “Restitution Claim” part of his judgment states :

“	… The common law cause of action asserted by the plaintiff for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment : …”

14. Mr Clayton correctly observes that this is quite different from the present case.

15. After a lengthy analysis Ribeiro PJ later said :

“

… In dealing with this argument, care must be taken to distinguish between cases (i) where the plaintiff makes payment to the defendant pursuant to a subsisting contractual obligation owed by him to the defendant; and (ii) where the plaintiff makes payment to the defendant pursuant to a contractual obligation owed by the plaintiff to a third person.”

16. It is acknowledged that no restitutionary claim arises in the first category and although the second category is described as “debateable” it is, again, not the situation which has arisen in the present case.  When making specific reference to the “leapfrogging” situation Ribeiro PJ said : “However, we are not concerned here with any such situation. …”

17. It seems to me that when focusing on the situation in this case both texts and authorities are against the remedy being available.

(2) Implied contract

18. The submission here is that by reason of the conduct of the parties an inference can be drawn that Yew Sang and HA had an agreement and that, under that agreement, HA is liable to make the payments which Yew Sang seeks.

19. Buckley LJ in Brown & Davis Ltd v. Galbraith [1972] 1 WLR 997 at page 1006 stated that the inference could only be drawn if :

“	… it is an inference which the business realities of the situation really make necessary to make sense of the dealings between the parties so that they can be implemented in a sensible manner.”

20. In fairness to the plaintiff I here set out all those matters upon which Mr Ng relies in support of the existence of an implied contract.  They are taken from his written submissions :

“	(i)	The entire nomination procedure implemented by the HA was such that, as a matter of business reality, the Plaintiff had no alternative but to enter into the Subcontract with Dickson.
	(ii)	The existence of the direct payment clause in the Main Contract which contemplated situations in which, upon default by Dickson, the HA would pay directly to subcontractors monies due to them.
	(iii)	The rationale of the direct payment clause was to provide some reasonable assurance to subcontractors that they would receive prompt payment for work certified to have been completed.
	(iv)	If the direct payment clause were to have any commercial value to subcontractors, one obvious situation in which the HA were expected to invoke it was when insolvency on the part of Dickson became a real likelihood and the primary payment mechanism put in place by the contractual regime no longer worked.
	(v)	The fact that the HA put the direct payment clause in its standard form Main Contract was a manifestation of their genuine intention to invoke it for the protection of subcontractors in times of need.  It would be wholly unconscionable and devoid of commercial sense for the HA, as a statutory body, to contend that they are entitled not to invoke the direct payment clause capriciously or arbitrarily, to the detriment of the subcontractors.
	(vi)	The inherent improbability that any subcontractors would accept the nomination system implemented by the HA unless there existed a legal obligation on the HA’s part to make direct payments to subcontractors in the one situation in which they were most needed i.e. impending insolvency of Dickson.”

21. In my judgment these arguments do not found an arguable case for the plaintiff for the following reasons.

22. This is not a case where it is being said that a contract should be implied so as to remedy the absence of words or documents.  It is not a case where the conduct of the parties can be construed as evidence of common intentions.  In fact it is an attempt to circumvent the existence and effect of two subsisting contracts, one between HA and Dickson, the other between Dickson and Yew Sang.

23. In order to establish such a contract in the present case the plaintiff must show that the parties impliedly agreed to it specifically because of the possibility of Dickson’s future insolvency.  This is its pleaded case.  However, the facts and matters relied on are all referrable not to such an implied agreement but to the existing contract between Yew Sang and Dickson.

24. As to the above six points relied on by Mr Ng, Mr Clayton answers them succinctly : (i) is always the case, (ii) to (v) relate to the “direct payments clause” which only “entitle” HA to pay Yew Sang directly in certain specific circumstances which do not arise in this case.  It does not infer any “obligation” on HA to pay.  (iv) is wrong because there was no such “legal obligation”.

25. The possibility of an implied contract was also dealt with in the Shanghai Tongji Science & Technology Ltd case (above).  The circumstances in which such a contract may arise are strict and do not apply in this case as is demonstrated by the following extracts :

“	… And the court will not imply such a contract lightly.  The conduct relied on must be unequivocally referable to the contract sought to be inferred. …
	... it is not enough to show that the parties have done something more than, or something different from, what they were already bound to do under obligations owed to others.  What they do must be consistent only with there being a new contract implied, and inconsistent with there being no such contract.
	… A contract will not be concluded unless the parties are agreed as to its material terms.  There must be ‘consensus ad idem’.  Whether the parties have reached agreement on the terms is not determined by evidence of the subjective intention of each party. It is, in large …”

(3) Retention money held on trust?

26. Mr Ng’s subsmission relies on the existence of a “Quistclose trust” (Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567).  The Quistclose case dealt specifically with a borrower/lender situation which does not arise in the present case, however Mr Ng contends that the principle has wider application.  He submits that the retention money was held specifically for the plaintiff and thus HA is under a fiduciary obligation to pay it to Yew Sang. 

27. In support he points to the definition of retention money in SCC 2(3) which provides for separate definitions of contractor retention money and sub-contractor retention money :

“	(3)	The following definitions are added to Clause 1(1) of the General Conditions of Contract.
		(a)	‘Retention Money Held in respect of the Nominated Sub-contractor’ means the sum as specified in the Contract to be respectively retained by the Employer as retention money from any estimated sum payable in respect of that part of the Works executed or supplied by a Nominated Sub-contractor.
		(b)	‘Retention Money Held in respect of the Contractor’ means the sum as specified in the Contract to be retained by the Employer as retention money from any estimated sum payable in respect of the Works excepting any part of the Works executed or supplied by Nominated Sub-contractors.”

28. As an example of a situation where the principle was extended beyond the borrower/lender situation Mr Ng cites Typhoon 8 Research Ltd v. Seapower Resources International Ltd [2002] 2 HKLRD 660 which concerned a rental deposit being held by a landlord.

29. At first blush it is tempting to agree that the innocent sub-contractor should have at least an equitable claim to its retention money.  Bearing in mind also the high burden on the applicant in a strike out application it is tempting also to conclude that Yew Sang’s claim for the retention money may not be impossible.

30. However, I have come to the conclusion that Mr Clayton’s answer to the plaintiff’s submission is simple and unarguable.

31. He makes two points.  The authorities upon which Mr Ng relies concern contracts which expressly provide for such a trust existing.  Not so in either the main contract or the sub-contract in the present case.  In all the cited examples there was a specific purpose for the money in question.  Not so in the present case.  In our case the retention money could be withheld for a variety of unspecified reasons.  The answer in the present case must be looked for and found in the terms of the contract.  GCC 83 provides a complete answer :

“	83.	(1)	All damages (including liquidated damages), costs, charges, expenses, debts or sums for which the Contractor is liable to the Employer under any provision of the Contract may be deducted by the Employer from monies due to the Contractor under the Contract including Retention Money and the Employer shall have the power to recover any balance not so deducted from monies due to the Contractor under any other contract between the Employer and the Contractor.
		(2)	All damages (including liquidated damages), costs, charges, expenses, debts or sums for which the Contractor is liable to the Employer under any provision of any other contract between the Contractor and the Employer may be deducted by the Employer from monies due to the Contract or under the Contract, including Retention Money.” [Emphasis added]

32. Under the terms of the contract the retention money consisted of both money held in respect of the nominated sub-contractor and money held in respect of the main contractor.  Under the sub-contract Dickson was obliged to pay Yew Sang its retention money within 28 days of certification.  However, there has been no certification and therefore no money can pass hands.  Once Dickson’s financial difficulties were known the HA acted properly in preventing further payments out.

33. Yew Sang was informed at early stage that HA had re-entered three sites involving Dickson and any monies being held at the time could be used to set off any of its loss and damages arising out of Dickson’s financial collapse.

34. In these circumstances any argument which purports to say that only part of the retention money should be retained by HA for the above reasons and another part is held on trust for Yew Sang must fail.

35. In all the circumstances paragraph 1(a) of the defendant’s summons dated 3 April 2007 is granted with costs of and occasioned by the summons to the defendant.  Costs will not be on an indemnity basis.