XCHRX ASSOCIATED ENGINEERS LTD. v. LEE SHING YUE CONSTRUCTION CO. LTD.

1998 No. A13014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

______________

______________

_______________

J U D G M E N T

_______________

Introduction

1. The Defendant was the main contractor on a project for the Kowloon Canton Railway Company ("the KCRC"). The Plaintiff was engaged by the Defendant as sub-contractor in respect of some of the works. The Plaintiff claims that the amount payable by the Defendant to the Plaintiff under the sub-contract, after variation works had been taken into account, was $25,561,542.92. It claims that the Defendant has only paid it sums totalling $21,669,353.17. That left an outstanding amount of $3,892,189.75. In this action, that is the amount claimed by the Plaintiff against the Defendant plus interest.

2. There was a delay in the completion of the project. That delay was initially assessed by the KCRC to amount to 64 days. Under the terms of the main contract between the KCRC and the Defendant, a liquidated sum of $45,000.00 a day was payable by the Defendant to the KCRC for any delay in completion. Accordingly, a sum of $2,880,000.00, i.e. $45,000.00 x 64, which would otherwise have been payable to the Defendant by the KCRC was withheld. On the other hand, under the terms of the sub-contract between the Plaintiff and the Defendant, a liquidated sum of $24,000.00 a day was payable by the Plaintiff to the Defendant if it had been responsible for any of the delay. At that rate, the sum which the Defendant could withhold would have been $1,536,000.00, i.e. $24,000.00 x 64. There is a dispute between the Plaintiff and the Defendant as to whether the Plaintiff was responsible for any of the delay. The Defendant claims that the Plaintiff was. The Plaintiff claims that it was not.

3. The Plaintiff accepts that there is a triable issue on that question. Accordingly, when the Plaintiff issued a summons for summary judgment under Ord. 14, it limited the sum for which it sought summary judgment to $2,356,189.75, i.e. the sum claimed of $3,892,189.75 less the sum of $1,536,000.00. Master Lok gave the Defendant unconditional leave to defend the action. The Plaintiff now appeals against that order. It maintains that it is entitled to summary judgment for at least $2,356,189.75. Indeed, for reasons which I shall come to later, it now seeks summary judgment for an even larger sum.

The Plaintiff's figures

4. The two sums by which the Plaintiff's claim of $3,892,189.75 is calculated are, as I have said, the sums of $25,561,542.52 and $21,669,353.17. Although the Defendant in its Re-amended Defence and Counterclaim denies the correctness of those figures, it does not assert any basis for that denial. Nor does it put forward figures of its own. For Ord. 14 purposes, therefore, the court is obliged to treat the Plaintiff's figures as correct.

The alleged oral terms

5. The Defendant claims that the sub-contract was subject to two express terms agreed orally during the pre-contractual negotiations:

(i) The sub-contract would be awarded on a "back-to-back" basis. According to the Defendant, that meant that the Plaintiff was obliged to "accept fully the terms and conditions of the Main Contract to the extent that they were applicable to the Sub-contract". The Defendant contends that that meant that under the sub-contract the Defendant was entitled to withhold a liquidated sum of $45,000.00, not $24,000.00, a day.

(ii) The Plaintiff's entitlement to payment from the Defendant would be conditional upon the KCRC first certifying the sub-contract works and paying the Defendant for them. The Defendant contends that since the KCRC has withheld $2,880,000.00 from the Defendant, the Defendant is entitled to withhold $2,880,000.00 from the Plaintiff.

6. The Plaintiff disputes that such terms were agreed, but in my view even if they were agreed they do not assist the Defendant. The first term applied to the extent that the terms of the main contract were applicable to the sub-contract. The term of the main contract providing for the withholding of a liquidated sum at the rate of $45,000.00 a day was not applicable to the sub-contract, because the sub-contract expressly provided for a different daily rate. As for the second term, the KCRC has paid the Defendant for all the certified sub-contract works. It simply withheld such payment as would otherwise be due as a result of the delay.

The set-off provisions

7. The Defendant, however, puts its case in an additional way. The sub-contract contained a number of provisions entitling the Defendant to set-off against the sums otherwise due from the Defendant to the Plaintiff the amount of any losses or expenses incurred by the Defendant by reason of any breaches by the Plaintiff of its obligations under the sub-contract. Thus, the Defendant seeks to set-off against the sums otherwise due to the Plaintiff the losses it alleges it incurred as a result of the Plaintiff's alleged responsibility for the delay in the completion of the project. These losses consist of two elements: the $2,880,000.00 withheld by the KCRC under the liquidated damages clause in the main contract, and sums totalling $1,898,689.22 representing what the Defendant alleges to be its additional losses.

8. I have already referred to the express provision in the sub-contract for liquidated damages for delay: $24,000.00 for each day's delay. The critical question is whether that liquidated damages clause excluded the Defendant's contractual right to set-off for delay. That is a matter of construing the sub-contract as a whole. I am inclined to agree with the view expressed in Temloc Ltd. v. Errill Properties Ltd. (1988) 39 BLR 30 that where there is an express provision for liquidated damages for delay, there is no room to imply a term to the contrary, even though this view has been doubted in at least one other common law jurisdiction. But in the present case there were a number of express terms purporting to confer on the Defendant the right to claim the actual loss it sustained for the Plaintiff's alleged delay in completing the works. The discussion of the issue in Mclnnes, "Hong Kong Construction Law", 1998 at paras. XII 5-48 shows how different views can be taken on the topic. I do not think that this issue of construction can be resolved in a summary procedure. In my view, the question whether the liquidated damages clause in the sub-contract excluded the Defendant's contractual right to set-off for delay is a triable issue to be determinated at trial.

9. I am very sceptical about the Defendant's ability to establish many of the heads of loss which contribute to the calculation of the sum of $1,898,689.22. But the difference between the sum claimed in the action of $3,892,189.75 and the set-off of $2,880,000.00 is just over $1m., and I think it arguable that the Defendant's other set-offs could come to at least $1m. If that is found to be correct at the trial of the action, and if at the trial it is found that (a) the Plaintiff was responsible for the delays in the completion of the project, and (b) the liquidated damages clause in the sub-contract did not exclude the Defendant's contractual right to set-off for delay, then the Defendant's set-offs will exceed the Plaintiff's claim.

The Defendant's schedule

10. I have not overlooked a schedule prepared by the Defendant upon which Mr. Andrew Allman-Brown for the Plaintiff placed much reliance. That schedule referred to the amount said to be outstanding by the Defendant to the Plaintiff. The amount was $2,487,149.75. That is the sum for which summary judgment is actually claimed. That sum was calculated by deducting two sums from the Plaintiff's claim of $3,892,189.75: (a) $30,000.00 for repairs to a damaged road, and (b) $1,375,000.00 for liquidated damages.

11. It may be that when that schedule was prepared, it was thought by whoever prepared it that the liquidated damages clause excluded the Defendant's contractual right to set-off for delay. But whether that is correct is a matter which, for the reasons I have given, can only properly be decided at the trial. It may be that the person who prepared the schedule simply (a) did not appreciate that if the Defendant's contractual right to set-off for delay was not excluded, that set-off could in law include the $2,880,000.00 withheld by the KCRC, and (b) did not know about the other losses now said to have been incurred as a result of the delay. Nor have I overlooked the proviso to clause 8 in Part D of the sub-contract, which provides that the amount of set-off has to be quantified in detail and with reasonable accuracy, and that notice has to have been given specifying the Defendant's intention to set-off the amount quantified and the ground on which the set-off is claimed. Such notice has been given, if not before, by the Re-amended Defence and Counterclaim and by the affirmation of Thomas Lee Chun Cheong.

Conclusion

12. For these reasons, I think that Master Lok was entirely correct to give the Defendant unconditional leave to defend the action, and this appeal must be dismissed.