YEW SANG HONG LTD v. HONG KONG HOUSING AUTHORITY

CACV 346/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 346 OF 2007

(ON APPEAL FROM HCCT NO. 79 OF 2006)

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REASONS  FOR  JUDGMENT

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Hon. Yuen JA:-

1.  I have had the benefit of reading the draft Judgment of Reyes J and agree with it.

Hon. Reyes J:-

INTRODUCTION

2.  The Housing Authority as Employer engaged Dickson Construction Ltd. as Main Contractor for a Tung Chung construction project.  Yew Sang was a Nominated Sub-Contractor.  Yew Sang accordingly entered into a sub-contract with Dickson.  There was no direct contractual relationship between Yew Sang and the Authority. 

3.  Dickson having become insolvent, Yew Sang claimed the monies owed to it by Dickson directly from the Authority.  Conventionally, the doctrine of privity of contract would have barred recovery by Dickson from the Authority.  But Yew Sang sought to get around the absence of privity by framing its claim against the Authority in restitution, trust and implied contract. 

4.  At first instance, Burrell J struck out Yew Sang’s claim as disclosing no reasonable cause of action.  On appeal Yew Sang argued that the judge was wrong to have done so.  We dismissed Yew Sang’s appeal and now give our reasons for so doing.

II.  DISCUSSION

5.  In this section I shall review the 3 heads of claim advanced by Yew Sang.

A.   Restitution

6.  To establish a claim in restitution, the following broad elements need to be established:-

See Shanghai Tongji Science & Technology Industrial Co. ltd. v. Casil Clearing Ltd. [2004] 2 HKLRD 548 (CFA), at §§67-68.

7.  Here the Authority was enriched. It indirectly benefitted from the services which Yew Sang provided to Dickson under the Nominated Sub-Contract.

8.  Mr. Peter Ng SC (appearing for Yew Sang) submitted that in light of 4 circumstances it would be unjust to allow the Authority to enjoy the benefit which it has indirectly obtained at Yew Sang’s expense.  The 4 circumstances are:-

9.  I have not been persuaded by Mr. Ng’s submission.  I do not think that the enrichment in this case may be characterised as “unjust” under the law of restitution.

10.  A plaintiff cannot normally obtain compensation for a benefit conferred on a third party as a result of the plaintiff performing an obligation owed to another otherwise than under compulsion of law.  See Goff & Jones on The Law of Restitution (7th ed., 2007), §§1-061 and 1-074.

11.  Goff & Jones (at §1-074) explain the rationale for this limitation on restitution as follows:-

“A sub-contractor contracts with the main contractor to install light fittings in the owner’s house.  He does so.  The contractor is unable to pay him.

English as well as the majority of American jurisdictions will deny ... the sub-contractor any claim against the owner.  At first it was said that the claim must fail because there was no privity between the parties; but that requirement, which is a relic of the heresy of implied contract, has been justly condemned as ‘unintelligible.’  In more recent years less formalistic reasons have been suggested for rejecting any restitutionary claim; in particular, that a claimant can never recover in unjust enrichment if the benefits were conferred on the defendant while discharging an obligation which the claimant owed to a third party.  Underlying the principle is the assumption that it is unwise to cut across contractual boundaries and to redistribute to a stranger, the owner, the risks which the plaintiff implicitly agreed to bear when he contracted with a third party ...  In some cases a defendant may be liable to pay a third party for services rendered even though they were rendered by the claimant, for such may be the case where the sub-contractor seeks restitution from the landowner who is contractually bound to make payments for the sub-contractor’s services to the head contractor.  Moreover, in ... our example, to allow the sub-contractor a direct claim against the landowner may result in the sub-contractor gaining priority over the contractor’s general creditors in the event of the contractor’s insolvency.”

12.  Where parties have expressly or impliedly allocated risks among themselves through a network of back-to-back or interlinking agreements, the law of restitution will not without compelling reason interfere with that allocation.  It is unwise to tinker with the parties’ allocation because a revision of risks as between (say) A and B may bring about adverse consequences as between (say) B and C or others in the contractual network.  Attempting to do justice between A and B alone may lead to injustice being done as between B and C.

13.  For similar reason, the law of restitution will not normally cut across long-established statutory regimes regulating creditors’ rights against insolvent debtors.  Otherwise, the law of restitution may undermine the pari passu principle whereby unsecured creditors share rateably in the assets of an insolvent debtor.  To allow a creditor a restitutionary remedy in the interests of “doing justice” in a specific case would only lead to that creditor jumping the queue of unsecured creditors and so bring about injustice in everyone else’s case.

14.  I have so far consciously qualified my statements of principle with words such as “normally” and “in the absence of compelling reason”. 

15.  Mr. Ng contended that Goff & Jones stated the principle too widely.  He argued that there may be cases where restitution will be allowed against B in favour of A even though the benefit conferred by A on B was the result of A’s discharging of an obligation owed to C. 

16.  In support Mr. Ng cited Shanghai Tongji.

17.  There Ribeiro PJ (at §89) distinguished between 2 categories of situation:-

“(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.”

18.  Counsel for Casil (relying on The “TRIDENT BEAUTY” [1994] 1 WLR 161 (HL)) had submitted that in the 2nd category of case the right to restitution was excluded altogether.  But Ribeiro PJ did not think that The “TRIDENT BEAUTY” established such blanket exclusion.  He said obiter (at §100):-

“It is true that ... there has been academic debate as to the viability and desirability of extending the principle [excluding the operation of restitution] to cover cases in the second category....  Difficult questions arise in this debate.  One can readily understand the need for the established exclusionary principle, based as it is on a desire to prevent subversion of contracts subsisting between the person conferring and the person receiving the benefit under the contract.  But on what, if any, ground should a restitutionary claim be excluded against an unjustly enriched recipient who is not a party to any contract pursuant to which the benefit was conferred?  The third party recipient may or may not be a party to a different contractual regime whereby he may have acquired the right to receive the benefit, but even if he is, it is by no means clear that allowing a restitutionary claim in such circumstances would necessarily be inconsistent or involve ‘subverting’ that separate contract.  Relevant defences may be available on the facts, making it highly debatable whether the established exclusionary principle should be so extended.  There is, however, no necessity in the present case to grapple with these difficulties since the claim based on total failure of consideration fails in any event since there has been no such failure of consideration.”

19.  I have deliberately stated the principle in qualified terms because I am prepared to accept as a first premise that restitution will not always be excluded in cases falling within the 2nd category identified by Ribeiro PJ.

20.  At first instance, Burrell J pointed out (at Judgment, §16) that in the dictum just quoted Ribeiro PJ was not apparently dealing with a “leapfrogging” situation.  Here Yew Sang wishes to “leapfrog” over Dickson (the “immediate enrichee” of Yew Sang’s efforts) by suing the Authority (the “indirect enrichee” which received the benefit conferred by Yew Sang on Dickson).  In Shanghai Tongji, however, Casil was the “immediate enrichee” of a benefit obtained at Tongji’s expense.  See Shanghai Tongji at §§72-73.

21.  But let me assume as a second premise that Ribeiro PJ intended his dictum to apply more generally, including to leapfrogging situations.

22.  It seems to me that, even given the 2 premises just identified, Mr. Ng’s pleading is still in difficulty. 

23.  This is because, in my view, Ribeiro PJ was merely pointing out that restitutionary relief will not automatically be excluded from operating just because a case falls within the 2nd category.  One must examine each situation.  Where allowing restitution would subvert a contractual (or statutory) regime whereby risks have been allocated in a particular manner, restitution will be excluded as matter of principle.  However, where no relevant regime of risk allocation can be identified, there may well be scope for the grant of restitution.

24.  Mr. Ng therefore must still show that Yew Sang’s claim does not cut across contractual or statutory regimes allocating the risk of Dickson’s insolvency in a particular way.

25.  I do not think that Mr. Ng can show this.  To see why not, consider the present situation more closely.

26.  The Authority has liquidated and unliquidated claims against Dickson and vice versa arising out of various construction projects (including the Tung Chung project).  Dickson’s claims against the Authority would include claims for monies due in respect of work done by Yew Sang on the Tung Chung project.  However, given Dickson’s insolvency, the Authority would be anxious to set off in accordance with the Authority’s contractual rights as much as possible of Dickson’s claims against its own claims.

27.  I do not think that the Court should interfere with the parties’ contractual or other rights of set-off.  There is no reason for the Court to say that, rather than relying on set-off to extinguish Dickson’s claims (including that part relating to Yew Sang), the Authority should instead pay what Dickson owes under the Nominated Sub-Contract directly to Yew Sang.

28.  If the Authority’s claims equal or exceed those of Dickson, there will be nothing left for Yew Sang. 

29.  But assume now that Dickson’s claims exceed those of the Authority.  Might the law of restitution then interfere with the contractual network of Main Contract and Nominated Sub-Contract and direct that the Authority pay the surplus or part of it directly to Yew Sang?

30.  Here one runs up against the insolvency regime established by the Companies Ordinance (Cap.32).  Any such direction by the Court to pay Yew Sang directly would mean by-passing all of Dickson’s other unsecured creditors.  If the Authority were to pay any surplus direct to Yew Sang, there would be less available for the pool of unsecured creditors.  Indeed Yew Sang would have jumped the queue of creditors. 

31.  Mr. Ng submitted that, on the contrary, the creditors would be benefitted.  According to Mr. Ng, there would be one fewer creditor, since Yew Sang would have been paid and would not have to lodge a proof of debt to that extent.  But I do not understand how that answer addresses the problem.

32.  If any surplus is paid by the Authority to Dickson, that amount would be available to be shared rateably among Dickson’s creditors (including Yew Sang).  Given direct payment of any surplus to Yew Sang, Yew Sang would receive the whole amount and not only a rateable proportion of it.  Yew Sang would benefit at the expense of Dickson’s other creditors.  However one looks at it, the insolvency regime mandated by the Companies Ordinance would be circumvented.

33.  Mr. Ng referred us to In re Tout & Finch Ltd. [1954] 1 WLR 178.  There, of its own volition, the employer wished to make a direct payment of retention monies to a nominated sub-contractor, by-passing the main contractor which had become insolvent.  Wynn-Parry J held that the employer could do so, apparently despite the main contractor’s voluntary liquidation.

34.  However, ultimately, Tout is of little assistance in the present case.  There are 3 crucial differences between that case and the situation here.

35.  First, the employer in Tout wished to make a payment direct to the nominated sub-contractor.

36.  Second, it was held in Tout that, under the main contract, the contractor had an interest in the retention monies which the contractor could make the subject of a valid equitable assignment.  Clause 11(h) of the sub-contract was construed (at 189) as having effected such an assignment in favour of the nominated sub-contractor.  Accordingly, pursuant to cl.11(h), the retention monies in relation to the nominated sub-contractor’s work would have been received by the main contractor as fiduciary on trust for the nominated sub-contractor.  It follows from this that the relevant retention monies in the hands of the main contractor would not have been available for distribution to the main contractor’s unsecured creditors in any event.  There is no equivalent to cl.11(h) in Yew Sang’s situation.

37.  Third, Wynn-Parry J observed cryptically (at 186) that:-

“It so happens in this case that the figures show that there will be sufficient -- so far as one can see more than sufficient -- to deal with all the claims of the nominated sub-contractors, without there being any necessity for abatement or apportionment”.

38.  This suggests (although it is far from clear precisely what was on Wynn-Parry J’s mind) that it is relevant for the Court to consider whether there is enough to go around among Dickson’s creditors.  Here, for what it is worth, the available evidence suggests that, in contrast to Tout, Dickson’s creditors are unlikely to recover much (if anything).

39.  Mr. Ng submitted that, for the purpose of surviving a strike-out application at least, he has arguable grounds for saying that the present situation is exceptional.  Thus, Mr. Ng says it would be unjust to exclude restitution here and to adhere to the established contractual and statutory regimes. 

40.  Let me then turn to the 4 circumstances which Mr. Ng has highlighted.  In my view, they do not take this situation outside of the principles under discussion.

41.  The 1st circumstance amounts to little more than saying that Yew Sang made a commercial decision to enter into a Nominated Sub-Contract with Dickson.  Yew Sang could have refused to do so, but then it would not have had the business. 

42.  Opting to contract with a person and risking that party’s being insolvent is something that businessmen do on a day-to-day basis.  It cannot be a compelling basis for overriding the contractual regime to which Yew Sang subscribed or the statutory regime which was a consequence of Yew Sang’s acceptance of the risk of Dickson’s insolvency.

43.  In actual fact, Yew Sang had a say in Dickson’s appointment as Main Contractor.  By letter dated 13 August 2001 Messrs. Lu & Associates (acting on behalf of the Authority) asked Yew Sang whether it objected to Dickson as a tenderer for the Main Contract.  By letter dated 17 August 2001 Yew Sang stated that it had no objection “to be under Contract with any of the proposed tenderers”.

44.  The 2nd circumstance is what normally happens at a construction site.  One would expect an employer’s staff to give instructions in relation to a project and such orders would be relayed directly or indirectly to the staff of sub-contractors. 

45.  The mere fact that Dickson functioned as a post-box for the Authority’s instructions, could not without more constitute some representation that Yew Sang could look directly to the Authority for payment.  Indeed, no specific representation to such effect by any of the Authority’s staff is alleged by Yew Sang.

46.  The 3rd circumstances relates to Clause 69 of the General Conditions of the Main Contract.  That entitles the Authority to pay a Nominated Sub-Contractor directly in certain circumstances. Any money so paid to the Nominated Sub-Contractor may be recoverable by the Authority from Dickson as Main Contractor.

47.  But GCC 69(3)(d) expressly states: “Neither the existence nor the exercise of any of the aforesaid powers [of direct payment] by the Employer [the Authority] ... shall render the Employer liable to pay any Nominated Sub-Contractor directly”.

48.  Given that provision, I do not think that Yew Sang can claim a legitimate expectation or entitlement to be paid directly by the Authority in the event of Dickson’s insolvency.

49.  Finally, I do not believe that the 4th circumstance identified by Mr. Ng takes the matter further. 

50.  Yew Sang retains its claim against Dickson.  Unfortunately, because of Dickson’s insolvency it must queue up along with Dickson’s other unsecured creditors for that claim to be met.  That Dickson has no defence to Yew Sang’s claim cannot by itself render it just for the Authority to be compelled to pay Yew Sang directly.

51.  The end result is that I do not believe that Yew Sang has a restitutionary remedy against the Authority.  There are no special circumstances rendering it just for the Court to override the established contractual and statutory regimes and compel the Authority to pay Yew Sang directly.

B.   Trust

52.  Mr. Ng argues that retention monies in the hands of the Authority relating to Yew Sang’s works were subject to a Quistclose trust in favour of Yew Sang.  Such monies were to be payable to Dickson subject to such trust and could not be used for any other purpose.

53.  I am unable to accept the analysis.

54.  There is first a problem of identifying a specific fund in the Authority’s hands which is subject to a trust.  Although one speaks loosely of “retention monies,” it is far from clear that there is any specific fund earmarked as retention monies in the hands of the Authority.  At best there may only be an acknowledgment that the Authority owes Dickson a debt.  That debt would be for an amount of money of which a part (the retention) represents a sum due in respect of Yew Sang’s work.  That debt need not be paid out, pending the remedying of defects by Yew Sang or the expiry of a defects liability period.

55.  Nonetheless, assume that a fund can be identified. 

56.  Even then it is not apparent why such fund should be subject to a trust.  In contrast to cl.11(h) in Tout, Mr. Ng is unable to point to any clause in the Main Contract or Sub-Contract which expressly subjects retention monies in respect of Yew Sang’s work to a trust.  There is nothing to suggest that the Authority is some sort of fiduciary of any retention monies in favour of Yew Sang.

57.  On the contrary, General Condition 83 of the Main Contract implies that there is no trust in Yew Sang’s favour. 

58.  As Burrell J pointed out, GCC 83 allows the Authority to set-off all damages (liquidated or unliquidated), costs, charges, expenses, debts or sums due to the Authority from Dickson against all retention monies held by the Authority (whether in respect of Yew Sang’s work or otherwise).  If there were a trust in favour of Yew Sang, why should the Authority be so entitled to deduct even amounts due from Dickson against retention monies relating to Yew Sang?

59.  For the foregoing reasons, in my judgment, the claim based on trust is likewise bound to fail.

C.   Implied contract

60.  Mr. Ng essentially submits that, by reason of the 4 circumstances identified in connection with Yew Sang’s restitution claim, the Court can infer a contract between Yew Sang and the Authority.  The contract would be to the effect that, in the event of Dickson’s insolvency, the Authority would pay Yew Sang directly.

61.  But I can infer no contract out of the 4 circumstances.  I do not find anything in the circumstances from which it can be said that there has been an unambiguous offer by the Authority and a corresponding acceptance by Yew Sang along the lines suggested by Mr. Ng.

62.  In particular, the direct payment provision in GCC 69 militates against any implication of an offer by the Authority to be liable in the event of Dickson’s default.  This is because GCC 69(3)(d) expressly states that nothing in the clause shall render the Authority liable to pay a nominated sub-contractor such as Yew Sang directly.

63.  The claim based on implied contract is therefore hopeless.

III.  CONCLUSION

64.  None of the grounds of claim advanced by Yew Sang having any prospect of success, we dismissed the appeal.  We also ordered that the Authority should have its costs of Yew Sang’s appeal, such costs to be taxed if not agreed.