XCHRX IPCO INSITUFORM (SE ASIA) PRIVATE LTD. v. KWAN TANG CONSTRUCTION CO. LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

1997, No. Con 129

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JUDGMENT

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The Background and the Facts

1. In these three actions, the plaintiff is seeking summary judgment against the defendants. The applications were heard together by agreement of the parties.

2. The plaintiff (IPCO) was the sub-contractor of Kwan Tang Construction Company Limited (Kwan Tang) in relation to two construction contracts. Mr Lam Man Kwong ( Mr Lam) is a shareholder and director of Kwan Tang.

3. In the middle of 1997, Kwan Tang ran into financial difficulties. Mr Lam says that, "as a result", Kwan Tang signed two agreements dated 23 September 1997.

4. These agreements recorded that Kwan Tang owed $1,027,985.57 and $6,289,361.03 (or $6,289,363.03) to IPCO, and said that Kwan Tang agreed "that it will not under any circumstances whatsoever contest or dispute the said debt nor raise any defence in any proceedings initiated by Ipco Insituform (S.E. Asia) Pte Ltd for the recovery of the said debt."

5. On 7 October 1997, Kwan Tang entered into another agreement in relation to one of the construction contracts for the purpose of "settlement of monies due and owing and payable by Kwan Tang to Ipco under the Subcontract". This agreement recorded again the larger debt, but this time gives a third figure of $6,289,316.03. There are three clauses of this agreement that are important for the purposes of the matters before me. These are -

"2) Over and above the amount of $6,289,316.03, Kwan Tang admits that there are monies which continue to be due and owing or payable to Ipco arising out of Ipco's performance under the Subcontract (the "Outstanding Amount"). The Outstanding Amount together with the sum of $6,289,316.03 constitutes the total sum of monies due, owing and payable by Kwan Tang to Ipco under the Subcontract ("Total Debt").

3) The parties agree that the Outstanding Amount shall be pre-agreed on a monthly basis between the parties based on the monthly Certificate issued by [the Engineer] on behalf of [the client] to Kwan Tang. The parties undertake to meet each other monthly upon Kwan Tang's receipt of the Engineer's Certificate to agree on the distribution the proportion of monies to be paid to Ipco towards satisfaction of Total Debt.

7) The parties agree that Kwan Tang will have a maximum of 20% of the monthly payments certified by the Engineer or HK$400,000 which ever sum is the lesser for the running expenses of the Main Contract. All other monies in the Project Account shall be withdrawn by Ipco towards the full and final satisfaction of the Total Debt."

6. Also on 7 October 1997, Mr Lam signed a guarantee to the effect that, if Kwan Tang failed to pay under agreement mentioned above, he would pay all money due. In addition, Mr Lam agreed to give to Ipco his undated personal cheque in the sum of $6,289,316.03, which he did. It was agreed that this cheque "shall only be banked by IPCO upon the following conditions: -

(a) in the event of a breach of the Agreement by Kwan Tang;

or

(b) Upon the issuance of the Certificate of Completion for the Main Contract by the Engineer on behalf of [the client]."

7. On 1 November 1997, Kwan Tang wrote to IPCO, saying "In accordance with the 7.10.1997 Agreement please be advised that the amount of workdone for the month of September 1997 certified by the Engineer is HK$374,748.15 and the due date is 10.11.1997. The share of payment will be as follow -

(1) Kwan Tang -HK$74,949.63

(2) Ipco Insituform -HK$299,798.52

Please contact the undersigned for the arrangement of the joint signature and collection of your cheque."

8. The sum of $74,949.63 is 20% of certified amount.

9. The letter refers to "joint signature" because, under the October agreement, the parties had agreed that the "Proceeds due under the Main Contract" would be paid into a project account to be operated by Mr Lam and two representatives of IPCO.

10. The next payment under the engineer's certificate was $1,467,729.37 received by Kwan Tang on 20 November 1997. In early December 1997, Mr Lam says that he discussed with Mr Kwong, the project manager for Kwan Tang, how this payment should be split. Mr Kwong considered that $757,581.56 should be paid to IPCO and $710,147.81 to Kwan Tang. I am not told how this apportionment was calculated. Mr Lam says that he thought that, if he presented IPCO with cheques in these sums, "they might in practice accept this division". Accordingly, on 11 December 1997, he signed the cheques and took them to Mr Barry Richardson, the project manager for IPCO "for him to countersign". Mr Lam says that he gave Mr Richardson the cheques "and asked him to sign the one to Kwan Tang and return it to me". Mr Richardson said "the one to Kwan Tang was too much and he would not sign it." Mr Lam says he was annoyed. He says that, at the time, "I had not appreciated the terms of clause 7 of the October agreement." He says this in spite of the fact that, by its letter of 1 November 1997, Kwan Tang implemented clause 7. Mr Lam goes on to say that "Because I thought it was unfair I instructed the Bank to cancel the cheque to the Plaintiff." He says that his solicitors explained to him that "pursuant to clause 7 of the October agreement arguably Kwan Tang was only entitled to HK$293,545.74".

11. Kwan Tang alleges that it has a claim against IPCO. This is based on an obligation of IPCO to "endeavour to complete the Sub-contract Works in accordance with the construction programme". Kwan Tang says that it is entitled to deduct the sum of $1,959,345.85 from contract money due to IPCO. This sum is made up as follows -

Retention money	$100,000
Contra-charges for materials supplied to IPCO	$251,345.85
Loss and expense from delay in breach of clause 12-
Cost of prolongation of traffic diversions	$130,000
Under-utilisation of resources	$428,000
Additional costs	$1,050,000

12. This claim is set out in a draft defence and counterclaim to IPCO's claim for $1,027,985.57, and it is said that Kwan Tang is entitled to set-off this claim. Mr Lam says that the issue is whether IPCO used its endeavours to complete the work in accordance with the programme. In his affirmation, Mr Lam does not mention the retention money or the contra-charges, and gives no more particulars about the major claim of $1,050,000 than is contained in the draft defence and counter-claim.

13. The draft defence also alleges that the agreement in which Kwan Tang agreed that it would not contest the claim for $1,027,985.57 is of "no legal effect as neither party gave good or any consideration"

14. Mr Richardson says that Kwan Tang entered into the September agreements to buy itself more time to pay. Kwan Tang notified IPCO in January 1997 that it might make a claim against IPCO arising from delay, but nothing further was heard about this until 30 October 1997.

The Matter for Decision

15. I have to decide whether, in relation to the three claims by IPCO, Kwan Tang has advanced any arguable defence.

The Claim for $1,027,985.57: Action 1997, No. Con 129

16. Although a defence of lack of consideration is advanced, and Mr Harris did not expressly abandon it, he did not argue it with any enthusiasm. This is understandable because both Mr Lam and Mr Richardson say that the agreements concerned were entered into because Kwan Tang found itself in financial difficulties. Mr Richardson says that the agreements were to enable Kwan Tang to buy more time, and, by implication, Mr Lam says the same thing. Obviously, both parties contemplated that that, as a result of the agreements, Kwan Tang would gain forbearance from IPCO. This is sufficient consideration.

17. Next, Mr Harris argues that the words in the September agreement that Kwan Tang "will not under any circumstances whatsoever contest or dispute the said debt nor raise any defence in any proceedings initiated by Ipco Insituform (S.E. Asia) Pte Ltd for the recovery of the said debt" do not debar Kwan Tang from raising a counterclaim that, at the least, entitles Kwan Tang to a stay of execution of a judgment entered for the sum $1,027,985.57.

18. What Kwan Tang wants to say is: "I owe the money to you, but you are not entitled to recover it because I have a claim against you." But that is precisely what Kwan Tang agreed not to do in relation to a claim for recovery of the debt. The agreement is clearly aimed at preventing Kwan Tang from resisting recovery of the debt; that is what the agreement says. It seems to me that Kwan Tang is debarred by the agreement from seeking to prevent recovery of the admitted debt by alleging that an amount more than the debt is due by IPCO.

19. Accordingly, even if Kwan Tang has a genuine counter-claim against IPCO, and the manner in which it has been advanced is not convincing, this does not constitute an arguable defence to the claim and does not entitle Kwan Tang to a stay.

20. In the result, there will be judgment against Kwan Tang on this claim as prayed.

The Claim for $6,289,316.03: Action 1997, No. A14007

21. This is the claim based on Mr Lam's cheque for $6,289,316.03 which was dishonoured.

22. The first defence advanced here is that the guarantee under which Mr Lam gave his cheque was not triggered by any breach of the October agreement.

23. Mr Harris argues that clauses 3 and 7 of that agreement are in conflict. That can be so only if the two clauses cannot be read together to make sense. The engineer's certificate reflects the total amount payable by the client. This amount has to be apportioned according to the work done by IPCO and that done by Kwan Tang. The amount due to IPCO for the work done by it must be paid to IPCO. In the ordinary course, the amount attributable to the work done by Kwan Tang would be paid to Kwan Tang, but clause 7 of the agreement provides that Kwan Tang is entitled to only the lesser of 20% or $400,000. The balance goes to IPCO to reduce Kwan Tang's debt to IPCO. That, as I see it, is what the agreement provides, and that makes perfectly good sense. I reject this defence.

24. Kwan Tang was clearly in breach of the October agreement. It did not pay IPCO what it was entitled to receive under that agreement.

25. In any event, Mr Harris says, IPCO will entitled to call on the guarantee only to the extent due under the October agreement, which, it is said, was only $1,174,183.96. This is not so. The amount due under the October agreement was the total sum due, not the balance of what was due from the sum of $1,467,729.37 received by Kwan Tang on 20 November 1997.

26. No arguable defence has been advanced in relation to this claim. There will be judgment in favour of IPCO as prayed.

The Claim for $757,581.56: Action 1997, No. A14008

27. I have recited what happened in relation to the handing over of this cheque to Mr Richardson by Mr Lam.

28. My first impression was that there had been a measure of overreaching here by Mr Richardson. This was on the basis that Mr Lam had handed two cheques to him on the understanding that he would sign both and return one to Mr Lam. On reconsideration, this impression is not a true view of the situation. IPCO was entitled to $1,467,729.37, less the 20% that Kwan Tang were entitled to retain. Kwan Tang know full well that this was IPCO's entitlement. Mr Lam says that he was not aware of this because he was not aware of clause 7.Whether this is so or not, Kwan Tang knew how clause 7 operated. Kwan Tang had done just what was required of it by its letter of 1 November 1997. So what Mr Lam did was to pay to IPCO less than its entitlement. In this situation, I believe Mr Richardson was entitled to say to Mr Lam, in essence, that IPCO would keep the payment, which was due and more, and refuse to pay Kwan Tang more than was due to it.

29. In any event, the cheque was an unconditional promise to pay, and nothing that was said or done when the cheque was handed over can contradict this.

30. In the result, I find that there is no arguable defence to this claim either. There will be judgment for the plaintiff as claimed.

Costs

31. There is nothing before me on which it could be argued that IPCO is not entitled to its costs. There will be an order nisi that Kwan Tang and Mr Lam, in respect of the actions in which they are defendants, pay IPCO's costs.