Vernaltex Co. Ltd. t/a Wing Wo Engineering Co. v. Dixie Engineering Co. Ltd.

CACV000344/2002

CACV 343/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 343 OF 2002

(ON APPEAL FROM HCCT 71/1999, HCCT 102/1999, 11/2000 and 35/2000)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 344 OF 2002

(ON APPEAL FROM HCCT 73/1999)

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Coram: Hon Woo, Cheung and Ma JJA in Court

Date of Hearing: 15 January 2003

Date of Judgment: 11 February 2003

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J U D G M E N T

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Hon Woo JA:

Introduction

1.There are two appeals before us. CACV 343/2002 is an appeal by the defendant Vernaltex Company Limited trading as Wing Wo Engineering Company ("Wing Wo") in four actions that had been consolidated where the plaintiff Dixie Engineering Company Limited ("Dixie") claimed under a sub-subcontract awarded by Wing Wo for the maintenance of certain structures of the highway in the New Territories, mainly between West Kowloon and Tuen Mun. The works took place between 1996 and 1999. The four actions relate to four successive periods of time when Dixie's invoices were submitted but remained unpaid.

2.The second appeal, CACV 344/2002, arose out of another action, Action 73/1999, in which the parties' positions were reversed, Wing Wo suing as the plaintiff against Dixie relating to the Tolo Highway road works that Dixie had subcontracted to Wing Wo. Wing Wo claimed that between 1992 and 1995, Dixie had deducted too much payment as management fee to which Dixie should be entitled under that contract.

3.After a trial for nine days, on 31 July 2002, Burrell J gave judgment in all the actions in favour of Dixie. In the consolidated action, the judgment sums amounted to $5,762,881.79, according to the quantum agreed by the parties. The claim by Wing Wo against Dixie in Action 73/1999 for $2,085,440.23, the quantum of which was also agreed by the parties, was dismissed.

The issues on appeal

4.In respect of the consolidated action, where Dixie sued Wing Wo for non-payment of part of the contract sums, the Judge clearly stated the main dispute between the parties at paragraph 2 of his judgment, as follows:

"(i) Whether the contract provided for the payment of 'fluctuations' to Dixie or not. Fluctuations were in fact paid, Wing Wo contended that they should not have been.

(ii) Whether the price for 'variations' was correctly calculated or not. Dixie said that 20% or 29% (depending on the nature of the variation) should have been deducted. These were the figures that were in fact deducted. Wing Wo contended that the 20% or 29% deduction should have been made after the initial management fee of 36% had been deducted (making a total of 48.8% and 54.56%) and not instead of the 36% management fee."

5.In respect of these issues, the Judge made findings of fact which were all against Wing Wo as he had, for the reasons detailed in his judgment, preferred the evidence of Dixie's witnesses to that of Wing Wo's witnesses. Four grounds of appeal are raised, all of which relate to the construction of the sub-subcontract, wisely avoiding the difficulty of challenging the Judge's findings of fact.

6.Ground 3 is the conclusion that upon a true and proper construction of the sub-subcontract, Dixie was overpaid by Wing Wo to the extent of $3,057,938.14. Ground 4 merely contends that Wing Wo was entitled to set off its claim in Action 73/1999 against Dixie's claims in the consolidated action. The success or otherwise of this ground depends on the outcome of CACV 344/2002. The only substantive grounds of appeal are Grounds 1 and 2.

7.Ground 1 challenges the Judge's decision that Wing Wo was bound to pay Dixie for the "fluctuations". It is contended that in deciding the "fluctuations" issue against Wing Wo, the Judge

(a) failed adequately to take into consideration clause (3) of the sub-subcontract when construing clause (4);

(b) took into consideration two irrelevant factors, namely that "normally fluctuations are included in contracts such as these" and that "the contract was prepared by Mr Ho of Wing Wo".

8.Ground 2 directs at the Judge's decision on the "variation" issue against Wing Wo, contending that the Judge failed to give a true and proper construction to clause (3)A and (3)B of the sub-subcontract, in that the two clauses construed together should mean that 20% management fee would be deducted from V.O. items only after the basic 36% management fee had been deducted.

9.Regarding Wing Wo's claim against Dixie for the $2 million odd as money over-retained by Dixie for Dixie's contractual management fee, the Judge found that the written sub-subcontract dated 23 March 1992 between the parties provided for a management fee of 38% to be retained by Dixie. The common ground was that from about the second payment onwards until the end of the relevant sub-subcontract, Dixie instead retained 42%. The Judge found as a fact that subsequent to the written sub-subcontract, an oral agreement was made between the parties which varied the management fee of Dixie upwards by 4%, justifying Dixie to retain 42% instead of the 38% stipulated in the contract. Without deciding on the issue of whether there was consideration for the increased percentage, the Judge proceeded on the basis that there was no consideration. He went on to hold that Wing Wo had waived the four additional percent retained by Dixie.

10.Several grounds of appeal are raised against this part of the judgment. They challenge the Judge's holding that it would be inequitable to permit Wing Wo to enforce its contractual rights on the basis of various facts and circumstances of the case, especially in view of the lack of evidence that Wing Wo knew or intended that Dixie would incur a detriment caused by the increased management fee that Wing Wo had allowed Dixie to retain. It is further contended that the Judge ought to have held that there was no valid legal consideration for the oral agreement to vary the management fee.

Fluctuations

11.The sub-subcontract relating to the consolidated action signed between Wing Wo and Dixie was in the Chinese language. Two separate translations of that contract in the English language, caused to be made by the parties respectively, were both certified by the court translator to be correct. They were, however, worded in different terms. The Judge had both translations before him, but did not decide which version he adopted. For the purposes of this appeal, we simply adopt the translation proffered by Wing Wo in our consideration of the grounds of appeal, to see if it is necessary to have resort to Dixie's translation. We set out below Wing Wo's translation of clauses (3), (4) and (5) as those clauses are being relied on in this appeal.

"(3) List of Price:

A. Basic contract unit rate - Party B [ie Dixie] based on the contract unit rate of the Government Contract (Contract No.: 19/HY/95) (i.e. the tender price of the Main Contractor) deduct 36% as management fee for Party A [ie Wing Wo].

B. Variation Order unit rate (V.O.) - deduct 20% as management fee for Party A.

C. Closure of road to allow Wing Wo to lay tarmac being contract price less 10%.

(4) Method of Payment:

Party B can apply to Party A for payment twice a month. The project amount is the balance of the amount which the Government certified and paid to the Main Contractor (Paylist) after deducting the management fee of Party A. Period of payment is two days after Wing Wo Engineering Co. received payment from Wing Fai Construction Co. Ltd. (i.e. on the 7th and 22nd day of each month).

(5) Rules and Regulations of the Project:

All the rules, plans and requirement etc. of the project are based on the Government Contract (Contract No. 19/HY/95). Party B fully understand the contract content, the project drawings, work specification and all annexes to this contract, agree to comply with the same and has (sic) received copies of the above-mentioned contract documents and drawings."

12.In order to understand the submissions of Mr John Scott SC, for Wing Wo, it is necessary to set out the Judge's decision on the issue of "fluctuations" quite fully. The Judge said:

"A. Fluctuations

19. ... He [Mr Cheng Shiu Ching, Dixie's Chairman and co-owner] said it was agreed at the time that fluctuations would be included in the payments to Dixie. He said that the absence of any express reference to fluctuations in the contract meant that Dixie was to be paid everything after the 36% management fee deduction, because that was what was agreed and that is what is normal. I was referred, by the defence [Wing Wo], to other contracts with other sub-contractors arising out of this or similar road maintenance projects in which fluctuations were expressly mentioned. It was submitted by the defence that the correct construction therefore should be that for fluctuations to be paid to the sub-contractor they should be specially mentioned in the written agreement. I do not accept this for a number of reasons.

(a) Generally speaking references to fluctuations in other contracts were made and were necessary because the agreement between those contracting parties was not the norm. For example, only a percentage of the fluctuations was to be paid, or an amendment to the agreement on fluctuations was being recorded or no fluctuations were to be paid. In any event the other contracts stand alone and provide peripheral guidance only in the construction of this contract.

(b) The undisputed terms of Clause 4 weigh heavily in the plaintiff's [Dixie's] favour. Whether the correct translation in Clause 4 is 'contract sum' or 'project amount' makes no difference. Both versions provides for Dixie to be paid that sum which the Government paid the main contractor minus the management fee. No more no less. There is no argument that the sum paid by the Government included fluctuations. Both versions also refer to 'paylists'. Two types of paylists were produced and considered in the course of the trial, firstly, a 'Government' paylist which is self-explanatory and secondly a 'detailed' paylist which was prepared by Eric Leung [a surveyor employed by Wing Fai, the main contractor, at the material time but who was responsible for calculating the amounts from Wing Wo, on their behalf, with Dixie] on Wing Wo's behalf. Both contained fluctuations.

(c) Regardless of whether there is any ambiguity in the terms of the contract or not the court is entitled to look at the factual matrix at the material time. Lord Hoffman in I.C.S. Ltd v. West Bromwich B.S. [1998] 1 WLR set out five principles at p.912. The first three are:

'The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasions on which to explore them.'

In our case a consideration of the matrix of fact at the material time would include the evidence (not denied by Mr Cheuk [a director of Wing Wo]) that normally fluctuations are included in contracts such as this. After all, fluctuations represent an ongoing uplift or decrease (depending on inflation or deflation) in the costs of materials and services which in the normal course of events would have been paid for by the sub-contractor. They protect the party who would otherwise have suffered as a result of inflation or deflation.

It would also include Mr Eric Leung's evidence that he 'assumed' that fluctuations were included in the payments to Dixie. This is an entirely reasonable assumption given the surrounding matrix of fact.

(d) The contract was prepared by Mr Ho of Wing Wo. They produced it in the terms that they required Dixie to sign, which they did in January 1997. They cannot now argue for a construction which is not apparent from the face of the document."

13.Mr Scott lays emphasis on the term "basic contract unit rate" in clause (3)A of the contract and relies on the stipulation in clause (4) that "The project amount is the balance of the amount which the Government certified and paid to the Main Contractor (Paylist) after deducting the management fee of Party A [i.e. Wing Wo]". He contends that plainly, the word "amount" could not be the total amount of the paylist since the paylist contained various works orders, some of which had been carried out by Wing Wo, some by Dixie and some by other sub-contractors. He argues that once it is accepted that the assessment of Dixie's payment entitlement involves the extraction of some relevant items from the Government paylist, the next question must be, what items in the paylist are relevant, and that the answer lies in clause (3) of the contract, which is titled "price list". The price list is the price to be paid to Dixie for works performed. The "amount" stated in clause (4) should therefore, logically, be referable to items contained in the price list. Fluctuation was an item listed separately in all paylists issued by the Government. However fluctuation was not expressly mentioned in clause (3) - "price list", and hence was not relevant in calculating the "amount" mentioned in clause (4).

14.It is true that in the whole of the sub-subcontract there was no mention of fluctuation. It is also true that the word "amount" used in clause (4) of the contract could not be the total amount of the "paylist". However, even where full effect is given to the "basic contract unit rate" mentioned in clause (3)A, the amount to which Dixie was entitled must be based on the works that it had performed and the payments for such works as certified by the Government under the main contract. The "price list" cannot help identify the works performed by Dixie, nor can the "paylist". In the light of the clear reference in clause (4) that "The project amount is the balance of the amount which the Government certified and paid to the Main Contractor (Paylist) after deducting the management fee of Party A", I am of the view that the "amount" stated in clause (4) clearly related to the "paylist" rather than the "price list" used for the title of clause (3). As such, whatever Government had certified by the paylist and paid to the main contractor, insofar as it was consequent upon the works performed by Dixie under the sub-subcontract, was payable to Dixie, two days after the receipt of the amount by Wing Wo, after deducting the management fee of 36% for Wing Wo.

15.This view of mine also disposes of the further arguments of Mr Scott that the words "basic" and "unit" in the term "basic contract unit rate" in clause (3)A are both indicia of the exclusion of fluctuation. Mr Scott's submissions are as follows. Under the main contract, it was stipulated that in preparing bills for payment, contract rate should be used in the calculation. On the other hand, Contract Price Fluctuation "CPF" is calculated only when the final certificate for a works order is issued. The mechanism of calculating CPF does not involve adjusting the contract rates. The CPF is calculated by multiplying the Effective Value ("EV") of a works order by the Price Fluctuation Factor ("PFF"). The PFF is calculated by referring to the change in government statistics, whereas EV is calculated by the total amount of the works order (multiplying the measured quantity of work by the contract rates) excluding, inter alia, sums based on the actual cost or current prices (which would be variation works). Therefore, so Mr Scott argues, for each works order issued under the main contract, fluctuation is calculated as a single item of CPF, without any need of adjusting the contract rates in the process. When talking about unit rates of the main contract, which must mean contract rates, so the argument continues, such unit rate invariably excluded fluctuation.

16.Despite all these arguments, in my view, they cannot displace the clear effect of the terms of clause (4) of the sub-subcontract, which provides that "The project amount is the balance of the amount which the Government certified and paid to the Main Contractor (Paylist) after deducting the management fee of Party A". Moreover, even looking at clause (3) alone, the "contract unit rate" was expressed to be based on the "tender price of the Main Contractor". In that tender there was an Appendix III "Schedule of Proportions to be used in Calculating the PPF", which shows clearly that fluctuation was one of the matters included in the price as tendered. In my judgment, the Judge was correct in holding that clause (4) of the sub-subcontract

"provides for Dixie to be paid that sum which the Government paid the main contractor minus the management fee. No more no less. There is no argument that the sum paid by the Government included fluctuations."

Matrix of fact

17.Ground of appeal 1(b) complains that the Judge took into consideration two irrelevant matters, namely that "normally fluctuations are included in contracts such as this" and that "the contract was prepared by Mr Ho of Wing Wo". Mr Scott refers us to the observation of Lord Bridge of Harwich in Mitsui v AG of HK (1986) 33 BLR 1, 18 that "comparison of one contract with another can seldom be a useful aid to construction". Indeed, the Judge did not rely on such a comparison because he said, in para 19(a) of his judgment already cited above,

"In any event the other contracts stand alone and provide peripheral guidance only in the construction of this contract."

18.What Mr Scott appears to be complaining is the Judge's utterance in para 19(c) of his judgment cited above:

"In our case a consideration of the matrix of fact at the material time would include the evidence... that normally fluctuations are included in contracts such as this."

19.However, Mr Scott submits that in the only previous contract made between the parties, namely, the Tolo Highway subcontract, the contract relating to Action 73/1999, "fluctuation" was expressly stipulated and was paid. The past dealing of the parties, which formed part of the factual matrix, indicated that the parties would make express provision for payment of fluctuation, if that formed part of their agreement.

20.What Mr Scott now attempts to do is what the Judge did, in the context of the matrix of fact to be considered in aid of the construction of the sub-subcontract. I do not see anything wrong in that approach as adopted by the Judge, and if his approach was wrong, Mr Scott's approach would be likewise.

21.The Judge had expressly dealt with the fact that sometimes fluctuations were referred to in other contracts, while it was not referred to in the sub-subcontract. He said under paragraph 19(a) of his judgment, which I repeat:

"Generally speaking references to fluctuations in other contracts were made and were necessary because the agreement between those contracting parties was not the norm. For example, only a percentage of the fluctuations was to be paid, or an amendment to the agreement on fluctuations was being recorded or no fluctuations were to be paid...."

22.Mr Scott also relies on the contract between Wing Wo and the main contractor, relating to the consolidated action, in which it was expressly stipulated that Wing Wo was to receive 50% of CPF. It is therefore argued that it is inherently improbable for Wing Wo to agree paying more than what it received. We are shown the evidence by way of a paylist that Mr Eric Leung, who made calculations on behalf of Wing Wo, used to calculate the amount to which Dixie was entitled under it, and it appears that the amount of fluctuation payable to Dixie was based on the amount of fluctuation received by the main contractor, instead of Wing Wo. Thus the evidence supports Mr Scott's argument factually. However, this evidence as part of the matrix would not be sufficient to bear out the construction contended for by Mr Scott, especially when he fairly concedes that Dixie did not know of the entitlement of the main contract to deduct 50% of the fluctuation before paying it to Wing Wo. On the other hand, this evidence should not legitimately be allowed to be used to help in the construction of clauses (3) and (4) if its purpose was to show the subjective intention of a party to a contract. This argument fails.

Contra proferentem

23.Mr Scott also attacks the Judge's reliance on the doctrine of contra proferentem in construing the sub-subcontract. It is the evidence of Mr Ho Kwok Poon, Mr Cheuk's partner and director of Wing Wo, that he prepared the sub-subcontract. Mr Scott states that according to Mr Ho's evidence, the sub-subcontract was not based on Wing Wo's standard document but he used the drafts supplied by other contractors, namely, Wing Fai and Fook Sing, in preparing the sub-subcontract. Mr Scott argues that therefore, the true draftsman of the sub-subcontract was not Mr Ho but someone else. He also relies on Lewison, Interpretation of Contracts, 2nd Ed., para 6.07 at page 172 that

"The true principle is that the proferens is the person for whose benefit the clause was inserted rather than the person who actually did the drafting."

24.Mr Scott argues that in the circumstances of the facts of this case, it could hardly be said that the payment clauses of the sub-subcontract were inserted for the benefit of Wing Wo alone, and therefore, the doctrine of contra proferentem should not have been applied.

25.I think Mr Scott has misunderstood the passage cited from Lewison. A number of rules and authorities are referred to by the author under paragraph 6.07 of the book. According to my understanding, the rule that a clause is to be construed against the proferens is based on the reasoning that the person who inserts the clause in the contract, which clause was important for his own benefit, must have done so with his own benefit in mind vis-à-vis the other contracting party and therefore, it would be fair for the court to construe that clause against him in case of ambiguity. In Tam Wing Chuen v Bank of Credit and Commerce Hong Kong Ltd [1996] 2 B.C.L.C. 69, 77, Lord Mustill said:

"a person who puts forward the wording of a proposed agreement may be assumed to have looked after his own interest so that if the words leave room for doubt about whether he is intended to have a particular benefit there is reason to suppose that he is not."

26.It lies ill in the mouth of Mr Scott to say that the payment clauses in the sub-subcontract were not inserted for the benefit of Wing Wo, in the context of the fact that it was Mr Ho of Wing Wo who prepared the sub-subcontract, based on and with reference to drafts supplied by other contractors. This argument also fails.

Variations

27.Ground 2 of appeal challenges the Judge's holding that for variations, Wing Wo was only entitled to deduct 20% or 29% of the management fee and no more. Clause (3)B stipulates that for variations, deduct 20%. 29% was later agreed to be deducted in respect of certain variation items only.

28.This ground has avoided the Judge's finding of fact against Wing Wo who counterclaimed a rectification of clause (3)B of the sub-subcontract. After referring to Joscelyne v Nissen [1978] 2 QB 86, the Judge preferred the evidence of Mr Cheng and another witness of Dixie to the evidence of Mr Cheuk that the 20% or 29% was in addition to the 36% management fee. Thus, the Judge rejected the rectification claim of Wing Wo.

29.It is clear that clause (3)B of the sub-subcontract did not provide for the deduction of 20% as management fee for Wing Wo after the 36% management fee referred to in clause (3)A had first been deducted. Mr Scott, however, relies on the word "basic" in clause (3)A, as compared to the absence of that word in clause (3)B and the term "contract price" used in clause 3(C) to say that the further 36% management fee referred to in clause (3)A is a basic deduction and that it was after this basic deduction that a further 20% management fee was agreed to be deducted from the variation order unit rate, as referred to in clause (3)B.

30.These arguments were rejected by the Judge, in my view correctly. He said:

"22. ...in my judgment, these arguments are over subtle and should not change the meaning of the document as a reasonable man would interpret it. The use of the word 'basic' adds nothing save to distinguish the initial management fee from a different fee for variations. Equally the use of the words "contract price" in Clause 3(C) cannot import into Clause 3(B) extra words said as 'additional', 'further' or 'extra'."

31.The Judge also dealt with the factual matrix in relation to clause (3)B. As said before, he preferred Dixie's evidence to that adduced by Wing Wo. He concluded:

"30. ... Perhaps the most telling additional factor which weighs against rectification is that by the time Wing Wo first sought this relief, on the basis that the earlier oral agreement was not truly reflected in the later written agreement, payments had always been made to Dixie for over three years on the basis contended for by Dixie. This basis is the one which is consistent with the plaintiff's evidence of the negotiations at the time which I have been able to accept with confidence. During that three years, Mr Eric Leung had been faithfully making his calculations on instructions. There was some dispute as to whether Eric Leung was employed by Wing Wo or the main contractor Wing Fai. Whichever it was (and I find that on a day-to-day basis he had been assigned, in a layman's sense, to Wing Wo for the purpose of this contract) he was not employed by Dixie. It is surprising that Wing Wo never checked the figures and never noticed the way in which Dixie's payments were being erroneously (allegedly) calculated until so much later."

32.I agree to the Judge's reasoning. This ground of appeal also fails.

The Tolo Highway Action

33.This action relates to Wing Wo's claim that Dixie had deducted 42%, instead of the contractual 38%, management fee in respect of Wing Wo's works done in relation to the Tolo Highway Project. The agreed increase was not for all the works under the contract. It was only applicable to the works to lay on the road surface tarmac that exceeded 55 mm in thickness. For the works below that thickness, the contractual 38% continued to apply. Again, Mr. Scott does not challenge the Judge's finding of fact that there was a subsequent oral agreement between the parties relating to the upward adjustment of 4%. He merely challenges the Judge's decision that by reason of this subsequent oral agreement, there was waiver on the part of Wing Wo regarding this additional 4%. In order to succeed, Mr Scott not only would have to satisfy us in his challenge of the Judge's holding of wavier, he would need to succeed on the point that the subsequent oral agreement could not stand because of the lack of consideration.

Waiver

34.The Judge referred to Dixie's defence of estoppel by representation and continued:

"54. 125 years ago, Lord Cairns in Hughes v. Metropolitan Railway Co. (1877) 2 AC 439 said:

"... if parties who have entered into definite and distinct terms involving certain legal results - certain penalties or legal forfeiture - afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties ...."

35.The Judge further stated:

"56. In coming to the conclusion that it would be inequitable to Dixie to permit Wing Wo to enforce its contractual rights, the key factor is the exceptionally long passage of time between first accepting the 42% fee and the institution of proceedings in 1999. In the intervening period I accept that Dixie conducted themselves in a way consistent with the acceptance of 42% as their contractual right.

58. In very broad terms the particulars of reliance were that because of the increased fee to 42%, Dixie were able to retain the services of Mr Lum [its site agent], pay him a bit more and also invest in the purchase of a workshop in Shatin. Mr Scott examined all these matters very carefully. He submitted they 'had the hallmarks of points fabricated to bolster a weak legal argument'.

59. I do not think that this is the correct way of looking at the matter. Wing Wo did not raise the dispute until 1999. Only then, at the earliest, would Dixie have to look back and ask themselves - to what extent did we rely on the extra income? In this context and in such a time frame, the issue of reliance takes on a much more general hue. The relevance of reliance on the question of waiver is limited. Firstly, in deciding the question of inequality it would be permissible to ask: did Dixie rely on the extra money so as to make it unjust for Wing Wo to claim it back many years later? Secondly, and this is merely an extension of the first question, did Dixie's reliance cause them to alter their position in some way because of revised arrangement?

60. Having heard Mr Cheng and Mr Lee, I am satisfied that with the knowledge of greater income from 1992 onwards they did not simply bank the bonus but it affected their day-to-day business decisions. A direct causal link between (a) agreeing the 42% fee on the one hand, and (b) deciding to buy a workshop in Shatin or deciding to give Mr Lum a bonus on the other hand would be difficult to establish given the passage of time. I am satisfied that the extra money was applied to business expenses in some way which were made in the confident knowledge that it was regular and continuing income from Wing Wo from the date of the oral agreement. This seems to be obvious from the evidence. A microscopic investigation of the use to which the money was put at the time, 10 years after the event does not take the matter much further. I have indeed attached little weight to the particulars of the late evidence adduced but I have attached weight to the general picture which emerged as a result.

61. For these reason I have come to the conclusion that Wing Wo's claim in Action No. 73/1999 must fail."

36.Mr Scott attacks the Judge's decision in two ways, namely,

(a) The Judge did not make any finding on the items of "reliance" pleaded by Dixie. On the other hand, the finding by the Judge that the extra money had been applied by Dixie to business expenses was not sufficient reliance to warrant a conclusion of waiver.

(b) Anyway, there was no evidence that the alleged items of reliance had been communicated to Wing Wo.

37.Mr Scott refers us to Chitty on Contracts, 28th edition, Vol. 1, para 3-081 at p 209:

"For the equitable doctrine to operate there must be a legal relationship giving rise to rights and duties between the parties; a promise or a representation by one party that he will not enforce against the other his strict legal rights arising out of that relationship; an intention on the part of the former party that the latter will rely on the representation; and such reliance by the latter party".

38.Mr Scott emphasises that when the oral agreement was made in April 1992, the additional 4% did not come to any definite sum that Dixie would receive under the contract, because there was uncertainty of the amount of the thicker tarmac works that would be required to be done by the Government under the main contract. He refers us to a chart showing that the extra money derived from this additional 4% received by Dixie as compared with Dixie's operating profits. I have extracted the following figures from the chart:

39.Mr. Scott asks us to look at the uncertainty of the amount of the extra money that is demonstrated by the above chart in examining of the matters referred to by the Judge that Dixie had relied on the increased 4% of management fee allowed by Wing Wo to be deducted. He submits that they had little connection with the increased fee.

40.On the increase of salary for Mr Oliver Lum, Mr Scott submits that Dixie's allegation that it had increased the salary of an employee as a result of the increased profit defies commercial sense and does not accord with any logical approach to business. The reason being the profit was uncertain both in amount and in the time of receipt.

41.As to Dixie's retaining Mr Lum longer on the site, Mr Scott points out that on the evidence, Mr Lum was useful to Dixie in obtaining more works orders. There was no difference between the type or quantity of work performed at the beginning and at the end of the term project. There was simply no reason to take Mr Lum off the site early. There was also evidence before the Judge that Dixie was, through Mr Lum, trying to get thick tarmac works from the Government.

42.In relation to the purchase of workshop alleged by Dixie, the purchase price of the workshop was only $850,000 whilst Dixie's operating profit at the time was $6.5 million. More importantly, Mr Scott points out, whereas Dixie alleged that the increased management fee was agreed some time in April 1992, the provisional sale and purchase agreement for the workshop was already signed on 13 April 1992. Dixie's decision to purchase the workshop must have been made some time before the signing of such an agreement. It is impossible to imagine that Dixie's decision to purchase the workshop had any connection with the increase in management fee.

43.Mr Scott submits that in the present case, an essential requirement, namely, an intention and knowledge on the part of the promisor Wing Wo that the promisee Dixie would rely on the representation, was overlooked by the Judge. He refers us to James v. Heim Gallery (London) Ltd. (1980) 41 P&CR 269 where Buckly LJ dealt with the law or promissory estoppel at p 275:

"... the promise, assurance or representation must be one which the promisor intends to be binding; that is to say, it must have the qualities of a promise. In Central London Property Trust ltd. v. High Trees House Ltd. Denning J. said: "They are really promises--promises intended to be binding, intended to be acted on, and in fact acted upon." The promise must be one relating to a legal relationship of some kind, existing between the promisor and the promisee. Whether that relationship need be a contractual one seems still to be an open question (see Spencer Bower's Estoppel by Representation). It must, in my judgment, be a promise which, if fulfilled, will be, or tend to be, for the advantage of the promisee in relation to the legal relationship. It must be a promise capable of inducing the promisee to alter his position, and to alter it in a way which would be to his disadvantage if his legal obligations to the promisor were to remain unqualified by the promise. It is for this reason that equity will not permit the promisor to act in a way inconsistent with the promise unless the promisee can be restored to his original position in relation to the promisor. ..."

At pp 277-278, Buckley LJ continued, and this is the passage which is heavily relied on by Mr Scott:

"The acts of the defendants which are relied upon in this connection are dealt with by the judge: they may be summarised thus: In consequence of the defendants having thought that the rent would not be substantially increased, (1) the defendants did not accumulate reserves to meet any possible increased rent; (2) the defendants remained in occupation of the property and made no attempt to find an assignee or to remove to cheaper premises; (3) the defendants would not have organised at their own expense as many as five loan exhibitions of works of art during the years from 1972 to 1977; (4) the defendants would not have made charitable donations amounting to ￡8,800 between 1972 and 1978. There is, however, no evidence to suggest that the plaintiffs had any knowledge of the defendants' financial affairs, or had any reason to suppose that the defendants could not pay, or make provision for the payment of, an increased market rental. Nor is there anything to suggest that the plaintiffs had any reason to suppose that the defendants would organise loan exhibitions, or that their ability to do so would be significantly affected by the defendants being required to pay an increased market rental. Nor, it would seem, had the plaintiffs any knowledge of the defendants' likelihood, or ability, to make charitable donations. The defendants, in my judgment, have failed to establish that if the plaintiffs made any such promise as the defendants allege, that promise was made in circumstances in which to the plaintiffs' knowledge the promise would be acted upon in any of these ways. On this ground also I think that this is not a case in which any promissory estoppel can arise."

44.Mr Scott contends that there is no evidence in the present case that the items of reliance pleaded by Dixie, or for that matter, the application of the extra money to business expenses found by the Judge, was known to Wing Wo, and that illustrates that any reliance by Dixie of Wing Wo's promise of the extra 4% was never intended by Wing Wo.

45.It is to be noted that the alleged waiver or promissory estoppel in James v. Heim Gallery (London) Ltd. that was rejected by the court was based on a so-called representation, said to have given rise by a casual conversation between the one of the plaintiffs and the defendants' director, that was found lacking by the court. Buckley LJ said at p 277:

"... there could have been no promissory estoppel in the present case because of the lack of the requisite promise."

At p 279, Shaw LJ said:

"... I cannot for myself see even the most frail foundation for holding that any material representation or promise whatsoever was made by the plaintiffs at any time."

At p 281, Oliver LJ said:

"I am, however, entirely unable to see that the plaintiffs' failure to argue further the defendants' contention could be said to amount to a representation of anything, let alone to a promise; ..."

46.It is therefore clear that what Buckley LJ said about the representor's knowledge of the representee's acts of reliance was unnecessary for determining the case in view of the court's unanimous finding of lack of the requisite promise and was obiter. Moreover, I consider that when Buckley LJ dealt with the question of knowledge on the part of the plaintiffs of the acts of the defendants said to be reliance on the representation, he was examining whether in the peculiar circumstances of that case, which are very different from those of the present case before us, any act or forbearance on the part of the defendants could possibly be said to be reliance intended by the plaintiffs. It was in those circumstances that the judge dealt with the absence of knowledge on the part of the plaintiffs to exclude any possible suggestion of their having intended whatever representation that they might have made to be acted on by the defendants.

47.Here Wing Wo made an agreement, a promise to allow Dixie to charge the extra 4%; it was more than a representation not to insist on a contractual right. When the agreement was made, and the deduction of the extra 4% from the payments to Wing Wo that was made subsequently wherever applicable shows again clearly that the promise was relied on. And if I may say so, it is almost inevitable in a situation like the present case that the extra money will invariably be relied on by the recipient. In other words, such a promise will almost always be relied on, and it is very difficult, if not impossible, for a promisor not to intend the promisee to rely on such a promise.

48.Mr Bell, for Dixie, has drawn our attention to the rule that in cases of waiver and promissory estoppel, it is unnecessary for the promisee to show a detriment in relying on the promise: it is sufficient if he has acted on the promise to alter his position. He refers us to Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189, at 213 where Lord Denning MR said:

"The principle of waiver is simply this: If one party, by his conduct, leads another to believe that the strict rights arising under the contract will not be insisted upon, intending that the other should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on that strict legal rights when it would be inequitable for him to do so: see Piasticmoda Societa per Azioni v. Davidsons (Manchester) Ltd. [1952] 1 Lloyd's Rep. 527, 539. There may be no consideration moving from him who benefits by the waiver. There may be no detriment to him by acting on it. There may be nothing in writing. Nevertheless, the one who waives his strict rights cannot afterwards insist on them. His strict rights are at any rate suspended so long as the waiver lasts. He may on occasion be able to revert to his strict legal rights for the future by giving reasonable notice in that behalf, or otherwise making it plain by his conduct that he will thereafter insist on them: Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [1955] 1 W.L.R. 761. But there are cases where no withdrawal is possible. It may be too late to withdraw: or it cannot be done without injustice to the other party. In that event he is bound by his waiver. He will not be allowed to revert to his strict legal rights. He can only enforce them subject to the waiver he has made.

Instances of these principles are ready to hand in contracts for the sale of goods. A seller may, by his conduct, lead the buyer to believe that he is not insisting on the stipulated time for exercising an option: Bruner v. Moore [1904] 1 Ch. 305. A buyer may, by requesting delivery, lead the seller to believe that he is not insisting on the contractual time for delivery: Charles Rickards Ltd. v. Oppenhaim [1950] 1 K.B. 616, 621. A seller may, by his conduct, lead the buyer to believe that he will not insist on a confirmed letter of credit: Plasticmoda [1952] 1 Lloyd's Rep. 527, but will accept an unconfirmed one instead: Panoustsos v. Raymond Hadley Corporation of New York [1917] 2 K.B. 473; Enrico Furst & Co. v. W. E. Fisher [1960] 2 Lloyd's Rep. 340. A seller may accept a less sum for his goods than the contracted price, thus inducing him to believe that he will not enforce payment of the balance: Central London Property Trust Ltd. v. High Trees House Ltd. [1947] K.B. 130 and D. & C. Builders Ltd. v. Rees [1966] 2 Q.B. 617, 624. In none of these cases does the party who acts on the belief such any detriment. It is not a detriment, but a benefit to him, to have an extension of time or to pay less, or as the case may be. Nevertheless, he has conducted his affairs on the basis that he has that benefit and it would not be equitable now to deprive him of it.

The judge rejected this doctrine because, he said, 'there is no evidence of the buyers having acted to their detriment.' I know that it has been suggested in some quarters that there must be detriment. But I can find no support for it in the authorities cited by the judge. The nearest approach to it is the statement of Viscount Simonds in the Tool Metal case [1955] 1 W.L.R. 761, 764, that the other must have been led 'to alter his position,' which was adopted by Lord Hodson in Ajayi v R. T. Briscoe (Nigeria) Ltd. [1964] 1 W.L.R. 1326, 1330. But that only means that he must have been led to act differently from what he otherwise would have done. And if you study the cases in which the doctrine has been applied, you will see that all that is required is that the one should have 'acted on the belief induced by the other party.' That is how Lord Cohen put it in the Tool Metal case [1955] 1 W.L.R. 761, 799, and that is how I would put it myself.

...

Applying the principle here, it seems to me that the sellers, by their conduct, waived the right to have payment by means of a letter of credit in Kenyan currency and accepted instead a letter of credit in sterling. It was, when given, conditional payment, with the result that, on being duly honoured (as it was), the payment was no longer conditional. It became absolute, and dated back to the time when the letter of credit was given and acted upon. The sellers have, therefore, received payment of the price and cannot recover more."

49.In that case, the seller who contracted with the buyer that the goods were to be paid by letter of credit in Kenyan currency but accepted a letter of credit in pound sterling was determined by the court to have been paid and could not revert to have the price in Kenyan currency despite the devaluation of the sterling in the meantime. A few points of particular relevance to the present case should be noted from the judgment of Lord Denning cited above:

(a) It is not necessary for the promisee or representee to prove detriment; his acting on the promise or representation is sufficient to found estoppel or waiver;

(b) In most cases, the promisee or representee obtains a benefit from the promise or representation but that does not derogate his right to rely on the promise or representation; and

(c) The letter of credit had been issued, and the seller could not revert to his contractual right of having the payment in Kenyan currency.

50.The point taken by Mr Scott that Wing Wo had no knowledge of the items of reliance pleaded by Dixie bears no relevance to the circumstances of the present case. His arguments about the weakness of those items of reliance have some weight, but that weakness seems to have been accepted by the Judge who, however, did not place too much importance on those items, in my view, quite properly, because of the time frame in which the matter would fairly have to be considered. However, the Judge did find that "the extra money was applied to business expenses in some way which were made in the confident knowledge that it was regular and continuing income from Wing Wo from the date of the oral agreement" and it affected Dixie's day-to-day business decisions. That finding as sufficient to found waiver is well supported by Lord Denning's judgment cited above. I do not think that the Judge's conclusion that waiver applied in the present case can be faulted.

51.As far as the competing equity of the parties is concerned, the situation in the present case is again covered by what Lord Denning says in Alan v El Nasr, which is repeated below:

" ... he has conducted his affairs on the basis that he has that benefit and it would not be equitable now to deprive him of it.

52.Dixie, as found by the Judge, had conducted its affairs in the confident knowledge that the extra money was forthcoming, and that had taken place a number of years before Wing Wo made a demand for its return. Dixie's position in equity is similar to that of the defendant in Alan v El Nasr, if not stronger. I am not persuaded that the Judge's holding of waiver should be disturbed.

Other issues

53.In view of my decision on the waiver point in favour of Dixie, it is unnecessary for me to deal with the issues of estoppel by representation and consideration, save to state my conclusion on those two issues with brief reasons.

54.I do not think that the oral agreement to allow Dixie to deduct an extra 4% amounts to an estoppel by representation because such an estoppel can only be based on a representation of an existing fact. The oral agreement can only amount to a promise given by Wing Wo, and not a representation of an existing fact.

55.I do not think that there was valid consideration for the oral agreement about the extra 4%, either. Consideration must flow from the promisee to the promisor. However Dixie dealt with the employment or wages of Mr Lum, be that viewed as a detriment to Dixie or a benefit to Wing Wo, there was a missing link in the evidence that it was sought by Wing Wo or incurred by Dixie as a bargain for Wing Wo's promise. That could not have been valid consideration in law. The same applies to the purposes to which Dixie would put the extra money; that was not within the knowledge of Wing Wo and could not have been made pursuant to Wing Wo's request.

56.Nor do I need to deal with the question of interest that would only arise for consideration if Wing Wo succeeds on getting the 4% back.

Conclusion

57.For the reasons given above, I would dismiss the appeals in respect of the consolidated action and Action 73/1999 with costs.

Hon Cheung JA:

58.I agree with the views expressed by Woo JA and Ma JA.

Hon Ma JA:

59.I agree with the conclusion of Woo JA that both appeals should be dismissed with costs. His Lordship has extensively set out the facts relevant to these appeals and it is unnecessary for me to augment them much further. I will on the whole adopt the same abbreviations and expressions.

CACV 343/2002

The relevant contractual relationships

60.In the background to this appeal (from four consolidated actions in which Dixie was the plaintiff and Wing Wo the defendant) was a Highways Department Term Contract numbered 19/HY/95 in relation to the maintenance of high speed roads in New Territories West and Kowloon.

61.The tender for the Term Contract was awarded by the Highways Department (of the Government) to Wing Fai Construction Company Limited ("Wing Fai"). I will refer to the Term Contract as "the Main Contract".

62.In turn, Wing Fai as the main contractor subcontracted the works under the Main Contract to Wing Wo (as I have said, the defendant in the four actions and the appellant in this appeal). The subcontract between Wing Fai and Wing Wo was dated 1 April 1996 ("the Subcontract").

63.Following negotiations and an agreement arrived at orally, Wing Wo as the subcontractor and Dixie as the sub-subcontractor eventually entered into a written contract (by then a sub-subcontract) in Chinese dated 22 January 1997 ("the Sub-Sub-Contract"). Under the Sub-Sub-Contract, Dixie was responsible for the provision of all labour and materials and other specified matters in relation to a portion of the work covered by the Main Contract. The relevant area where the work was to be carried out was stated in clause 1 of the Sub-Sub-Contract to be "Route 2 Highway New Territories West (Kwai Chung to Tuen Mun Yaohan), Kowloon Area and part of the work that will be included in this contract area in the future".

64.In this appeal, we are concerned with the true construction and effect of the Sub-Sub-Contract insofar as the question of fluctuations and variations are concerned. One feature of this contract, on which I will expand presently, was its reference to the Main Contract rather than the Subcontract. The critical clauses are clauses 3 and 4 of the Sub-Sub-Contract. Woo JA has already identified the way these issues were framed by Burrell J: see paragraph 4 above.

65.I will deal with these issues in turn.

Fluctuations

66.Building contracts sometimes, but not invariably, contain provisions regarding fluctuations. The term 'fluctuations' means the adjustments that are made to the amount of money payable to a contractor for work carried out by him to take into account the possibility that, for example, the price of labour or materials he has had to provide or other matters, may have risen (or dropped) since the inception of the contract. Though not entirely accurate to refer to this aspect in these terms, fluctuation provisions in building contracts deal with the possibility of inflation or deflation over the course of the performance of the contract.

67.The Main Contract contained as part of its terms the General Conditions of Contract for Term Contracts for Civil Engineering Works ("the GCC"). Clauses 78 and 92 of the GCC state as follows:

"78. (1) Within 60 days of the date of issue of the certificate of completion in accordance with Clause 55 for any Works the Contractor shall submit to the Engineer a statement of final account for such Works showing in detail the value in accordance with the Contract of the work done in accordance with the Works Order together with all other sums which the Contractor considers to be due to him under the Contract. The statement shall be accompanied by invoices, receipts, and other documents as may be required by the Engineer.

(2) The statement and the supporting documents shall be prepared by and at the expense of the Contractor in the form and with such copies as are stated in the Contract or required by the Engineer.

(3) On receipt of the statement and the supporting documents the Engineer shall value in accordance with the Contract and certify for payment the sum which in his opinion is due to the Contractor.

.........

92. (1) The sum payable by the Employer to the Contractor in any final payment certificate by the Engineer pursuant to Clause 78(3) (other than sums due under this Clause) shall be increased or decreased in accordance with the provisions of this Clause if there shall be any changes in the following Index Figures compiled by the Census and Statistics Department of the Government of Hong Kong and published in the Government of Hong Kong Gazette:-

(a) the Index of the Cost of Labour used in Civil Engineering Construction;

(b) the Indices of the Cost of Materials used in Civil Engineering construction applicable to those materials listed in the 'Schedule of Proportions'.

The net total of such increases and decreases shall be given effect to in determining the final value of the Works.

(2) For the purpose of this Clause:-

(a) 'Index Figure' shall mean any Index Figure appropriate to sub-clause (1) of this Clause.

(b) 'Base Index Figure' shall mean the appropriate Index Figure applicable to the date 42 days prior to the date for the return of tenders.

(c) 'Current Index Figure' shall mean the Index Figure to be applied in respect of any final payment certificate issued by the Engineer pursuant to Clause 78 which shall be the appropriate Index Figure applicable to the date 42 days prior to the date for commencement stated on the Works Order.

(d) The 'Effective Value' in respect of the Works under a Works Order shall be the total amount which in the opinion of the Engineer is due to the Contractor under Clause 78 less:

(i) the sum due under this Clause; and

(ii) any sums for items based on actual cost or current prices; and

(iii) any sums payable pursuant to sub-clauses 68(2) and 68(3).

(3) The increase or decrease in the sums otherwise payable pursuant to sub-clause (1) of this C1ause shall be calculated by multiplying the Effective Value by a Price Fluctuation Factor which shall be the net sum of the products obtained by multiplying each of the proportions given in column 7 of the 'Schedule of Proportions' by a fraction the numerator of which is the relevant Current Index Figure minus the relevant Base Index Figure and the denominator of which is the relevant Base Index Figure.

(4) The 'Schedule of Proportions' shall (irrespective of the actual constituants of the work) be 'the Schedule of Proportions to be used in calculating the Price Fluctuation Factor' submitted with the Tender and with the calculations duly completed.

(5) The provisions of this Clause shall not apply to interim payment certificate issued by the Engineer pursuant to Clause 79."

68.The references in Woo JA's judgment to EV (Effective Value) and PFF (Price Fluctuation Factor) are to be found in GCC clause 92.

69.Over the course of the performance of the Sub-Sub-Contract, Dixie was given credit for fluctuations. Was it entitled to be paid in this respect?

70.Woo JA has, with respect, correctly analysed the matter by referring to clauses 3 and 4 of the Sub-Sub-Contract (set out in paragraph 11 above). Although the aspect of fluctuations is not expressly mentioned in the Sub-Sub-Contract, on a true construction of clauses 3 and 4, it is clear in my view that Dixie was entitled to be paid in respect of the same. I shortly state my reasons for arriving at this conclusion:

(1) Much was made by Mr John Scott SC (for Wing Wo) of clause 3(A) of the Sub-Sub-Contract and the explicit reference to "unit" rates. The relevant unit rates here are of course those contained in the Main Contract. In the Main Contract, fluctuations, Mr Scott says (rightly), do not individually alter the unit rates as such. The only alteration is to the money payable to the contractor and here, he refers to clauses 78 and 92 of the GCC, as set out above.

(2) This argument, attractively though it was put, fails to take sufficient account of the effect of clause 4 of the Sub-Sub-Contract. In my view, this clause (which after all is the clause in the Sub-Sub-Contract dealing with what Dixie was entitled to be paid for its performance of the designated work) states in clear terms (in the second sentence thereof) that Dixie was to be paid that amount which was certified under the Main Contract to be payable to Wing Fai (under paylists) after deduction of the management fee payable to Wing Wo. Obviously, Dixie could only be paid for work which it had actually performed but subject to this qualification, Wing Wo was obliged to pay Dixie the amount as certified and contained in paylists less the agreed management fee. And if the paylists contained additions (or deductions) to the amounts as certified, these being attributable to fluctuations, then Dixie should be entitled to the benefit of such additions (or be subject to the deductions) as long as they related to the work it had carried out.

(3) One does not have to strain the language of clause 4 at all to arrive at this result. Indeed, quite the contrary. It is the natural reading of it. This result also accords with common sense. As Mr Scott accepted, fluctuations are directly related to the work carried out by a contractor and where, as in the present case, labour and materials are supplied by that contractor (Dixie), fluctuations are then obviously related to these items and it is right that he should have the benefit or detriment, as the case may be, of fluctuations. Thus, while the fluctuation provisions do not affect the unit rates for labour and materials individually, they obviously affect them generally.

(4) Even if one refers to clause 3(A) alone, it can be seen that there is support for this result. Although that clause refers to the unit rates contained in the Main Contract, there is also express reference to the "tender price" of the Main Contractor, Wing Fai. When one then looks at the actual tender of Wing Fai (which is a part of the Main Contract), one can then see in Appendix I thereof Wing Fai's schedule of percentages to be applied to the unit rates stipulated in the Main Contract (this enabling the precise unit rates for each item of labour and materials to be ascertained) and in Appendix III the schedule of proportions to be used in calculation PFF. This schedule of proportions is expressly referred to in GCC clause 92(1)(b) and (4). As can be seen from Appendix III, these proportions (which go to fluctuations) make express reference to items of labour and materials (for example, bitumen). In short, the tender itself refers not only to the precise unit rates for the specific items of labour and materials, but also to fluctuations relevant to labour and materials as a whole. Once again, I make the observation that although the percentages of fluctuations are not applied to unit rates for labour and materials individually, they are applied to them generally. There can be no doubt that fluctuations are directly related to labour and materials, and therefore the price, that a contractor can expect to get for the provision of such.

71.In reaching the above conclusion on the true construction of the Sub-Sub-Contract, I have not needed to have recourse to the so-called contra proferentem rule and I say no more about it. In my view, the Sub-Sub-Contract, in particular clauses 3 and 4, are not ambiguous.

72.As to factual matrix, in my view there is nothing in the surrounding circumstances not contained in the Sub-Sub-Contract that is relevant to the construction of that contract. Of the surrounding circumstances, the most important is the fact that the Sub-Sub-Contract (in particular those terms relevant to Dixie's payment entitlements thereunder) was linked with the Main Contract (and not to the Subcontract) and it is therefore to that contract (which includes the tender) one looks to for guidance. However, this circumstance is expressly referred to in the Sub-Sub-Contract in a number of places.

73.Lastly, I would just refer to Mr Scott's argument that as a matter of fact, if Dixie was entitled to payment for fluctuations as claimed, Wing Wo would incur a loss. The factual basis was this: in the Subcontract, Wing Wo was to be paid only half the amount of any payments or allowances that Wing Fai got under the Main Contract for fluctuations, yet on Dixie's case, Wing Wo would be obliged to pay the whole of any amounts or allowances that Wing Fai got under the Main Contract less the 36% management fee. Even on the assumption that this submission was correct factually (and I am not convinced it is since fluctuations may result in a decrease and not only an increase in entitlements), it cannot provide any assistance to the correct interpretation of the Sub-Sub-Contract. I would reiterate the point that while the Sub-Sub-Contract made specific reference to the Main Contract, it makes no reference to the applicability of the Subcontract.

Variations

74.Woo JA has dealt with this ground of appeal and I agree with his reasons.

75.Clause 3 of the Sub-Sub-Contract sets out the parties' respective entitlements in three given contexts: (1) the performance by Dixie of original work under the contract by reference to the Main Contract (clause 3(A)), (2) Dixie's performance of variation work (clause 3(B)) and (3) the closure of roads to allow Wing Wo to lay tarmac (clause 3(C)).

76.We are concerned with clause 3(B)) regarding variation work. By definition, variation work is non-standard work i.e. work which is not within a contractor's basic contractual work as stipulated in his contract. Accordingly, there can be no justification or logic, unless the words of the contract dictate this result, for the management fees payable to Wing Wo in relation to variations to be in addition to the management fees payable for basic work. The two works are quite different by nature:- variation work is not basic work plus variations; it is simply variation work. The words of clause 3, in particular sub-clause (B) thereof, do not suggest otherwise.

CACV 344/2002

Equitable or promissory estoppel

77.This issue arises in the Tolo Harbour Actions.

78.As Chitty on Contracts (28th Edition) Volume 1 at paragraph 3-081 sets out, equitable or promissory estoppel arises in the following way:-

"Requirements. For the equitable doctrine to operate there must be a legal relationship giving rise to rights and duties between the parties; a promise or a representation by one party that he will not enforce against the other his strict legal rights arising out of that relationship; an intention on the part of the former party that the latter will rely on the representation; and such reliance by the latter party. Even if these requirements are satisfied, the operation of the doctrine may be excluded if it is, nevertheless, not 'inequitable' for the first party to go back on his promise. The doctrine most commonly applies to promises not to enforce contractual rights, but it also extends to certain other relationships. These points will be discussed in the following paragraphs."

79.This statement of principle is derived from numerous cases originating from Hughes v Metropolitan Railway (1877) 2 App Cas 439.

80.In James v Heim Gallery (London) Limited (1980) 41 P & CR 269, Buckley LJ dealt with the principles in a passage already set out in Woo JA's judgment. Oliver LJ also had this to say at 280:-

"In order to found a promissory estoppel, there has first to be found some clear and unequivocal representation, either by words or conduct, that the party claimed to be estopped will not rely upon his strict contractual rights. Secondly, the representation must be made with the intention, or at least the knowledge that it is to be acted upon by the other party by altering his legal position; and thirdly, he must so alter his legal position in reliance upon the representation in such a way that it would be inequitable, or unfair, to permit the party claimed to be estopped from departing from the representation."

81.Broken down into its component parts, the doctrine of equitable or promissory estoppel, insofar as it applies to contractual situations, consists of:-

(1) A clear and unequivocal representation by A to B that he will not rely on his strict contractual rights. The representation may be by words or by conduct.

(2) The representation by A must be made with the intention by him "or at least the knowledge" that B will act on it.

(3) B must in fact have acted in reliance on the representation.

82.I wish, however, to emphasise two points here in relation to equitable or promissory estoppel.

83.First, the somewhat formularistic identification of the doctrine as set out above provides in most cases a ready test to see whether it applies in any given case. It is, however, crucial to bear in mind that whether or not the doctrine applies so as to estop the representor (A) from departing from the effect of his representation as against the representee (B), will depend on the equity or fairness of the situation confronting the court. In short: would it be inequitable or unfair to allow the representor to go back on his promise or representation? These considerations will determine whether or not the representor will be able to go back on his representation or promise either at all or only for the future.

84.Secondly, as set out above, the representation must be made with the intention or knowledge on the part of the representor that the representee should act on it. The reference to "knowledge" is sometimes found in the authorities. James v Heim Gallery (London) Limited is an example of this. There is no magic in the words "intention" or "knowledge". They are ordinary words. The requirement here concentrates on the state of mind of the representor in the circumstances. Often, a person may, even in a dogmatic way, make a general statement which seems to convey a promise. Expressions of disbelief that a state of affairs can exist or happen coupled with a promise to do something if that state of affairs is true (such as "I will buy the whole of London a drink if W United wins on Saturday") come under this category. But there is no intention that anyone should act on that statement. If, however, the representor actually knows that someone will act on that statement or representation, he may well be fixed with legal liability. A good illustration of this approach is James v Heim Gallery (London) Limited itself. In that case, as Woo JA has pointed out, part of the representation alleged to give rise to an equitable estoppel, was made in the course of a casual conversation following a chance meeting in the street. All that was said was "One can't always win". The English Court of Appeal held the representation was insufficient to found a clear and unequivocal representation. It was further held that in the circumstances there could not have been any intention on the part of the plaintiff in that case that it should be acted upon. Without the requisite intention, the court then examined whether there was knowledge that the alleged representation would be acted upon and it was held that there was no knowledge either:- see page 277-8 (per Buckley LJ), 282 (per Oliver LJ). This I believe to have been the true context of the inquiry by the Court of Appeal in that case into knowledge.

85.Mr Scott seeks to elevate these passages I have just referred to, into a principle that in all cases of equitable or promissory estoppel, the representor must know just how the representee was to act in reliance on the representation. Neither James v Heim Gallery (London) Limited (when properly understood) nor any other authority I am aware of, requires such an exacting standard. The principle is simply that the representor must intend or know that his representation will be acted upon.

86.On the facts as found by the learned judge, the requirements of the doctrine I have earlier alluded to, are satisfied in the present case:-

(1) The promise to pay the extra 4% and management fee was made by Wing Wo and agreed to by Dixie. The judge has made a finding that an oral agreement was made and there is no appeal from that finding of fact. The promise was in the circumstances a clear and unequivocal one.

(2) By making the promise to pay more money in the context of the performance of an ongoing contract, it can be inferred that Wing Wo must have intended and known that it would be acted upon by Dixie. One cannot reasonably assume otherwise. Moreover, the subsequent conduct of Wing Wo and Dixie implementing the extra 4% and management fee agreement, reinforces this point. Mr Scott argued otherwise, but with emphasis on the knowledge requirement of the doctrine. I have already disposed of this argument.

(3) As to reliance on the part of Dixie, the judge has made findings to this effect. He says this at paragraph 60 of the Judgment:

'60. Having heard Mr Cheng and Mr Lee, I am satisfied that with the knowledge of greater income from 1992 onwards they did not simply bank the bonus but it affected their day-to-day business decisions. A direct causal link between (a) agreeing the 42% fee on the one hand, and (b) deciding to buy a workshop in Shatin or deciding to give Mr Lum a bonus on the other hand would be difficult to establish given the passage of time. I am satisfied that the extra money was applied to business expenses in some way which were made in the confident knowledge that it was regular and continuing income from Wing Wo from the date of the oral agreement. This seems to me to be obvious from the evidence. A microscopic investigation of the use to which the money was put at the time, 10 years after the event does not take the matter much further. I have indeed attached little weight to the particulars of the late evidence adduced but I have attached weight to the general picture which emerged as a result."

(4) The evidence before the judge included the fact that but for the 4% increase in management fee, Dixie would not have retained an experienced site agent on site (Mr Oliver Lum) rather than a more junior one, nor would its management have spent more time on the project than it did. This evidence came from Mr S.C. Cheng, the defendant's chairman and co-owner. The judge clearly accepted this evidence, among other aspects. He was right in his conclusions here. As to reliance: see also Chitty on Contracts Volume 1 at paragraph 3-088.

(5) In view of the reliance by Dixie on Wing Wo's representation and the fact that it was not until 1999, years after this particular project had finished, when Wing Wo first made a claim for the overpayment of the 4% management fee it had been paying all along, the equities of the case clearly belong to Dixie. It is now too late to turn the clock back and as there are no future dealings in this project between Wing Wo and Dixie, there is no question of the estoppel being suspensive in relation only to the past but not the future.

87.Again, in view of my conclusions on this aspect, it is unnecessary to go into the other issues that were raised in this context, namely, consideration and estoppel by representation (estoppel in pais).

Conclusion

88.For the above reasons, like Woo JA, I would dismiss both appeals with costs.

Representation:

Mr Adrian Bell, instructed by Messrs Massie & Clement, for the Plaintiff in CACV343/2002 and the Defendant in CACV344/02.

Mr John Scott, SC and Mr David Tsang, instructed by Messrs Chan Leung & Cheung, for the Defendant in CACV343/02 and the Plaintiff in CACV344/02.